-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AsQotmQehq4HODdEatYNI5tpP41sz7J15DBxaFxZkEFoGLNdTdRFZWbHOU5KhXDe cgXYrnwq+2TuaqyfcMmiwA== 0000357261-03-000004.txt : 20030321 0000357261-03-000004.hdr.sgml : 20030321 20030321161524 ACCESSION NUMBER: 0000357261-03-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLORIDA POWER CORP / CENTRAL INDEX KEY: 0000037637 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 590247770 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03274 FILM NUMBER: 03612524 BUSINESS ADDRESS: STREET 1: 3201 34TH ST SOUTH STREET 2: ONE PROGRESS PLAZA CITY: ST PETERSBURG STATE: FL ZIP: 33701 BUSINESS PHONE: 7278205151 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLORIDA PROGRESS CORP CENTRAL INDEX KEY: 0000357261 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 592147112 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08349 FILM NUMBER: 03612523 BUSINESS ADDRESS: STREET 1: ONE PROGRESS PLAZA STREET 2: STE 2600 CITY: ST PETERSBURG STATE: FL ZIP: 33701 BUSINESS PHONE: 7278246400 MAIL ADDRESS: STREET 1: ONE PROGRESS PLZ STREET 2: SUITE 2600 CITY: ST PETERSBURG STATE: FL ZIP: 33701 10-K 1 pei_fpcfp10k-.txt FLORIDA PROGRESS/FLORIDA POWER FORM 10-K YEAR ENDED 12/31/2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 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 I.R.S. Exact name of each Registrant as specified in Employer Commission its charter, state of incorporation, address of Identification File No. principal executive offices and telephone number 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 d/b/a Progress Energy Florida, Inc. A Florida Corporation 100 Central Avenue St. Petersburg, Florida 33701 Telephone (727) 820-5151 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Florida Progress Corporation: 7.10% Cumulative Quarterly Income Preferred New York Stock Exchange Securities, Series A, of FPC Capital I (and the Guarantee of Florida Progress with respect thereto) Florida Power Corporation: None
1 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Florida Progress Corporation: None Florida Power Corporation: None Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Act). YES [ ] NO [X] As of June 30, 2002, the aggregate market value of the voting and non-voting common equity of each of the registrants held by non-affiliates was $0. All of the common stock of Florida Progress Corporation is owned by Progress Energy, Inc., its corporate parent. All of the common stock of Florida Power Corporation is owned by Florida Progress Corporation. As of February 28, 2003, each registrant had the following shares of common stock outstanding: Registrant Description Shares ---------- ----------- ------ Florida Progress Corporation Common Stock (without par value) 98,616,658 Florida Power Corporation Common Stock (without par value) 100 Florida Progress Corporation and Florida Power Corporation meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-K with the reduced disclosure format permitted by General Instruction I(2) to such Form 10-K. This combined Form 10-K 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. Each registrant makes no representation as to information relating exclusively to the other registrant. 2 TABLE OF CONTENTS GLOSSARY SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS PART I ITEM 1. BUSINESS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ITEM 14. CONTROLS AND PROCEDURES PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K RISK FACTORS 3 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined FORM 10-K are defined below: TERM DEFINITION AFUDC Allowance for funds used during construction AST Advanced Separation Technologies, Incorporated Btu British thermal units CERCLA or Superfund Comprehensive Environmental Response Compensation & Liability Act Code Internal Revenue Service Code CVO Contingent Value Obligation Colona Colona Synfuel Limited Partnership, L.L.L.P. the Company Florida Progress Corporation CP&L Carolina Power & 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 EITF Emerging Issues Task Force EITF Issue 02-03 EITF Issue 02-03, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" EPA United States Environmental Protection Agency ERISA Employee Retirement Income Security Act of 1974 FASB Financial Accounting Standards Board FDEP Florida Department of Environmental Protection FERC Federal Energy Regulatory Commission FIN No. 45 FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34" FIN No. 46 FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51" Financial Statements Florida Progress' Financial Statements and Florida Power's Financial Statements, for the year ended December 31, 2002 contained under ITEM 8 herein Florida Power or the Utility Florida Power Corporation Florida Progress or FPC Florida Progress Corporation FPSC Florida Public Service Commission Funding Corp. Florida Progress Funding Corporation Georgia Power Georgia Power Company IRS Internal Revenue Service ISO Independent System Operator kV Kilovolt kVA Kilovolt-ampere LTIP Long-Term Incentive Plan MGP Manufactured Gas Plant MW Megawatts NEIL Nuclear Electric Insurance Limited NERC North American Electric Reliability Council NRC United States Nuclear Regulatory Commission PLR Private Letter Ruling Preferred Securities FPC-obligated mandatorily redeemable preferred securities of FPC Capital I 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 Electric Fuels Corporation 4 Progress Rail Progress Rail Services Corporation Progress Telecom Progress Telecommunications Corporation PVI Progress Ventures, Inc., formerly referred to as Energy Ventures, a business segment of Progress Energy PUHCA Public Utility Holding Company Act of 1935, as amended PURPA Public Utility Regulatory Policies Act of 1978 PWR Pressurized Water Reactors QFs Qualifying facilities RTO Regional Transmission Organization SEC United States Securities and Exchange Commission Section 29 Section 29 of the Internal Revenue Service Code SFAS No. 4 Statement of Financial Accounting Standards No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of Accounting Principles Board (APB) Opinion No. 30)" SFAS No. 5 Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" SFAS No. 13 Statement of Financial Accounting Standards No. 13, "Accounting for Leases" SFAS No. 71 Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" SFAS No. 87 Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" SFAS No. 106 Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" SFAS No. 121 Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" SFAS No. 123 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" SFAS No. 133 Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities" SFAS No. 138 Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133" SFAS No. 142 Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" SFAS No. 143 Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" SFAS No. 144 Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" SFAS No. 145 Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections" SFAS No. 148 Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123" the Trust FPC Capital I 5 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS This combined report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The matters discussed throughout this report 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, examples of forward-looking statements discussed in this report include, but are not limited to, statements under the following headings: 1) "Liquidity and Capital Resources" about operating cash flows, estimated capital requirements through the year 2005 and future financing plans, and 2) "Risk Factors." Any forward-looking statement speaks only as of the date on which such statement is made, and neither Florida Progress nor Florida Power undertakes any 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: the impact of fluid and complex government laws and regulations, including those relating to the environment; the impact of recent events in the energy markets that have increased the level of public and regulatory scrutiny in the energy industry and in the capital markets; the impact of Florida Power's rate case settlement; deregulation or restructuring in the electric industry that may result in increased competition and unrecovered (stranded) costs; the uncertainty regarding the timing, creation and structure of regional transmission organizations; weather conditions that directly influence the demand for electricity and natural gas; recurring seasonal fluctuations in demand for electricity and natural gas; fluctuations in the price of energy commodities and purchased power; successful maintenance and operation of Florida Power's energy commodities and purchased power; economic fluctuations and the corresponding impact on the Florida Power's commercial and industrial customers; the inherent risks associated with the operation of nuclear facilities, including environmental, health, regulatory and financial risks; the impact of any terrorist acts generally and on our generating facilities and other properties; the ability to successfully access capital markets on favorable terms; the impact that increases in leverage may have on the Company and Florida Power; the ability of the Company and Florida Power to maintain their current credit ratings; the impact of derivative contracts used in the normal course of business; the Company's continued ability to use Section 29 tax credits related to its coal and synthetic fuels businesses; the continued depressed state of the telecommunications industry and the Company's ability to realize future returns from Progress Telecommunications Corporation (Progress Telecom); the Company's ability to successfully integrate newly acquired assets or properties into its operations as quickly or as profitably as expected; and unanticipated changes in operating expenses and capital expenditures. Many of these risks similarly impact the Company's subsidiaries. These and other risk factors are detailed from time to time in Florida Progress' and Florida Power's SEC reports. All such factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond the control of Florida Progress and Florida Power. Many, but not all of the factors that may impact actual results are discussed under the heading "Risk Factors". You should carefully read the "Risk Factors" section of this report. 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 and Florida Power. 6 PART I ITEM 1. BUSINESS GENERAL COMPANY Florida Progress Corporation (Florida Progress or the Company, which term includes consolidated subsidiaries unless otherwise indicated) is a wholly owned subsidiary of Progress Energy, Inc. (Progress Energy), a registered holding company under the Public Utility Holding Company Act (PUHCA) of 1935. Progress Energy and its subsidiaries, including Florida Progress, are subject to the regulatory provisions of PUHCA. Florida Progress is the parent company of Florida Power Corporation (Florida Power or the Utility) and certain other subsidiaries. Progress Energy controls Florida Power Corporation and the other Florida Progress subsidiaries through its ownership of Florida Progress. On November 30, 2000, the acquisition of Florida Progress by CP&L Energy, Inc. (CP&L Energy) became effective. On December 4, 2000, CP&L Energy was renamed Progress Energy. Effective January 1, 2003, Florida Power began doing business under the name Progress Energy Florida, Inc. The legal name of the entity has not been changed and there is no restructuring of any kind related to the name change. The current corporate and business unit structure remains unchanged. Florida Progress' revenues for the year ended December 31, 2002, were $4.4 billion, and assets at year-end were $6.6 billion. Its principal executive offices are located at 410 South Wilmington Street, Raleigh, North Carolina 27601-1748, telephone number (919) 546-6111. Information about Florida Progress and its subsidiaries can be found at Progress Energy's home page on the Internet at http://www.progress-energy.com, the contents of which are not and shall not be deemed to be a part of this document or any other SEC filing. The Company makes available free of charge on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after such material is electronically filed or furnished to the Securities and Exchange Commission (SEC). Florida Progress was incorporated in Florida on January 21, 1982. Florida Progress' principal business segment is Florida Power, which encompasses all regulated public utility operations (See ITEM 1 "Business - Utility Operations - Florida Power") and accounts for approximately 70% and 84% of Florida Progress' revenues and assets, respectively, at year end in 2002. Florida Progress' other business segments, including Energy and Related Services, Rail Services, and Other, represent its diversified operations (See ITEM 1 "Business - Diversified Operations"). Progress Capital Holdings, Inc. (Progress Capital) is the downstream holding company for Florida Progress' diversified subsidiaries and provides a portion of the financing for the non-utility operations. Diversified operations includes Progress Fuels Corporation (Progress Fuels), formerly Electric Fuels Corporation (Electric Fuels), and Progress Telecom. On January 2, 2002, Electric Fuels changed its name to Progress Fuels. Progress Fuels is a diversified non-utility energy company, whose principal business segments are Energy and Related Services and Rail Services. Florida Progress' Other category consists primarily of Progress Telecom, the Company's Investment in FPC Capital Trust, and the holding company, Florida Progress. Progress Telecom is a provider of wholesale telecommunications services. After the acquisition of Florida Progress, Progress Energy hired a financial adviser to assist Florida Progress in evaluating its strategic alternatives with respect to Progress Fuels' Inland Marine Transportation and Rail Services segments. On November 1, 2001, the Inland Marine Transportation segment was sold to AEP Resources, Inc. During 2001, Progress Energy decided to retain the Rail Services segment in the near term. In December 2002, the Progress Energy Board of Directors adopted a resolution approving the sale of Railcar Ltd., a subsidiary included in the Rail Services segment. On March 12, 2003, Progress Energy announced that Railcar Ltd. signed a letter of intent to sell predominately all of its railroad leasing assets to The Andersons, Inc. The proceeds of the sale will be used to pay off Railcar Ltd. lease obligations. The transaction is still subject to various closing conditions including financing, due diligence and the completion of a definitive purchase agreement. 7 ACQUISITIONS On November 30, 2000, CP&L Energy, which subsequently changed its name to 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, subject to proration, and one contingent value obligation (CVO) in exchange for each of their shares 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. Westchester Gas Company Acquisition On April 26, 2002, Progress Fuels, a wholly owned subsidiary of Progress Energy, completed the acquisition of Westchester Gas Company, which included approximately 215 natural gas producing wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems. The aggregate purchase price of approximately $153 million consisted of cash consideration of approximately $22 million and the issuance of 2.5 million shares of Progress Energy common stock valued at approximately $129 million. The purchase price included approximately $2 million of direct transaction costs. The properties are located within a 25-mile radius of Jonesville, Texas, on the Texas-Louisiana border. This transaction added 140 billion cubic feet of gas reserves to Progress Fuels' growing energy portfolio. Acquisition of Natural Gas Wells During the first quarter of 2003, Progress Fuels entered into three independent transactions to acquire approximately 162 natural gas producing wells with proven reserves of 195 billion cubic feet (Bcf) from Republic Energy, Inc. and two other privately-owned companies, all headquartered in Texas. The gross total purchase price for the transactions was approximately $133 million. DIVESTITURES Railcar Ltd. Divestiture In December 2002, the Progress Energy Board of Directors adopted a resolution to sell the assets of Railcar Ltd., a leasing subsidiary included in the Rail Services segment. An estimated impairment on assets held for sale of $58.8 million has been recognized for the write-down of the assets to be sold to fair value less the costs to sell. On March 12, 2003, the Company signed a letter of intent to sell Railcar Ltd. to The Andersons, Inc. The proceeds of the sale will be used by the Company to pay off Railcar Ltd. lease obligations. The transaction is still subject to various closing conditions including financing, due diligence and the completion of a definitive purchase agreement. Sale of MEMCO Barge Line, Inc. On July 23, 2001, Progress Energy announced the disposition of the Inland Marine Transportation segment of FPC, which was operated by MEMCO Barge Line, Inc. Inland Marine provided transportation of coal, agricultural and other dry-bulk commodities as well as fleet management services. On November 1, 2001, Progress Energy completed the sale of the Inland Marine Transportation segment to AEP Resources, Inc., a wholly owned subsidiary of American Electric Power. ENVIRONMENTAL General In the areas of air quality, water quality, control of toxic substances and hazardous and solid wastes and other environmental matters, the Company is subject to regulation by various federal, state and local authorities. The Company considers itself to be in substantial compliance with those environmental regulations currently applicable to its business and operations and believes it has all necessary permits to conduct such operations. 8 Environmental laws and regulations constantly evolve and the ultimate costs of compliance cannot always be accurately estimated. For further information with respect to environmental matters, see Note 22E to the Financial Statements. Clean Air Legislation The 1990 amendments to the Clean Air Act require substantial reductions in sulfur dioxide and nitrogen oxide emissions from fossil-fueled electric generating plants. The Clean Air Act required Florida Power to meet more stringent provisions effective January 1, 2000. The Company meets the sulfur dioxide emissions requirements by fuel switching and maintaining sufficient sulfur dioxide emission allowances. Installation of additional equipment was necessary to reduce nitrogen oxide emissions. Increased operation and maintenance costs, including emission allowance expense, installation of additional equipment and increased fuel costs are not expected to be material to the financial position or results of operations of the Company. The U.S. Environmental Protection Agency (EPA) is 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 initiated enforcement actions against other unaffiliated utilities as part of this initiative, some of which have resulted in or may result in settlement agreements calling for expenditures, 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. Superfund The provisions of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), authorize the EPA to require the clean up of hazardous waste sites. This statute imposes retroactive joint and several liability. Some states have similar types of legislation. There are presently several sites with respect to which the Company has been notified by the EPA, the State of Florida or other state agencies with respect to potential liability, as described below in greater detail. Various organic materials associated with the production of manufactured gas, generally referred to as coal tar, are regulated under various 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 manufactured gas plant (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 EPA and the Florida Department of Environmental Protection (FDEP). Although Florida Power may incur costs at these sites about which it has been notified, based upon current status of these sites, Florida Power does not expect those costs to be material to the financial position or results of operations of Florida Power. 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. Other Environmental Matters 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. 9 Florida Power has filed claims with the Company's general liability insurance carriers to recover costs arising out of actual or potential environmental liabilities. Some claims have settled and others are still pending. While management cannot predict the outcome of these matters, the outcome is not expected to have a material effect on the financial position or results of operations. EMPLOYEES As of February 28, 2003, Florida Progress and its subsidiaries had approximately 7,800 regular full-time employees. As of February 28, 2003, Florida Power had approximately 4,000 regular full-time employees. The International Brotherhood of Electrical Workers (IBEW) represents approximately 2,100 of these full-time employees. Florida Power and the IBEW reached agreement in early December on a new, three-year labor contract. The previous contract expired December 1, 2002. UTILITY OPERATIONS - FLORIDA POWER GENERAL Florida Power was incorporated in Florida in 1899, and is an operating public utility engaged in the generation, purchase, transmission, distribution and sale of electricity. At December 31, 2002, Florida Power had a total summer generating capacity (including jointly-owned capacity) of approximately 8,024 megawatts (MW). Florida Power provided electric service during 2002 to an average of 1.5 million customers in west central Florida. Its service area covers approximately 20,000 square miles and includes the densely populated areas around Orlando, as well as the cities of St. Petersburg and Clearwater. Florida Power is interconnected with 20 municipal and 9 rural electric cooperative systems. Major wholesale power sales customers include Seminole Electric Cooperative, Inc., Florida Municipal Power Agency, Florida Power & Light, and Tampa Electric Company. Florida Power is subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC) and the Florida Public Service Commission (FPSC). BILLED ELECTRIC REVENUES Florida Power's electric revenues billed by customer class, for the last three years, are shown as a percentage of total electric revenues in the table below: BILLED ELECTRIC REVENUES Revenue Class 2002 2001 2000 ------------- ---- ---- ---- Residential 55% 54% 53% Commercial 24% 24% 24% Industrial 7% 7% 8% Others 6% 6% 5% Wholesale (a) 8% 9% 10% (a) These revenues are managed by Progress Ventures on behalf of Florida Power. Important industries in the territory include phosphate rock mining and processing, electronics design and manufacturing, and citrus and other food processing. Other important commercial activities are tourism, health care, construction and agriculture. 10 FUEL AND PURCHASED POWER General Florida Power's consumption of various types of fuel depends on several factors, the most important of which are the demand for electricity by Florida Power's customers, the availability of various generating units, the availability and cost of fuel and the requirements of federal and state regulatory agencies. Florida Power's energy mix for the last three years is presented in the following table: ENERGY MIX PERCENTAGES Fuel Type 2002 2001 2000 --------- ---- ---- ---- Coal (a) 33% 33% 34% Oil 16% 16% 15% Nuclear 15% 15% 15% Gas 15% 14% 14% Purchased Power 21% 22% 22% (a) Includes synthetic fuel from unrelated third parties and petroleum coke. Florida Power is generally permitted to pass the cost of recoverable fuel and purchased power to its customers through fuel adjustment clauses. The future prices for and availability of various fuels discussed in this report cannot be predicted with complete certainty. However, Florida Power believes that its fuel supply contracts, as described below, will be adequate to meet its fuel supply needs. Florida Power's average fuel costs per million British thermal units (Btu) for the last three years were as follows: AVERAGE FUEL COST (per million Btu) 2002 2001 2000 ---- ---- ---- Coal (a) $2.43 $2.16 $1.89 Oil 3.77 3.81 4.15 Nuclear .46 .47 .47 Gas 4.06 4.52 4.32 Weighted Average 2.60 2.59 2.46 (a) Includes synthetic fuel from unrelated third parties and petroleum coke. Changes in the unit price for coal, oil and gas are due to market conditions. Since these costs are primarily recovered through recovery clauses established by regulators, the fluctuation does not materially affect net income. Coal Florida Power anticipates a combined requirement of approximately 5.7 million to 6.1 million tons of coal and synthetic fuel in 2003. Most of the coal is expected to be supplied from the Appalachian coal fields of the United States. Approximately two-thirds of the fuel is expected to be delivered by rail and the remainder by barge. All of this fuel is supplied by Progress Fuels pursuant to contracts between Florida Power and Progress Fuels. For 2003, Progress Fuels has medium-term and long-term contracts with various sources for approximately 100% of the fuel requirements of Florida Power's coal units. These contracts have price adjustment provisions. All the coal to be purchased for FPC is considered to be low sulfur coal by industry standards. Oil and Gas Oil is purchased under contracts and in the spot market from several suppliers. The majority of the cost of Florida Power's oil and gas is determined by market prices as reported in certain industry publications. Management believes that 11 Florida Power has access to an adequate supply of oil for the reasonably foreseeable future. Florida Power believes that the threat of or a war against Iraq could negatively impact the price of oil. Florida Power's natural gas supply is purchased under firm supply and transportation contracts and in the spot market from numerous suppliers. Florida Power also uses interruptible transportation contracts on certain occasions when available. Florida Power believes that existing contracts for oil are sufficient to cover its requirements if natural gas is unavailable during certain time periods. Nuclear Nuclear fuel is processed through four distinct stages. Stages I and II involve the mining and milling of the natural uranium ore to produce a concentrate and the conversion of this uranium concentrate into uranium hexafluoride. Stages III and IV entail the enrichment of the uranium hexafluoride and the fabrication of the enriched uranium hexafluoride into usable fuel assemblies. Florida Power has sufficient uranium, conversion, enrichment and fabrication contracts to meet its near term nuclear fuel requirement needs. Florida Power expects to contract for all of its future long-term uranium, conversion and enrichment service needs with contract durations ranging from five to ten years. Although Florida Power cannot predict the future availability of uranium and nuclear fuel services, Florida Power does not currently expect to have difficulty obtaining uranium oxide concentrate or the services necessary for its conversion, enrichment and fabrication into nuclear fuel. Purchased Power Florida Power, along with other Florida utilities, buys and sells power in the wholesale market on a short- and long-term basis. As of December 31, 2002, Florida Power had a variety of purchase power agreements for the purchase of approximately 1,304 MW of firm power. These agreements include (1) long-term contracts for the purchase of about 473 MW of purchased power with other investor-owned utilities, including a contract with The Southern Company for approximately 413 MW, and (2) approximately 831 MW of capacity under contract with certain qualifying facilities (QFs). The capacity currently available from QFs represents about 10% of Florida Power's total installed system capacity. COMPETITION Electric Industry Restructuring Florida Power continues to monitor progress toward a more competitive environment and has actively participated in regulatory reform deliberations in Florida. Movement toward deregulation in this state has been affected by recent developments related to deregulation of the electric industry in California and other states. On December 11, 2001, the Florida 2020 Study Commission issued its final report to the Florida Legislature regarding possible changes to the regulation of electric utilities in Florida. The Florida legislature did not take any action on the final report during the 2001 or 2002 session. In response to a legislative directive, the FPSC and the FDEP submitted in February 2003 a joint report on renewable electric generating technologies for Florida. The report assessed the feasibility and potential magnitude of renewable electric capacity for Florida, and summarized the mechanisms other states have adopted to encourage renewable energy. The report did not contain any policy recommendations. The Company cannot anticipate when, or if, restructuring legislation will be enacted, or if the Company would be able to support it in its final form. Regional Transmission Organizations As a result of Order 2000, Florida Power, along with Florida Power & Light Company and Tampa Electric Company (the Applicants) filed with the FERC in October 2000 an application for approval of a GridFlorida RTO. The GridFlorida proposal is pending before both the FERC and the FPSC. The FERC provisionally approved the structure and governance of GridFlorida. In December 2001, the FPSC found the Applicants were prudent in proactively forming GridFlorida but ordered the Applicants to modify the proposal in several material respects, including a change in structure to a not-for-profit Independent Systems Operator (ISO). The Commission's most recent order in September 2002 ordered further state proceedings. The issues to be addressed as modifications include but are not limited to 1) pricing/rate structure; 2) elimination of the pancaking of revenues; 3) cost recovery of incremental costs; 4) demarcation dates for new 12 facilities and long-term transmission contracts; and 6) market design. The Florida Office of Public Counsel appealed the September 2002 order to the Florida Supreme Court and on October 28, 2002, the FPSC abated its proceedings pending the outcome of the appeal. It is unknown what the outcome of this appeal will be at this time. It is unknown when the FERC or the FPSC will take final action with regard to the status of GridFlorida or what the impact of further proceedings will have on the Company's earnings, revenues or pricing. Standard Market Design On July 31, 2002, the FERC issued its Notice of Proposed Rulemaking in Docket No. RM01-12-000 Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design (SMD NOPR). The proposed rules set forth in the SMD NOPR would require, among other things, that 1) all transmission owning utilities transfer control of their transmission facilities to an independent third party; 2) transmission service to bundled retail customers be provided under the FERC-regulated transmission tariff, rather than state-mandated terms and conditions; 3) new terms and conditions for transmission service be adopted nationwide, including new provisions for pricing transmission in the event of transmission congestion; 4) new energy markets be established for the buying and selling of electric energy; and 5) load serving entities be required to meet minimum criteria for generating reserves. If adopted as proposed, the rules set forth in the SMD NOPR would materially alter the manner in which transmission and generation services are provided and paid for. Florida Power filed comments on November 15, 2002 and supplemental comments on January 10, 2003. On January 15, 2003, the FERC announced the issuance of a White Paper on SMD NOPR to be released in April 2003. Florida Power plans to file comments on the White Paper. The FERC has also indicated that it expects to issue final rules during the summer of 2003. Merchant Plants There has been no change in the statutory framework for siting new generation since the Florida Supreme Court's decision in Tampa Electric Company v. Garcia, 767 So.2d 428 (Fla. 2000) in April 2000. The Court reversed a decision of the Florida Public Service Commission and held that under Florida's Power Plant Siting Act, an applicant for any new generation over 75 MW that includes a steam generating facility must be a load-serving utility or the output of the proposed plant must be under firm contract to a load-serving utility. Thus, site certification for merchant generation for large, non-peaking capacity cannot be independently undertaken. At the present time there are no pending legislative proposals for change. Franchise Agreements Florida Power holds franchises with varying expiration dates in 104 of the municipalities in which it distributes electric energy. Florida Power also serves within a number of municipalities and in all its unincorporated areas without existing franchise agreements. The general effect of these franchises is to provide for the manner in which Florida Power occupies rights-of-way in incorporated areas of municipalities for the purpose of constructing, operating and maintaining an energy transmission and distribution system. Approximately 36% of Florida Power's total utility revenues for 2002 were from the incorporated areas of the 104 municipalities that had franchise ordinances during the year. Since 2000, Florida Power has renewed 27 expiring franchises and reached agreement on a franchise with a city that did not previously have a franchise. Franchises with eight municipalities have expired without renewal. All but 26 of the existing franchises cover a 30-year period from the date enacted. The exceptions are 22 franchises each with a term of 10 years and expiring between 2005 and 2012; two franchises each with a term of 15 years and expiring in 2017; one 30-year franchise that was extended in 2000 for five years expiring in 2005; and one franchise with a term of 20 years expiring in 2020. Of the 104 franchises, 39 expire between January 1, 2003 and December 31, 2012 and 65 expire between January 1, 2013 and December 31, 2031. Ongoing negotiations are taking place with the municipalities to reach agreement on franchise terms and to enact new franchise ordinances. For further information with respect to franchise litigation, see Note 22 to the Financial Statements. 13 Stranded Costs An important issue encompassed by industry restructuring is the recovery of "stranded costs." Stranded costs primarily include the generation assets of utilities whose value in a competitive marketplace would be less than their current book value, as well as above-market purchased power commitments to QFs. Thus far, all states that have passed restructuring legislation have provided for the opportunity to recover a substantial portion of stranded costs. Assessing the amount of stranded costs for a utility requires various assumptions about future market conditions, including the future price of electricity. For Florida Power, the single largest stranded cost exposure is its commitment to QFs. Florida Power has taken a proactive approach to this industry issue. Since 1996, Florida Power has been seeking ways to address the impact of escalating payments from contracts it was obligated to sign under provisions of Public Utility Regulatory Policies Act of 1978 (PURPA). REGULATORY MATTERS General Florida Power is subject to the jurisdiction of the FPSC with respect to, among other things, retail rates and issuance of securities. In addition, Florida Power is subject to regulation by the FERC with respect to transmission and sales of wholesale power, accounting and certain other matters. The underlying concept of utility ratemaking is to set rates at a level that allows the utility to collect revenues equal to its cost of providing service including a reasonable rate of return on its equity. Increased competition as a result of industry restructuring may affect the ratemaking process. Electric Retail Rates The FPSC authorizes retail "base rates" that are designed to provide a utility with the opportunity to earn a specific rate of return on its "rate base," or average investment in utility plant. These rates are intended to cover all reasonable and prudent expenses of utility operations and to provide investors with a fair rate of return. 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. The Agreement eliminates the authorized Return on Equity (ROE) range normally used by the FPSC for the purpose of addressing earning levels; 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 rates by 9.25%; resulting in a reduction of 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 caps will be divided into two shares - a 1/3 share to be retained 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 amount for 2002 was $1.296 billion 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 100% 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 cap for 2002 was $1.356 billion and will increase $37 million each year thereafter. As of December 31, 2002, $4.7 million was accrued and will be refunded to customers in March 2003. On February 24, 2003, the parties to the Agreement filed a motion seeking an order from the FPSC to enforce the Agreement. In this motion, the parties dispute Florida Power's calculation of retail revenue subject to refund and contend that the refund should be approximately $23 million. Florida Power cannot predict the outcome of this matter. The Agreement also provides that beginning with the in-service date of Florida Power's Hines Unit 2 and continuing through December 31, 2005, Florida Power will be allowed to recover through the fuel cost recovery clause a return on 14 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. Hines Unit 2 is a 516 MW combined-cycle unit under construction and currently scheduled for completion in late 2003. 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. There was no accelerated depreciation or amortization expense recorded for the year ended December 31, 2002. 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. Per the Agreement, Florida Power was required to refund to customers $35 million of revenues collected during the interim period of March 13, 2001 through April 30, 2002. This one-time retroactive revenue refund was recorded in the first quarter of 2002 and was returned to retail customer over an eight-month period ended December 31, 2002. Fuel and Other Cost Recovery Florida Power's operating costs not covered by the utility's base rates include fuel, purchased power and energy conservation expenses and specific environmental costs. The state commission allows electric utilities to recover certain of these costs through various cost recovery clauses, to the extent the respective commission determines in an annual hearing that such costs are prudent. In addition, in December 2002, the FPSC approved an Environmental Cost Recovery Clause which will permit the Company to recover the costs of specified environmental projects to the extent these expenses are found to be prudent in an annual hearing and not otherwise included in base rates. Costs will be recovered through this recovery clause in the same manner as the other existing clause mechanisms. The state commission's determination results in the addition of a rider to a utility's base rates to reflect the approval of these costs and to reflect any past over- or under-recovery. Due to the regulatory treatment of these costs and the method allowed for recovery, changes from year to year have no material impact on operating results. NUCLEAR MATTERS Florida Power has one nuclear generating plant, Crystal River Unit No. 3 (CR3), which is subject to regulation by the NRC. The NRC's jurisdiction encompasses broad supervisory and regulatory powers over the construction and operation of nuclear reactors, including matters of health and safety, antitrust considerations and environmental impact. Florida Power has a license to operate the nuclear plant through December 3, 2016. Florida Power currently has a 91.8% ownership interest in CR3. On February 20, 2003, Florida Power notified the NRC of its intent to submit an application to extend the plant license in the first quarter of 2009. In late 2002, CR3 received a license amendment authorizing a small power level increase. The power level increase of approximately 8 MW was implemented in February 2003. On March 18, 2002, the NRC sent a bulletin to companies that hold licenses for pressurized water reactors (PWRs) requiring information on the structural integrity of the reactor vessel head and a basis for concluding that the vessel head will continue to perform its function as a coolant pressure boundary. The Company filed responses as required. Inspections of the vessel heads at the Company's PWR plants have been performed during previous outages. In October 2001, at CR3, 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. 15 On August 9, 2002, the NRC issued an additional bulletin dealing with head leakage due to cracks near the control rod nozzles. The NRC has asked licensees to commit to high inspection standards to ensure the more susceptible plants have no cracks. For CR3, the Company has responded to the NRC that previous inspections are sufficient until the reactor head is replaced in the fall of 2003. In February 2003, the NRC issued Order EA-03-009, requiring specific inspections of the reactor pressure vessel head and associated penetration nozzles at PWRs. The Company has responded to the Order, stating that the Company intends to comply with the provisions of the Order. No adverse impact is anticipated. Security On February 25, 2002, the NRC issued an order requiring interim compensatory measures with regard to security at nuclear plants. This order formalized many of the security enhancements made at the Company's nuclear plants since September 2001. This order includes 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 completed the requirements by the established deadlines. NRC inspections for compliance are underway. In addition, in January 2003, the NRC issued a final order with regard to access control. This order requires the Company to enhance its current access control program by January 7, 2004. The Company expects that it will be in full compliance with the order by the established deadline. 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. Enrichment Facilities Decontamination Florida Power filed an action against the United States in the U.S. Court of Claims on November 1, 1996 challenging certain retroactive assessments imposed by the federal government on domestic nuclear power companies to fund the decommissioning and decontamination of the government's uranium enrichment facilities. The government is collecting this assessment on an annual basis, which is levied upon all domestic utilities that had enrichment services contracts with the government. Collection of the special assessments began in 1992 and is scheduled to continue for a 15-year period. A number of other utilities have filed similar actions against the government. The Claims Court issued a decision granting the government's summary judgment motion. That decision was appealed to the U.S. Court of Appeals for the Federal Circuit, which stayed its consideration of the case pending a decision by the U.S. Supreme Court on a petition for writ of certiorari that was filed by Commonwealth Edison et al. in their case against the government. This Supreme Court refused to accept that case for review, effectively resolving the case in favor of the government. Based on a joint motion, Florida Power's appeal has been dismissed with prejudice. ENVIRONMENTAL MATTERS There are two former MGP sites and 11 other active waste sites or categories of sites associated with Florida Power that have required or are anticipated to require investigation and/or remediation costs. As of December 31, 2002 and 2001, Florida Power has accrued approximately $10.9 million and $8.5 million, respectively, for probable and reasonably estimable costs at these sites. Florida Power does not believe that it can provide an estimate of the reasonably possible total remediation costs beyond what it has currently accrued. In 2002, Florida Power filed a petition for recovery of approximately $4.0 million in environmental costs through the Environmental Cost Recovery Clause with the FPSC. Florida Power was successful with this filing and will recover costs through rates for investigation and remediation associated with transmission and distribution substations and transformers. As more activity occurs at these sites, Florida Power will assess the need to adjust the accruals. These accruals have been recorded on an undiscounted basis. Florida Power measures its liability for these sites based on available evidence including its experience in investigating and remediating environmentally impaired sites. This process often includes assessing and developing cost-sharing arrangements with other potentially responsible parties. 16 DIVERSIFIED OPERATIONS GENERAL Florida Progress' diversified operations are owned directly or indirectly through Progress Capital, a Florida corporation and wholly owned subsidiary of Florida Progress. Progress Capital holds the capital stock of, and provides the financing for, Florida Progress' non-utility subsidiaries. Its primary subsidiary is Progress Fuels, formerly Electric Fuels. On January 2, 2002, Electric Fuels changed its name to Progress Fuels. Formed in 1976, Progress Fuels is an energy and transportation company. When the Inland Marine Transportation unit was sold in November 2001, Progress Fuels was reorganized into two business units, Energy and Related Services and Rail Services. Progress Fuels' energy and related services business unit supplies coal to Florida Power's Crystal River Energy Complex and other utility and industrial customers. This business unit also produces and sells natural gas and synthetic fuel along with operating terminal services and offshore marine transportation. Progress Fuels also manages all of Progress Energy's synthetic fuel facilities (See Note 16 to the Financial Statements). The rail services business unit, led by Progress Rail Services Corporation (Progress Rail), is one of the largest integrated and diversified suppliers of railroad and transit system products and services in North America and is headquartered in Albertville, Alabama. Rail Services' principal business functions include the Mechanical Group, Rail and Trackwork Group, and Recycling Group. The Company intends to sell the assets of Railcar Ltd., a leasing subsidiary, during 2003 and has therefore reported these assets as assets held for sale. On March 12, 2003, the Company signed a letter of intent to sell Railcar Ltd. to The Andersons, Inc. The proceeds of the sale will be used by the Company to pay off Railcar Ltd. lease obligations. The transaction is still subject to various closing conditions including financing, due diligence and the completion of a definitive purchase agreement. With operations in 26 states, Canada and Mexico, Progress Rail offers a full range of railcar parts, maintenance-of-way equipment, rail and other track material, railcar repair facilities, railcar scrapping and metal recycling as well as railcar sales and leasing. The Mechanical Group is primarily focused on railroad rolling stock that includes freight cars, transit cars and locomotives, the repair and maintenance of these units, and the manufacturing or reconditioning of major components for these units. The Rail and Trackwork Group focuses on rail and other track components, the infrastructure which supports the operation of rolling stock, as well as the equipment used in maintaining the railroad infrastructure and right-of-way. The Recycling Group supports the Mechanical and Rail and Trackwork Groups through its reclamation of reconditionable material. In addition, the Recycling Group is a major supplier of recyclable scrap metal to North American steel mills and foundries through its processing locations as well as its scrap brokerage operations. Rail Services' key railroad industry customers are Class 1 railroads, regional and shortline railroads, major North American transit systems, major railcar and locomotive builders, and major railcar lessors. The U.S. operations are located in 26 states and include further geographic coverage through mobile crews on a selected basis. This coverage allows for Rail Services' customer base to be dispersed throughout the U.S., Canada and Mexico. After the acquisition of Florida Progress, Progress Energy hired a financial adviser to assist Florida Progress in evaluating its strategic alternatives with respect to Progress Fuels' Inland Marine Transportation and Rail Services segments. On July 23, 2001, Progress Energy announced the disposition of the Inland Marine Transportation segment of the Company, which was operated by MEMCO Barge Line, Inc. Inland Marine provided 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 (See Note 4 to the Financial Statements). During 2001, Progress Energy decided to retain the Rail Services segment in the near term. An SEC order approving the merger of Florida Progress with Progress Energy requires Progress Energy to divest of Rail Services and certain immaterial, non-regulated investments of Florida Progress by November 30, 2003. Progress Energy is pursuing alternatives, but does not expect to find the right divestiture opportunity by that date. Therefore, Progress Energy plans to seek an extension from the SEC. 17 In October 1998, Florida Progress formed a new subsidiary, Progress Telecom. Progress Telecom has data fiber network transport capabilities that stretch from New York to Miami, Florida, with gateways to Latin America and conducts primarily a carrier's carrier business. Progress Telecom markets wholesale fiber-optic-based capacity service in the Eastern United States to long-distance carriers, internet service providers and other telecommunications companies. Progress Telecom also markets wireless structure attachments to wireless communication companies and governmental entities. As a result of the acquisition by Progress Energy, Progress Telecom now manages the fiber-optic network of Caronet, Inc. (Caronet), a subsidiary of Progress Energy, stretching from Atlanta to Washington, D. C. Progress Telecom combined its fiber network with Caronet's fiber network in 2001. As of December 31, 2002, Progress Telecom and Caronet owned and managed approximately 8,400 route miles and more than 130,000 fiber miles of fiber-optic cable. For additional information regarding asset and investment impairments, see Note 7 to the Financial Statements. Progress Telecom competes with other providers of fiber-optic telecommunications services, including local exchange carriers and competitive access providers, in the Eastern United States. Lease revenue for dedicated transport and data services is generally billed in advance on a fixed rate basis and recognized over the period the services are provided. Revenues relating to design and construction of wireless infrastructure are recognized upon completion of services (i.e., as the revenue is earned) for each completed phase of design and construction. COMPETITION Florida Progress' non-utility subsidiaries compete in their respective marketplaces in terms of price, quality of service, location and other factors. Progress Fuels competes in several distinct markets. Its coal and synthetic fuel operations compete in the eastern United States utility and industrial coal markets, and its rail operations compete in the railcar repair, parts and associated services markets primarily in the eastern United States, but also in the midwest and west. Factors contributing to Progress Fuels' success in these markets include a competitive cost structure and strategic locations. There are numerous competitors in each of these markets, although no one competitor is dominant in any industry. The business of Progress Fuels and its subsidiaries, taken as a whole, is not subject to significant seasonal fluctuation. 18 ITEM 2. PROPERTIES GENERAL Florida Progress believes that its physical properties and those of its subsidiaries are adequate to carry their businesses as currently conducted. Florida Progress and its subsidiaries maintain property insurance against loss or damage by fire or other perils to the extent that such property is usually insured. UTILITY OPERATIONS As of December 31, 2002, Florida Power's 14 generating plants represent a flexible mix of fossil, nuclear, combustion turbine and combined cycle resources with a total summer generating capacity (including jointly-owned capacity) of 8,024 MW. At December 31, 2002, Florida Power has the following generating facilities: - ----------------------------------------------------------------------------------------------------------------------- Facility Location No. of In-Service Fuel Florida Summer Net Units Date Ownership Capability (a) (in %) (in MW) - ----------------------------------------------------------------------------------------------------------------------- STEAM TURBINES Anclote Holiday, FL 2 1974-1978 Gas/Oil 100 993 Bartow St. Petersburg, FL 3 1958-1963 Gas/Oil 100 444 Crystal River Crystal River, FL 4 1966-1984 Coal 100 2,302 Suwannee River Live Oak, FL 3 1953-1956 Gas/Oil 100 143 --------- -------------------------------- Total 12 3,882 COMBINED CYCLE Hines Bartow, FL 1 1999 Gas/Oil 100 482 Tiger Bay Fort Meade, FL 1 1997 Gas 100 207 --------- -------------------------------- Total 2 689 COMBUSTION TURBINES Avon Park Avon Park, FL 2 1968 Gas/Oil 100 52 Bartow St. Petersburg, FL 4 1958-1972 Gas/Oil 100 187 Bayboro St. Petersburg, FL 4 1973 Oil 100 184 DeBary DeBary, FL 10 1975-1992 Gas/Oil 100 667 Higgins Oldsmar, FL 4 1969-1970 Gas 100 122 Intercession City Intercession City, FL 14 1974-2000 Gas/Oil 100 (c) 1,041 (b) Rio Pinar Rio Pinar, FL 1 1970 Oil 100 13 Suwannee River Live Oak, FL 3 1980 Gas/Oil 100 164 Turner Enterprise, FL 4 1970-1974 Oil 100 154 University of Florida Cogeneration Gainesville, FL 1 1994 Gas 100 35 --------- -------------------------------- Total 47 2,619 NUCLEAR Crystal River Crystal River, FL 1 1977 Uranium 91.78 834 (b) --------- -------------------------------- Total 1 834 TOTAL 62 8,024 - -----------------------------------------------------------------------------------------------------------------------
(a) Amounts represent Florida Power's net summer peak rating, gross of co-ownership interest in plant capacity. (b) Facilities are jointly owned. The capacities shown include joint owners' share. (c) Florida Power and Georgia Power Company ("Georgia Power") are co-owners of a 143 MW advanced combustion turbine located at Florida Power's Intercession City site (Unit P11). Georgia Power has the exclusive right to the output of this unit during the months of June through September. Florida Power has that right for the remainder of the year. 19 As of December 31, 2002, including both the total generating capacity of 8,024 MW and the total firm contracts for purchased power of 1,304 MW, Florida Power had total capacity resources of approximately 9,328 MW. Hines Unit 2 is a 516 MW combined-cycle unit currently under construction and scheduled for completion in late 2003. Several entities have acquired undivided ownership interests in CR3 in the aggregate amount of 8.22%. The joint ownership participants are: City of Alachua - - 0.08%, City of Bushnell - 0.04%, City of Gainesville - 1.41%, Kissimmee Utility Authority - 0.68%, City of Leesburg - 0.82%, Utilities Commission of the City of New Smyrna Beach - 0.56%, City of Ocala - 1.33%, Orlando Utilities Commission - 1.60% and Seminole Electric Cooperative, Inc. - 1.70%. Florida Power and Georgia Power are co-owners of a 143 MW advance combustion turbine located at Florida Power's Intercession City site (P11). Georgia Power has the exclusive right to the output of this unit during the months of June through September. Florida Power has that right for the remainder of the year. Otherwise, Florida Power has good and marketable title to its principal plants and important units, subject to the lien of its mortgage and deed of trust, with minor exceptions, restrictions and reservations in conveyances, as well as minor defects of the nature ordinarily found in properties of similar character and magnitude. Florida Power also owns certain easements over private property on which transmission and distribution lines are located. As of December 31, 2002, Florida Power distributed electricity through 370 substations with an installed transformer capacity of approximately 45,000,000 kVA. Of this capacity, about 31,000,000 kVA is located in transmission substations and 14,000,000 kVA in distribution substations. Florida Power has the second largest transmission network in Florida. Florida Power has approximately 5,000 circuit miles of transmission lines, of which 2,600 circuit miles are operated at 500, 230, or 115 kV and the balance at 69 kV. Florida Power has approximately 28,000 circuit miles of distribution lines, which operate at various voltages ranging from 2.4 to 25 kV. DIVERSIFIED OPERATIONS Progress Fuels owns and/or operates approximately 5,300 railcars and 100 locomotives that are used for the transportation and shipping of coal, steel, and other bulk products. Through a joint venture, Progress Fuels has four oceangoing tug/barge units. Progress Fuels controls, either directly or through subsidiaries, coal reserves located in eastern Kentucky and southeastern Virginia of approximately 12 million tons and controls, through mineral leases, additional estimated coal reserves of approximately 18 million tons. The reserves controlled include substantial quantities of high quality, low sulfur coal that is appropriate for use at Florida Power's existing generating units. Progress Fuels' total production of coal during 2002 was approximately 2.6 million tons. In connection with its coal operations, Progress Fuel's business units own and operate an underground mining complex located in southeastern Kentucky and southwestern Virginia. Other subsidiaries own and operate surface and underground mines, coal processing and loadout facilities and a river terminal facility in eastern Kentucky, a railcar-to-barge loading facility in West Virginia, and two bulk commodity terminals on the Kanawha River near Charleston, West Virginia. Progress Fuels and its subsidiaries employ both company and contract miners in their mining activities. Progress Fuels has oil and gas leases on about 20,000 acres in Garfield and Mesa counties in Colorado, containing proven natural gas net reserves of 98 billion cubic feet. This subsidiary currently operates 96 gas wells on the properties. Progress Fuels also has oil and gas leases on about 35,000 acres concentrated within a 25-mile radius along the Texas and Louisiana border, containing proven natural gas reserves of 125 billion cubic feet. This subsidiary currently operates 234 gas wells on the properties. Progress Fuels' natural gas production in 2002 was 11.8 billion cubic feet. The Company is exploring opportunities to divest of its Mesa properties in 2003. Progress Fuels owns and operates a manufacturing facility at the Florida Power Energy Complex in Crystal River, Florida. The manufacturing process utilizes the fly ash generated by the burning of coal as the major raw material in the production of lightweight aggregate used in construction building blocks. Progress Rail, a Progress Fuels subsidiary, is one of the largest integrated processors of railroad materials in the United States, and is a leading supplier of new and reconditioned freight car parts, rail, rail welding and track work components, railcar repair facilities, railcar and locomotive leasing, maintenance-of-way equipment and scrap metal recycling. It has facilities and offices in 26 states, Mexico and Canada. 20 As a result of the acquisition by Progress Energy, Progress Telecom now manages the fiber-optic network of Caronet, Inc. (Caronet), a subsidiary of Progress Energy, stretching from Atlanta to Washington, D.C. Progress Telecom combined its fiber network with Caronet's fiber network in 2001. Progress Telecom provides wholesale telecommunications services throughout the Eastern United States. Progress Telecom incorporates more than 130,000 fiber miles in its network, including over 160 Points-of-Presence, or physical locations where a presence for network access exists. ITEM 3. 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. Florida Power and Florida Progress have successfully resolved and settled the multi-party lawsuit served on the companies in 1995. In 1995, Florida Power and Florida Progress were named defendants in an age discrimination lawsuit. The number of plaintiffs was 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 sought 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 (ADEA). 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 Age Discrimination in Employment Act. 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 trial for the first set of twelve plaintiffs began on July 22, 2002. The jury entered a verdict in favor of Florida Power in that trial on August 9, 2002. The next group of plaintiffs' to be tried was named, but no trial date was set. The parties attended a second mediation on October 31 and November 1, 2002. The Company was able to reach a settlement of this matter with all but one plaintiff, the details of which are subject to a confidentiality agreement. The amount of the settlements are not expected to have a material adverse impact on the Company. The Company believes this proceeding no longer meets the disclosure standards for this item, and thus will no longer report on it. (For additional information, see Note 22F to the Financial Statements - Commitments and Contingencies - Legal Matters - Age Discrimination Suit.) 2. Calgon Carbon Corporation v. Potomac Capital Investment Corporation, Potomac Electric Power Company, Progress Capital Holdings, Inc., and Florida Progress Corporation, United States District Court for the Western District of Pennsylvania, Civil Action No. 98-0072. Calgon Carbon Corporation (Calgon) filed a complaint on January 12, 1998, asserting securities fraud, breach of contract and other claims in connection with the sale to it by two of the defendants in December 1996 of their interests in Advanced Separation Technologies, Incorporated (AST), a corporation engaged in the business of designing and assembling proprietary 21 separation equipment. Prior to closing, Progress Capital, a wholly owned subsidiary of Florida Progress, owned 80% of the outstanding stock of AST and Potomac Capital Investment Corporation (an entity unaffiliated with Progress Capital or Florida Progress) owned 20%. Calgon paid Progress Capital an aggregate of approximately $57.5 million (producing net proceeds of approximately $56 million after certain fees and expenses) in respect of Progress Capital's share of AST's stock. Calgon claims that AST's assets and revenues were overstated and liabilities and expenses were understated for 1996. Calgon also alleges undisclosed facts relating to accounting methodology, poor products, manufacturing and quality control problems and undisclosed warranty claims. Calgon seeks damages, punitive damages and the right to rescind the purchase. The defendants have filed a motion for summary judgement, which is pending. As a result of documents recently produced by the plaintiff which Florida Progress believes undercut several of Calgon's claims, discovery has been reopened. Defendants will be allowed to supplement their motion. (See Note 22 to the Financial Statements - Commitments and Contingencies - Legal Matters - Advanced Separation Technologies.) 3. Wallace Bentley, et al. v. City of Tallahassee, Interstate Fibernet, Inc. and Florida Power Corporation, Circuit Court for Leon County, Florida. Case No. 98-7107. In December 1998, Florida Power was served with this class action lawsuit seeking damages, declaratory and injunctive relief for the alleged improper use of electric transmission easements. The plaintiffs contend that the licensing of fiber-optic telecommunications lines to third parties or telecommunications companies for other than Florida Power's internal use along the electric transmission line right-of-way exceeds the authority granted in the easements. In June 1999, plaintiffs amended their complaint to add Progress Telecom as a defendant and adding counts for unjust enrichment and constructive trust. In January 2000, the trial 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 trial court preliminarily approved the amended settlement agreement, certified the settlement class and approved the class notice. On November 16, 2001, the trial court issued a final order approving the settlement. Several objectors to the settlement appealed the order to the 1st District Court of Appeal. On February 12, 2003, the appellate court issued an opinion upholding the trial court's subject matter jurisdiction over the case, but reversing the trial court's order approving the mandatory settlement class for purposes of declaratory and injunctive relief. The appellate court remanded the case to the trial court for further proceedings. The Company filed a motion requesting discretionary review before the Florida Supreme Court, which is pending before the 1st District Court of Appeal. The objectors and the class plaintiffs also have filed similar requests for discretionary review as well as requests for rehearing before the 1st District Court of Appeal, all of which are pending. The Company cannot predict the outcome of any future proceedings in this case. (See Note 22 to the Financial Statements - Commitments and Contingencies - Legal Matters - Easement Litigation.) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The information called for by ITEM 4 is omitted pursuant to Instruction I (2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries). 22 PART II ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS FLORIDA PROGRESS All of Florida Progress' common stock is owned by Progress Energy, and as a result there is no established public trading market for the stock. Florida Progress receives dividends from Florida Power. Florida Power's Amended Articles of Incorporation and its Indenture dated as of January 1, 1944, under which it issues first mortgage bonds, contain provisions restricting dividends in certain circumstances. At December 31, 2002, Florida Power's ability to pay dividends was not limited by these restrictions. Florida Progress and Progress Capital have entered into a Second Amended and Restated Guaranty and Support Agreement dated as of August 7, 1996, pursuant to which Florida Progress has unconditionally guaranteed the payment of Progress Capital's debt (as defined in the agreement). Florida Progress did not issue any equity securities during 2002 that were not registered under the Securities Act. FLORIDA POWER All of Florida Power's common stock is owned by Florida Progress, and as a result there is no established public trading market for the stock. For the past three years, Florida Power has paid quarterly dividends to Florida Progress totaling the amounts shown in the Statements of Common Equity in the Financial Statements. Florida Power's amended articles of incorporation, and its Indenture dated as of January 1, 1944, as supplemented, under which it issues first mortgage bonds, contain provisions restricting dividends in certain circumstances. At December 31, 2002, Florida Power's ability to pay dividends was not limited by these restrictions. Florida Power did not issue any equity securities during 2002 that were not registered under the Securities Act. ITEM 6. SELECTED FINANCIAL DATA The information called for by ITEM 6 is omitted pursuant to Instruction I(2)(a) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries). 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis contains forward-looking statements that 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. Please review "Risk Factors" and "SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion of the factors that may impact any such forward-looking statements made herein. OVERVIEW Florida Progress' income from continuing operations for the years ended December 31, 2002 and 2001 were $230.1 million and $265.4 million respectively. The year over year comparisons were most significantly impacted by: o $144.0 million of after-tax impairments and related charges in the telecommunications operations in 2002; o $44.7 million of after-tax estimated impairment on assets held for sale related to Railcar Ltd. in 2002; o $108.1 million of after-tax long-lived asset impairments related to the Rail Services operations in 2001; o improved operations of the Rail Services segment, exclusive of the asset impairment, and o improved earnings at Florida Power. These and other key operating results are discussed by segment, below. FLORIDA POWER CORPORATION Florida Power's operating results are primarily influenced by customer demand for electricity, its ability to control costs and its regulatory return on equity. Annual demand for electricity is based on the number of customers and their annual usage, with usage largely driven by weather. Since Florida Power serves a predominately retail customer base, operating results are primarily influenced by the level of retail sales and the costs associated with those sales. The FPSC oversees the retail sales of the state's investor-owned electric utilities and authorizes retail base rates. Base rates and the resulting base revenues are intended to cover all reasonable and prudent expenses of utility operations and provide investors with a fair rate of return. Costs not covered by base rates include fuel, purchased power energy conservation expenses and certain environmental costs. The FPSC allows electric utilities to recover these costs, referred to as "pass-through" costs, through various cost recovery clauses to the extent those costs are prudent. Due to the regulatory treatment of these expenses and the method allows for recovery, changes from year to year have no material impact on operating results. Florida Power contributed earnings of $322.6 million and $309.6 million for the years ended December 31, 2002 and 2001, respectively. Florida Power's earnings in 2002 were affected by the outcome of the Florida Power rate case settlement, which included a one-time retroactive revenue refund of $35.0 million ($21.0 million after tax), a decrease in retail rates of 9.25% (effective May 1, 2002), which resulted in an additional $79.5 million decline in revenues, and an estimated revenue sharing refund of $4.7 million. These revenue declines were partially offset by $78.2 million of lower depreciation and amortization pursuant to the rate case and increased service revenue rates. See Note 12 to the Florida Progress consolidated financial statements for further discussion of the rate case settlement. A comparison of the results of operations of Florida Power for 2002 and 2001 follows. 24 Revenues Florida Power's electric revenues for the years ended December 31, 2002 and 2001 and the percentage change by year and by customer class, as well as the impact of the rate case settlement on revenue, are as follows: --------------------------------------------------------------------- (in millions) --------------------------------------------------------------------- Customer Class 2002 % Change 2001 --------------------------------------------------------------------- Residential $ 1,645 0.1% $ 1,643 Commercial 731 (3.1) 754 Industrial 211 (5.4) 223 Governmental 173 (1.7) 176 Revenue Sharing Refund (5) - - Retroactive Retail Rate Refund (35) - - --------- --------- Total Retail Revenues 2,720 (2.7) 2,796 Wholesale 230 (20.1) 288 Unbilled (3) - (22) Miscellaneous 115 (23.8) 151 --------- --------- Total Electric Revenues $ 3,062 (4.7)% $ 3,213 --------------------------------------------------------------------- Florida Power's electric energy sales for the years ended December 31, 2002 and 2001 and the percentage change by year and by customer class are as follows: ------------------------------------------------------------------------- (in thousands of mWh) ------------------------------------------------------------------------- Customer Class 2002 % Change 2001 ------------------------------------------------------------------------- Residential 18,754 6.5% 17,604 Commercial 11,420 3.2 11,061 Industrial 3,835 (1.0) 3,872 Governmental 2,850 4.5 2,726 --------- --------- Total Retail Energy Sales 36,859 4.5 35,263 Wholesale 4,180 (11.4) 4,719 Unbilled 5 - (511) --------- --------- Total mWh Sales 41,044 4.0% 39,471 ------------------------------------------------------------------------- Florida Power electric revenues decreased $151.1 million from 2001 to 2002. The revenue declines were driven by the $119.2 million impact of the rate case, mentioned previously. Additionally, wholesale revenues declined $58.1 million, driven primarily by a contract that was not renewed. Year over year comparisons were also unfavorably impacted by the recognition of $63.0 million of revenue deferred from 2000 to 2001. Partially offsetting the unfavorable revenue impacts was growth in the residential (approximately 29,000 additional customers) and commercial (approximately 4,000 additional customers) customer classes. Additional offsets included weather conditions, primarily a warmer than normal summer in 2002, and an increase in other service revenue, resulting primarily from increased rates allowed under the rate case settlement, along with higher transmission wheeling revenues. Residential and commercial sales increased in 2001 and reflect continued growth in the number of customers served by Florida Power Electric, partially offset by milder weather and a downturn in the economy. Florida Power Electric added over 35,000 new customers in 2001. Expenses Fuel used in generation and purchased power was $1.4 billion for the year ended December 31, 2002, a decrease of $58.8 million from 2001. The decrease is primarily due to a lower recovery of fuel expense that resulted from a mid-course correction of Florida Power's fuel cost recovery clause, as part of the rate settlement, and lower purchased power costs, partially offset by an increase in coal prices and volume from high system requirements. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, have no material impact on operating results. 25 Operations and maintenance expense increased $85.1 million in 2002 when compared to $487.1 million in 2001, due primarily to a reduced pension credit of $30.8 million, increased costs related to the Commitment to Excellence program of $11.3 million, and an increase in other salary and benefit costs of $21.5 million related partially to increased medical costs. The Commitment to Excellence program was initiated in 2002 to improve service and reliability. Depreciation and amortization expense decreased $158.1 million in 2002 when compared to $453.0 million in 2001. In addition to the depreciation and amortization reduction of approximately $79.0 million related to the rate case, depreciation declined an additional $97.0 million related to accelerated amortization on the Tiger Bay regulatory asset, which was created as a result of the early termination of certain long-term cogeneration contracts. See Note 12A to the financial statements for further detail on the rate case. Florida Power amortizes the regulatory asset according to a plan approved by the FPSC in 1997 and plans to fully amortize the asset by the end of 2003. In 2001, $97.0 million of accelerated amortization was recorded on the Tiger Bay regulatory asset, of which $63.0 million was associated with deferred revenue from 2000 and had no impact on 2001 earnings. According to an SEC order under PUHCA, Progress Energy's tax benefit not related to acquisition interest expense is to be allocated to profitable subsidiaries. Therefore, the tax benefit that was previously held in Progress Energy's holding company was allocated to its profitable subsidiaries effective with 2002. This resulted in the allocation of a $19.9 million tax benefit to Florida Power in 2002. Other fluctuations in income taxes are primarily due to changes in pretax income. 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 - Income from continuing operations for Energy and Related Services were $117.5 million and $128.5 million for 2002 and 2001, respectively. The Energy and Related Services unit sold 6.5 million and 8.1 million tons of synthetic fuel in 2002 and 2001. The sales resulted in tax credits of $170.3 million and $213.4 million for 2002 and 2001, respectively. The synthetic fuel is produced at a loss; however, the production and sale of the fuels qualifies for tax credits under Section 29 of the Code, which more than offsets the loss. Production in 2002 was curtailed to ensure effective utilization of the credits. The synthetic fuels operations generated losses before income taxes of $111.1 million and $165.8 million in 2002 and 2001, respectively. Other fluctuations in income taxes are primarily due to changes in pretax income. The Energy and Related Services unit also includes operations related to natural gas exploration and production. In 2001, these operations included the operations of Mesa Hydrocarbons, Inc. (Mesa), which owns natural gas reserves and operates wells in Colorado and sells natural gas. In 2002, it also included similar operations of Westchester Gas Company, which was purchased during 2002. These gas operations generated income from continuing operations of $9.6 million and $5.3 million in 2002 and 2001, respectively. Westchester Gas Company produced 5.8 million cubic feet of gas in 2002, which represented 49% of the combined production for the year. This increased production drove the earnings increase from 2001 to 2002. The Company is exploring opportunities to divest of its Mesa properties in 2003. Rail Services - Rail Services' operations represent the activities of Progress Rail and include railcar and locomotive repair, trackwork, rail parts reconditioning and sales, scrap metal recycling, railcar leasing and other rail related services. Rail Services' results for the year ended December 31, 2001, include Rail Services' cumulative revenues and net loss from the date of acquisition, November 30, 2000, because Rail Services had been held for sale from the date of acquisition through the second quarter of 2001. Rail Services contributed net losses from continuing operations of $47.4 million and $144.4 million for the years ended December 31, 2002 and 2001, respectively. The net loss in 2002 includes a $44.7 million after-tax estimated impairment on assets held for sale related to Railcar Ltd., a leasing subsidiary of Progress Rail. The Company intends to sell the assets of Railcar Ltd. in 2003 and has reported these assets as assets held for sale. See Note 4A to the Florida Progress consolidated financial statements for discussion of this planned divestiture. On March 12, 2003, Progress Energy announced that Railcar Ltd. signed a letter of intent to sell predominately all of its railroad leasing assets to The Andersons, Inc. The proceeds of the sale will be used to pay off 26 Railcar Ltd. lease obligations. The transaction is still subject to various closing conditions including financing, due diligence and the completion of a definitive purchase agreement. The net loss in 2001 includes a $108.1 million after-tax long-lived asset impairment, which is discussed in Note 7 of the Florida Progress consolidated financial statements and an after-tax loss on the sale of scrap operations of $18.7 million. Rail Services' results for both years were affected by a downturn in the overall economy, decreases in rail service procurement by major railroads and a downturn in the domestic scrap market. Rail Services' 2002 results were favorably impacted by aggressive cost cutting, new business opportunities and restructuring initiatives. An SEC order approving the merger of Florida Progress with Progress Energy requires Progress Energy to divest of Rail Services by November 30, 2003. Progress Energy is actively pursuing alternatives, but does not expect to find the right divestiture opportunity by that date. Therefore, Progress Energy plans to seek an extension from the SEC. OTHER The Other segment includes telecommunications, holding company and financing expenses and had net losses from continuing operations of $162.6 million and $28.3 million in 2002 and 2001, respectively. The increase in net loss is due primarily to the recognition of asset impairments and related charges in the telecommunications business unit. This is partially offset by lower interest charges resulting from lower interest rates and the capitalization of interest related to the building of nonregulated generating plants. Progress Telecom had net losses of $156.2 million and $10.9 million for 2002 and 2001, respectively. The decrease in earnings in 2002, when compared to 2001, is primarily due to asset impairments and after tax charges of $144.0 million. See Note 7 to the Florida Progress consolidated financial statements for further discussion of these charges. Application of Critical Accounting Policies and Estimates Florida Progress prepared its consolidated financial statements in accordance with accounting principles generally accepted in the United States. In doing so, certain estimates were made that were critical in nature to the results of operations. The following discusses those significant estimates that may have a material impact on its financial results and are subject to the greatest amount of subjectivity. Senior management has discussed the development and selection of these critical accounting policies with the Audit Committee of Progress Energy's Board of Directors. Utility Regulation Florida Power is subject to regulation that sets the prices (rates) it is permitted to charge customers based on the costs that regulatory agencies determine Florida Power is permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense by a nonregulated company. This ratemaking process results in deferral of expense recognition and the recording of regulatory assets based on anticipated future cash inflows. As a result of the changing regulatory framework, a significant amount of regulatory assets has been recorded. Florida Power continually reviews these assets to assess their ultimate recoverability within the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislative, judicial or regulatory actions in the future. Additionally, the state regulatory agency often provides flexibility in the manner and timing of the depreciation of property, nuclear decommissioning costs and amortization of the regulatory assets. Note 12 to the Florida Progress consolidated financial statements provides additional information related to the impact of utility regulation on Florida Power. Asset Impairments Florida Progress evaluates the carrying value of long-lived assets for impairment whenever indicators exist. Examples of these indicators include current period losses combined with a history of losses, or a projection of continuing losses, or a significant decrease in the market price of a long-lived asset group. If an indicator exists, the asset group held and used is tested for recoverability by comparing the carrying value to the sum of undiscounted expected future cash flows directly attributable to the asset group. If the asset group is not recoverable through undiscounted cash flows or if the asset group is to be disposed of, an impairment loss is recognized for the difference 27 between the carrying value and the fair value of the asset group. A high degree of judgment is required in developing estimates related to these evaluations and various factors are considered, including projected revenues and cost and market conditions. During 2002, Florida Progress recorded pre-tax long-lived asset impairments of $214.6 million related to its telecommunications business. See Note 7 to the Florida Progress consolidated financial statements for further information on this impairment and other charges. The fair value of these assets was determined using an external valuation study heavily weighted on a discounted cash flow methodology and using market approaches as supporting information. However, if the telecommunications market continues to deteriorate, the Company's telecommunications related assets may be further adversely affected. Synthetic Fuels Tax Credits Florida Progress, through the Energy and Related Services business unit, produces synthetic fuel from coal fines. The production and sale of the synthetic fuel qualifies for tax credits under Section 29 of the Internal Revenue Code (Section 29) if certain requirements are satisfied, including a requirement that the synthetic fuel differs significantly in chemical composition from the feedstock used to produce such synthetic fuel. Any synthetic fuel tax credit amounts not utilized are carried forward indefinitely and are included in deferred taxes on the accompanying Consolidated Balance Sheet. All of Florida Progress's synthetic fuel facilities have received private letter rulings from the Internal Revenue Service (IRS) with respect to their operations. These tax credits are subject to review by the IRS, and if Progress Energy fails to prevail through the administrative or legal process, there could be a significant tax liability owed for previously taken Section 29 credits, with a significant impact on earnings and cash flows. Pension and Other Postretirement Benefits Florida Progress' reported costs of providing pension and other postretirement benefits (described in Note 15 to the Florida Progress consolidated financial statements), primarily health benefits, are dependent on numerous factors resulting from actual plan experience and assumptions of future experience. For example, such costs are impacted by employee demographics, changes made to plan provisions, and key actuarial assumptions such as rates of return on plan assets, discount rates used in determining benefit obligations and annual costs and, for other postretirement benefits, medical trend rates. Due to a decline in market interest rates for high-quality (AAA/AA) debt securities, which are used as the benchmark for setting the discount rate, Florida Progress lowered the discount rate to 6.60% at December 31, 2002, which will increase the 2003 benefit costs recognized. In addition, the continuing declines in the equity markets have adversely affected the fair value of plan assets, which will also increase the benefit costs recognized in 2003. Evaluations of the effects of these factors has not been completed, but the Florida Progress estimates that 2003 total cost for pension and other postretirement benefits will increase by approximately $26 million over the amount recorded in 2002, due in large part to these factors. The majority of that increase has been anticipated and reflected in the Florida Progress's budgeting/forecasting process. Recoveries in the level of interest rates and equity markets would, correspondingly, have positive effects on future years' benefit cost recognition. Florida Progress has substantial pension plan assets, with a fair value of approximately $687.4 million at December 31, 2002. Florida Progress's expected rate of return on pension plan assets has been 9.25%. Under the accounting standard for pension accounting, the expected rate of return used in pension cost recognition is a long-term rate of return; therefore, Florida Progress would only adjust that return if its fundamental assessment of the debt and equity markets changes or its investment policy changes significantly. Florida Progress continues to believe that its pension plan's investment mix supports the long-term rate of 9.25% being used. A 0.25% change in the expected rate of return for 2002 would have changed 2002 pension cost by approximately $2.0 million. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW Florida Progress' utility and diversified operations are capital-intensive businesses. Florida Progress relies upon its operating cash flow, commercial paper facilities and its ability to access long-term capital markets for its liquidity needs. Since a substantial majority of Florida Progress' operating costs are related to its regulated electric utility, a significant portion of these costs are recovered from customers through fuel and energy cost recovery clauses. 28 At Florida Power, cash from operations is the primary source of cash for the utility's construction expenditures. Florida Power's estimated capital requirements for 2003, 2004 and 2005 are $590 million, $450 million and $500 million, respectively. In addition to funding its construction commitments with cash from operations, the companies access the capital markets through the issuance of commercial paper, secured and unsecured notes, preferred securities and equity through Progress Energy, which can offer issuances of common stock. Risk factors associated with commercial paper back up credit facilities and credit ratings are discussed below under "Risk Factors". Florida Power's interim financing needs are funded primarily through its commercial paper program. In addition, Florida Power has an uncommitted bank bid facility that authorizes them to borrow and re-borrow. The facility was established to temporarily supplement commercial paper borrowings, as needed. In addition to funding the working capital needs of its diversified businesses primarily through its commercial paper program, Progress Energy can issue long-term debt to fund the capital requirements of Progress Fuels. CASH FLOW FROM OPERATING ACTIVITIES Florida Progress' cash from operations of $671 million decreased $280.2 million compared with 2001 due primarily to lower operating cash flow at Florida Power. The utility's operating cash flow decreased by $500 million, due primarily to higher working capital requirements. Florida Progress' cash from operations of $928.2 million in 2001 increased $430.5 million compared with 2000 due primarily to improved operating cash flow at Florida Power. The utility's improved operating cash flow was due to customer growth and the recovery of fuel costs previously deferred. Florida Power is allowed full recovery of prudently incurred costs through rates charged to customers. CASH FLOW FROM INVESTING ACTIVITIES Cash requirements for investing activities during 2002 of $647.7 million increased $144.8 million when compared with 2001. The increase was due mainly to an increase in utility property additions of $196.6 million compared to 2001. Cash requirements for investing activities during 2001 decreased $43.7 million when compared with 2000 due primarily to lower investing activity at Florida Progress' diversified operations. Florida Power's construction expenditures, including nuclear fuel, totaled $550.1 million, $396.5 million and $286.8 million for 2002, 2001 and 2000, respectively. These expenditures are primarily for distribution lines and generating facilities necessary to meet the needs of the utility's growing customer base. In planning for its future generation needs, Florida Power develops a forecast of annual demand for electricity, including a forecast of the level and duration of peak demands during the year. These forecasts have historically been developed using a 15% reserve margin. The reserve margin is the difference between a company's net system generating capacity and the maximum demand on the system. In December 1999, the FPSC approved a joint proposal by Florida Power, Florida Power & Light and Tampa Electric Company to increase the reserve margin to 20% by 2004. In response, Florida Power is constructing a second generating unit at the Hines site. Hines Unit 2 is the same combined-cycle technology as Hines Unit 1 and has a summer generating capacity of approximately 516 MW. In addition, Florida Power is currently planning for the construction of a third unit at the Hines Energy Complex. Progress Fuels' capital expenditures for 2002, 2001 and 2000 were $102.0 million, $61.8 million and $88.2 million, respectively. These capital expenditures have been primarily for the expansion of its synthetic fuel operations and the construction of a new rail car repair and trackworks facility. CASH FLOW FROM FINANCING ACTIVITIES Cash flow from operations exceeded cash requirements from investing activity in 2002. Long-term debt financing activity was limited to refinancing of Florida Power's tax-exempt debt discussed below. 29 Strong cash flow from operations and lower investing activities during 2001 when compared with 2000 enabled Florida Progress to reduce debt by approximately $200 million. In February 2002, $50 million of Progress Capital's medium-term notes, 5.78% Series, matured. Progress Energy funded this maturity through the issuance of commercial paper. As of December 31, 2002, Progress Capital had $223 million of fixed rate medium-term notes outstanding. The final medium-term note is due in May 2008. Progress Energy intends to fund these maturing notes through internally generated funds and the issuance of commercial paper. During 2002, Florida Power took advantage of historically low interest rates and refinanced several issues of tax-exempt debt as well as certain taxable issues. In July 2002, Florida Power issued approximately $241 million of Pollution Control Revenue Refunding Bonds, secured by First Mortgage Bonds. Proceeds from this issuance were used to redeem $241 million of Pollution Control Revenue Bonds in August of 2002. Also in July 2002, $30 million of medium-term notes, 6.54% Series, matured. Florida Power funded this maturity through the issuance of commercial paper. On February 18, 2003 Florida Power issued $425 million of 4.80% First Mortgage bonds due March 1, 2013 and $225 million of 5.90% First Mortgage Bonds due March 1, 2033. Proceeds from the bond issue were or will be used as follows: o $155.6 million to redeem the aggregate outstanding balance ($150 million) of our 8% First Mortgage Bonds due December 1, 2022. o $215.0 million to refinance Florida Power's secured and unsecured indebtedness, $70 million of which matured on March 1, 2003, and $145 million of which matures on July 1, 2003. o $257.1 million to repay the balance of our outstanding commercial paper, with the remaining proceeds to be used to reduce the outstanding balance of notes payable to affiliated companies. Our 8% First Mortgage Bonds due December 1, 2022 will be redeemed at a price of 103.75% of the principal amount outstanding ($150 million) plus accrued interest to the redemption date of March 24, 2003. 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. The Company's consolidated subsidiaries have lines of credit totaling $290.5 million, which are used to support the issuance of commercial paper. The lines of credit were not drawn on as of December 31, 2002. The lines of credit consist of two revolving bank credit facilities for Florida Power. The Florida Power facilities consist of $90.5 million with a 364-day term expiring in April 2003, and $200 million long-term revolving bank credit facility, expiring in 2004. Florida Power is currently negotiating the renewal of its 364-day facility. The Company's financial policy precludes issuing commercial paper in excess of its supporting lines of credit. At December 31, 2002, the total amount of commercial paper outstanding was $257.1 million, leaving approximately $33 million available for issuance. The Company is required to pay minimal annual commitment fees to maintain its credit facilities. These credit agreements contain various terms and conditions that could affect the Company's ability to borrow under these facilities. These include a maximum debt to total capital ratio, a material adverse change clause and a cross-default provision. For Florida Power, the maximum total debt to total capital ratio is 65%. Indebtedness as defined by the bank agreements includes certain letters of credit and guarantees which are not recorded on the Consolidated Balance Sheets. As of December 31, 2002, the calculated ratio for Florida Power, pursuant to the terms of the agreement, was 48.6% Florida Power's credit facilities include a provision under which lender could refuse to advance funds in the event of a material adverse change in the borrower's financial condition. 30 Each of these credit agreements contains a cross-default provision for defaults of indebtedness in excess of $10 million. Under these provisions, if the applicable borrower or certain affiliates fail to pay various debt obligations in excess of $10 million the lenders could accelerate payment of any outstanding borrowing and terminate their commitments to the credit facility. Florida Power has an uncommitted bank bid facility authorizing it to borrow and re-borrow, and have loans outstanding at any time, up to $100 million. At December 31, 2002, there were no outstanding loans against these facilities. Florida Power currently has filed registration statements under which it can issue an aggregate of $50 million of various long-term debt securities. Florida Power expects to increase its shelf capacity in the second or third quarter of 2003. Credit Rating Matters As of February 7, 2003, the major credit rating agencies rated the Company's securities as follows: Moody's Investors Service Standard and Poor's Florida Power Corporation Corporate Credit Rating Not Applicable BBB+ Commercial Paper P-1 A-2 Senior Secured Debt A1 BBB+ Senior Unsecured Debt A2 BBB+ Preferred Stock Baa1 BBB- FPC Capital I Preferred Stock* Baa1 BBB- Progress Capital Holdings, Inc. Senior Unsecured Debt* A3 BBB *Guaranteed by Florida Progress Corporation These ratings reflect the current views of these rating agencies and no assurances can be given that these ratings will continue for any given period of time. However, the Company monitors its financial condition as well as market conditions that could ultimately affect its credit ratings. The Company and its subsidiaries' debt indentures and credit agreements do not contain any "ratings trigger" which would cause the acceleration of interest and principal payments in the event of a ratings downgrade. In March 2002, Standard & Poor's affirmed the ratings of Florida Power but revised the outlook to negative from stable. S&P stated that its change in outlook reflected the lower-than-projected credit protection measures. On February 7, 2003, Moody's Investors Service changed the outlook of Florida Power Corporation (A1 senior secured) and Progress Capital's (A3 senior unsecured) from stable to negative and lowered the trust preferred rating of FPC Capital I from A3 to Baa1 with a negative outlook. The change in outlook by the rating agencies has not materially affected the Company's access to liquidity or the cost of its short-term borrowings. Fitch Ratings Service announced on February 14, 2003 that it was downgrading the ratings of Florida Power. The ratings outlook is stable. Florida Power's senior secured rating was changed to A- from AA- and its senior unsecured rating was changed to BBB+ from A+. Florida Power's short-term rating was changed to F-2 from F-1+. Interest Rate Derivatives In December 2002, Florida Power entered into a Treasury Rate Lock agreement, with a notional amount of $35 million, to hedge the interest rate risk on an anticipated debt issuance. At December 31, 2002, the value of this hedge was a $0.5 million liability position. In January and February 2003, Florida Power entered into Treasury Rate Lock agreements, with a total notional amount of $55 million, to hedge the interest rate risk on an anticipated debt issuance. These contracts are designated as cash flow hedges for accounting purposes. 31 NEW ACCOUNTING STANDARDS See Note 1 to the Financial Statements for a discussion of the anticipated impact of new accounting standards. 32 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FLORIDA PROGRESS Market risk represents the potential loss arising from adverse changes in market rates and prices. Florida Progress is exposed to certain market risks, including changes in interest rates with respect to its long-term debt and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. The Company manages its market risk in accordance with its established risk management policies, which may include entering into various derivative transactions. These financial instruments are held for purposes other than trading. The risks discussed below do not include the price risks associated with non-financial instrument transactions and positions associated with Florida Progress' operations, such as sales commitments and inventory. INTEREST RATE RISK The Company manages its interest rate risks through the use of a combination of fixed and variable rate debt. Variable rate debt has rates that adjust in periods ranging from daily to monthly. The following tables provide information as of December 31, 2002 and 2001, about the Company's interest rate risk sensitive instruments. The tables present principal cash flows and weighted-average interest rates by expected maturity dates for the fixed long-term debt and the FPC obligated mandatorily redeemable securities of trust. December 31, 2002 Fair Value 2003 2004 2005 2006 2007 Thereafter Total December 31 - --------------------------------------------------------------------------------------------------------------- (Dollars in millions) Fixed rate long-term debt $ 275 $ 68 $ 49 $ 109 $ 124 $ 826 $ 1,451 $ 1,598 Average interest rate 6.42% 6.57% 6.66% 6.98% 6.79% 6.97% 6.82% - Variable rate long- term debt - - - - - $ 241 $ 241 $ 241 Average interest rate 1.11% 1.11% - FPC mandatorily redeemable securities of Trust - - - - - $ 300 $ 300 $ 303 Fixed rate 7.10% 7.10% - Unsecured note with - - - - - $ 500 $ 500 $ 512 parent Average interest rate 6.45% 6.45% Interest rate forward contracts (a) $ 35 - - - - - $ 35 $ (0.5)
(a) Treasury Rate Lock agreement on $35 million designed as cash flow hedge of anticipated fixed-rate debt issuance. 33 December 31, 2001 Fair Value 2002 2003 2004 2005 2006 Thereafter Total December 31 - --------------------------------------------------------------------------------------------------------------- (Dollars in millions) Fixed rate long-term debt $ 88 $ 276 $ 68 $ 48 $ 109 $ 1,192 $ 1,781 $ 1,832 Average interest rate 5.96% 6.42% 6.60% 6.72% 6.97% 6.87% 6.75% - FPC mandatorily redeemable securities of Trust - - - - - $ 300 $ 300 $ 291 Fixed rate 7.10% 7.10% - Unsecured note with - - - - - $ 500 $ 50 $ 494 parent Average interest rate 6.43% 6.43%
FLORIDA POWER The information required by this item is incorporated herein by reference to the Florida Progress Quantitative and Qualitative Disclosures About Market Risk insofar as it relates to Florida Power. The following tables provide information as of December 31, 2002 and 2001, about Florida Power's interest rate risk sensitive instruments. December 31, 2002 Fair Value 2003 2004 2005 2006 2007 Thereafter Total December 31 - ---------------------------------------------------------------------------------------------------------------- (Dollars in millions) Fixed rate long-term debt $ 217 $ 43 $ 48 $ 48 $ 89 $ 782 $ 1,227 $ 1,351 Average interest rate 6.15% 6.69% 6.72% 6.76% 6.80% 7.00% 6.80% - Variable rate long- term debt - - - - - $ 241 $ 241 $ 241 Average interest rate 1.11% 1.11% - Interest rate forward $ 35 - - - - $ 35 $ (0.5) contracts (a)
(a) Treasury Rate Lock agreement on $35 million designed as cash flow hedge of anticipated fixed-rate debt issuance. December 31, 2001 Fair Value 2002 2003 2004 2005 2006 Thereafter Total December 31 - --------------------------------------------------------------------------------------------------------------- (Dollars in millions) Fixed rate long-term debt $ 32 $ 217 $ 43 $ 48 $ 48 $ 1,112 $ 1,500 $ 1,538 Average interest rate 6.55% 6.15% 6.69% 6.72% 6.76% 6.89% 6.76% -
34 MARKETABLE SECURITIES PRICE RISK Florida Power maintains trust funds, as required by the Nuclear Regulatory Commission, to fund certain costs of decommissioning its nuclear plants. These funds are primarily invested in stocks, bonds and cash equivalents, which are exposed to price fluctuations in equity markets and to changes in interest rates. At December 31, 2002 and 2001, the fair values of these funds were approximately $373.6 million and $406.1 million, respectively. The Company actively monitors its portfolio by benchmarking the performance of its investments against certain indices and by maintaining, and periodically reviewing, target allocation percentages for various asset classes. The accounting for nuclear decommissioning recognizes that the Company's regulated electric rates provide for recovery of these costs, net of any trust fund earnings, and therefore, fluctuations in trust fund marketable security returns do not affect the earnings of the Company. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements, supplementary data and consolidated financial statement schedules are included herein: Page Independent Auditors' Report - Deloitte and Touche LLP 37 Independent Auditors' Report - KMPG LLP 38 Consolidated Financial Statements - Florida Progress Corporation: Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000 39 Consolidated Balance Sheets as of December 31, 2002 and 2001 40 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 41 Consolidated Schedules of Capitalization for the Years Ended December 31, 2002, 2001 and 2000 42 Consolidated Statements of Common Equity 43 Consolidated Quarterly Financial Data (Unaudited) 43 Financial Statements - Florida Power Corporation: Statements of Income and Comprehensive Income for the Years Ended December 31, 2002, 2001, and 2000 44 Balance Sheets as of December 31, 2002 and 2001 45 Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 46 Schedules of Capitalization as of December 31, 2002 and 2001 47 Statements of Common Equity for the Years Ended December 31, 2002, 2001 and 2000 48 Quarterly Financial Data (Unaudited) 48 Notes to Financial Statements 49 Independent Auditors' Report on Consolidated Financial Statement Schedules 85 Financial Statement Schedules for the Years Ended December 31, 2002, 2001 and 2000: II-Valuation and Qualifying Accounts - Florida Progress Corporation 86 II-Valuation and Qualifying Accounts - Florida Power Corporation 87 All other schedules have been omitted as not applicable or not required or because the information required to be shown is included in the Consolidated Financial Statements or the accompanying Notes to the Financial Statements.
36 INDEPENDENT AUDITORS' REPORT TO THE BOARDS OF DIRECTORS OF FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION: We have audited the accompanying consolidated balance sheets and schedules of capitalization of Florida Progress Corporation and its subsidiaries (Florida Progress) and the accompanying balance sheets and schedules of capitalization of Florida Power Corporation (Florida Power) as of December 31, 2002 and 2001, and the related Florida Progress consolidated statements of income and comprehensive income, of common equity, and of cash flows and the related Florida Power statements of income and comprehensive income, of common equity, and of cash flows for each of the two years in the period ended December 31, 2002. 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. The consolidated financial statements of Florida Progress and the financial statements of Florida Power for the year ended December 31, 2000 were audited by other auditors whose report, dated February 15, 2001 expressed an unqualified opinion on those statements. 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, 2002 and 2001, and the results of their respective operations and cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Raleigh, North Carolina February 12, 2003 37 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF FLORIDA PROGRESS CORPORATION: We have audited the accompanying statements of income and comprehensive income, cash flows, and common equity of Florida Progress Corporation and subsidiaries, and of Florida Power Corporation, for the year ended December 31, 2000. In connection with our audit of these financial statements, we also have audited the financial statement schedules listed in Item 8 therein. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Florida Progress Corporation and subsidiaries, and Florida Power Corporation for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related fiancial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/KPMG LLP KPMG LLP St. Petersburg, Florida February 15, 2001 38 CONSOLIDATED STATEMENTS of INCOME AND COMPREHENSIVE INCOME Florida Progress Corporation Years ended December 31 (In thousands) 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------- Operating Revenues Utility $ 3,061,732 $ 3,212,841 $ 2,871,563 Diversified business 1,291,534 1,323,620 1,358,772 - -------------------------------------------------------------------------------------------------------------- Total Operating Revenues 4,353,266 4,536,461 4,230,335 - -------------------------------------------------------------------------------------------------------------- Operating Expenses Utility Fuel used in electric generation 853,500 912,735 681,869 Purchased power 514,975 514,528 498,458 Operation and maintenance 572,237 487,144 589,131 Depreciation and amortization 294,856 452,972 402,625 Taxes other than on income 227,699 230,169 213,280 Diversified business Cost of sales 1,329,157 1,374,445 1,336,276 Impairment of long-lived assets 281,157 160,569 130,700 Other 32,679 100,401 143,135 - -------------------------------------------------------------------------------------------------------------- Total Operating Expenses 4,106,260 4,232,963 3,995,474 - -------------------------------------------------------------------------------------------------------------- Operating Income 247,006 303,498 234,861 - -------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 6,647 9,005 8,418 Other, net (13,676) (26,085) (26,332) - -------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (7,029) (17,080) (17,914) - -------------------------------------------------------------------------------------------------------------- Interest Charges Interest charges 185,808 194,841 209,510 Allowance for borrowed funds used during construction (2,659) (1,087) (3,117) - -------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 183,149 193,754 206,393 - -------------------------------------------------------------------------------------------------------------- Income before Income Taxes 56,828 92,664 10,554 Income Tax Benefit (173,223) (172,719) (124,715) - -------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 230,051 265,383 135,269 Discontinued Operations, Net of Tax: Income from discontinued operations - 2,682 8,972 Net gain (loss) on disposal of discontinued operations, (net of applicable income tax expense and benefit of $2,880 and $7,896, respectively) 5,120 (23,734) - - -------------------------------------------------------------------------------------------------------------- Net Income $ 235,171 $ 244,331 $ 144,241 - -------------------------------------------------------------------------------------------------------------- Change in net unrealized losses on cash flow hedges (net of tax of $3,678) (6,150) - - Reclassification adjustment for amounts included in net income (net of tax of $315) (515) - - Minimum pension liability adjustment (net of tax of $2,829) (4,503) - - Foreign currency and other (1,584) (1,578) (982) - -------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 222,419 $ 242,753 $ 143,259 - --------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 39 CONSOLIDATED BALANCE SHEETS Florida Progress Corporation (In thousands) December 31 Assets 2002 2001 - --------------------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 7,477,025 $7,151,729 Accumulated depreciation (4,123,947) (3,984,308) - --------------------------------------------------------------------------------------------------------------- Utility plant in service, net 3,353,078 3,167,421 Held for future use 7,921 8,274 Construction work in progress 426,641 292,883 Nuclear fuel, net of amortization 40,260 62,536 - --------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 3,827,900 3,531,114 - --------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 33,601 5,201 Accounts receivable 385,431 357,038 Unbilled accounts receivable 60,481 63,080 Receivables from affiliated companies 42,418 26,976 Deferred income taxes 26,209 32,334 Inventory 492,273 485,891 Deferred fuel cost 37,503 15,147 Prepayments and other current assets 93,802 73,684 - --------------------------------------------------------------------------------------------------------------- Total Current Assets 1,171,718 1,059,351 - --------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 130,114 174,081 Unamortized debt expense 23,363 21,021 Nuclear decommissioning trust funds 373,551 406,100 Diversified business property, net 699,493 669,078 Miscellaneous other property and investments 83,222 115,496 Prepaid pension cost 226,413 202,167 Other assets and deferred debits 90,716 144,875 - --------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 1,626,872 1,732,818 - --------------------------------------------------------------------------------------------------------------- Total Assets $ 6,626,490 $ 6,323,283 - --------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - --------------------------------------------------------------------------------------------------------------- Capitalization (see consolidated schedules of capitalization) - --------------------------------------------------------------------------------------------------------------- Common stock $ 1,628,951 $ 1,409,034 Retained earnings 598,191 666,201 Accumulated other comprehensive loss (15,737) (2,985) 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 1,710,363 1,989,684 - --------------------------------------------------------------------------------------------------------------- Total Capitalization 4,455,265 4,595,431 - --------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 275,397 88,053 Accounts payable 348,842 292,292 Payables to affiliated companies 102,619 116,520 Notes payable to affiliated companies 379,677 147,583 Interest accrued 68,120 67,861 Short-term obligations 257,100 154,250 Customer deposits 121,998 118,285 Other current liabilities 167,164 141,304 - --------------------------------------------------------------------------------------------------------------- Total Current Liabilities 1,720,917 1,126,148 - --------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes - 165,816 Accumulated deferred investment tax credits 47,914 54,387 Regulatory liabilities 61,004 50,193 Other liabilities and deferred credits 341,390 331,308 - --------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 450,308 601,704 - --------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 22) - --------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 6,626,490 $ 6,323,283 - --------------------------------------------------------------------------------------------------------------- See Notes to Financial Statements.
40 CONSOLIDATED STATEMENTS of CASH FLOWS Florida Progress Corporation Years ended December 31 (In thousands) 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 235,171 $ 244,331 $ 144,241 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations - (2,682) (8,972) Net (gain) loss on disposal of discontinued operations (5,120) 23,734 - Impairment of long-lived assets 281,157 160,569 130,700 Depreciation and amortization 386,126 537,983 453,757 Deferred income taxes and investment tax credits, net (239,526) (201,787) (236,978) Deferred fuel cost (credit) (22,356) 75,287 (122,076) Net (increase) decrease in accounts receivable (34,619) 39,808 (137,794) Net (increase) decrease in inventories (39,914) (131,662) 47,572 Net increase in prepayments and other current assets (11,918) (10,600) (57,602) Net increase in accounts payable 38,564 55,685 48,979 Net increase in other current liabilities 28,723 216,957 84,242 Other 54,749 (56,391) 174,627 - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 671,037 951,232 520,696 - --------------------------------------------------------------------------------------------------------------------------- Investing Activities Property additions (550,019) (353,433) (286,800) Diversified business property additions (153,908) (133,447) (194,195) Nuclear fuel additions (58) (43,087) - Net contributions to nuclear decommissioning trust 12,206 (19,973) (19,971) Proceeds from sale of assets 34,825 24,988 - Proceeds from sale of discontinued operations 8,000 28,023 - Other 1,231 (5,927) (45,673) - --------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (647,723) (502,856) (546,639) - --------------------------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt 235,975 299,201 7,307 Proceeds from issuance of long-term debt to parent - 500,000 - Net increase (decrease) in short-term obligations 102,850 (813,042) 330,611 Retirement of long-term debt (350,477) (190,642) (166,441) Net increase (decrease) in intercompany notes 232,094 (102,403) - Equity contributions from parent 87,155 90,149 84,490 Dividends paid to parent (303,181) (248,804) - Dividends paid on common stock - - (215,277) Other 670 (1,786) (168) - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 5,086 (467,327) 40,522 - --------------------------------------------------------------------------------------------------------------------------- Cash Provided by (Used in) Discontinued Operations - (48) 33 - --------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 28,400 (18,999) 14,612 - --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of Year 5,201 24,200 9,588 - --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 33,601 $ 5,201 $ 24,200 - --------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 180,032 $ 169,983 $ 195,500 income taxes (net of refunds) $ 60,303 $ (3,926) $ 182,500
Noncash Activities o On April 26, 2002, Progress Fuels Corporation received an equity contribution from Progress Energy, Inc., with which it acquired 100% of Westchester Gas Company. In conjunction with the purchase, Progress Energy, Inc., issued approximately $129 million in common stock. See Notes to Financial Statements. 41 CONSOLIDATED SCHEDULES of CAPITALIZATION Florida Progress Corporation December 31 (In thousands except share data) 2002 2001 - ---------------------------------------------------------------------------------------------------------- Common Stock Equity Common stock without par value, 250,000,000 shares authorized; 98,616,658 outstanding in 2002 and 2001 $1,628,951 $1,409,034 Accumulated other comprehensive loss (15,737) (2,985) Retained earnings 598,191 666,201 - ---------------------------------------------------------------------------------------------------------- Total Common Stock Equity $2,211,405 $2,072,250 - ---------------------------------------------------------------------------------------------------------- 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, 2002) Florida Power Corporation: First mortgage bonds, maturing 2003-2023 6.83% $ 810,000 $ 810,000 Pollution control revenue bonds, maturing 2018-2027 1.11% 240,865 240,865 Medium-term notes, maturing 2003-2028 6.74% 416,900 449,100 Unamortized premium and discount, net (6,433) (2,935) - ---------------------------------------------------------------------------------------------------------- $ 1,461,332 $ 1,497,030 - ---------------------------------------------------------------------------------------------------------- Florida Progress Funding Corporation: Mandatorily redeemable preferred securities, maturing 2039 7.10% $ 300,000 $ 300,000 - ---------------------------------------------------------------------------------------------------------- $ 300,000 $ 300,000 - ---------------------------------------------------------------------------------------------------------- Progress Capital Holdings, Inc.: Medium-term notes, maturing 2003-2008 6.96% $ 223,000 $ 273,000 Unsecured note with parent, maturing 2011 6.43% 500,000 500,000 Miscellaneous notes, maturing 2003-2004 1.53% 1,428 7,707 - ---------------------------------------------------------------------------------------------------------- 724,428 780,707 - ---------------------------------------------------------------------------------------------------------- Less: Current portion of long-term debt (275,397) (88,053) - ---------------------------------------------------------------------------------------------------------- Total Long-Term Debt, Net $ 2,210,363 $ 2,489,684 - ---------------------------------------------------------------------------------------------------------- Total Capitalization $ 4,455,265 $ 4,595,431 ==========================================================================================================
See Notes to Financial Statements. 42 CONSOLIDATED STATEMENTS of COMMON EQUITY Florida Progress Corporation Years ended December 31 (In thousands except share data) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------- Beginning Balance $ 2,072,250 $ 1,987,581 $ 2,008,707 Net income 235,171 244,331 144,241 Other comprehensive loss (12,752) (1,578) (982) Common stock issued - 162,570 shares - - 6,854 Equity contribution from parent, net 219,917 90,720 44,038 Dividend to parent (303,181) (248,804) - Common stock dividends - - (215,277) - ------------------------------------------------------------------------------------------------------------- Ending Balance $ 2,211,405 $ 2,072,250 $ 1,987,581 - ------------------------------------------------------------------------------------------------------------- See Notes to Financial Statements. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) Florida Progress Corporation (In thousands) First Quarter Second Quarter Third Quarter Fourth Quarter - --------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 2002 Operating revenues $ 978,779 $ 1,110,223 $ 1,187,120 $ 1,077,144 Operating income (loss) 102,683 128,803 (43,249) 58,769 Income (loss) from continuing operations 75,773 90,356 (57,021) 120,943 Net income (loss) 75,773 90,356 (51,901) 120,943 - ------------------------------------------------------------------------------------------------------------------- Year ended December 31, 2001 Operating revenues $ 1,131,247 $ 1,119,984 $ 1,246,939 $ 1,038,291 Operating income (loss) 129,265 130,120 178,265 (134,152) Income (loss) from continuing operations 75,625 101,900 181,452 (93,594) Net income (loss) 75,988 89,811 167,332 (88,800)
o 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. o Fourth quarter 2001 includes impairment, loss on sale of assets and other charges of $201.3 million ($136.5 million after tax). o Third quarter 2002 includes impairment and other charges related to Progress Telecommunications Corporation, of $233.0 million ($137.4 million after tax) (See Note 7). o Fourth quarter 2002 includes estimated impairment on assets held for sale of Railcar Ltd. of $66.5 million ($44.7 million after tax) (See Note 4A). See Notes to Financial Statements. 43 STATEMENTS of INCOME AND COMPREHENSIVE INCOME Florida Power Corporation Years ended December 31 (In thousands) 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- Operating Revenues Utility $ 3,061,732 $ 3,212,841 $ 2,871,563 - --------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 3,061,732 3,212,841 2,871,563 - --------------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 853,500 912,735 681,869 Purchased power 514,975 514,528 498,458 Operation and maintenance 572,237 487,144 589,131 Depreciation and amortization 294,856 452,972 402,625 Taxes other than on income 227,699 230,169 213,280 - --------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 2,463,267 2,597,548 2,385,363 - --------------------------------------------------------------------------------------------------------------------- Operating Income 598,465 615,293 486,200 - --------------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 1,624 2,872 1,852 Other, net (5,927) (10,780) (407) - --------------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (4,303) (7,908) 1,445 - --------------------------------------------------------------------------------------------------------------------- Interest Charges Interest charges 109,442 114,794 128,479 Allowance for borrowed funds used during construction (2,659) (1,087) (3,117) - --------------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 106,783 113,707 125,362 - --------------------------------------------------------------------------------------------------------------------- Income before Income Taxes 487,379 493,678 362,283 Income Tax Expense 163,273 182,590 150,473 - --------------------------------------------------------------------------------------------------------------------- Net Income 324,106 311,088 211,810 Dividends on Preferred Stock 1,512 1,512 1,512 - --------------------------------------------------------------------------------------------------------------------- Earnings for Common Stock $ 322,594 $ 309,576 $ 210,298 - --------------------------------------------------------------------------------------------------------------------- Comprehensive Income, Net of Tax: Net Income $ 324,106 $ 311,088 $ 211,810 Change in net unrealized losses on cash flow hedges (net of tax of $200) (318) - - Minimum pension liability adjustment (net of tax of $1,486) (2,366) - - - --------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 321,422 $ 311,088 $ 211,810 - ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 44 BALANCE SHEETS Florida Power Corporation (In thousands) December 31 Assets 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $7,477,025 $ 7,151,729 Accumulated depreciation (4,123,947) (3,984,308) - ---------------------------------------------------------------------------------------------------------------------- Utility plant in service, net 3,353,078 3,167,421 Held for future use 7,921 8,274 Construction work in progress 426,641 292,883 Nuclear fuel, net of amortization 40,260 62,536 - ---------------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 3,827,900 3,531,114 - ---------------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 15,636 - Accounts receivable 186,630 185,562 Unbilled accounts receivable 60,481 63,080 Receivables from affiliated companies 44,976 16,424 Notes receivable from affiliated companies - 119,799 Deferred income taxes 26,209 32,334 Inventory 235,043 188,630 Deferred fuel cost 37,503 15,147 Prepayments and other current assets 5,339 4,336 - ---------------------------------------------------------------------------------------------------------------------- Total Current Assets 611,817 625,312 - ---------------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 130,114 174,081 Unamortized debt expense 14,503 11,844 Nuclear decommissioning trust funds 373,551 406,100 Miscellaneous other property and investments 39,298 44,403 Prepaid pension cost 222,543 198,351 Other assets and deferred debits 6,517 18,435 - ---------------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 786,526 853,214 - ---------------------------------------------------------------------------------------------------------------------- Total Assets $5,226,243 $ 5,009,640 - ---------------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ---------------------------------------------------------------------------------------------------------------------- Capitalization (see schedules of capitalization) - ---------------------------------------------------------------------------------------------------------------------- Common stock $1,081,257 $ 1,081,257 Retained earnings 969,795 950,387 Accumulated other comprehensive loss (2,684) - Preferred stock - not subject to mandatory redemption 33,497 33,497 Long-term debt, net 1,244,411 1,465,030 - ---------------------------------------------------------------------------------------------------------------------- Total Capitalization 3,326,276 3,530,171 - ---------------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 216,921 32,000 Accounts payable 147,978 150,595 Payables to affiliated companies 88,661 189,817 Notes payable to affiliated companies 237,425 - Taxes accrued 24,472 1,768 Interest accrued 55,675 54,440 Short-term obligations 257,100 154,250 Customer deposits 121,998 118,285 Other current liabilities 55,323 63,919 - ---------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 1,205,553 765,074 - ---------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 361,133 394,828 Accumulated deferred investment tax credits 47,423 53,875 Regulatory liabilities 61,004 50,193 Other liabilities and deferred credits 224,854 215,499 - ---------------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 694,414 714,395 - ---------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 22) - ---------------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $5,226,243 $ 5,009,640 - ---------------------------------------------------------------------------------------------------------------------- See Notes to Financial Statements.
45 STATEMENTS of CASH FLOWS Florida Power Corporation Years ended December 31 (In thousands) 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 324,106 $ 311,088 $ 211,810 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 320,886 467,025 453,291 Deferred income taxes and investment tax credits, net (37,349) (41,080) (59,495) Deferred fuel (credit) cost (22,356) 75,287 (122,076) Net (increase) decrease in accounts receivable (27,021) 32,271 (117,191) Net (increase) decrease in inventories (46,413) (49,514) 28,124 Net (increase) decrease in prepayments and other current assets (1,004) 4,761 (55,550) Net increase (decrease) in accounts payable (103,773) 130,761 33,720 Net increase in other current liabilities 18,538 107,816 30,433 Other 2,468 (110,237) 52,599 - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 428,082 928,178 455,665 - --------------------------------------------------------------------------------------------------------------------------- Investing Activities Property additions (550,019) (353,433) (286,800) Nuclear fuel additions (58) (43,087) - Net contributions to nuclear decommissioning trust 12,206 (19,973) (19,971) Other 11,632 7,239 3,501 - --------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (526,239) (409,254) (303,270) - --------------------------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt 235,975 297,621 - Net increase (decrease) in short-term obligations 102,850 (238,280) 39,374 Retirement of long-term debt (277,559) (82,000) (76,800) Net increase (decrease) in intercompany notes 357,225 (109,350) - Equity contributions from parent - - 71,000 Advances to/from parent - (139,979) 20,200 Dividends paid to parent (303,186) (248,804) (201,277) Dividends paid on preferred stock (1,512) (1,512) (1,512) - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 113,793 (522,304) (149,015) - --------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 15,636 (3,380) 3,380 - --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of Year - 3,380 - - --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 15,636 $ - $ 3,380 - --------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 105,549 $ 106,384 $ 135,000 income taxes (net of refunds) $ 173,168 $ 210,629 $ 194,400
See Notes to Financial Statements. 46 SCHEDULES of CAPITALIZATION Florida Power Corporation December 31 (In thousands except share data) 2002 2001 - --------------------------------------------------------------------------------------------------------- Common Stock Equity Common stock without par value $1,081,257 $1,081,257 Accumulated other comprehensive loss (2,684) - Retained earnings 969,795 950,387 - --------------------------------------------------------------------------------------------------------- Total Common Stock Equity $2,048,368 $2,031,644 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- 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, 2002) First mortgage bonds, maturing 2003-2023 6.83% $ 810,000 $ 810,000 Pollution control revenue bonds, maturing 2018-2027 1.11% 240,865 240,865 Medium-term notes, maturing 2003-2028 6.74% 416,900 449,100 Unamortized premium and discount, net (6,433) (2,935) - --------------------------------------------------------------------------------------------------------- Less: Current portion of long-term debt (216,921) (32,000) - --------------------------------------------------------------------------------------------------------- Total Long-Term Debt, Net $1,244,411 $1,465,030 - --------------------------------------------------------------------------------------------------------- Total Capitalization $3,326,276 $3,530,171 - --------------------------------------------------------------------------------------------------------- See Notes to Financial Statements.
47 STATEMENTS of COMMON EQUITY Florida Power Corporation Years ended December 31 (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Beginning Balance $ 2,031,644 $ 1,965,028 $ 1,885,007 Net income 324,106 311,088 211,810 Preferred stock dividends at stated rates (1,512) (1,512) (1,512) Other comprehensive loss (2,684) - - Equity contribution from parent - 5,844 71,000 Dividends paid to parent (303,186) (248,804) (201,277) - ----------------------------------------------------------------------------------------------------------------- Ending Balance $ 2,048,368 $ 2,031,644 $ 1,965,028 - ----------------------------------------------------------------------------------------------------------------- See Notes to Financial Statements. QUARTERLY FINANCIAL DATA (UNAUDITED) Florida Power Corporation (In thousands) First Quarter Second Quarter Third Quarter Fourth Quarter - ------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 2002 Operating revenues $686,441 $765,923 $863,637 $745,731 Operating income 120,417 150,974 207,100 119,974 Net income 58,121 77,131 124,152 64,702 - ------------------------------------------------------------------------------------------------------------------------ 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 71,984 84,689 114,457 39,958
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. See Notes to Financial Statements. 48 FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION NOTES TO FINANCIAL STATEMENTS 1. Organization and 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). Throughout the report, the terms utility and regulated will be used to discuss items pertaining to Florida Power. Diversified business and nonregulated will be used to discuss the subsidiaries of Florida Progress excluding Florida Power. Effective January 1, 2003, Florida Power began doing business under the assumed name Progress Energy Florida, Inc. The legal name of the entity has not changed and there is no restructuring of any kind related to the name change. The current corporate and business unit structure remains unchanged. B. Basis of Presentation The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). 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 regulated entities 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. Significant intercompany balances and transactions have been eliminated in consolidation except as permitted by Statement of Financial Accounting Standards (SFAS) No. 71, which provides that profits on intercompany sales to regulated affiliates are not eliminated if the sales price is reasonable and the future recovery of the sales price through the ratemaking process is probable. The financial statements include the financial results of the Company and its majority-owned operations. Unconsolidated investments in 20% to 50% owned joint ventures are accounted for using the equity method. Other investments are stated principally at cost. These equity and cost investments, which total approximately $13.9 million and $33.1 million at December 31, 2002 and 2001, respectively, are included in miscellaneous property and investments on the Consolidated Balance Sheets. The primary component of this balance is the Company's investment in affordable housing of $8.9 million and $28.1 million, respectively, for December 31, 2002 and 2001. Results of operations of Progress Rail Services Corporation and certain other diversified operations are recognized one month in arrears. Certain amounts for 2001 and 2000 have been reclassified to conform to the 2002 presentation. C. Use of Estimates and Assumptions In preparing financial statements that conform with GAAP, 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. D. Utility Plant Utility plant in service is stated at historical cost less accumulated depreciation. The Company capitalizes all construction related direct labor and material costs of units of property as well as indirect construction costs. The costs of renewals and betterments are also capitalized. 49 Maintenance and repairs of property, and replacements and renewals of items determined to be less than units of property, are charged to maintenance expense as incurred. The cost of units of property replaced, renewed or retired, plus removal or disposal costs, less salvage, is charged to accumulated depreciation. The balances of utility plant in service at December 31 are listed below (in thousands), with a range of depreciable lives for each: 2002 2001 ----------- ----------- Production plant (7-33 years) $ 3,432,865 $ 3,369,491 Transmission plant (30-75 years) 976,423 921,219 Distribution plant (12-50 years) 2,728,239 2,704,035 General plant and other (8-75 years) 339,498 156,984 ----------- ----------- Utility plant in service $ 7,477,025 $ 7,151,729 =========== =========== Substantially all of the electric utility plant is pledged as collateral for the first mortgage bonds of Florida Power (See Note 8). Allowance for funds used during construction (AFUDC) represents the estimated debt and equity costs of capital funds necessary to finance the construction of new regulated assets. As prescribed in the regulatory uniform systems of accounts, AFUDC is charged to the cost of the plant. The equity funds portion of AFUDC is credited to other income and the borrowed funds portion is credited to interest charges. Regulatory authorities consider AFUDC an appropriate charge for inclusion in the rates charged to customers by the utilities over the service life of the property. The total equity funds portion of AFUDC was $2.3 million, $0.1 million and $1.3 million in 2002, 2001 and 2000, respectively. The composite AFUDC rate for Florida Power's electric utility plant was 7.8% in 2002, 2001 and 2000. E. Depreciation and Amortization - Utility Plant For financial reporting purposes, substantially all depreciation of utility plant other than nuclear fuel is computed on the straight-line method based on the estimated remaining useful life of the property, adjusted for estimated net salvage. Florida Power's depreciation provisions, including decommissioning costs (See Note 1F), as a percentage of average depreciable property other than nuclear fuel, were approximately 3.3%, 4.3% and 4.6% in 2002, 2001 and 2000, respectively. Total depreciation provisions were $230.6 million, $299.1 million and $301.0 million in 2002, 2001 and 2000, respectively. Depreciation in 2002 was reduced pursuant to the rate case settlement (See Note 12A). Amortization of nuclear fuel costs, including disposal costs associated with obligations to the U.S. Department of Energy (DOE), is computed primarily on the units-of-production method and charged to fuel expense. Costs related to obligations to the DOE for the decommissioning and decontamination of enrichment facilities are also charged to fuel expense. The total of these costs for the years ended December 31, 2002, 2001 and 2000 were $32.0 million, $29.1 million and $31.6 million, respectively. Effective January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," and no longer amortizes goodwill (See Note 19). Prior to the adoption of SFAS No. 142, the Company amortized goodwill on a straight-line basis over a period not exceeding 40 years. Intangible assets are being amortized on a straight-line basis over their respective lives. F. 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. 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. As a result of the settlement in the Florida Power rate case, Florida Power suspended accruals on its reserves for nuclear decommissioning through December 31, 2005. Florida Power's most recent site-specific estimate of decommissioning costs for 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. 50 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. Application to extend the plant license for 20 years is anticipated to be submitted in the first quarter of 2007. Management believes that decommissioning costs that have been and will be recovered through rates by Florida Power will be sufficient to provide for the costs of decommissioning. Florida Power's reserve for fossil plant dismantlement was approximately $141.6 million and $140.5 million at December 31, 2002 and 2001, 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 annual provision, approved by the FPSC in 2001, was $8.8 million. The accrual for fossil dismantlement reserves was suspended again in 2002 by the Florida Rate Case settlement. The Financial Accounting Standards Board (FASB) has issued SFAS No. 143, "Accounting for Asset Retirement Obligations," that will impact the accounting for the decommissioning provisions beginning in 2003 (See Note 1R). G. Diversified Business Property Diversified business property is stated at cost less accumulated depreciation. If an impairment loss is recognized on an asset, the fair value becomes its new cost basis. The costs of renewals and betterments are capitalized. The cost of repairs and maintenance is charged to expense as incurred. Depreciation is computed on a straight-line basis using the estimated useful lives as indicated in the table below. Depletion of mineral rights is provided on the units-of-production method based upon the estimates of recoverable amounts of clean mineral. The Company uses the full cost method to account for its natural gas and oil properties. Under the full cost method, substantially all productive and nonproductive costs incurred in connection with the acquisition, exploration and development of natural gas and oil reserves are capitalized. These capitalized costs include the costs of all unproved properties, internal costs directly related to acquisition and exploration activities. These costs are amortized using the units-of-production method over the life of the Company's proved reserves. Total capitalized costs are limited to a ceiling based on the present value of discounted (at 10%) future net revenues using current prices, plus the lower of cost or fair market value of unproved properties. If the ceiling (discounted revenues) is not equal to or greater than total capitalized costs, the Company is required to write-down capitalized costs to this level. The Company performs this ceiling test calculation every quarter. No write-downs were required in 2002, 2001 or 2000. The following is a summary of diversified business property as of December 31 (in thousands), with a range of depreciable lives for each: 2002 2001 ---------- ---------- Equipment (3 - 25 years) $ 328,790 $ 257,514 Land and mineral rights 76,145 72,972 Buildings and plants (5 - 40 years) 91,266 97,261 Oil and gas properties (units-of-production) 264,767 41,413 Telecommunications equipment (5 - 20 years) 40,827 184,539 Rail equipment (3 - 20 years) 54,283 72,733 Marine equipment (3 - 35 years) 80,501 78,868 Computers, office equipment and software (3 - 10 years) 30,306 39,600 Construction work in progress 34,163 106,839 Accumulated depreciation (301,555) (282,661) ---------- ---------- Diversified business property, net $ 699,493 $ 669,078 ========== ==========
The decrease in telecommunications equipment from 2001 to 2002 is attributable to an impairment of long-lived assets discussed in Note 7. Diversified business depreciation expense was $64.9 million, $69.1 million and $70.8 million for the years ended December 31, 2002, 2001 and 2000, respectively. The synthetic fuel facilities are being depreciated through 2007 when the Section 29 tax credits will expire. 51 H. Inventory Inventory is carried at average cost. As of December 31, inventory was comprised of the following (in thousands): FLORIDA PROGRESS FLORIDA POWER ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Fuel $ 182,731 $ 155,188 $ 111,112 $ 92,417 Rail equipment and parts 155,206 200,697 - - Materials and supplies 134,163 113,638 123,931 96,213 Other 20,173 16,368 - - --------- --------- --------- --------- Total inventory $ 492,273 $ 485,891 $ 235,043 $ 188,630 ========= ========= ========= ========= I. Utility Revenues, Fuel and Purchased Power Expenses The Company recognizes electric utility revenues as service is 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 resulting from fuel, purchased power, energy conservation cost recovery and environmental 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 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, 2002 and 2001, the amounts accrued were $60.5 million and $63.1 million, respectively. J. Diversified Business Revenues Diversified business 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." Lease revenue for dedicated transport and data services is generally billed in advance on a fixed rate basis and recognized over the period the services are provided. Revenues relating to design and construction of wireless infrastructure are recognized upon completion of services for each completed phase of design and construction. K. Income Taxes Progress Energy and its affiliates file a consolidated federal income tax return. The consolidated income tax of Progress Energy is allocated to Florida Progress and Florida Power in accordance with the Inter-company Income Tax Allocation Agreement. The agreement provides an allocation that recognizes positive and negative corporate taxable income. The agreement provides for an equitable method of apportioning the carry over of uncompensated tax benefits. Progress Energy Holding Company tax benefits not related to acquisition interest expense are allocated to profitable subsidiaries, beginning in 2002, in accordance with a PUHCA order. Income taxes are provided as if Florida Progress and Florida Power filed separate returns. Deferred income taxes have been provided for temporary differences. These occur when there are differences between the book and tax bases of assets and liabilities. Investment tax credits related to regulated operations have been deferred and are being amortized over the estimated service life of the related properties. Credits for the production and sale of synthetic fuel are deferred to the extent they cannot be or have not been utilized in the annual consolidated federal income tax returns (See Note 16). L. Impairment of Long-lived Assets and Investments The Company reviews the recoverability of long-lived and intangible assets whenever indicators exist. Examples of these indicators include current period losses, combined with a history of losses or a projection of continuing losses, or a significant decrease in the market price of a long-lived asset group. If an indicator exists, then the asset group is tested for recoverability by comparing the carrying value to the sum of 52 undiscounted expected future cash flows directly attributable to the asset group. If the asset group is not recoverable through undiscounted cash flows, then an impairment loss is recognized for the difference between the carrying value and the fair value of the asset group. The accounting for impairment of long-lived assets is based on SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which was adopted by the Company effective January 1, 2002. Prior to the adoption of this standard, impairments were accounted for under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which was superceded by SFAS No. 144. See Note 7 for a discussion of impairment evaluations performed and charges taken. M. Excise Taxes The Company, as an agent for a state or local government, collects from customers certain excise taxes levied by the state or local government upon the customer. Florida Power accounts for excise taxes on a gross basis. Excise taxes are separately billed to customers in addition to Florida Power's base rates. For the years ended December 31, 2002, 2001 and 2000, gross receipts tax and franchise taxes of approximately $131.7 million, $133.0 million and $118.5 million, respectively, are included in taxes other than on income on the accompanying Statements of Income and Comprehensive Income. These approximate amounts are also included in electric operating revenues. N. Derivatives 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 balance sheet and measure those instruments at fair value (See Note 13). In connection with the January 2003 FASB Emerging Issues Task Force (EITF) meeting, the FASB was requested to reconsider an interpretation of SFAS No. 133. The interpretation, which is contained in the Derivatives Implementation Group's C11 guidance, relates to the pricing of contracts that include broad market indices. In particular, that guidance discusses whether the pricing in a contract that contains broad market indices (e.g., CPI) could qualify as a normal purchase or sale (the normal purchase or sale term is a defined accounting term, and may not, in all cases, indicate whether the contract would be "normal" from an operating entity viewpoint). The Company is currently reevaluating which contracts, if any, that have previously been designated as normal purchases or sales would now not qualify for this exception. The Company is currently evaluating the effects that this guidance will have on its results of operations and financial position. O. Environmental The Company accrues environmental remediation liabilities when the criteria for SFAS No. 5, "Accounting for Contingencies," has been met. Environmental expenditures are expensed as incurred or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as additional information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recognized when their receipt is deemed probable. P. Other Policies The Company considers cash and cash equivalents to include cash on hand, cash in banks and temporary investments purchased with a maturity of three months or less. Progress Energy and its subsidiaries participate in a money pool arrangement to better manage cash and working capital requirements. Under this arrangement, those companies with surplus short-term funds provide short-term loans to participating affiliates (See Note 6). The Company maintains an allowance for doubtful accounts receivable, which totaled approximately $28.0 million and $25.7 million at December 31, 2002 and 2001, respectively. Florida Power's allowance for doubtful accounts receivable totaled $2.5 million at December 31, 2002 and 2001, respectively. 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 applicable life using the straight-line method consistent with ratemaking treatment. 53 The Company follows the guidance in SFAS No. 87 "Employers' Accounting for Pensions," to account for its defined benefit retirement plans. In addition to pension benefits, the Company provides other postretirement benefits which are accounted for under SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." See Note 15 for related disclosures for these plans. 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 in accordance with SFAS 5. Q. Cost-Based Regulation Florida Power's regulated operations are subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS No. 71 allows a regulated company to record costs that have been or are expected to be allowed in the ratemaking process in a period different from the period in which the costs would be charged to expense by a nonregulated enterprise. Accordingly, Florida Power records assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for nonregulated entities. These regulatory assets and liabilities represent expenses deferred for future recovery from customers or obligations to be refunded to customers and are primarily classified in the accompanying Balance Sheets as regulatory assets and regulatory liabilities (See Note 12B). R. New Accounting Standards SFAS No. 143, "Accounting for Asset Retirement Obligations" The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in July 2001. This statement provides accounting and disclosure requirements for retirement obligations associated with 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 a liability with an equivalent amount added to the asset cost and depreciated over an appropriate period. The liability is then accreted over time by applying an interest method of allocation to the liability. Cumulative accretion and accumulated depreciation will be recognized for the time period from the date the liability would have been recognized had the provisions of this statement been in effect, to the date of adoption of this statement. The cumulative effect of initially applying this statement is recognized as a change in accounting principle. The adoption of this statement will have no impact on the income of Florida Power, as the effects are expected to be offset by the establishment of regulatory assets or liabilities pursuant to SFAS No. 71. The Company's review identified legal retirement obligations for nuclear decommissioning, coal mine operations, synthetic fuel operations, and gas production. The Company will record liabilities pursuant to SFAS No. 143 beginning in 2003. The Company used an expected cash flow approach to measure the obligations. The following proforma liabilities reflect amounts as if this statement had been applied during all periods (in millions): Liability as of December 31, 2002 2001 ---------- ---------- Regulated: Nuclear decommissioning $ 302.8 $287.2 Nonregulated: Coal mine operations $ 6.1 $ 5.6 Synfuel operations 1.4 1.1 Gas production 2.2 2.0 Nuclear decommissioning and coal mine operations have previously-recorded liabilities. Amounts recorded for nuclear decommissioning were $283.8 million and $276.2 million at December 31, 2002 and 2001, respectively. Amounts recorded for coal mine reclamation were $4.7 million and $4.8 million at December 31, 2002 and 2001, respectively. Synthetic fuel operations and gas production had no previously recorded liabilities. Proforma net income has not been presented for the years ended December 31, 2002, 2001 and 2000 because the proforma application of SFAS No. 143 to prior periods would result in proforma net income and earnings per share not materially different from the actual amounts reported for those periods in the accompanying Consolidated Statements of Income and Comprehensive Income. 54 The Company has identified but not recognized asset retirement obligation (ARO) liabilities related to electric transmission and distribution, gas distribution, and telecommunications assets as the result of easements over property not owned by the Company. These easements are generally perpetual and only require retirement action upon abandonment or cessation of use of the property for the specified purpose. The ARO liability is not estimable for such easements, as the Company intends to utilize these properties indefinitely. In the event the Company decides to abandon or cease the use of a particular easement, an ARO liability would be recorded at that time. Florida Power has previously recognized removal costs as a component of depreciation in accordance with regulatory treatment. To the extent these amounts do not represent SFAS No. 143 legal retirement obligations, they will be disclosed as regulatory liabilities upon adoption of the statement. SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This newly issued statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of Accounting Principles Board (APB) Opinion No. 30)," which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria set forth by APB Opinion 30 will now be used to classify those gains and losses. Any gain or loss on extinguishment will be recorded in the most appropriate line item to which it relates within net income before extraordinary items. For Florida Power, any expenses or call premiums associated with the reacquisition of debt obligations are amortized over the applicable life using the straight-line method consistent with ratemaking treatment (See Note 1P). SFAS No. 145 also amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS No. 145 amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. For the provisions related to the rescission of SFAS No. 4, SFAS No. 145 is effective for the Company beginning in fiscal year 2004. The remaining provisions of SFAS No. 145 are effective for the Company in fiscal year 2003. The Company is currently evaluating the effects, if any, that this statement will have on its results of operations and financial position. SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123," and provided alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement requires that companies follow the prescribed format and provide the additional disclosures in their annual reports for years ending after December 15, 2002. The Company applies the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by SFAS Nos. 123 and 148, and related interpretations in accounting for its stock-based compensation plans, as described in Note 14. 55 The following table illustrates the effect on net income (in thousands) if the Company had applied the fair value recognition provisions of SFAS No. 123 to the stock option plan. The stock option plan was not in effect in 2000. FLORIDA PROGRESS 2002 2001 2000 ---------------- ---------------- ------------ Net income, as reported $ 235,171 $ 244,331 $ 144,241 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 2,806 600 - ---------------- ---------------- ------------ Proforma net income $ 232,365 $ 243,731 $ 144,241 ================ ================ ============ FLORIDA POWER 2002 2001 2000 ---------------- ---------------- ------------ Net income, as reported $ 324,106 $ 311,088 $ 211,810 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 2,372 500 - ---------------- ---------------- ------------ Proforma net income $ 321,734 $ 310,588 $ 211,810 ================ ================ ============
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34" (FIN No. 45). This interpretation clarifies the disclosures to be made by a guarantor in its interim and annual financial statements about obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The applicable disclosures required by FIN No. 45 have been made in Notes 9 and 22B. The Company is currently evaluating the effects, if any, that this interpretation will have on its results of operations and financial position. FIN No. 46, "Consolidation of Variable Interest Entities" In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46). This interpretation provides guidance related to identifying variable interest entities (previously known as special purpose entities or SPEs) and determining whether such entities should be consolidated. Certain disclosures are required when FIN No. 46 becomes effective if it is reasonably possible that a company will consolidate or disclose information about a variable interest entity when it initially applies FIN No. 46. This interpretation must be applied immediately to variable interest entities created or obtained after January 31, 2003. For those variable interest entities created or obtained on or before January 31, 2003, the Company must apply the provisions of FIN No. 46 in the third quarter of 2003. The Company has an arrangement with Railcar Asset Financing Trust (RAFT), through its Railcar Ltd. subsidiary to which this interpretation may apply. Because the Company expects to sell Railcar Ltd. during 2003 (See Note 4A), the application of FIN No. 46 is not expected to have a material impact. The Company is currently evaluating what effects, if any, this interpretation will have on its results of operations and financial position. EITF Issue 02-03, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" In June 2002, the Emerging Issues Task Force (EITF) reached consensus on a portion of Issue 02-03, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." EITF Issue 02-03 requires all gains and losses (realized or unrealized) on energy trading contracts to be shown net in the income statement. Florida Power's policy already required the gains and losses to be recorded on a net basis. The net of the gains and losses are recorded in other, net on the Consolidated Statements of Income and Comprehensive Income. Florida Power does not recognize a dealer profit or unrealized gain or loss at the inception of a derivative unless the fair value of that instrument, in its entirety, is evidenced by quoted market prices or current market transactions. 56 2. Acquisition by Progress Energy 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. 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 and Comprehensive Income (in millions): Florida Power Diversified Total - Florida Operation and Business Progress Maintenance Expenses Corporation -------------- ----------- --------------- 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 15). 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. The activity for the non-executive involuntary termination costs is detailed in the table below (in millions): 2002 2001 --------- ---------- Balance at January 1 $ 7.7 $41.8 Payments (4.1) (28.0) Adjustments credited to operating results (3.6) (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 14), 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. 3. Acquisitions A. Westchester Acquisition On April 26, 2002, Progress Fuels, a subsidiary of Florida Progress, acquired 100% of Westchester Gas Company (Westchester). The acquisition included approximately 215 natural gas-producing wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems located within a 25-miles radius of Jonesville, Texas, on the Texas-Louisiana border. 57 The aggregate purchase price of approximately $153 million consisted of cash consideration of approximately $22 million and the issuance of 2.5 million shares of Progress Energy common stock valued at approximately $129 million. The purchase price included approximately $2 million of direct transaction costs. The purchase price was primarily allocated to fixed assets, including oil and gas properties, based on the preliminary fair values of the assets acquired. The preliminary purchase price allocation is subject to adjustment for changes in the preliminary assumptions and analyses used, pending additional information including final asset valuations. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of operations for Westchester have been included in Florida Progress' consolidated financial statements since the date of acquisition. The proforma results of operations reflecting the acquisition would not be materially different than the reported results of operations for the years ended December 31, 2002 or 2001. B. Other Acquisitions During 2000, subsidiaries of Progress Fuels acquired seven 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 proforma results of consolidated operations for 2000, assuming the 2000 acquisitions were made at the beginning of the year, would not differ significantly from the historical results. 4. Divestitures A. Railcar Ltd. Divestiture In December 2002, the Progress Energy Board of Directors adopted a resolution approving the sale of Railcar Ltd., a subsidiary included in the Rail Services segment. A series of sales transactions is expected to take place throughout 2003. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," an estimated impairment on assets held for sale of $66.5 million has been recognized for the write-down of the assets to be sold to fair value less the costs to sell. This impairment has been included in impairment of long-lived assets in the Consolidated Statements of Income and Comprehensive Income (See Note 7). The assets of Railcar Ltd. have been grouped as assets held for sale and are included in other current assets on the Consolidated Balance Sheets as of December 31, 2002. The assets are recorded at $23.6 million, which reflects the Company's initial estimate of the fair value expected to be realized from the sale of these assets. The majority of these assets, approximately $21.6 million, are current assets. These assets are subject to certain commitments under operating leases (See Note 20). The Company expects to be relieved of the majority of these commitments as a result of the sale. B. Inland Marine Transportation Divestiture On July 23, 2001, Progress Energy announced the disposition of the Inland Marine Transportation segment of the Company, which was operated by MEMCO Barge Line, Inc. Inland Marine provided 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 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 and Comprehensive Income as discontinued operations. 58 Results of discontinued operations for years ended December 31, were as follows (in thousands): 2001 2000 --------- --------- Revenues $142,721 $170,329 Earnings before income taxes 4,530 16,961 Income taxes 1,848 7,989 --------- --------- Net earnings 2,682 8,972 Estimated loss on disposal of discontinued operations, including provision of $5,468 for pre-tax operating income during phase-out period (net of applicable income tax benefit of $7,896) (23,734) - --------- --------- Income (loss) from discontinued operations $(21,052) $ 8,972 ========= =========
The net gain on disposal of discontinued operations in the Company's Consolidated Statements of Income and Comprehensive Income for year ended December 31, 2002, represents the after-tax gain from the resolution of approximately $5.1 million of contingencies in the purchase agreement of the Inland Marine Transportation segment. 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. 5. Financial Information by Business Segment The Company's principal business segment is Florida Power, a 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 4B). The Energy & Related Services segment 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 Corporation (Progress Telecom), 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 Telecom 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. The Company allocates a portion of its operating expenses to business segments. The Company's business segment information for 2002, 2001 and 2000 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 2002 includes an estimated impairment on the assets held for sale of Railcar Ltd. of $66.5 million pre-tax ($44.7 million after-tax) included in the Rail Services segment and an asset impairment and other charges related to Progress Telecom totaling $233.0 million on a pre-tax basis ($144.0 million after-tax) included in the Other segment. 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 7). 59 Energy and Related Rail (In millions) Utility Services Services Other Consolidated - -------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2002 Revenues $ 3,061.7 $ 342.8 $ 714.5 $ 234.3 $ 4,353.3 Intersegment revenues - 525.6 4.6 (530.2) - Depreciation and amortization 294.9 33.9 20.4 11.2 360.4 Net interest charges 106.8 21.9 32.8 21.6 183.1 Impairment of long-lived assets and investments - - 66.5 214.6 281.1 Income tax expense (benefit) 163.3 (206.6) (19.4) (110.5) (173.2) Income (loss) from continuing operations 322.6 117.5 (47.4) (162.6) 230.1 Total segment assets 5,226.2 708.0 614.5 77.8 6,626.5 Capital and investment expenditures 550.0 104.2 8.3 41.4 703.9 - -------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2001 Revenues $ 3,212.8 $ 369.7 $ 820.1 $ 133.9 $ 4,536.5 Intersegment revenues - 398.3 1.1 (399.4) - Depreciation and amortization 453.0 23.6 33.8 12.0 522.4 Net interest charges 113.7 12.0 36.4 31.7 193.8 Impairment of long-lived assets - - 160.6 - 160.6 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 segment assets 5,009.6 452.9 602.6 258.2 6,323.3 Capital and investment expenditures 353.4 43.5 18.0 72.0 486.9 - -------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2000 Revenues $ 2,871.6 $ 329.3 $ 1,002.1 $ 27.3 $ 4,230.3 Intersegment revenues - 244.3 0.7 (245.0) - Depreciation and amortization 402.6 25.2 32.3 13.3 473.4 Net interest charges 125.4 12.2 42.7 26.1 206.4 Impairment of long-lived assets - 70.2 60.5 - 130.7 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 segment assets 4,978.0 345.4 802.3 366.9 6,492.6 Capital and investment expenditures 286.8 63.0 25.1 106.1 481.0 - --------------------------------------------------------------------------------------------------------------------
6. 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. The weighted-average interest rates associated with such money pool balances were 2.18% and 4.47% at December 31, 2002 and 2001, respectively. Funds may be withdrawn from or repaid to the pool at any time without prior notice. At December 31, 2002, Florida Progress and Florida Power had $379.7 60 million and $237.4 million, respectively, of amounts payable to the money pool that are included in notes payable to affiliated companies on the Balance Sheets. At December 31, 2001, Florida Progress had $147.6 million of amounts payable to the money pool and Florida Power had $119.8 million of amounts receivable from the money pool that are included in notes payable to affiliated companies and notes receivable from affiliated companies, respectively, on the Balance Sheets. Interest expense related to advances from Progress Energy was $6.6 million and $8.2 million for Florida Progress in 2002 and 2001, respectively, and $0.6 million for Florida Power in 2002. Florida Progress and Florida Power both recorded $1.2 million and $2.4 million of interest income related to the money pool for 2002 and 2001, respectively. Interest expense and interest income related to the money pool in 2000 was 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 U.S. Securities and Exchange Commission (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 2002 and 2001 amounted to $248.6 million and $199.9 million, respectively, and $116.1 million and $110.9 million, respectively. At December 31, 2002 and 2001, Florida Progress had a net payable to PESC of $43.1 million and $31.7 million, respectively. Florida Power had a net payable to the service company of $36.6 million and $28.1 million, respectively, at December 31, 2002 and 2001. During 2002, the Office of Public Utility Regulation within the SEC completed an audit examination of the Progress Energy's books and records. This examination is a standard process for all PUHCA registrants. Based on the review, the method for allocating PESC costs to the Parent and its affiliates will change in 2003. The Company does not anticipate the reallocation of costs will have a material impact on the results of operations. Progress Fuels has an outstanding note due to the Parent. The principal outstanding on this note was $500.0 million at December 31, 2002 and 2001. Progress Fuels recorded interest expense related to this note of $32.1 million and $5.4 million for 2002 and 2001, respectively. Progress Fuels sells coal to Florida Power which are eliminated from revenues in Florida Progress' consolidated financial statements. In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," profits on intercompany sales between Progress Fuels and Florida Power are not eliminated if the sales price is reasonable and the future recovery of sales price through the ratemaking process is probable. In April 2000, Progress Ventures, Inc. (PVI), 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, PVI purchased a 90% ownership interest in another synthetic fuel facility located in West Virginia. The purchase agreements contained a provision that would require PVI 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 were transferred to Progress Energy. As of December 31, 2002 and 2001, the Company has a note receivable of $46.6 million and $59.9 million from PVI that has been recorded as a reduction to equity for financial reporting purposes. Payments on the note during 2002 and 2001 totaled $17.2 million and $13.9 million, respectively, representing $13.3 million and $3.9 million in principal and interest in 2002 and $9.4 million and $4.5 million in principal and interest in 2001. From time-to-time the Company and its subsidiaries may receive equity contributions from Progress Energy. During 2002, the Company received cash equity contributions of $87.2 million. 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 August 2002, CP&L transferred reservation payments for the manufacture of two combustion turbines to Florida Power at CP&L's original cost of $20.0 million. These combustion turbines will be installed at the Florida Power Hines facility in 2005. In December 2002, PVI transferred reservation payments for the manufacture of one combustion turbine and exhaust stack to Florida Power at PVI's original cost of $15.5 million. This combustion turbine will be installed at a Florida Power production facility in 2004. At December 31, 2002, Florida Power had a $14.2 million payable to CP&L related to these transfers. 61 7. Impairment of Long-Lived Assets and Investments 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." In 2002, 2001 and 2000, the Company recorded impairments of approximately $281.2 million, $160.6 million and $130.7 million, respectively. The 2002 amount includes an estimated impairment of assets held for sale of $66.5 million related to Railcar, Ltd. (See Note 4A). Due to the decline of the telecommunications industry and continued operating losses, the Company initiated an independent valuation study during 2002 to assess the recoverability of the long-lived assets Progress Telecom. Based on this assessment, the Company recorded asset impairments of $214.6 million on a pre-tax basis and other charges of $18.4 million on a pre-tax basis primarily related to inventory adjustments in the third quarter of 2002. This write-down constitutes a significant reduction in the book value of these long-lived assets. The long-lived asset impairments include an impairment of property, plant and equipment, construction work in process and intangible assets. The impairment charge represents the difference between the fair value and carrying amount of these long-lived assets. The fair value of these assets was determined using a valuation study heavily weighted on the discounted cash flow methodology, using market approaches as supporting information. Due to results of divestiture efforts and the decision to retain the Rail Services business segment in the near term, 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 and Comprehensive 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, Inc. (Progress Capital) 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 are included in other, net on the Consolidated Statements of Income and Comprehensive Income. 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 Consolidated Statements of Income and Comprehensive Income. During 2000, Progress Energy hired a financial advisor 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 Consolidated Statements of Income and Comprehensive Income. 62 8. Debt and Credit Facilities A. Lines of Credit At December 31, 2002, Florida Power had committed lines of credit totaling $290.5 million, all of which are used to support its commercial paper borrowings. Florida Power is required to pay minimal annual commitment fees to maintain its credit facilities. The following table summarizes Florida Power's credit facilities used to support the issuance of commercial paper (in millions): Description Total ------------------ 364-Day (expiring 4/1/03) $ 90.5 5-Year (expiring 11/30/03) 200.0 ------------------ $ 290.5 ================== There were no loans outstanding under these facilities at December 31, 2002. As of December 31, 2002 and 2001, Florida Power had $257.1 million and $154.3 million, respectively, of outstanding commercial paper and other short-term debt classified as short-term obligations. The weighted-average interest rates of such short-term obligations at December 31, 2002 and 2001 were 1.55% and 2.49%, respectively. Florida Power no longer reclassifies commercial paper to long-term debt. Certain amounts for 2001 have been reclassified to conform to 2002 presentation, with no effect on previously reported net income or common stock equity. The combined aggregate maturities of Florida Progress long-term debt for 2003 through 2007 are approximately $275 million, $68 million, $49 million, $109 million and $124 million, respectively. Florida Power's aggregate maturities of long-term debt for 2003 through 2007 are approximately $217 million, $43 million, $48 million, $48 million and $89 million, respectively. B. Covenants and Default Provisions Financial Covenants Florida Power's credit line contains various terms and conditions that could affect Florida Power's ability to borrow under these facilities. These include a maximum debt to total capital ratio, a material adverse change clause and a cross-default provision. Florida Power's credit line requires a maximum total debt to total capital ratio of 65.0%. Indebtedness as defined by the bank agreement includes certain letters of credit and guarantees which are not recorded on the Consolidated Balance Sheets. As of December 31, 2002, Florida Power's total debt to total capital ratio was 48.6%. Material adverse change clause The credit facility of Florida Power includes a provision under which lenders could refuse to advance funds in the event of a material adverse change in the borrower's financial condition. Default provisions Florida Power's credit lines include cross-default provisions for defaults of indebtedness in excess of $10 million. Florida Power's cross-default provisions only apply to defaults of indebtedness by Florida Power and not to other affiliates of Florida Power. The credit lines of Progress Energy include a similar provision. Progress Energy's cross-default provisions only apply to defaults of indebtedness by Progress Energy and its significant subsidiaries, which includes Florida Power, Florida Progress, Progress Fuels and Progress Capital. In the event that either of these cross-default provisions were triggered, the lenders could accelerate payment of any outstanding debt. Any such acceleration would cause a material adverse change in the respective company's financial condition. Certain agreements underlying the Company's indebtedness also limit the Company's ability to incur additional liens or engage in certain types of sale and leaseback transactions. 63 Other restrictions Florida Power's mortgage indenture provides that it will not pay any cash dividends upon its common stock, or make any other distribution to the stockholders, except a payment or distribution out of net income of Florida Power subsequent to December 31, 1943. In addition, Florida Power's Articles of Incorporation provide that no cash dividends or distributions on common stock shall be paid, if the aggregate amount thereof since April 30, 1944, including the amount then proposed to be expended, plus all other charges to retained earnings since April 30, 1944, exceed (a) all credits to retained earnings since April 30, 1944, plus (b) all amounts credited to capital surplus after April 30, 1944, arising from the donation to Florida Power of cash or securities or transfers amounts from retained earnings to capital surplus. At December 31, 2002, none of Florida Power's retained earnings of $598 million was restricted. Florida Power's Articles also provide that cash dividends on common stock shall be limited to 75% of net income available for dividends if common stock equity falls below 25% of total capitalization, and to 50% if common stock equity falls below 20%. On December 31, 2002, Florida Power's common stock equity was approximately 50.7% of total capitalization. C. Secured Obligations Florida Power's first mortgage bonds are secured by their respective mortgage indentures. Florida Power's mortgage constitutes a first lien on substantially all of its fixed properties, subject to certain permitted encumbrances and exceptions. The Florida Power mortgage also constitutes a lien on subsequently acquired property. At December 31, 2002, Florida Power had approximately $1.1 billion in aggregate principal amount of first mortgage bonds outstanding including those related to pollution control obligations. The Florida Power mortgage allows the issuance of additional mortgage bonds upon the satisfaction of certain conditions. D. Guarantees of Subsidiary Debt Florida Progress has guaranteed the outstanding debt obligations for two of its wholly owned subsidiaries, FPC Capital I and Progress Capital. At December 31, 2002 and 2001, Progress Capital had $223 million and $273 million in medium term notes outstanding which was fully guaranteed by Florida Progress. FPC Capital I had $300 million in mandatorily redeemable securities outstanding at December 31, 2002 and 2001 for which Florida Progress has guaranteed payment. See Note 9 for additional discussion of these notes. E. Hedging Activities Florida Power uses interest rate derivatives to adjust the fixed and variable rate components of its debt portfolio and to hedge cash flow risk of fixed rate debt to be issued in the future. See discussion of risk management and derivative transactions at Note 13. 9. 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 and used for general corporate purposes including the repayment of a portion of certain outstanding short-term bank loans and commercial paper. 64 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. 10. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents and short-term obligations approximate fair value due to the short maturities of these instruments. At December 31, 2002 and 2001, there were miscellaneous investments, consisting primarily of investments in company-owned life insurance and other benefit plan assets, with carrying amounts of approximately $64.1 million and $74.2 million, respectively, included in miscellaneous other property and investments. The carrying amount of these investments approximates fair value due to the short maturity of certain instruments and certain instruments are presented at fair value. The carrying amount of the Company's long-term debt, including current maturities, was $2.5 billion and $2.6 billion at December 31, 2002 and 2001, respectively. The estimated fair value of this debt, as obtained from quoted market prices for the same or similar issues, was $2.7 billion and $2.8 billion at December 31, 2002 and 2001, respectively. External funds have been established as a mechanism to fund certain costs of nuclear decommissioning (See Note 1F). These nuclear decommissioning trust funds are invested in stocks, bonds and cash equivalents. Nuclear decommissioning trust funds are presented on the Balance Sheets at amounts that approximate fair value. Fair value is obtained from quoted market prices for the same or similar investments. 11. 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 or outstanding. 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 or outstanding. All Cumulative Preferred Stock series are without sinking funds and are not subject to mandatory redemption. 12. Regulatory Matters A. Rates Florida Power's retail rates are set by the FPSC, while its wholesale rates are governed by the FERC. Florida Power's last general 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. The FPSC initiated a rate proceeding in 2001 regarding Florida Power's future base rates. 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. 65 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 was limited to 67.1% of the 2/3 customer share. The retail base rate revenue sharing threshold amounts for 2002 was $1.296 billion 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 was limited to 67.1% of the retail base rate revenues that exceeded the 2002 cap. The retail base revenue cap for 2002 was $1.356 billion and will increase $37 million each year thereafter. Any amounts above the retail base revenue caps will be refunded 100% to customers. As of December 31, 2002, $4.7 million has been accrued and will be refunded to customers by March 2003. The Agreement also provides that beginning with the in-service date of Florida Power's Hines Unit 2 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. Hines Unit 2 is a 516 MW combined-cycle unit under construction and currently scheduled for completion in late 2003. Additionally, the Agreement provided that Florida Power would 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. There was no accelerated depreciation or amortization expense recorded for the year ended December 31, 2002. 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 provided that Florida Power was required to 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 and was returned to retail customers over an eight-month period ended December 31, 2002. Any additional refunds under the Agreement are recorded when they become probable. In February 2003, Florida Power petitioned the FPSC to increase its fuel factors due to continuing increases in oil and natural gas commodity prices. The crisis in the Middle East along with the Venezuelan oil workers' strike have put upward pressure on commodity prices that were not anticipated by Florida Power when fuel factors for 2003 were approved by the FPSC in November 2002. If Florida Power's petition is approved, the increase would go into effect April 1, 2003. B. Regulatory Assets and Liabilities As a regulated entity, Florida Power is subject to the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." Accordingly, the Florida Power records certain assets and liabilities resulting from the effects of the ratemaking process, which would not be recorded under GAAP for nonregulated entities. The utility's ability to continue to meet the criteria for application of SFAS No. 71 may be affected in the future by competitive forces and restructuring in the electric utility industry. In the event that SFAS No. 71 no longer applied to Florida Power's operations, related regulatory assets and liabilities would be eliminated unless an appropriate regulatory recovery mechanism was provided. Additionally, these factors could result in an impairment of utility plant assets as determined pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (See Note 1L). 66 Florida Power has regulatory assets (liabilities) at December 31, 2002 and 2001 as follows (in thousands): 2002 2001 ----------- ----------- Deferred fuel (included in current assets) $37,503 $15,147 ----------- ----------- Income taxes recoverable through future rates 32,623 27,610 Deferred purchased power contract termination costs 46,601 95,326 Loss on reacquired debt 19,756 19,848 Deferred DOE enrichment facilities-related costs 6,955 8,531 Other 24,179 22,766 ----------- ----------- Total regulatory assets 130,114 174,081 ----------- ----------- Nuclear maintenance and refueling (9,601) (346) Storm reserve (Note 22C) (35,631) (35,527) Other (15,772) (14,320) ----------- ----------- Total regulatory liabilities (61,004) (50,193) ----------- ----------- Net regulatory assets $ 106,613 $ 139,035 =========== ===========
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. The Tiger Bay regulatory asset, for contract termination costs, is 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 had the option to accelerate the amortization at its discretion. Including accelerated amounts, Florida Power recorded amortization expense of $48.7 million, $130.5 million and $71.2 million in 2002, 2001 and 2000, 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. Similar approvals were given by the FPSC in November 1999. 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, Florida Power recognized $44.4 million of revenue, and recorded $44.4 million, plus interest, of amortization against the Tiger Bay regulatory asset. 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. 13. Risk Management Activities and Derivatives Transactions Under its risk management policy, the Company may use a variety of instruments, including swaps, options and forward contracts, to manage exposure to fluctuations in commodity prices and interest rates. Such instruments contain credit risk if the counterparty fails to perform under the contract. The Company minimizes such risk by performing credit reviews using, among other things, publicly available credit ratings of such counterparties. Potential non-performance by counterparties is not expected to have a material effect on the consolidated financial position or consolidated results of operations of the Company. A. Commodity Contracts - General Most of the Company's commodity contracts either are not derivatives pursuant to SFAS No. 133 or qualify as normal purchases or sales pursuant to SFAS No. 133. Therefore, such contracts are not recorded at fair value. 67 B. Commodity Derivatives - Cash Flow Hedges Progress Fuels held natural gas and oil cash flow hedging instruments at December 31, 2002. The objective for holding these instruments is to manage a portion of the market risk associated with fluctuations in the price of natural gas and oil on Progress Fuel's forecasted sales of natural gas and oil production. As of December 31, 2002, Progress Fuels is hedging exposures to the price variability of these commodities for contracts maturing through December 2004. The total fair value of these instruments at December 31, 2002 was a $10.2 million liability position. The ineffective portion of commodity cash flow hedges was not material in 2002. As of December 31, 2002, $5.0 million of after-tax deferred losses in accumulated other comprehensive income (OCI) are expected to be reclassified to earnings during the next 12 months as the hedged transactions occur. Due to the volatility of the commodities markets, the value in OCI is subject to change prior to its reclassification into earnings. C. Commodity Derivatives - Economic Hedging and Trading Nonhedging derivatives, primarily electricity forward contracts, may be entered into for trading purposes and for economic hedging purposes. While management believes the economic hedges mitigate exposures to fluctuations in commodity prices, these instruments are not designated as hedges for accounting purposes and are monitored consistent with trading positions. The Company manages open positions with strict policies that limit its exposure to market risk and require daily reporting to management of potential financial exposures. Gains and losses from such contracts were not material during 2002, 2001 or 2000, and the Company did not have material outstanding positions in such contracts at December 31, 2002 or 2001. D. Interest Rate Derivatives - Fair Value or Cash Flow Hedges The Company manages its interest rate exposure in part by maintaining its variable-rate and fixed rate-exposures within defined limits. In addition, the Company also enters into financial derivative instruments, including, but not limited to, interest rate swaps and lock agreements to manage and mitigate interest rate risk exposure. The Company uses cash flow hedging strategies to hedge variable interest rates on long-term debt and to hedge interest rates with regard to future fixed-rate debt issuances. At December 31, 2002, Florida Power held an interest rate cash flow hedge, with a notional amount of $35 million, related to an anticipated 2003 issuance of long-term debt. The fair value of that hedge was a $0.5 million liability position at December 31, 2002. As of December 31, 2002, an immaterial amount of after-tax deferred losses in OCI is expected to be reclassified to earnings during the next 12 months as the hedged interest payments occur. Due to the volatility of interest rates, the value in OCI is subject to change prior to its reclassification into earnings. At December 31, 2001, the Company held no interest rate cash flow hedges. The Company uses fair value hedging strategies to manage its exposure to fixed interest rates on long-term debt. At December 31, 2002 and 2001, the Company had no open interest rate fair value hedges. The notional amounts of interest rate derivatives are not exchanged and do not represent exposure to credit loss. In the event of default by a counterparty, the risk in these transactions is the cost of replacing the agreements at current market rates. 14. Stock-Based Compensation A. Long-Term Incentive Plans 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 were fully vested and paid in conjunction with the merger. 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 were $17 million. 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. 68 B. Employee Stock Ownership Plan Progress Energy sponsors the Progress Energy 401(k) Savings and Stock Ownership Plan (401(k)) for which substantially all full-time non-bargaining unit employees and certain part-time non-bargaining employees within participating subsidiaries are eligible. Effective January 1, 2002, Florida Progress is a participating subsidiary of the 401(k), which has matching and incentive goal features, encourages systematic savings by employees and provides a method of acquiring Progress Energy common stock and other diverse investments. The 401(k), as amended in 1989, is an Employee Stock Ownership Plan (ESOP) that can enter into acquisition loans to acquire Progress Energy common stock to satisfy 401(k) common stock needs. Qualification as an ESOP did not change the level of benefits received by employees under the 401(k). Common stock acquired with the proceeds of an ESOP loan is held by the 401(k) Trustee in a suspense account. The common stock is released from the suspense account and made available for allocation to participants as the ESOP loan is repaid. Such allocations are used to partially meet common stock needs related to Progress Energy matching and incentive contributions and/or reinvested dividends. Florida Progress' matching and incentive goal compensation cost under the 401(k) is determined based on matching percentages and incentive goal attainment as defined in the plan. Such compensation cost is allocated to participants' accounts in the form of Progress Energy common stock, with the number of shares determined by dividing compensation cost by the common stock market value at the time of allocation. The 401(k) common stock share needs are met with open market purchases, with shares released from the ESOP suspense account and with newly issued shares. Florida Progress' matching and incentive cost met with shares released from the suspense account totaled approximately $2.0 million for the year ended December 31, 2002. C. Stock Option Agreements Pursuant to the Progress Energy's 1997 Equity Incentive Plan and 2002 Equity Incentive Plans as amended and restated as of July 10, 2002, Progress Energy may grant options to purchase shares of common stock to directors, officers and eligible employees. During 2002 and 2001, approximately 2.9 million and 2.4 million common stock options were granted. Of these amounts, approximately 0.5 million and 0.4 million, respectively, were granted to officers and eligible employees of Florida Progress and Florida Power. No compensation expense was recognized under the provisions of APB 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 2002 by approximately $2.8 million and $2.4 million, respectively. Compensation expense for 2001 was insignificant. D. Other Stock-Based Compensation Plans Progress Energy has additional compensation plans for officers and key employees that are stock-based in whole or in part. The Company participates in these plans. The two primary active stock-based compensation programs are the Performance Share Sub-Plan (PSSP) and the Restricted Stock Awards program (RSA), both of which were established pursuant to Progress Energy's 1997 Equity Incentive Plan and were continued under the 2002 Equity Incentive Plan, as amended and restated as of July 10, 2002. Under the terms of the PSSP, officers and key employees are granted performance shares on an annual basis that vest over a three-year consecutive period. Each performance share has a value that is equal to, and changes with, the value of a share of Progress Energy's common stock, and dividend equivalents are accrued on, and reinvested in, the performance shares. The PSSP has two equally weighted performance measures, both of which are based on Progress Energy's results as compared to a peer group of utilities. Compensation expense is recognized over the vesting period based on the expected ultimate cash payout and is reduced by any forfeitures. 69 The RSA allows Progress Energy to grant shares of restricted common stock to officers and key employees of Progress Energy. The restricted shares generally vest on a graded vesting schedule over a minimum of three years. Compensation expense, which is based on the fair value of common stock at the grant date, is recognized over the applicable vesting period and is reduced by any forfeitures. The total amount expensed by the Company for other stock-based compensation under these plans was $1.4 million in 2002 and 2001, and $0.03 million in 2000. 15. Benefit Plans A. Pension Benefits The Company and some of its subsidiaries (including Florida Power) sponsor noncontributory defined benefit pension plans covering most employees. The Company also has supplementary defined benefit pension plans, which provide additional benefits to certain higher-level employees. As a result of the acquisition by Progress Energy, the benefits of two plans are now frozen, and in 2000, the Company recorded merger-related charges of $24.4 million associated 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. B. 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 2002, 2001 and 2000: Pension Benefits Other Postretirement Benefits --------------------------------- ----------------------------- (In millions) 2002 2001 2000 2002 2001 2000 --------------------------------- ----------------------------- Service cost $ 18.9 $ 10.5 $ 18.7 $ 4.7 $ 3.9 $ 3.2 Interest cost 44.2 42.0 42.5 15.0 12.5 10.9 Expected return on plan assets (75.8) (86.3) (92.0) (0.7) (0.6) (0.5) Net amortization and deferral (7.3) (18.8) (22.8) 4.1 3.5 2.7 --------------------------------- ----------------------------- Net cost/(benefit) recognized by Florida Progress $ (20.0) $ (52.6) $ (53.6) $ 23.1 $ 19.3 $ 16.3 --------------------------------- ----------------------------- Net cost/(benefit) recognized by Florida Power $ (21.9) $ (50.3) $ (51.3) $ 21.9 $ 18.0 $ 15.9
The following weighted average actuarial assumptions at December 31 were used in the calculation of the year-end obligation or each year's cost: Pension Benefits Other Postretirement Benefits ------------------------------- --------------------------------- (In millions) 2002 2001 2000 2002 2001 2000 ------------------------------- --------------------------------- Discount rate for obligation 6.60% 7.50% N/A 6.60% 7.50% N/A Expected long-term rate of return 9.25% 9.25% 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% 4.00% 4.50% 4.00% 4.00% 4.50% Nonqualified plans 4.00% 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 2002 and 2001: 70 Other Postretirement Pension Benefits Benefits ------------------------ ------------------------- (In millions) 2002 2001 2002 2001 ------------------------ ------------------------- Change in benefit obligation Benefit obligation at beginning of year $ 587.8 $ 627.7 $ 180.4 $ 156.2 Service cost 18.9 10.5 4.7 3.9 Interest cost 44.2 42.0 15.0 12.5 Plan amendment - (43.0) - 7.8 Actuarial (gain)/loss 118.9 (13.4) 55.5 9.6 Transfers (17.6) - (5.4) - Benefits paid (38.7) (35.0) (14.4) (9.6) Curtailment gain and special termination benefits (See Note 2) - (1.0) - - ------------------------ ------------------------- Benefit obligation at end of year $ 713.5 $ 587.8 $ 235.8 $ 180.4 ------------------------ ------------------------- Change in plan assets Fair value of plan assets at beginning of year $ 853.7 $ 948.8 $ 13.4 $ 11.6 Return on plan assets (114.4) (63.3) 1.3 0.5 Employer contributions 4.4 3.2 15.8 10.9 Transfers (17.6) - - - Benefits paid (38.7) (35.0) (14.4) (9.6) ------------------------ ------------------------- Fair value of plan assets at end of year $ 687.4 $ 853.7 $ 16.1 $ 13.4 ------------------------ ------------------------- Funded status $ (26.1) $ 265.9 $ (219.7) $ (167.0) Unrecognized transition (asset) obligation (0.7) (5.6) 34.9 38.4 Unrecognized prior service cost (20.0) (21.7) 7.0 7.5 Unrecognized net actuarial (gain) loss 213.2 (96.5) 32.9 (16.6) Minimum pension liability adjustment (7.3) - - - ------------------------ ------------------------- Prepaid (accrued) benefit cost-Florida Progress $ 159.1 $ 142.1 $ (144.9) $ (137.7) ------------------------ ------------------------- Prepaid (accrued) benefit cost-Florida Power $ 188.0 $ 168.4 $ (139.4) $ (132.9)
The Florida Progress net prepaid pension cost of $159.1 million and $142.1 million at December 31, 2002 and 2001, respectively, is included in the accompanying Consolidated Balance Sheets as prepaid pension cost of $226.4 million and $202.2 million, respectively, and accrued benefit cost of $67.3 million and $60.1 million, respectively, which is included in other liabilities and deferred credits. The Florida Power net prepaid pension cost of $188.0 million and $168.4 million at December 31, 2002 and 2001, respectively, is included in the accompanying Consolidated Balance Sheets as prepaid pension cost of $222.5 million and $198.4 million, respectively, and accrued benefit cost of $34.5 million and $30.0 million, respectively, which is included in other liabilities and deferred credits. For Florida Progress, the defined benefit plans with accumulated benefit obligations in excess of plan assets had projected benefit obligations totaling $67.6 million and $59.6 million at December 31, 2002 and 2001, respectively. Those plans had accumulated benefit obligations totaling $67.3 million and $59.6 million, respectively, and no plan assets. For Florida Power, the defined benefit plans with accumulated benefit obligations in excess of plan assets had projected benefit obligations totaling $34.8 million and $30.0 million at December 31, 2002 and 2001, respectively. Those plans had accumulated benefit obligations totaling $34.5 million and $30.0 million, respectively, and no plan assets. Florida Progress and Florida Power recorded a minimum pension liability adjustment of $7.3 million and $3.9 million, respectively, at December 31, 2002, with a corresponding pre-tax charge to accumulated other comprehensive loss, a component of common stock equity. Accrued other postretirement benefit cost is included in other liabilities and deferred credits in the respective balance sheets of Florida Progress and Florida Power. 71 The assumed pre-Medicare and post Medicare health care cost trend rates are: 2002 2001 -------------------------- Initial medical cost trend for pre-medicare benefits 7.50% 7.50% Initial medical cost trend for post-medicare benefits 7.50% 7.50% Ultimate medical cost trend rate 5.25% 5.00% Year ultimate medical cost trend rate is achieved 2009 2008
Assuming a 1% increase in the medical cost trend rates, the aggregate of the service and interest cost components of the net periodic OPEB cost for 2002 would increase by $3.0 million, and the OPEB obligation at December 31, 2002, would increase by $23.3 million. Assuming a 1% decrease in the medical cost trend rates, the aggregate of the service and interest cost components of the net periodic OPEB cost for 2002 would decrease by $2.6 million and the OPEB obligation at December 31, 2002, would decrease by $21.2 million. 16. Income Taxes Income tax expense (benefit) applicable to continuing operations is comprised of (in millions): FLORIDA PROGRESS 2002 2001 2000 -------------- --------------- ------------ Payable currently: Federal $ 42.9 $ 3.4 $96.8 State 23.4 25.7 15.5 -------------- --------------- ------------ 66.3 29.1 112.3 -------------- --------------- ------------ Deferred, net: Federal (220.0) (187.5) (215.6) State (13.1) (6.5) (13.5) -------------- --------------- ------------ (233.1) (194.0) (229.1) -------------- --------------- ------------ Amortization of investment tax credits, net (6.4) (7.8) (7.9) -------------- --------------- ------------ Income tax benefit $ (173.2) $ (172.7) $ (124.7) ============== =============== ============ FLORIDA POWER 2002 2001 2000 -------------- --------------- ------------ Payable currently: Federal $ 171.6 $ 192.9 $ 181.3 State 29.0 30.7 28.6 -------------- --------------- ------------ 200.6 223.6 209.9 -------------- --------------- ------------ Deferred, net: Federal (28.2) (30.2) (46.0) State (2.7) (3.0) (5.6) -------------- --------------- ------------ (30.9) (33.2) (51.6) -------------- --------------- ------------ Amortization of investment tax credits, net (6.4) (7.8) (7.8) -------------- --------------- ------------ Income tax expense $ 163.3 $ 182.6 $ 150.5 ============== =============== ============
72 The primary differences between the statutory rates and the effective income tax rates are detailed below: FLORIDA PROGRESS 2002 2001 2000 --------------- -------------- -------------- Federal statutory income tax rate 35.0% 35.0% 35.0% State income tax, net of federal income tax benefits 10.3 12.8 12.4 Amortization of investment tax credits (11.3) (8.4) (74.8) Synthetic fuel income tax credits (299.7) (230.3) (1,402.7) Other income tax credits (11.6) (6.5) (66.3) Goodwill amortization - 9.7 0.2 Non-deductible acquisition costs - - 233.8 Net unfunded taxes from prior years - - 40.0 Impairment loss - - 16.2 Company owned life insurance - cash surrender value 3.2 2.1 11.5 Progress Energy tax allocation benefit (See Note 1K) (35.2) - - Other 4.5 (0.8) 13.0 --------------- -------------- -------------- Effective income tax rates (304.8)% (186.4)% (1,181.7)% =============== ============== ============== FLORIDA POWER 2002 2001 2000 --------------- -------------- -------------- Federal statutory income tax rate 35.0% 35.0% 35.0% State income tax, net of federal income tax benefits 3.4 3.6 4.1 Amortization of investment tax credits (1.3) (1.6) (2.2) Non-deductible acquisition costs - - 3.0 Progress Energy tax allocation benefit (See Note 1K) (3.8) - - Other 0.3 - 1.6 --------------- -------------- -------------- Effective income tax rates 33.6% 37.0% 41.5% =============== ============== ==============
The following summarizes the components of deferred tax liabilities and assets at December 31 (in millions): FLORIDA PROGRESS 2002 2001 --------------- -------------- Deferred tax liabilities: Difference in tax basis of property, plant and equipment $ 384.9 $ 436.4 Investment in partnerships (10.4) 1.8 Deferred book expenses 5.9 7.0 Other 93.0 80.6 --------------- -------------- Total deferred tax liabilities $ 473.4 $ 525.8 =============== ============== Deferred tax assets: Accrued book expenses $ 66.6 $ 71.4 Income tax credit carry forward 314.2 202.9 Unbilled revenues 17.8 17.7 State income tax loss carry forward 24.9 20.4 Valuation allowance (25.6) (20.4) Other 108.5 100.3 --------------- -------------- Total deferred tax assets $ 506.4 $ 392.3 =============== ==============
73 FLORIDA POWER 2002 2001 --------------- -------------- Deferred tax liabilities: Difference in tax basis of property, plant and equipment $ 377.2 $ 413.7 Deferred book expenses 6.1 7.0 Other 21.2 10.4 --------------- -------------- Total deferred tax liabilities $ 404.5 $ 431.1 =============== ============== Deferred tax assets: Accrued book expenses $ 42.0 $ 40.4 Unbilled revenues 17.8 17.7 Other 9.8 10.5 --------------- -------------- Total deferred tax assets $ 69.6 $ 68.6 =============== ==============
At December 31, 2002 and 2001, Florida Progress had net non-current deferred tax (assets)/liabilities of $(6.8) million and $165.8 million and net current deferred tax assets of $26.2 million and $32.3 million, respectively. The income tax credit carry forward at December 31, 2002, consists of $301.6 million of alternative minimum tax credit with an indefinite carry forward period, and $12.6 million of general business credit with a carry forward period that will begin to expire in 2020. The company had a valuation allowance of $20.4 million at December 31, 2001 and established additional valuation allowances of $5.2 million during 2002 due to the uncertainty of realizing certain future state income tax benefits. 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, 2002 and 2001, Florida Power had net non-current deferred tax liabilities of $361.1 million and $394.8 million and net current deferred tax assets of $26.2 million and $32.3 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. Total Section 29 credits generated to date are approximately $573.2 million. All three majority-owned entities and all three minority-owned 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 significant impact on earnings and cash flows. The current Section 29 tax credit program will expire in 2007. One of the Company's synthetic fuel entities, Colona Synfuel Limited Partnership, L.L.L.P. (Colona), is being audited by the IRS. The audit of Colona was expected. The Company is audited regularly in the normal course of business as are most similarly situated companies. The Company has been allocated approximately $225 million in tax credits to date for this synthetic fuel entity. As provided for in contractual arrangements pertaining to Progress Energy's purchase of Colona, the Company has begun escrowing quarterly royalty payments owed to an unaffiliated entity until final resolution of the audit. In September 2002, all three of Florida Progress' majority-owned synthetic fuel entities, including Colona, and two of the Company's minority owned synthetic fuel entities were accepted into the IRS's Pre-Filing Agreement (PFA) program. The PFA program allows taxpayers to voluntarily accelerate the IRS exam process in order to seek resolution of specific issues. Either the Company or the IRS can withdraw from the program at any time, and issues not resolved through the program may proceed to the next level of the IRS exam process. While the ultimate outcome is uncertain, the Company believes that participation in the PFA program will likely shorten the tax exam process. 74 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. 17. Joint Ownership of Generating Facilities Florida Power holds an undivided ownership interest in certain jointly-owned generating facilities, CR3 and Intercessions Unit P-11 (P11). Florida Power is entitled to shares of the generating capability and output of CR3 equal to its ownership interest. Florida Power also pays its ownership share of additional construction costs, fuel inventory purchases and operating expenses. Florida Power's share of expenses for the jointly-owned facility are included in the appropriate expense category. The co-owner of P11 has exclusive rights to the output of the unit during the months of June through September. Florida Power has that right for the remainder of the year. Florida Power's ownership interest in CR3 and P11 is listed below with related information as of December 31, 2002 and 2001 (dollars in thousands): Company Unamortized Construction Megawatt Ownership Plant Accumulated Accumulated Nuclear Work in 2002 Capability Interest Investment Depreciation Decommissioning Fuel Progress ---------- -------- ---------- ------------ --------------- ---- -------- CR3 834 91.78% $777,141 $504,417 $396,868 $40,260 $27,907 P11 143 66.67% 22,090 5,232 - - 3,897 Company Unamortized Construction Megawatt Ownership Plant Accumulated Accumulated Nuclear Work in 2001 Capability Interest Investment Depreciation Decommissioning Fuel Progress ---------- -------- ---------- ------------ --------------- ---- -------- CR3 834 91.78% $773,835 $469,840 $416,995 $62,536 $25,723 P11 143 66.67% 22,302 4,583 - - 94
18. Other Income and Other Expense Other income and expense includes interest income and other income and expense items as discussed below. The components of other, net as shown on the Consolidated Statements of Income and Comprehensive Income for fiscal years 2002, 2001 and 2000 are as follows (in thousands): 2002 2001 2000 --------------- ---------------- ---------------- Other income Net energy purchased for resale gain (loss) $ 292 $ (287) $ 3,822 Net financial trading gain (loss) - (3,958) 128 Nonregulated energy and delivery services income 16,937 17,655 21,840 AFUDC equity 2,307 77 1,297 Other 3,513 1,372 155 --------------- ---------------- ---------------- Total other income - Florida Power $ 23,049 $ 14,859 $ 27,242 --------------- ---------------- ---------------- Income from equity investments 5,213 4,416 1,220 Other income - Florida Progress 5,937 2,896 7,691 --------------- ---------------- ---------------- Total other income - Florida Progress $ 34,199 $ 22,171 $ 36,153 --------------- ---------------- ---------------- Other expense Nonregulated energy and delivery services expenses $ 15,141 $ 13,382 $ 19,561 Donations 10,464 6,902 5,508 Other 3,371 5,355 2,580 --------------- ---------------- ---------------- Total other expense - Florida Power $ 28,976 $ 25,639 $ 27,649 --------------- ---------------- ---------------- Loss from equity investments 4,707 11,891 9,388 Other expense - Florida Progress 14,192 10,726 25,448 --------------- ---------------- ---------------- Total other expense - Florida Progress $ 47,875 $ 48,256 $ 62,485 --------------- ---------------- ---------------- Other, net $ (13,676) $ (26,085) $ (26,332) =============== ================ ================
75 Net financial trading gain (loss) represents non-asset-backed trades of electricity. Nonregulated energy and delivery services include power protection services and mass market programs (surge protection, appliance services and area light sales) and delivery, transmission and substation work for other utilities. 19. 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 completed the first step of the initial transitional goodwill impairment test, which indicated that the Company's goodwill was not impaired as of January 1, 2002. The Company's carrying amount of goodwill at December 31, 2002 and 2001, was $11.1 million in the Energy and Related Services segment. Florida Power has no goodwill and no significant intangible assets as of December 31, 2002 and 2001. The Company and Florida Power had no other significant intangible assets as of December 31, 2002 and 2001. As required by SFAS No. 142, the results for the prior years have not been restated. A reconciliation of net income as if SFAS No. 142 had been adopted is presented below for the years ended December 31 (in thousands). 2001 2000 ------------------- ------------------ Reported net income $ 244,331 $ 144,241 Goodwill amortization 2,394 3,001 ------------------- ------------------ Adjusted net income $ 246,725 $ 147,242 =================== ================== 20. Leases The Company leases transportation equipment, office buildings, computer equipment, and other property and equipment with various terms and expiration dates. The Company generally requires the subsidiaries to pay all executory costs such as maintenance and insurance. Some rental payments include minimum rentals plus contingent rentals based on mileage. These contingent rentals are not significant. Rent expense (under operating leases) totaled $32.6 million, $25.3 million and $73.9 million during 2002, 2001 and 2000, respectively. In addition, Progress Telecom has entered into capital leases for equipment. Assets recorded under capital leases totaled $2.9 million and $12.2 million as of December 31, 2002 and 2001, respectively. Accumulated amortization was not significant. These assets were written down in conjunction with the impairments of Progress Telecom recorded during the third quarter of 2002 (See Note 7). Minimum annual rental payments, excluding executory costs such as property taxes, insurance and maintenance, under long-term noncancelable leases as of December 31, 2002 are (in thousands): Capital Leases Operating Leases -------------- ---------------- 2003 $ 1,111 $ 53,089 2004 1,111 41,671 2005 1,111 23,706 2006 1,111 17,230 2007 1,111 12,780 Thereafter 8,740 53,990 --------------- ---------------- $ 14,295 $202,466 ================ Less amount representing imputed interest (4,828) --------------- Present value of net minimum lease payments uner capital lease $ 9,467 ===============
The Company expects to sell Railcar Ltd. during 2003 (See Note 4A). The operating lease obligations above include $34.2 million, $24.0 million, $6.7 million, $1.5 million, and $1.4 million for the years 2003 through 2007, respectively, which are attributable to Railcar Ltd. Upon the sale of the related assets, the Company expects to be relieved of these obligations. 76 The Company is also a lessor of land, buildings, railcars and other types of properties it owns under operating leases with various terms and expiration dates. The leased buildings and railcars are depreciated under the same terms as other buildings and railcars included in diversified business property. Minimum rentals receivable under noncancelable leases as of December 31, 2002, are (in thousands): Amounts ----------------- 2003 $ 10,589 2004 7,213 2005 5,836 2006 4,681 2007 2,626 Thereafter 6,304 ----------------- $ 37,249 ================= The rentals receivable totals above include $10.3 million, $7.0 million, $5.6 million, $4.5 million, and $2.6 million, for the years 2003 through 2007, respectively, and $4.4 million thereafter, which are attributable to Railcar Ltd. Upon the sale of the related assets, the Company expects to no longer receive this income. Florida Power is the lessor of electric poles and streetlights. Rents received are contingent upon usage and totaled $52.5 million, $47.5 million and $47.7 million for 2002, 2001 and 2000, respectively. In December 2000, Railcar Ltd., a subsidiary of Progress Fuels, sold a portfolio of railcars to Railcar Asset Financing Trust (RAFT). Railcar Ltd. 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 Railcar Ltd. has the option to repurchase the railcars at fair value. As of December 31, 2002, the RAFT was accounted for as assets held for sale, which is presented in other current assets on the accompanying Consolidated Balance Sheets. 21. Accumulated Other Comprehensive Loss Components of accumulated other comprehensive loss for Florida Progress and Florida Power as of December 31, 2002 and 2001 are as follows (in thousands): FLORIDA PROGRESS 2002 2001 ----------- ------------ Loss on cash flow hedges $ (6,665) $ - Minimum pension liability adjustments (4,503) - Foreign currency translation and other (4,569) (2,985) ----------- ------------ Total accumulated other comprehensive loss $ (15,737) $ (2,985) =========== ============ FLORIDA POWER 2002 2001 ----------- ------------ Loss on cash flow hedges $ (318) $ - Minimum pension liability adjustments (2,366) - ----------- ------------ Total accumulated other comprehensive loss $ (2,684) $ - =========== ============ 22. Commitments and Contingencies A. Fuel, Coal and Purchased Power Commitments Florida Power has long-term contracts for approximately 473 megawatts of purchased power with other utilities, including a contract with The Southern Company for approximately 413 megawatts of purchased power annually through 2010. Florida Power can lower these purchases to approximately 200 MW annually with a three-year notice. Total purchases, for both energy and capacity, under these agreements amounted to $159.3 million, $111.7 million and $104.5 million for 2002, 2001 and 2000, respectively. Total capacity payments were $50.5 million, $54.1 million and $54.0 million for 2002, 2001 and 2000, respectively. Minimum purchases under these contracts, representing capital-related capacity costs, are approximately $50 million annually through 2005 and $30 million annually for 2006 and 2007. Florida Power has ongoing purchased power contracts with certain cogenerators (qualifying facilities) for 871 megawatts of capacity with expiration dates ranging from 2003 to 2025. These 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 megawatts under contract, 831 77 megawatts currently are available to Florida Power. All commitments have been approved by the FPSC. Total capacity purchases under these contracts amounted to $231.7 million, $225.8 million and $226.4 million for 2002, 2001 and 2000, respectively. Minimum expected future capacity payments under these contracts as of December 31, 2002 are $246.8 million, $257.4 million, $268.7 million, $279.7 million and $289.4 million for 2003 through 2007, respectively. Florida Power has entered into various long-term contracts for oil, gas and coal requirements of its generating plants. Payments under these commitments were $750.3 million, $641.6 million and $614.7 million in 2002, 2001 and 2000, respectively. Estimated annual payments for firm commitments of fuel purchases and transportation costs under these contracts are approximately $1.2 billion, $635.7 million, $562.8 million, $595.6 million and $651.7 million for 2003 through 2007, respectively. Progress Fuels has two coal supply contracts with Florida Power, which require Florida Power to buy and Progress Fuels to supply substantially all of the coal requirements of four of Florida Power's generating units, 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 $188.3 million and $41.7 million for 2003 and 2004, respectively, with no obligations thereafter. The total cost incurred for these commitments in 2002, 2001 and 2000 was $207.4 million, $134.1 million and $110.6 million, respectively. 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. B. Guarantees As a part of normal business, Florida Progress and certain subsidiaries enter into various agreements providing financial or performance assessments to third parties. Such agreements include guarantees, stand-by letters of credit and surety bonds. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended commercial purposes. At December 31, outstanding guarantees are as follows (in millions): 2002 2001 ------------------- ----------------- Standby letters of credit $ 42.5 $ 24.3 Surety bonds 38.6 13.0 Other guarantees 5.1 33.9 ------------------- ----------------- Total $ 86.2 $ 71.2 =================== ================= Standby Letters of Credit The Company has issued stand-by letters of credit to financial institutions for the benefit of third parties that have extended credit to the Company and certain subsidiaries. These letters of credit have been issued primarily for the purpose of supporting payments of trade payables, securing performance under contracts and lease obligations and self insurance for workers compensation. If a subsidiary does not pay amounts when due under a covered contract, the counterparty may present its claim for payment to the financial institution, which will in turn request payment from the Company. Any amounts owed by the Company's subsidiaries are reflected in the Consolidated Balance Sheets. Surety Bonds At December 31, 2002, the Company had $38.6 million in surety bonds purchased primarily for purposes such as providing workers compensation coverage and obtaining licenses, permits and rights-of-way. To the extent liabilities are incurred as a result of the activities covered by the surety bonds, such liabilities are included in the Consolidated Balance Sheets. Other Guarantees The Company has other guarantees outstanding related primarily to prompt performance payments, lease obligations, and other payments subject to contingencies. 78 Progress Energy has issued approximately $7.5 million of financial guarantees on behalf of Progress Rail Services Corporation for obligations related to the purchase and sale of railcar parts, equipment and services. As of December 31, 2002, management does not believe conditions are likely for performance under these agreements. C. Insurance Florida Power is a member of Nuclear Electric Insurance Limited (NEIL), which provides primary and excess insurance coverage against property damage to members' nuclear generating facilities. Under the primary program, Florida Power is insured for $500 million at its nuclear plant, CR3. In addition to primary coverage, NEIL also provides decontamination, premature decommissioning and excess property insurance with a limit of $1.1 billion. Insurance coverage against incremental costs of replacement power resulting from prolonged accidental outages at nuclear generating units is also provided through membership in NEIL. Florida Power is insured thereunder, following a twelve-week deductible period, for 52 weeks in the amount of $3.5 million per week at CR3. An additional 110 weeks of coverage is provided at 80% of the above weekly amount. For the current policy period, Florida Power is subject to retrospective premium assessments of up to approximately $7.3 million with respect to the primary coverage, $6.7 million with respect to the decontamination, decommissioning and excess property coverage, and $4.7 million for the incremental replacement power costs coverage, in the event covered losses at insured facilities exceed premiums, reserves, reinsurance and other NEIL resources. Pursuant to regulations of the U.S. Nuclear Regulatory Commission, Florida Power's property damage insurance policies provide that all proceeds from such insurance be applied, first, to place the plant in a safe and stable condition after an accident and, second, to decontaminate, before any proceeds can be used for decommissioning, plant repair or restoration. Florida Power is responsible to the extent losses may exceed limits of the coverage described above. Florida Power is insured against public liability for a nuclear incident up to $9.55 billion per occurrence. Under the current provisions of the Price Anderson Act, which limits liability for accidents at nuclear power plants, Florida Power, as an owner of a nuclear unit, 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. In the event that public liability claims from an insured nuclear incident exceed $300 million (currently available through commercial insurers), Florida Power would be subject to pro rata assessments of up to $88.1 million for each reactor owned per occurrence. Payment of such assessments would be made over time as necessary to limit the payment in any one year to no more than $10 million per reactor owned. Congress is expected to approve revisions to the Price Anderson Act in the first quarter of 2003, that will include increased limits and assessments per reactor owned. The final outcome of this matter cannot be predicted at this time. 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 $300 million. The second level of coverage obtained through the assessments discussed above would continue to apply to losses exceeding $300 million and would provide coverage in excess of any diminished primary limits due to the terrorist acts aggregate. 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 (See Note 12B). A reconciliation of the activity in the reserve for the years ended December 31 is included in the table below (in thousands): 2002 2001 2000 ------------- -------------- ----------- Reserve balance at beginning of year $ 35,527 $ 29,527 $ 25,629 Accruals made 6,000 6,000 6,000 Charges taken (5,896) - (2,102) ------------- -------------- ----------- Ending balance at end of year $ 35,631 $ 35,527 $ 29,527 ============= ============== ===========
79 D. 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, 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 $57.1 million and $67.0 million at December 31, 2002 and 2001, representing the minimum amounts due through 2007, discounted at 6.05%. As of December 31, 2002 and 2001, respectively, the portions of the asset and liability recorded that were classified as current were $11.9 million and $12.9 million, respectively. 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 paid under these agreements were approximately $24.1 million in 2002, $25.2 million in 2001, and $22.5 million in 2000. E. Claims and Uncertainties The Company is subject to federal, state and local regulations addressing hazardous and solid waste management, air and water quality and other environmental matters. Hazardous and Solid Waste Management Various organic materials associated with the production of manufactured gas, generally referred to as coal tar, are regulated under federal and state laws. The principal regulatory agency that is responsible for a specific former manufactured gas plant (MGP) site depends largely upon the state in which the site is located. There are several MGP sites to which the Company has some connection. In this regard, Florida Power and other potentially responsible parties, are participating in investigating and, if necessary, remediating former MGP sites with several regulatory agencies, including, but not limited to, the U.S. Environmental Protection Agency (EPA), and the Florida Department of Environmental Protection (FDEP). In addition, Florida Power 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. Florida Power. There are two former MGP sites and 11 other active sites associated with Florida Power that have required or are anticipated to require investigation and/or remediation costs. As of December 31, 2002 and 2001, Florida Power has accrued approximately $10.9 million and $8.5 million, respectively, for probable and reasonably estimable costs at these sites. Florida Power does not believe that it can provide an estimate of the reasonably possible total remediation costs beyond what is currently accrued. In 2002, Florida Power filed a petition for recovery of approximately $4.0 million in environmental cost through the Environmental Cost Recovery Clause with the FPSC. Florida Power was successful with this filing and will recover costs through rates for investigation and remediation associated with transmission and distribution substations and transformers. As more activity occurs at these sites, Florida Power will assess the need to adjust the accruals. These accruals have been recorded on an undiscounted basis. Florida Power measures its liability for these sites based on available evidence including its experience in investigating and remediating environmentally impaired sites. This process often includes assessing and developing cost-sharing arrangements with other potentially responsible parties. A rollforward of the balance in this liability is not provided due to the immateriality of this activity in the periods presented. Florida Progress. In 2001, Florida Progress sold Inland Marine Transportation to AEP Resources, Inc (See Note 4B). Florida Progress established an accrual to address indemnities and retained environmental liability associated with the transaction. The balance in this accrual is $9.9 million at December 31, 2002. Florida Progress estimates that its maximum contractual liability to AEP Resources, Inc. associated with Inland Marine Transportation is $60 million. This accrual has been determined on an undiscounted basis. Florida Progress measures its liability for this site based on estimable and probable remediation scenarios. The Company believes that it is reasonably probable that additional costs, which cannot be currently estimated, may be incurred related to the environmental indemnification provision beyond the amount accrued. The Company cannot predict the outcome of this matter. 80 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. The Company is also currently in the process of assessing potential costs and exposures at other environmentally impaired sites. As the assessments are developed and analyzed, the Company will accrue costs for the sites to the extent the costs are probable and can be reasonably estimated. Air and Water Quality There has been and may be further proposed federal legislation requiring reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon dioxide and mercury. Some of these proposals establish nationwide caps and emission rates over an extended period of time. This national multi-pollutant approach to air pollution control could involve significant capital 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. However, the Company cannot predict the outcome of this matter. The EPA is 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 initiated civil enforcement actions against other unaffiliated utilities as part of this initiative. Some of these actions resulted in settlement agreements calling for expenditures, 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 cost through rate adjustments or similar mechanisms. The Company cannot predict the outcome of this matter. Certain historical waste sites exist that are being addressed voluntarily by the Energy and Related Service segment. An accrual has been established to address investigation expenses related to these sites. The Company cannot determine the total costs that may be incurred in connection with these sites. According to current information, these future costs are not expected to be material to the Company's financial condition or results of operations. Rail Services is voluntarily addressing certain historical waste sites. An accrual has been established to address estimable costs. The Company cannot determine the total costs that may be incurred in connection with these sites. According to current information, these future costs are not expected to be material to the Company's financial condition or results of operations. The Kyoto Protocol was adopted in 1997 by the United Nations to address global climate change by reducing emissions of carbon dioxide and other greenhouse gases. The United States has not adopted the Kyoto Protocol, however, a number of carbon dioxide emissions control proposals have been advanced in Congress and by the Bush Administration. The Bush Administration favors voluntary programs. Reductions in carbon dioxide emissions to the levels specified by the Kyoto Protocol and some legislative proposals could be materially adverse to the Company's financials and operations if associated costs cannot be recovered from customers. The Company favors the voluntary program approach recommended by the administration, and is evaluating options for the reduction, avoidance, and sequestration of greenhouse gases. However, the Company cannot predict the outcome of this matter. In 1997, the EPA's Mercury Study Report and Utility Report to Congress conveyed that mercury is not a risk to the average American and expressed uncertainty about whether reductions in mercury emissions from coal-fired power plants would reduce human exposure. Nevertheless, the EPA determined in 2000 that regulation of mercury emissions from coal-fired power plants was appropriate. The EPA is currently developing a Maximum Available Control Technology (MACT) standard, which is expected to become final in December 2004, with compliance in 2008. Achieving compliance with the MACT standard could be materially adverse to the Company's financials and operations. However, the Company cannot predict the outcome of this matter. 81 F. Legal Matters 1. Age Discrimination Suit. Florida Power and Florida Progress have successfully resolved and settled the multi-party lawsuit served on the companies in 1995. In 1995, Florida Power and Florida Progress were named defendants in an age discrimination lawsuit. The number of plaintiffs was 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 sought 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 trial for the first set of twelve plaintiffs began on July 22, 2002. The jury entered a verdict in favor of Florida Power in that trial on August 9, 2002. The next group of plaintiffs' to be tried was named, but no trial date was set. The parties attended a second mediation on October 31 and November 1, 2002. The Company was able to reach a settlement of this matter with all but one plaintiff, the details of which are subject to a confidentiality agreement. 2. 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. On June 19 and 20, 2002, a hearing was held before a federal magistrate judge, on the sellers objection to the report of Calgon's damages expert. The sellers argued that the report and opinions of Calgon's expert, Arthur Andersen, are inadmissible for a number of reasons. On January 14, 2003, the federal magistrate judge issued a Report and Recommendation finding that part of Andersen's expert report should be excluded from evidence. Specifically, the Report recommended that Andersen's damages analysis using the discounted cash flow methodology should be excluded, but did not recommend exclusion of Andersen's damage analysis based on the guideline public traded company ("GPTC") method. On January 30, 2003, the sellers filed a Notice of Appeal from the Report with the United States District Court for the Western District of Pennsylvania on the grounds that Andersen's GPTC analysis should also be excluded. Calgon also filed a Notice of Appeal from the Report arguing that Andersen's discounted cash flow analysis should be admissible. 3. Easement Litigation. In December 1998, Florida Power was served with a class action lawsuit seeking damages, declaratory and injunctive relief for the alleged improper use of electric transmission easements. The plaintiffs contend that the licensing of fiber optic telecommunications lines to third parties or telecommunications companies for other than Florida Power's internal use along the electric transmission line right-of-way exceeds the authority granted in the easements. In June 1999, plaintiffs amended their complaint to add Progress Telecom as a defendant and adding counts for unjust enrichment and constructive trust. In January 2000, the trial 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 trial court preliminarily approved the amended settlement agreement, certified the settlement class and approved the class notice. On November 16, 2001, the trial court issued a final order approving the settlement. Several objectors to the settlement appealed the order to the 1st District Court of Appeal. On February 12, 2003, the appellate court issued an opinion upholding the trial court's subject matter jurisdiction over the case, but reversing the trial court's order approving the mandatory settlement class for purposes of declaratory and injunctive relief. The appellate court remanded the case to the trial court for further proceedings. The Company is considering whether to file a motion for rehearing and/or a motion for rehearing en banc before the 1st District Court of Appeal, and/or whether to seek discretionary review before the Florida Supreme Court. The Company cannot predict the outcome of any future proceedings in this case. 82 4. Franchise Litigation. Six cities, with a total of approximately 49,000 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. Five circuit courts have entered orders requiring arbitration to establish the purchase price of Florida Power's electric distribution system within five cities. Two appellate courts have held those circuit court decisions and authorized cities to determine the value of Florida Power's electric distribution system within the cities through arbitration. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system. An arbitration in one of the cases was held in August 2002 and an award was issued in October 2002 setting the value of Florida Power's distribution system within one city at approximately $22 million. At this time, whether and when there will be further proceedings following this award cannot be determined. Additional arbitrations have been scheduled to occur in the first and second quarters of 2003. As part of the above litigation, two appellate courts have also reached opposite conclusions regarding whether Florida Power must continue to collect from its customers and remit to the cities "franchise fees" under the expired franchise ordinances. Florida Power has filed an appeal with the Florida Supreme Court to resolve the conflict between the two appellate courts. The Florida Supreme Court has issued an order setting a briefing schedule and reserving ruling on accepting jurisdiction. On January 12, 2003, Florida Power served its Initial Brief in the Supreme Court and its request for oral argument. Three amicus curiae also filed motions seeking leave to participate in support of Florida Power's position and filed amicus briefs. No oral argument has yet been set. Florida Power cannot predict the outcome of these matters at this time. 5. DOE Litigation. As required under the Nuclear Waste Policy Act of 1982, Florida Power entered into a contract with the DOE under which the DOE agreed to begin taking spent nuclear fuel by no later than January 31, 1998. All similarly situated utilities were required to sign the same standard contract. In April 1995, the DOE issued a final interpretation that it did not have an unconditional obligation to take spent nuclear fuel by January 31, 1998. In Indiana & Michigan Power v. DOE, the Court of Appeals vacated the DOE's final interpretation and ruled that the DOE had an unconditional obligation to begin taking spent nuclear fuel. The Court did not specify a remedy because the DOE was not yet in default. After the DOE failed to comply with the decision in Indiana & Michigan Power v. DOE, a group of utilities petitioned the Court of Appeals in Northern States Power (NSP) v. DOE, seeking an order requiring the DOE to begin taking spent nuclear fuel by January 31, 1998. The DOE took the position that its delay was unavoidable, and the DOE was excused from performance under the terms and conditions of the contract. The Court of Appeals did not order the DOE to begin taking spent nuclear fuel, stating that the utilities had a potentially adequate remedy by filing a claim for damages under the contract. After the DOE failed to begin taking spent nuclear fuel by January 31, 1998, a group of utilities filed a motion with the Court of Appeals to enforce the mandate in NSP v. DOE. Specifically, this group of utilities asked the Court to permit the utilities to escrow their waste fee payments, to order the DOE not to use the waste fund to pay damages to the utilities, and to order the DOE to establish a schedule for disposal of spent nuclear fuel. The Court denied this motion based primarily on the grounds that a review of the matter was premature, and that some of the requested remedies fell outside of the mandate in NSP v. DOE. Subsequently, a number of utilities each filed an action for damages in the Federal Court of Claims. In a recent decision, the U.S. Circuit Court of Appeals (Federal Circuit) ruled that utilities may sue the DOE for damages in the Federal Court of Claims instead of having to file an administrative claim with DOE. Florida Power is in the process of evaluating whether it should file a similar action for damages. Florida Power also continues to monitor legislation that has been introduced in Congress, which might provide some limited relief. Florida Power cannot predict the outcome of this matter. 83 6. 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. 84 INDEPENDENT AUDITORS' REPORT TO THE BOARDS OF DIRECTORS OF FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION We have audited the consolidated balance sheets and schedules of capitalization of Florida Progress Corporation and its subsidiaries (Florida Progress) and the balance sheets and schedules of capitalization of Florida Power Corporation (Florida Power) as of December 31, 2002 and 2001, and the related Florida Progress consolidated statements of income and comprehensive income, of common equity, and of cash flows and the related Florida Power statements of income and comprehensive income, of common equity, and of cash flows for each of the two years in the period ended December 31, 2002 and have issued our report thereon dated February 12, 2003; such financial statements and report are included herein. Our audits also included the financial statement schedules of Florida Progress and Florida Power for the years ended December 31, 2002 and 2001, listed in Item 8. These financial statement schedules are the responsibility of the respective company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Raleigh, North Carolina February 12, 2003 85 Schedule II FLORIDA PROGRESS CORPORATION Valuation and Qualifying Accounts For the Years Ended December 31, 2002, 2001 and 2000 (In millions) Balance at Additions Balance at Beginning Charged to Other End of Description of Period Expense Additions Deductions Period - -------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2002 Uncollectible accounts $ 25.7 $ 6.6 $ - $ (4.3) (a) $ 28.0 Fossil dismantlement reserve 140.5 1.1 - - 141.6 Nuclear refueling outage reserve 0.3 9.7 - (0.4) (b) 9.6 YEAR ENDED DECEMBER 31, 2001 Uncollectible accounts $ 26.2 $10.2 $ 0.5 $(11.2) (a) $ 25.7 Fossil dismantlement reserve 134.6 5.9 - - 140.5 Nuclear refueling outage reserve 10.8 17.3 - (27.8) (b) 0.3 YEAR ENDED DECEMBER 31, 2000 Uncollectible accounts $ 5.8 $25.1 $ - $ (4.7) (a) $ 26.2 Fossil dismantlement reserve 132.5 2.2 - (0.1) 134.6 Nuclear refueling outage reserve 0.5 10.9 - (0.6) (b) 10.8
(a) Represents write-off of uncollectible accounts, net of recoveries. (b) Represents payments of actual expenditures related to outages. 86 Schedule II FLORIDA POWER CORPORATION Valuation and Qualifying Accounts For the Years Ended December 31, 2002, 2001 and 2000 (In millions) Balance at Additions Balance at Beginning Charged to Other End of Description Of Period Expense Additions Deductions Period - ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2002 Uncollectible accounts $ 2.5 $ 3.4 $ - $ (3.4) (a) $ 2.5 Fossil dismantlement reserve 140.5 1.1 - - 141.6 2001 Nuclear Refueling Outage Reserve (#12) (0.4) 0.8 - (0.4) (b) - 2003 Nuclear Refueling Outage Reserve (#13) 0.7 8.9 - - (b) 9.6 YEAR ENDED DECEMBER 31, 2001 Uncollectible accounts $ 5.2 $ 3.5 $ - $ (6.2) (a) $ 2.5 Fossil dismantlement reserve 134.6 5.9 - - 140.5 2001 Nuclear Refueling Outage Reserve (#12) 10.8 16.6 - (27.8) (b) (0.4) 2003 Nuclear Refueling Outage Reserve (#13) 0.7 - - 0.7 YEAR ENDED DECEMBER 31, 2000 Uncollectible accounts $ 4.0 $ 4.3 $ 0.1 $ (3.2) (a) $ 5.2 Fossil dismantlement reserve 132.5 2.2 - (0.1) 134.6 1999 Nuclear Refueling Outage Reserve (#11) (0.3) 0.3 - - - 2001 Nuclear Refueling Outage Reserve (#12) 0.8 10.6 - (0.6) (b) 10.8
(a) Represents write-off of uncollectible accounts, net of recoveries. (b) Represents payments of actual expenditures related to outages. 87 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE As a result of the acquisition of Florida Progress and Florida Power by Progress Energy, management decided to retain Deloitte & Touche LLP (D&T) as its independent public accountants. D&T has served as the independent public accountants for Progress Energy for over fifty years. On March 21, 2001, the Audit Committee of the Board of Directors approved this recommendation and formally elected to (i) engage D&T as the independent accountants for FPC and Florida Power and (ii) dismiss KPMG LLP (KPMG) as such independent accountants. KPMG's reports on FPC's and Florida Power's financial statements for 2000 and 1999 (the last two fiscal years of KPMG's engagement) contained no adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. D&T became FPC's and Florida Power's independent accountants upon the completion of the 2000 audit and issuance of the related financial statements. During FPC's and Florida Power's last two fiscal years and the subsequent interim period to the date of their dismissal, there were no disagreements between FPC and Florida Power and KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused them to make reference to the subject matter of the disagreements in connection with their report on the financial statements for such years. KPMG furnished a letter addressed to the Securities and Exchange Commission stating that it agreed with the above statements made by FPC and Florida Power in this Form 10-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS The information called for by ITEM 10 is omitted pursuant to Instruction I (2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries). ITEM 11. EXECUTIVE COMPENSATION The information called for by ITEM 11 is omitted pursuant to Instruction I (2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by ITEM 12 is omitted pursuant to Instruction I (2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by ITEM 13 is omitted pursuant to Instruction I (2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries). ITEM 14. CONTROLS AND PROCEDURES Florida Progress Corporation Within the 90 days prior to the filing date of this report, Florida Progress carried out an evaluation, under the supervision and with the participation of its management, including Florida Progress' chief executive officer and chief financial officer, of the effectiveness of the design and operation of Florida Progress' disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, Florida Progress' chief executive officer and chief financial officer concluded that its disclosure controls and procedures are effective in timely alerting them to material information relating to Florida Progress (including its consolidated subsidiaries) required to be included in its periodic SEC filings. Since the date of the evaluation, there have been no significant changes in Florida Progress' internal controls or in other factors that could significantly affect these controls. 88 Florida Power Corporation Within the 90 days prior to the filing date of this report, Florida Power carried out an evaluation, under the supervision and with the participation of its management, including Florida Power's chief executive officer and chief financial officer, of the effectiveness of the design and operation of Florida Power's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, Florida Power's chief executive officer and chief financial officer concluded that its disclosure controls and procedures are effective in timely alerting them to material information relating to Florida Power (including its consolidated subsidiaries) required to be included in its periodic SEC filings. Since the date of the evaluation, there have been no significant changes in Florida Power's internal controls or in other factors that could significantly affect these controls. 89 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FOR FLORIDA PROGRESS AND FLORIDA POWER 1. Financial Statements, notes to Financial Statements and reports thereon of DELOITTE & TOUCHE LLP and KPMG LLP are found in ITEM 8 "Financial Statements and Supplementary Data" herein. 2. The following Financial Statement Schedules are included herein: Florida Progress II-Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000 Florida Power II-Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000 All other schedules are not submitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto. 3. Exhibits filed herewith: Florida Florida Number Exhibit Progress Power *2 Amended and Restated Agreement and Plan of X Exchange by and among Carolina Power & Light Company, Florida Progress Corporation and CP&L Energy, Inc., dated as of August 22, 1999, amended and restated as of March 3, 2000. (Filed as Annex A to the Florida Progress preliminary proxy statement on Schedule 14A, as filed with the SEC on March 6, 2000). *3.(a) Amended Articles of Incorporation, as X amended, of Florida Power. (Filed as Exhibit 3(a) to the Florida Power Form 10-K for the year ended December 31, 1991, as filed with the SEC (File No. 1-3274) on March 30, 1992.) *3.(b) Restated Articles of Incorporation, as X amended, of Florida Progress. (Filed as Exhibit 3(a) to Florida Progress' Form 10-K for the year ended December 31,1991, as filed with the SEC on March 30, 1992.) *3.(c) Bylaws of Florida Progress, as amended November X 30, 2000. Filed as Exhibit 3(c) to the Florida Progress Form 10-K for the year ended December 31, 2001, as filed with the SEC on March 28, 2002). *3.(d) Bylaws of Florida Power, as amended October 1, X 2001. (Filed as Exhibit 3(d) to the Florida Power Form 10-K for the year ended December 31, 2001, as filed with the SEC on March 28, 2002). 90 *4.(a) Indenture, dated as of January 1, 1944 (the X X "Indenture"), between Florida Power and Guaranty Trust Company of New York and The Florida National Bank of Jacksonville, as Trustees. (Filed as Exhibit B-18 to Florida Power's Registration Statement on Form A-2 (No. 2-5293) filed with the SEC on January 24, 1944.) *4.(b) Twenty-Ninth Supplemental Indenture, dated as X X of September 1, 1982, between Florida Power and Morgan Guaranty Trust Company of New York and Florida National Bank, as Trustees, with reference to the modification and amendment of the Indenture. (Filed as Exhibit 4(c) to Florida Power's Registration Statement on Form S-3 (No. 2-79832) filed with the SEC on September 17, 1982.) *4.(c) Seventh Supplemental Indenture, dated as of X X July 1, 1956, between Florida Power and Guaranty Trust Company of New York and The Florida National Bank of Jacksonville, as Trustees, with reference to the modification and amendment of the Indenture. (Filed as Exhibit 4(b) to Florida Power's Registration Statement on Form S-3 (No. 33-16788) filed with the SEC on September 27, 1991.) *4.(d) Eighth Supplemental Indenture, dated as of X X July 1, 1958, between Florida Power and Guaranty Trust Company of New York and The Florida National Bank of Jacksonville, as Trustees, with reference to the modification and amendment of the Indenture. (Filed as Exhibit 4(c) to Florida Power's Registration Statement on Form S-3 (No. 33-16788) filed with the SEC on September 27, 1991.) *4.(e) Sixteenth Supplemental Indenture, dated as of X X February 1, 1970, between Florida Power and Morgan Guaranty Trust Company of New York and The Florida National Bank of Jacksonville, as Trustees, with reference to the modification and amendment of the Indenture. (Filed as Exhibit 4(d) to Florida Power's Registration Statement on Form S-3 (No. 33-16788) filed with the SEC on September 27, 1991.) *4.(f) Rights Agreement, dated as of November 21, X 1991, between Florida Progress and Manufacturers Hanover Trust Company, including as Exhibit A the form of Rights Certificate. (Filed as Exhibit 4(a) to Florida Progress' Form 8-K dated November 21, 1991, as filed with the SEC on November 27, 1991.) 91 *4.(g) Thirty-Eighth Supplemental Indenture dated as X X of July 25, 1994, between Florida Power and First Chicago Trust Company of New York, as successor Trustee, Morgan Guaranty Trust Company of New York, as resigning Trustee, and First Union National Bank of Florida, as resigning Co-Trustee, with reference to confirmation of First Chicago Trust Company of New York as successor Trustee under the Indenture. (Filed as exhibit 4(f) to Florida Power's Registration Statement on Form S-3 (No. 33-55273) as filed with the SEC on August 29, 1994.) *4.(h) Thirty-Ninth Supplemental Indenture dated as of X July 1, 2001 between Florida Power Corporation and First Chicago Trust Company of New York, as Trustee. (Filed as Exhibit 4 to Current Report on Form 8-K filed with the SEC on July 23, 2001.) *4.(i) Fortieth Supplemental Indenture dated as of July 1, X 2002 between Florida Power Corporation and First Chicago Trust Company of New York. (Filed as Exhibit 4 to Current Report on Form 8-K filed with the SEC on February 18, 2003.) *4.(j) Forty-First Supplemental Indenture, dated as of X February 1, 2003 between Florida Power Corporation and First Chicago Trust Company of New York, as successor Trustee. (Filed as Exhibit 4 to Current Report on Form 8-K filed with the SEC on February 21, 2003.) *4.(k) Amendment to Shareholder Rights X Agreement dated February 20, 1997, between Florida Progress and The First National Bank of Boston. (Filed as Exhibit 4(a) to the Florida Progress Form 10-K for the year ended December 31, 1996, as filed with the SEC on March 27, 1997.) *4.(l) Form of Certificate representing shares of X Florida Progress Common Stock. (Filed as Exhibit 4(b) to the Florida Progress Form 10-K for the year ended December 31, 1996, as filed with the SEC on March 27, 1997.) *4.(m) Second Amendment to Shareholder Rights X Agreement dated as of August 22, 1999, between Florida Progress and BankBoston, N.A. (Filed as Exhibit 4 to the combined Florida Progress and Florida Power Form 8-K dated August 22, 1999.) *10.(a)(1) Second Amended and Restated Guaranty and X Support Agreement dated as of August 7, 1996. (Filed as Exhibit 4 to Florida Progress' Form 10-Q for the quarter ended June 30, 1996.) 10.(a)(2) Florida Power Corporation $200,000,000 X Third Amended and Restated 5-Year Credit Agreement dated as of November 17, 1998. *10.(a)(3) Florida Power Corporation $170,000,000 364-Day X Revolving Credit Agreement dated as of December 18, 2001 (filed as Exhibit 10 a(2) to the combined Florida Progress Florida Power Annual Report on Form 10-K dated March 28, 2002, File No.1-8349 and 1-3274). 92 10.(a)(4) First Amendment to Credit Agreement between X Florida Power Corporation and certain lenders dated December 18, 2001, effective as of December 10, 2002. +*10.(b)(1) Executive Optional Deferred Compensation X X Plan. (Filed as Exhibit 10.(c) to the Florida Progress Form 10-K for the year ended December 31, 1996 as filed with the SEC on March 27, 1997.) +*10.(b)(2) Management Incentive Compensation Plan X X of Florida Progress Corporation, as amended December 14, 1999. (Filed as Exhibit 10.(a) to the Florida Progress Form 10-K for the year ended December 31, 1999, as filed with the SEC on March 30, 2000.) +*10.(b)(3) Florida Progress Supplemental Executive X X Retirement Plan, as amended and restated effective February 20, 1997. (Filed as Exhibit 10.(e) to the Florida Progress Form 10-K for the year ended December 31, 1999, as filed with the SEC on March 30, 2000.) -+*10.(b)(4) Resolutions of the Board of Directors of Carolina X Power & Light Company dated May 8, 1991, amending the Directors Deferred Compensation Plan (filed as Exhibit 10(b), File No. 33-48607). +*10.(b)(5) Carolina Power & Light Company Non-Employee X Director Stock Unit Plan, effective January 1, 1998. -+*10.(b)(6) Carolina Power & Light Company Restricted Stock X X Agreement, as approved January 7, 1998, pursuant to Carolina Power & Light Company's 1997 Equity Incentive Plan (filed as Exhibit No. 10 to Carolina Power & Light Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998, File No. 1-3382.) -+*10.(b)(7) Carolina Power & Light Company Restoration X X Retirement Plan, as amended January 1, 2000 (filed as Exhibit No. 10c(9) to the Progress Energy, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2001). -+*10.(b)(8) Amended and Restated Supplemental Senior X X Executive Retirement Plan of Carolina Power & Light Company, effective January 1, 1984, as last amended March 15, 2000 (filed as Exhibit 10b(24) to Carolina Power & Light Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File No. 1-3382). 93 +*10.(b)(9) Performance Share Pub-Plan of the Progress X X Energy, Inc. 2002 Equity Incentive Plan, dated July 9, 2002 (filed as Exhibit 10(ii) to Quarterly Report on form 10-Q for the quarterly period ended September 30, 2002, File No. 1-08349 and 1-03274). -+*10.(b)(10) Performance Share Sub-Plan of the Carolina X X Power & Light Company 1997 Equity Incentive Plan, as amended January 1, 2001 (filed as Exhibit 10b(11) to the Progress Energy, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2001). +*10.(b)(11) Progress Energy, Inc. 2002 Equity Incentive Plan, X X dated July 10, 2002 (filed as Exhibit 10(i) to Quarterly Report on form 10-Q for the quarterly period ended September 30, 2002, File No. 1-08349 and 1-03274). +*10.(b)(12) 1997 Equity Incentive Plan, Amended and Restated X X as of September 26, 2001 (filed as Exhibit 4.3 to Progress Energy, Inc. Form S-8 dated September 27, 2001, File No. 1-3382). +*10.(b)(13) Progress Energy, Inc. Form of Stock Option X X Agreement (filed as Exhibit 4.4 to Form S-8 dated September 27, 2001, File No. 333-70332.) +*10.(b)(14) Progress Energy, Inc. Form of Stock Option Award X X (filed as Exhibit 4.5 to Form S-8 dated September 27, 2001, File No. 333-70332.) -+*10.(b)(15) Amended Management Incentive Compensation Plan X X of Progress Energy, Inc., as amended and restated January 1, 2002 (filed as Exhibit 10c(15) to the Progress Energy, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2001). -+*10.(b)(16) Progress Energy, Inc. Management X X Deferred Compensation Plan, amended and restated as of January 1, 2002 (filed as Exhibit 10c(16) to the Progress Energy, Inc. Annual Report on Form 10-K for the fiscal year Ended December 31, 2001). +*10.(b)(17) Employment Agreement dated August 1, 2000 X between CP&L Service Company LLC and William Cavanaugh III (filed as Exhibit 10(i) to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, File No. 1-15929 and No. 1-3382) 94 +*10.(b)(18) Employment Agreement dated August 1, 2000 X between Carolina Power & Light Company and William S. "Skip" Orser (filed as Exhibit 10(ii) to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, File No. 1-15929 and No. 1-3382). +*10.(b)(19) Employment Agreement dated August 1, 2000 X between Carolina Power & Light Company and Tom Kilgore (filed as Exhibit 10(iii) to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, File No. 1-15929 and No. 1-3382. +*10.(b)(20) Employment Agreement dated August 1, 2000 X between CP&L Service Company LLC and Robert McGehee (filed as Exhibit 10(iv) to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, File No. 1-15929 and No. 1-3382). +*10.(b)(21) Form of Employment Agreement dated August 1, 2000 X X (i) between Carolina Power & Light Company and Don K. Davis; and (ii) between CP&L Service Company LLC and Peter M. Scott III; and (iii) between CP&L Service Company LLC and William D. Johnson (filed as Exhibit 10(v) to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, File No. 1-15929 and No. 1-3382). +*10.(b)(22) Form of Employment Agreement dated August 1, 2000 X between Carolina Power & Light Company and (i) Fred Day IV, (ii) C.S. "Scotty" Hinnant, (iii) Cecil L. Goodnight and (iv)E. Michael Williams (filed as Exhibit 10(vi) to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, File No. 1-15929 and No. 1-3382.) +*10.(b)(23) Employment Agreement dated November 30, 2000 X X between Carolina Power & Light Company, Florida Power Corporation and H. William Habermeyer (filed as Exhibit 10.(b)(32) to Annual Report on Form 10-K for the year ended December 31, 2000). +*10.(b)(24) Florida Power Corporation Management Incentive X Compensation Plan, effective January 1, 2001 (filed as Exhibit 10b(25) to Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-15929 and No. 1-3382.) 95 12 Statement of Computation of Ratios X 23.(a) Consent of Deloitte & Touche LLP X X 23.(b) Consent of KPMG LLP X 23.(c) Consent of KPMG LLP X
X Exhibit is filed for that respective company. * Incorporated herein by reference as indicated. + Management contract or compensation plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K. - Sponsorship of this management contract or compensation plan or arrangement was transferred by Carolina Power & Light Company to Progress Energy, Inc., effective August 1, 2000. (b) Reports on Form 8-K filed during or with respect to the last quarter of 2002 and the portion of the first quarter of 2003 prior to the filing of this Form 10-K: Florida Progress Corporation Financial Item Statements Reported Included Date of Event Date Filed 7 Yes February 18, 2003 February 18, 2003 Florida Power Corporation Financial Item Statements Reported Included Date of Event Date Filed 5 No January 1, 2003 January 3, 2003 5 No February 7, 2003 February 12, 2003 7 Yes February 18, 2003 February 18, 2003 5 No February 18, 2003 February 18, 2003 5 No February 21, 2003 February 21, 2003 Supplementary Information to be Furnished With Reports filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act No annual report or proxy materials have been sent to Florida Power's security holders during the fiscal year ended December 31, 2002. No annual report or proxy materials will be sent to security holders subsequent to the filing of this annual report on Form 10-K. 96 Risk factors In this section, unless the context indicates otherwise, the terms "our," "we," "us" or similar terms refer to Florida Power Corporation. The following section is applicable most directly to Florida Power Corporation. However, the risk factors discussed below are substantially applicable to our corporate parent, Florida Progress. Investing in our securities involves risks, including the risks described below, that could affect the energy industry, as well as us and our business. Although we have tried to discuss key factors, please be aware that other risks may prove to be important in the future. New risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance. Before purchasing our securities, you should carefully consider the following risks and the other information in this Annual Report, as well as the documents we file with the SEC from time to time. Each of the risks described below could result in a decrease in the value of our securities and your investment therein. Risks Related to the Energy Industry - ------------------------------------ We are subject to fluid and complex government regulations that may have a negative impact on our business and our results of operations. We are subject to comprehensive regulation by several federal and state regulatory agencies, which significantly influence our operating environment and may affect our ability to recover costs from utility customers. We are required to have numerous permits, approvals and certificates from the agencies that regulate our business. We believe the necessary permits, approvals and certificates have been obtained for our existing operations and that our business is conducted in accordance with applicable laws. The Federal Energy Regulatory Commission ("FERC"), the Nuclear Regulatory Commission ("NRC"), the Environmental Protection Agency ("EPA") and the FPSC regulate many aspects of our utility operations, including siting and construction of facilities, customer service and the rates that we can charge customers. Although we are not a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), we are subject to many of the regulatory provisions of PUHCA. We are a wholly-owned subsidiary of Progress Energy, Inc., a registered public utility holding company under PUHCA. Repeal of PUHCA has been proposed, but it is unclear whether or when such a repeal would occur. It is also unclear to what extent repeal of PUHCA would result in additional or new regulatory oversight or action at the federal or state levels, or what the impact of those developments might be on our business. We are unable to predict the impact on our business and operating results from future regulatory activities of these federal and state agencies. Changes in regulations or the imposition of additional regulations could have a negative impact on our business and results of operations. We are subject to numerous environmental laws and regulations that may increase our cost of operations, impact or limit our business plans, or expose us to environmental liabilities. We are subject to numerous environmental regulations affecting many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, and hazardous waste. These laws and regulations can result in increased capital, operating and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. We cannot predict the financial or operational outcome of any related litigation that may arise. In addition, we may be a responsible party for environmental clean up at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties. We cannot assure you that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us. Revised or additional regulations, which result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have a material adverse effect on our results of operations. Recent events in the energy markets that are beyond our control have increased the level of public and regulatory scrutiny in our industry and in the capital markets and have resulted in increased regulation and new accounting standards. The reaction to these events may have negative impacts on our business, financial condition and access to capital. 97 As a result of the energy crisis in California during the summer of 2001, the recent volatility of natural gas prices in North America, the bankruptcy filing by the Enron Corporation and Worldcom, Inc., recently discovered accounting irregularities of several public companies, and investigations by governmental authorities into energy trading activities, companies in the regulated and non-regulated utility businesses have been under a generally increased amount of public and regulatory scrutiny. Recently discovered accounting irregularities have caused regulators and legislators to review current accounting practices, financial disclosures and companies' relationships with their independent auditors. The capital markets and ratings agencies also have increased their level of scrutiny. We believe that we are complying with all applicable laws, and we have taken steps to avoid the occurrence of such events, but it is difficult or impossible to predict or control what effect these types of disruptions in the energy markets may have on our business, financial condition or our access to the capital markets. Additionally, it is unclear what laws or regulations may develop, and we cannot predict the ultimate impact of any future changes in accounting regulations or practices in general on public companies, the energy industry or our operations specifically. Any such new accounting standards could impact the way we are required to record revenues, assets and liabilities. These changes in accounting standards could lead to negative impacts on reported earnings or increases in liabilities that could, in turn, affect our reported results of operations. Deregulation or restructuring in the electric utility industry may result in increased competition and unrecovered costs that could adversely affect our financial condition, results of operations and cash flows. Increased competition resulting from deregulation or restructuring efforts could have a significant adverse financial impact on our results of operations and cash flows. Increased competition could also result in increased pressure to lower rates. Retail competition and the unbundling of regulated energy and gas service could have a significant adverse financial impact on us due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital. Because we have not previously operated in a competitive retail environment, we cannot predict the extent and timing of entry by additional competitors into the electric markets. Movement toward deregulation in Florida has slowed as a result of recent developments, including developments related to electric deregulation in California and other states. We cannot predict when we will be subject to changes in legislation or regulation, nor can we predict the impact of these changes on our financial condition, results of operations or cash flows. One of the major issues to be resolved from deregulation is who would pay for stranded costs. Stranded costs are those costs and investments made by utilities in order to meet their statutory obligation to provide electric service but which could not be recovered through the market price of electricity following industry restructuring. The amount of such stranded costs that we might experience would depend on the timing of, and the extent to which, direct competition is introduced, and the then-existing market price of energy. If we were no longer subject to cost-based regulation and it was not possible to recover stranded costs, our financial condition and results of operations could be adversely affected. Additionally, the electric utility industry has experienced a substantial increase in competition at the wholesale level, caused by changes in federal law and regulatory policy. As a result of the Public Utilities Regulatory Policies Act of 1978 and the Energy Policy Act of 1992, competition in the wholesale electricity market has greatly increased due to a greater participation by traditional electricity suppliers, non-utility generators, independent power producers, wholesale power marketers and brokers, as well as the trading of energy futures contracts on various commodities exchanges. This increased competition could affect our load forecasts, plans for power supply and wholesale energy sales and related revenues. The impact could vary depending on the extent to which additional generation is built to compete in the wholesale market, new opportunities are created for us to expand our wholesale load, or current wholesale customers elect to purchase from other suppliers after existing contracts expire. In 1996, the FERC issued new rules on transmission service to facilitate competition in the wholesale market on a nationwide basis. The rules give greater flexibility and more choices to wholesale power customers. As a result of the changing regulatory environment and the relatively low barriers to entry, we expect competition to steadily increase. As competition continues to increase, our financial condition, results of operations and cash flows could be adversely affected. The uncertain outcome regarding the timing, creation and structure of regional transmission organizations, or RTOs, may materially impact our results of operations, cash flows or financial condition. On December 20, 1999, the FERC issued Order No. 2000 on RTOs. This order required public utilities that own, operate or control interstate electricity transmission facilities to file either a proposal to participate in an RTO or an alternative filing describing efforts and plans to participate in an RTO. We, along with other investor-owned utilities, filed applications with the FERC and the FPSC for approval of an RTO, currently named GridFlorida. On November 7, 2001, the FERC issued an order providing guidance on continued processing of RTO filings. In this order, the FERC recognized that it would not be possible for all RTOs to be operational by December 15, 2001 as set forth in Order No. 2000; therefore, the FERC stated that its future orders would address the establishment of a timeline for the RTO progress in each region of the country. 98 On July 31, 2002, the FERC issued its Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design ("SMD NOPR"). The proposed rules set forth in the SMD NOPR would require, among other things, that 1) all transmission owning utilities transfer control of their transmission facilities to an independent third party; 2) transmission service to bundled retail customers be provided under the FERC- regulated transmission tariff, rather than state-mandated terms and conditions; and 3) new terms and conditions for transmission service be adopted nationwide, including new provisions for pricing transmission in the event of transmission congestion. If adopted as proposed, the rules set forth in the SMD NOPR would materially alter the manner in which transmission and generation services are provided and paid for. Progress Energy, Inc. filed comments on the SMD NOPR on November 15, 2002 and January 10, 2003. On January 15, 2003, the FERC announced the issuance of a White Paper on SMD to be released in April 2003. Progress Energy, Inc. plans to file comments on the White Paper as appropriate. The FERC has also indicated that it expects to issue the final rules during the summer of 2003. On October 15, 2002 the FPSC abated its proceedings regarding its review of the proposed GridFlorida. The GridFlorida proposal includes the formation of a not-for-profit ISO by the joint applicants -- us and two other investor-owned utilities. Participation is expected from many of the other transmission owners in the state of Florida. The FPSC previously found the applicants were prudent in proactively forming GridFlorida but ordered the applicants to modify their proposal. The modifications include but are not limited to addressing 1) pricing structure that recognizes the FPSC's jurisdiction over retail transmission rates, 2) pricing/rate structure of long-term transmission contracts, 3) elimination of pancaking of short-term transmission revenues, 4) cost recovery of incremental costs imposed on the applicants, 5) demarcation dates for new facilities and long term transmission contracts, and 6) market design. The FPSC action to abate the proceedings comes in response to the Florida Office of Public Counsel appeal before the state Supreme Court requesting review of the FPSC's order approving the transfer of operational control of electric transmission assets to an RTO under the jurisdiction of the FERC. It is unknown what the outcome of this appeal will be at this time. We are continuing to make progress towards the development of the GridFlorida RTO. The actual structure of GridFlorida, as well as the date it may become operational, depends upon the resolution of all regulatory approvals and technical issues. Given the regulatory uncertainty of the ultimate timing, structure and operations of GridFlorida, we cannot predict whether its creation or the creation of an alternate combined transmission structure will have any material adverse effect on our future results of operations, cash flows or financial condition. Furthermore, the SMD NOPR presents several uncertainties, including what percentage of our investments in GridFlorida will be recovered, how the elimination of transmission charges, as proposed in the SMD NOPR, will impact us, and what amount of capital expenditures will be necessary to create a new wholesale market. Since weather conditions directly influence the demand for electricity, as well as the price of energy commodities, our results of operations, financial condition and cash flows can be negatively affected by changes in weather conditions and severe weather. Our results of operation, financial condition and cash flows can be affected by changing weather conditions. Weather conditions in our service territories directly influence the demand for electricity and affect the price of energy commodities. Furthermore, severe weather, such as hurricanes, tornadoes and severe thunder storms, can be destructive, causing outages, downed power lines and property damage and requiring us to incur additional and unexpected expenses and causing us to lose generating revenues. In 2002, drought conditions and related water restrictions affected numerous electric utilities in the southeast United States. Drought conditions and any mandated water restrictions that could be implemented in response thereto, could impact a small percentage of our generating facilities. This may result in additional expenses, such as higher fuel costs and/or purchased power expenses. We continue to monitor weather patterns and will develop contingency plans, as necessary, to mitigate the impact of drought conditions. We do not have any reliability concerns with our generating facilities currently and do not expect these developments to have a material impact on our results of operations. Our revenues, operating results and financial condition may fluctuate with the economy and its corresponding impact on our commercial and industrial customers, and may also fluctuate on a seasonal or quarterly basis. Our business is impacted by fluctuations in the macroeconomy. For the year ended December 31, 2002, commercial and industrial customers represented approximately 23.9% and 6.9% of our electric revenues, respectively. As a result, changes in the macroeconomy can have negative impacts on our revenues. As our commercial and industrial customers experience economic hardships, our revenues can be negatively impacted. Electric power demand is generally a seasonal business. In many parts of the country, demand for power peaks during the hot summer months, with market prices also peaking at that time. In other areas, power demand peaks during the winter. The pattern of this fluctuation may change depending on the nature and location of facilities we acquire and the terms of power sale contracts into which we enter. In addition, we have historically sold less power, and consequently earned less income, when weather conditions are milder. As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis. 99 Risks Related to Us and Our Business - ------------------------------------ Under a settlement agreement we entered into in 2002, we are required to reduce our retail rates annually through 2005 and to operate under a revenue sharing plan which provides for possible rate refunds to our retail customers. This agreement could affect our profit margin if we do not control our costs. In March 2002, we entered into a Stipulation and Settlement Agreement related to retail rate matters. The agreement is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if our base rate earnings fall below a 10% return on equity, we may petition the FPSC to amend our base rates. The agreement provided for a 9.25% rate reduction designed to result in a reduction of our retail revenues from the sale of electricity by an annual amount of $125 million. The agreement also provides that we will operate under a revenue sharing incentive plan through 2005, and thereafter until terminated by the FPSC, that establishes annual revenue caps and sharing thresholds. The agreement 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 our shareholder, and a 2/3 share to be refunded to our retail customers. The agreement 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. Any amounts above the retail base revenue caps will be refunded 100 percent to customers. As of December 31, 2002, $4.7 million has been accrued and will be refunded to customers by March 2003. On February 24, 2003, the adverse parties to the agreement filed a motion with the FPSC seeking an order finding that the proper amount of the revenue refund should be $23.0 million. Under the terms of the agreement, we agreed to continue the implementation of our four-year Commitment to Excellence reliability plan and expect to achieve a 20% improvement in our annual system average interruption duration index by no later than 2004. If this improvement level is not achieved for calendar years 2004 or 2005, we must provide a refund of $3 million for each year the level is not achieved to 10% of our total retail customers served by our worst performing distribution feeder lines. Although the reduced revenues are partially offset by lower depreciation allowed under the agreement, our cash costs are not frozen or reduced under the agreement. Additionally, our Commitment to Excellence program will require dedicated capital expenditures. Thus, our ability to maintain our profit margins depends upon stable demand for electricity and our efforts to manage our costs. The settlement agreement will also affect our ability to recover from our customers costs associated with investments that we make in new transmission and distribution facilities since we will not be able to increase rates to recover those costs. There are inherent potential risks in the operation of nuclear facilities, including environmental, health, regulatory, terrorism, and financial risks that could result in fines or the shutdown of our nuclear unit, which may present potential exposures in excess of our insurance coverage. We own and operate one nuclear unit that represents approximately 834 megawatts, or 10%, of our generation capacity. Our nuclear facility is subject to environmental, health and financial risks such as the ability to dispose of spent nuclear fuel, the ability to maintain adequate capital reserves for decommissioning, potential liabilities arising out of the operation of this facility, and the costs of securing the facility against possible terrorist attacks. We maintain a decommissioning trust and external insurance coverage to minimize the financial exposure to these risks; however, it is possible that damages could exceed the amount of our insurance coverage. The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of non-compliance, the NRC has the authority to impose fines or to shut down our unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. Revised safety requirements promulgated by the NRC could require us to make substantial capital expenditures at our nuclear plant. In addition, although we have no reason to anticipate a serious nuclear incident at our plant, if an incident did occur, it could materially and adversely affect our results of operations or financial condition. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit. Our facility requires licenses that need to be renewed or extended in order to continue operating. We do not anticipate any problems renewing these licenses. However, as a result of potential terrorist threats and increased public scrutiny of utilities, the licensing process could result in increased licensing or compliance costs that are difficult or impossible to predict. 100 Our financial performance depends on the successful operation of our electric generating facilities. Operating electric generating facilities involves many risks, including: o operator error and breakdown or failure of equipment or processes; o operating limitations that may be imposed by environmental or other regulatory requirements; o labor disputes; o fuel supply interruptions; and o catastrophic events such as fires, earthquakes, explosions, floods, terrorist attacks or other similar occurrences. A decrease or elimination of revenues generated by our electric generating facilities or an increase in the cost of operating the facilities could have an adverse effect on our business and results of operations. Our business is dependent on our ability to successfully access capital markets. Our inability to access capital may limit our ability to execute our business plan, or pursue improvements and make acquisitions that we may otherwise rely on for future growth. We rely on access to both short-term money markets and long-term capital markets as a significant source of liquidity for capital requirements not satisfied by the cash flow from our operations. Our net cash flow from operations funded approximately 78% of our capital requirements for the year ended December 31, 2002. If we are not able to access capital at competitive rates, our ability to implement our business operations will be adversely affected. We believe that we will maintain sufficient access to these financial markets based upon current credit ratings. However, certain market disruptions or a downgrade of our credit rating may increase our cost of borrowing or adversely affect our ability to access one or more financial markets. Such disruptions could include: o an economic downturn; o a ratings downgrade of Progress Energy, Inc.; o the bankruptcy of an unrelated energy company; o capital market conditions generally; o market prices for electricity; o terrorist attacks or threatened attacks on our facilities or those of unrelated energy companies; or o the overall health of the utility industry. Restrictions on our ability to access financial markets may affect our ability to execute our business plan as scheduled. An inability to access capital may limit our ability to pursue improvements or acquisitions that we may otherwise rely on for future growth. Increases in our leverage could adversely affect our competitive position, business planning and flexibility, financial condition, ability to service our debt obligations and ability to access capital on favorable terms. Our cash requirements arise primarily from the capital-intensive nature of our business. In addition to operating cash flows, we rely heavily on our commercial paper and long-term debt. As of December 31, 2002, our commercial paper balance was approximately $257.1 million, our notes payable to affiliated companies balance was $237.4 million and our long-term debt balances were approximately $1.2 billion (net of current portion, which at December 31, 2002, was $216.9 million). In February 2003, we issued $650 million aggregate principal amount of our first mortgage bonds, the proceeds from which were or will be used to reduce, redeem, or retire our outstanding long- and short-term, secured and unsecured, indebtedness. We have two committed credit lines that support our commercial paper programs totaling $290.5 million, each of which mature in 2003. As of December 31, 2002, we had no outstanding borrowings under these lines. If we are unable to extend or renew these credit lines on favorable terms, or at all, we may experience a liquidity shortfall that could have a material adverse impact on us and our financial condition. We also have an uncommitted credit line for up to $100 million. As of December 31, 2002, we had no outstanding borrowings under this uncommitted line of credit. In addition, under our shelf registration statement on file with the SEC, we may issue secured and unsecured debt securities up to an additional $50 million. This amount may be increased from time to time, and we expect to increase our shelf capacity in the second or third quarter of 2003. 101 Our credit lines impose various limitations that could impact our liquidity. Our credit facilities include defined maximum total debt to total capital ratios. As of December 31, 2002, the maximum and actual ratios, pursuant to the terms of the credit facilities, were 65% and 48.6%, respectively. Indebtedness, as defined under the credit facility agreements, includes certain letters of credit and guarantees that are not recorded on our balance sheets. In the event our capital structure changes such that we approach the permitted ratios, our access to capital and additional liquidity could decrease. A limitation in our liquidity could have a material adverse impact on our business strategy and our ongoing financing needs. Furthermore, our credit lines include provisions that preclude us from borrowing additional funds in the event of a material adverse change in our financial condition. Our indebtedness also includes cross-default provisions which could significantly impact our financial condition. Our credit lines include cross-default provisions for defaults of indebtedness in excess of $10 million. Our cross-default provisions only apply to defaults on our indebtedness, but not defaults by our affiliates. In the event that a cross-default provision were triggered, our lenders could accelerate payment of any outstanding debt. Any such acceleration would cause a material adverse change in our financial condition. Changes in economic conditions could result in higher interest rates, which would increase our interest expense on our floating rate debt and reduce funds available to us for our current plans. Additionally, an increase in our leverage could adversely affect us by: o increasing the cost of future debt financing; o making it more difficult for us to satisfy our existing financial obligations; o limiting our ability to obtain additional financing, if we need it, for working capital, acquisitions, debt service requirements or other purposes; o increasing our vulnerability to adverse economic and industry conditions; o requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce funds available to us for operations, future business opportunities or other purposes; o limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; o placing us at a competitive disadvantage compared to our competitors who have less debt; and o causing a downgrade in our credit ratings. Any reduction in our credit ratings could increase our borrowing costs and limit our access to additional capital, which could materially and adversely affect our business, results of operations and financial condition. Our senior secured debt has been assigned a rating by Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, Inc., of "BBB+" (negative outlook), and by Moody's Investors Service, Inc. of "A1" (negative outlook), and our senior unsecured debt rating has been assigned a rating by S&P of "BBB+" (negative outlook) and by Moody's of "A2" (stable outlook). On February 7, 2003, Moody's changed the outlook on our senior secured debt from stable to negative, noting its belief that a base rate reduction in 2002, higher capital expenditures and increased leverage to finance such capital expenditures would put pressure on our performance going forward. In addition, S&P's rating philosophy links the ratings of a utility subsidiary to the credit rating of its parent corporation. Accordingly, if S&P were to downgrade Progress Energy, Inc.'s credit ratings, our credit rating would also likely be downgraded, regardless of whether or not we had experienced any change in our business operations or financial conditions. We will seek to maintain a solid investment grade rating through prudent capital management and financing structures. We cannot, however, assure you that our current ratings will remain in effect for any given period of time or that our ratings will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Any downgrade could increase our borrowing costs and adversely affect our access to capital, which could negatively impact our financial results. Further, we may be required to pay a higher interest rate in future financings, and our potential pool of investors and funding sources could decrease. Although we would have access to liquidity under our committed and uncommitted credit lines, if our short-term rating were to fall below "A-2" or "P-1," the current ratings assigned by S&P and Moody's, respectively, it could significantly limit our access to the commercial paper market. We note that the ratings from credit agencies are not recommendations to buy, sell or hold our securities and that each rating should be evaluated independently of any other rating. 102 The use of derivative contracts in the normal course of our business could result in financial losses that negatively impact our results of operations. We use derivatives, including futures, forwards and swaps, to manage our commodity and financial market risks. In the future, we could recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these financial instruments can involve management's judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the value of the reported fair value of these contracts. 103 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FLORIDA PROGRESS CORPORATION Date: March 21, 2003 (Registrant) 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 (ChiefAccounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date /s/ William Cavanaugh III Principal Executive March 19, 2003 (William Cavanaugh III, Officer and Director Chairman and Chief Executive Officer) /s/ Peter M. Scott III Principal Financial March 19, 2003 (Peter M. Scott III, Executive Officer Vice President and Chief Financial Officer) /s/ Edwin B. Borden Director March 19, 2003 (Edwin B. Borden) /s/ James E. Bostic, Jr. Director March 19, 2003 (James E. Bostic, Jr.) /s/ David L. Burner Director March 19, 2003 (David L. Burner) /s/ Charles W. Coker Director March 19, 2003 (Charles W. Coker) /s/ Richard L. Daugherty Director March 19, 2003 (Richard L. Daugherty) /s/ W.D. Frederick, Jr. Director March 19, 2003 (W.D. Frederick, Jr.) 104 /s/ William O. McCoy Director March 19, 2003 (William O. McCoy) /s/ E. Marie McKee Director March 19, 2003 (E. Marie McKee) /s/ John H. Mullin, III Director March 19, 2003 (John H. Mullin, III) /s/ Richard A. Nunis Director March 19, 2003 (Richard A. Nunis) /s/ Carlos A. Saladrigas Director March 19, 2003 (Carlos A. Saladrigas) /s/ J. Tylee Wilson Director March 19, 2003 (J. Tylee Wilson) /s/ Jean Giles Wittner Director March 19, 2003 (Jean Giles Wittner) 105 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FLORIDA POWER CORPORATION Date: March 21, 2003 (Registrant) 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. Controller (Chief Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date /s/ William Cavanaugh III Principal Executive March 19, 2003 (William Cavanaugh III, Officer and Director Chairman) /s/ H. William Habermeyer, Jr. Principal Executive March 19, 2003 (H. William Habermeyer, Jr., Officer and Director President and Chief Executive Officer) /s/ Peter M. Scott III Principal Financial March 19, 2003 (Peter M. Scott, Executive Officer and Director Vice President and Chief Financial Officer) /s/ Robert B. McGehee Director March 19, 2003 (Robert B. McGehee) /s/ William D. Johnson Director March 19, 2003 (William D. Johnson) /s/ Fred N. Day, IV Director March 19, 2003 (Fred N. Day, IV) /s/ William S. Orser Director March 19, 2003 (William S. Orser) 106 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, William Cavanaugh III, certify that: 1. I have reviewed this annual report on Form 10-K of Florida Progress Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 21, 2003 /s/ William Cavanaugh III William Cavanaugh III Chairman and Chief Executive Officer 107 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter M. Scott III, certify that: 1. I have reviewed this annual report on Form 10-K of Florida Progress Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 21, 2003 /s/ Peter M. Scott III Peter M. Scott III Executive Vice President and Chief Financial Officer 108 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, H. William Habermeyer, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Florida Power Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 21, 2003 /s/ H. William Habermeyer, Jr. H. William Habermeyer, Jr. President and Chief Executive Officer 109 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter M. Scott III, certify that: 1. I have reviewed this annual report on Form 10-K of Florida Power Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 21, 2003 /s/ Peter M. Scott III Peter M. Scott III Executive Vice President and Chief Financial Officer 110 Exhibit 12 FLORIDA POWER CORPORATION Statement of Computation of Ratios (Dollars In Millions) Ratio of Earnings to Fixed Charges: 2002 2001 2000 1999 1998 ----------- ---------- ---------- ---------- ---------- Net Income $ 324.1 $ 311.1 $ 211.8 $ 267.0 $ 250.1 Income Taxes 163.3 182.6 150.5 151.3 141.0 ----------- ---------- ---------- ---------- ---------- Income Before Taxes 487.4 493.7 362.3 418.3 391.1 Net Interest Charges 109.4 114.8 128.5 124.0 136.5 ----------- ---------- ---------- ---------- ---------- Total Earnings (A) $ 596.8 $ 608.5 $ 490.8 $ 542.3 $ 527.6 ----------- ---------- ---------- ---------- ---------- Fixed Charges (B) $ 109.4 $ 114.8 $ 128.5 $ 124.0 $ 136.5 ----------- ---------- ---------- ---------- ---------- Preferred Dividends grossed up for effective tax rate 2.4 2.4 2.6 2.3 2.3 Total Fixed Charges plus Preferred Dividends (C) 111.8 117.2 131.1 126.3 138.8 ----------- ---------- ---------- ---------- ---------- Ratio of Earnings to Fixed Charges (A/B) 5.46 5.30 3.82 4.37 3.87 =========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges and Preferred Dividends (A/C) 5.34 5.19 3.74 4.29 3.80 =========== ========== ========== ========== ==========
111 Exhibit 23.(a) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-53939 on Form S-8, Registration Statement No. 33-54972 on Form S-8, Registration Statement No. 333-02169 on Form S-8, Registration Statement No. 333-19037 on Form S-8, Registration Statement No. 333-75373 on Form S-8, Registration Statement No. 333-39232 on Form S-3, Registration Statement No. 33-51573 on Form S-3, Registration Statement No. 33-47623 on Form S-8, Registration Statement No. 2-93111 on Form S-3, Registration Statement No. 333-94143 on Form S-8, Registration Statement No. 333-66161 on Form S-8, and Registration Statement No. 333-07853 on Form S-3 of Florida Progress Corporation of our reports dated February 12, 2003, appearing in this Annual Report on Form 10-K of Florida Progress Corporation for the year ended December 31, 2002. We also consent to the incorporation by reference in Post-Effective Amendment 1 to Registration Statement No. 33-55273 on Form S-3, Post-Effective Amendment 1 to Registration Statement No. 333-29897 on Form S-3, Post-Effective Amendment 1 to Registration Statement No. 333-62210 on Form S-3, and Registration Statement No. 333-63204 on Form S-3 of Florida Power Corporation of our reports dated February 12, 2003, appearing in this Annual Report on Form 10-K of Florida Power Corporation for the year ended December 31, 2002. /s/ Deloitte & Touche LLP Raleigh, North Carolina March 19, 2003 Exhibit 23.(b) INDEPENDENT AUDITORS' CONSENT Board of Directors Florida Progress Corporation: We consent to incorporation by reference in the registration statements on Form S-8 (Nos. 33-53939, 33-54972, 333-02169, 333-19037, 333-75373, 33-47623, 333-94143 and 333-66161) and Form S-3 (Nos. 333-39232, 33-51573, 2-93111 and 333-07853) of Florida Progress Corporation of our report dated February 15, 2001 relating to the statements of income and comprehensive income, cash flows and common equity and the related financial statements schedules of Florida Progress Corporation and subsidiaries, and of Florida Power Corporation for the year ended December 31, 2000, which report appears in this report on Form 10-K of Florida Progress Corporation. /s/ KPMG LLP KPMG LLP Tampa, Florida March 20, 2003 112 Exhibit 23.(c) INDEPENDENT AUDITORS' CONSENT Board of Directors Florida Power Corporation: We consent to incorporation by reference in the registration statements on Form S-3 (No. 333-63204 and Post Effective Amendment 1 to Nos. 33-55273, 333-29897, and 33-62210) of Florida Power Corporation of our report dated February 15, 2001, relating to the statements of income and comprehensive income, cash flows and common equity and the related financial statements schedules of Florida Progress Corporation and subsidiaries, and of Florida Power Corporation for the year ended December 31, 2000, which report appears in this report on Form 10-K of Florida Power Corporation. /s/ KPMG LLP KPMG LLP Tampa, Florida March 20, 2003 113 EX-10 3 pei_fp10kexhibit10a2-.txt EXHIBIT 10(A)(2) Exhibit 10.(a)(2) ****************************************************************** FLORIDA POWER CORPORATION ---------------------------------------- THIRD AMENDED AND RESTATED CREDIT AGREEMENT B Dated as of November 17, 1998 This Agreement amends and restates Credit Agreement B Dated as of November 26, 1991 ---------------------------------------- THE CHASE MANHATTAN BANK as Agent ****************************************************************** TABLE OF CONTENTS This Table of Contents is not part of the Agreement to which it is attached but is inserted for convenience only. Page Section 1. Definitions and Accounting Matters................................1 1.01 Certain Defined Terms...........................1 1.02 Accounting Terms and Determinations ...........11 1.03 Classes and Types of Loans.....................11 Section 2. Commitments .....................................................12 2.01 Syndicated Loans ..............................12 2.02 Borrowings of Syndicated Loans ................12 2.03 Money Market Loans ............................12 2.04 Changes of Commitments ........................16 2.05 Facility Fee ..................................16 2.06 Lending Offices ...............................16 2.07 Several Obligations; Remedies Independent .....17 2.08 Notes .........................................17 2.09 Prepayments and Conversions on Continuations of Loans.......................................17 Section 3. Payments of Principal and Interest ..............................17 3.01 Repayment of Loans ...........................17 3.02 Interest ......................................18 Section 4. Payments; Pro Rata Treatment; Computations; Etc. ................19 4.01 Payments ......................................19 4.02 Pro Rata Treatment ............................19 4.03 Computations ..................................20 4.04 Minimum Amounts ..............................20 4.05 Certain Notices ...............................20 4.06 Non-Receipt of Funds by the Agent .............21 4.07 Sharing of Payments, Etc ......................22 Section 5. Yield Protection and Illegality .................................23 5.01 Additional Costs ..............................23 5.02 Limitation on Types of Loans ..................25 5.03 Illegality ....................................26 5.04 Treatment of Affected Loans ...................26 5.05 Compensation ..................................27 Section 6. Conditions Precedent ............................................27 6.01 Initial Loan ..................................27 6.02 Initial and Subsequent Loans ..................28 Section 7. Representations and Warranties ..................................28 7.01 Corporate Existence ...........................29 7.02 Financial Condition ...........................29 7.03 Litigation ....................................29 7.04 No Breach .....................................29 7.05 Corporate Action ..............................30 7.06 Approvals .....................................30 7.07 Use of Loans ..................................30 7.08 ERISA .........................................30 7.09 Taxes .........................................30 7.10 Investment Company Act .......................31 7.11 Public Utility Holding Company Act ............31 Section 8. Covenants of the Company ........................................31 8.01 Financial Statements ..........................31 8.02 Litigation ....................................33 8.03 Corporate Existence, Etc ......................34 8.04 Prohibition of Fundamental Changes ............34 8.05 Use of Proceeds ...............................34 8.06 Indebtedness to Capitalization Ratio...........34 8.07 Negative Pledge ...............................34 Section 9. Events of Default ...............................................35 Section 10. The Agent .......................................................38 10.01 Appointment, Powers and Immunities ............38 10.02 Reliance by Agent .............................39 10.03 Defaults ......................................39 10.04 Rights as a Lender ............................39 10.05 Indemnification ...............................39 10.06 Non-Reliance on Agent and Other Lenders........40 10.07 Failure to Act ................................40 10.08 Resignation or Removal of Agent ...............40 10.09 Agency Fee ....................................41 Section 11. Miscellaneous ...................................................41 11.01 Waiver.........................................41 11.02 Notices........................................41 11.03 Expenses, Etc..................................41 11.04 Amendments, Etc ...............................42 11.05 Successors and Assigns ........................42 11.06 Assignments and Participations ................42 ii 11.07 Survival.......................................44 11.08 Captions.......................................44 11.09 Counterparts...................................44 11.10 Governing Law; Submission to Jurisdiction......44 11.11 Waiver of Jury Trial...........................45 EXHIBIT A-1 - Form of Note for Syndicated Loans EXHIBIT A-2 - Form of Note for Money Market Loans EXHIBIT B - Form of Opinion of Counsel to the Parent EXHIBIT C - Form of Money Market Quote Request EXHIBIT D - Form of Money Market Quote iii THIS THIRD AMENDED AND RESTATED CREDIT AGREEMENT B dated as of November 17, 1998 between: FLORIDA POWER CORPORATION, a corporation duly organized and validly existing under the laws of the State of Florida (the "Company"); each of the lenders that is a signatory hereto or which, pursuant to Section 11.06(b) hereof, shall become a "Lender" hereunder (individually, a "Lender" and, collectively, the "Lenders"); and THE CHASE MANHATTAN BANK, as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"); amends and restates the Credit Agreement B dated as of November 26, 1991, between the Company, each of the Lenders and the Agent. The Company has requested that the Lenders make loans to it in an aggregate principal amount not exceeding $200,000,000 at any one time outstanding and the Lenders are prepared to make such loans upon the terms hereof. Accordingly, the parties hereto agree as follows: Section 1. Definitions and Accounting Matters. ---------------------------------- 1.01 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Applicable Lending Office" shall mean, for each Lender and for each Type of Loan, the "Lending Office" of such Lender (or of an affiliate of such Lender) designated for such Type of Loan on the signature pages hereof or such other office of such Lender (or of an affiliate of such Lender) as such Lender may from time to time specify to the Agent and the Company as the office by which its Loans of such Type are to be made and maintained. "Applicable Margin" shall mean: (i) during each Class 1 Rating Period, (A) with respect to Base Rate Loans, zero, (B) with respect to Eurodollar Loans, 0.17%, and (C) with respect to CD Loans, 0.295%, (ii) during each Class 2 Rating Period, (A) with respect to Base Rate Loans, zero, (B) with respect to Eurodollar Loans, 0.225%, (C) with respect to CD Loans, 0.35%, and (iii) during each Class 3 Rating Period, (A) with respect to Base Rate Loans, zero, (B) with respect to Eurodollar Loans, 0.40%, and (C) with respect to CD Loans, 0.525%. "Applicable Facility Fee Rate" shall mean, a rate per annum equal to (a) during each Class 1 Rating Period, 0.08%; (b) during each Class 2 Rating Period, 0.15%; and (c) during each Class 3 Rating Period, 0.20%. "Assessment Rate" shall mean, for any Interest Period for any CD Loan, the effective annual assessment rate (rounded upwards, if necessary, to the nearest 1/100 of 1%) payable by Chase to the Federal Deposit Insurance Corporation (or any successor) for deposit insurance for Dollar time deposits with Chase at the Principal Office during such Interest Period, as reasonably estimated by the Agent. "Base Rate" shall mean, for any day, the higher of (a) the Federal Funds Rate for such day plus 1/2 of 1% per annum and (b) the Prime Rate for such day. Each change in any interest rate provided for herein based upon the Base Rate resulting from a change in the Base Rate shall take effect at the time of such change in the Base Rate. "Base Rate Loans" shall mean Syndicated Loans which bear interest at rates based upon the Base Rate. "Business Day" shall mean any day on which commercial banks are not authorized or required to close in New York City and, if such day relates to the giving of notices or quotes in connection with a LIBOR Auction or to a borrowing of, a payment or prepayment of principal of or interest on,, or an Interest Period for, a Eurodollar Loan or a LIBOR Market Loan or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Capital Lease Obligations" shall mean, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board) and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13). "CD Loans" shall mean Syndicated Loans the interest rates on which are determined on the basis of rates referred to in clause (b) of the definition of "Fixed Base Rate" in this Section 1.01. 2 "Chase" shall mean The Chase Manhattan Bank. "Class" shall have the meaning given to that term in Section 1.03 hereof. "Class 1 Rating Period" shall mean any period during which the rating of the First Mortgage Bonds (a) by Moody's equals or exceeds "A3" and (b) by S&P equals or exceeds "A-". "Class 2 Rating Period" shall mean any period during which the rating of the First Mortgage Bonds (a) by Moody's equals or exceeds "Baa3" and (b) by S&P equals or exceeds "BBB-", and which is not a Class 1 Rating Period. "Class 3 Rating Period" shall mean any period that is neither a Class 1 Rating Period nor a Class 2 Rating Period. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Commitment" shall mean, with respect to each Lender, the obligation of such Lender to make Syndicated Loans pursuant to Section 2.01 hereof in an aggregate amount at any one time outstanding up to but not exceeding the amount set opposite such Lender's name on the signature pages hereof under the caption "Commitment" (as the same may be reduced at any time or from time to time pursuant to Section 2.04 hereof). The original aggregate amount of the Commitments is $200,000,000. "Commitment Termination Date" shall mean, with respect to each Lender, November 30, 2003; provided that (a) if, (i) not later than 39 months, but no more than 40 months, prior to the Commitment Termination Date, determined after giving effect to all previous extensions thereof pursuant to this definition (the "Existing Commitment Termination Date"), the Company requests that the Lenders agree to extend the Commitment Termination Date to the December 31 falling two years after the Existing Commitment Termination Date (the "Proposed Commitment Termination Date") and (ii) each of the Lenders so agrees in writing prior to the Existing Commitment Termination Date, then the "Commitment Termination Date" shall be extended, with respect to each Lender, to the Proposed Commitment Termination Date; (b) if, pursuant to any such request, some, but not all, of the Lenders agree to so extend the Existing Commitment Termination Date to the Proposed Commitment Termination Date (the Lenders that so agree, the "Consenting Lenders"), the "Commitment Termination Date" shall mean (i) with respect to the Consenting Lenders, the Proposed Commitment Termination Date and (ii) with respect to the Lenders that are not Consenting Lenders, the Existing Commitment Termination Date; and 3 (c) if the Commitment Termination Date as determined above is not a Business Day, the Termination Date shall be the next preceding Business Day. "Consolidated Subsidiary" shall mean, as to any Person, each Subsidiary of such Person (whether now existing or hereafter created or acquired) the financial statements of which shall be (or should have been) consolidated with the financial statements of such Person in accordance with GAAP. "Continue", "Continuation" and "Continued" shall refer to the continuation pursuant to Section 2.09 hereof of a Fixed Rate Loan of one Type as a Fixed Rate Loan of the same Type from one Interest Period to the next Interest Period. "Convert", "Conversion" and "Converted" shall refer to a conversion pursuant to Section 2.09 hereof of Base Rate Loans into CD Loans or Eurodollar Loans, of CD Loans into Base Rate Loans or Eurodollar Loans, or of Eurodollar Loans into Base Rate Loans or CD Loans, which may be accompanied by the transfer by a Lender (at its sole discretion) of a Loan from one Applicable Lending Office to another. "Default" shall mean an Event of Default or an event which with notice or lapse of time or both would become an Event of Default. "Dollars" and "$" shall mean lawful money of the United States of America. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company or is under common control (within the meaning of Section 414(c) of the Code) with the Company. "Eurodollar Loans" shall mean Syndicated Loans the interest rates on which are determined on the basis of rates referred to in clause (a) of the definition of "Fixed Base Rate" in this Section 1.01. "Event of Default" shall have the meaning assigned to such term in Section 9 hereof. "Existing Indenture" shall mean the Indenture dated as of January 1, 1944 between the Company and First Chicago Trust Company of New York, successor Trustee, as amended and supplemented and in effect from time to time. 4 "Federal Funds Rate" shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to Chase on such day on such transactions as determined by the Agent. "First Mortgage Bonds" shall mean the Company's First Mortgage Bonds issued under the Existing Indenture. "Fixed Base Rate" shall mean, with respect to any Fixed Rate Loan for any Interest Period therefor: (a) if such Loan is a Eurodollar Loan or a LIBOR Market Loan, the arithmetic mean (rounded upwards, if necessary, to the nearest 1/16 of 1%), as determined by the Agent, of the rates per annum quoted by the respective Reference Lenders at approximately 11:00 a.m.London time (or as soon thereafter as practicable) on the date two Business Days prior to the first day of such Interest Period for the offering by the respective Reference Lenders to leading banks in the London interbank market of Dollar deposits having a term comparable to such Interest Period and in an amount comparable to the principal amount of the Eurodollar Loan or LIBOR Market Loan to be made by the respective Reference Lenders for such Interest Period; and (b) if such Loan is a CD Loan, the arithmetic mean (rounded upwards, if necessary, to the nearest 1/20 of 1%), as determined by the Agent, of the rates per annum determined by the respective Reference Lenders to be the average of the bid rates quoted to the respective Reference Lenders at approximately 10:00 a.m. New York time (or as soon thereafter as practicable) on the first day of such Interest Period by at least two certificate of deposit dealers of recognized national standing selected by the respective Reference Lenders for the purchase at face value of certificates of deposit of the respective Reference Lenders having a term comparable to such Interest Period and in an amount comparable to the principal amount of the CD Loan to be made by the respective Reference Lenders for such Interest Period. If any Reference Lender is not participating in any Fixed Rate Loan during any Interest Period therefor, the Fixed Base Rate for such Loan shall be determined by reference to the amount of the Loan which such Reference Lender would have made had it been participating in such Loan; provided that in the case of any LIBOR Market Loan, the Fixed Base Rate for such Loan shall be determined with reference to deposits of $10,000,000. If any Reference Lender does not timely furnish such information for determination of any Fixed Base Rate, the Agent shall determine such Fixed Base Rate on the basis of information timely furnished by the remaining Reference Lenders. 5 "Fixed Rate" shall mean, for any Fixed Rate Loan for any Interest Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Agent to be equal to the sum of (a) the Fixed Base Rate for such Interest Period divided by 1 minus the Reserve Requirement for such Loan for such Interest Period plus (b) if such Loan is a CD Loan, the Assessment Rate for such Interest Period. "Fixed Rate Loans" shall mean CD Loans, Eurodollar Loans and, for the purposes of the definition of "Fixed Base Rate" in this Section 1.01 and in Section 5 hereof, LIBOR Market Loans. "GAAP" shall mean generally accepted accounting principles as in effect from time to time. "Guarantee" shall mean any guarantee, endorsement, contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock of any Person, or any agreement to purchase, sell or lease (as lessee or lessor) property, products, materials, supplies or services primarily for the purpose of enabling any Person to make payment of its obligations or any agreement to assure a creditor against loss, and including without limitation, causing a bank to open a letter of credit for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall have a correlative meaning. "Indebtedness" shall mean, as to any Person: (a) indebtedness created, issued or incurred by such Person for borrowed money (whether by loan or the issuance and sale of debt securities); (b) obligations of such Person to pay the deferred purchase or acquisition price of property, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are paid within 90 days of the date the respective goods are delivered; (c) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for the account of such Person; (d) Capital Lease Obligations of such Person; and (e) Indebtedness of others Guaranteed by such Person. "Interest Period" shall mean: (a) with respect to any Eurodollar Loan, each period commencing on the date such Eurodollar Loan is made or Converted from a Loan of another Type or the last day of the next preceding Interest Period for such Loan and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the Company may select as provided in Section 4.05 hereof, except that each Interest Period which commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; 6 (b) with respect to any CD Loan, each period commencing on the date such CD Loan is made or Converted from a Loan of another Type or the last day of the next preceding Interest Period for such Loan and ending on the day 30, 60, 90 or 180 days thereafter, as the Company may select as provided in Section 4.05 hereof; (c) With respect to any Set Rate Loan, the period commencing on the date such Set Rate Loan is made and ending on any Business Day up to 180 days thereafter, as the Company may select as provided in Section 2.03(b) hereof; and (d) With respect to any LIBOR Market Loan, the period commencing on the date such LIBOR Market Loan is made and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the Company may select as provided in Section 2.03(b) hereof, except that each Interest Period which commences on the last Business Day of a calendar month (or any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) no Interest Period with respect to Loans to be made by any Lender may end after such Lender's Commitment Termination Date (as in effect on the first day of such Interest Period); (ii) each Interest Period which would otherwise end on a day which is not A Business Day shall end on the next succeeding Business Day (or, in the case of an Interest Period for Eurodollar Loans or LIBOR Market Loans, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) notwithstanding clause (i) above, no Interest Period for any Fixed Rate Loans or LIBOR Market Loans shall have a duration of less than one month (in the case of Eurodollar Loans and LIBOR Market Loans) or 30 days (in the case of CD Loans) and, if the Interest Period for any Fixed Rate Loans or LIBOR Market Loans would otherwise be a shorter period, such Loans shall not be available hereunder. "LIBO Rate" shall mean, for any LIBOR Market Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Agent to be equal to the rate of interest specified in clause (a) of the definition of "Fixed Base Rate" in this Section 1.01 for the Interest Period for such Loan divided by 1 minus the Reserve Requirement for such Loan for such Interest Period. "LIBOR Auction" shall mean a solicitation of Money Market Quotes setting forth Money Market Margins based on the LIBO Rate pursuant to Section 2.03 hereof. "LIBOR Market Loans" shall mean Money Market Loans the interest rates on which are determined on the basis of LIBO Rates pursuant to a LIBOR Auction. 7 "Lien" shall mean, with respect to any asset, any mortgage, lien, pledge, hypothecation, charge, security interest or encumbrance of any kind in respect of such asset. For purposes of this Agreement, the Parent or any of its Subsidiaries shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loans" shall mean Money Market Loans and Syndicated Loans. "Majority Lenders" shall mean Lenders having at least 66-2/3% of the aggregate amount of the Commitments; provided that, if all of the Commitments shall have terminated, Majority Lenders shall mean Lenders holding at least 66-2/3% of the aggregate unpaid principal amount of the Loans. "Margin Stock" shall mean margin stock within the meaning of Regulations U and X. "Money Market Borrowing" shall have the meaning assigned to such term in Section 2.03(b) hereof. "Money Market Loans" shall mean the loans provided for by Section 2.03 hereof. "Money Market Margin" shall have the meaning assigned to such term in Section 2.03(c)(ii)(C) hereof. "Money Market Quote" shall mean an offer in accordance with Section 2.03(c) hereof by a Lender to make a Money Market Loan with one single specified interest rate. "Money Market Quote Request" shall have the meaning assigned to such term in Section 2.03(b) hereof. "Money Market Rate" shall have the meaning assigned to such term in Section 2.03(c)(ii)(D) hereof. "Moody's" shall mean Moody's Investors Services, Inc. "Multiemployer Plan" shall mean a Multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company, the Parent or any ERISA Affiliate and which is covered by Title IV of ERISA. "1935 Act" shall have the meaning given to that term in Section 7.11 hereof. "1934 Act Reports" shall mean all periodic reports filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. 8 "Notes" shall mean the promissory notes provided for by Section 2.08 hereof. "Other FPC Agreement" shall mean the Third Amended and Restated Credit Agreement A dated as of November 17, 1998 between the Company, the Lenders and Chase, as agent for the Lenders thereunder, as the same may be amended and supplemented and in effect from time to time. "Parent" shall mean Florida Progress Corporation, a Florida corporation. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PCH Agreements" shall mean, collectively, (a) the Third Amended and Restated Credit Agreement A dated as of November 17, 1998 between Progress Capital Holdings, Inc., the Lenders and Chase, as agent for the Lenders thereunder and (b) the Third Amended and Restated Credit Agreement B dated as of November 17, 1998 between Progress Capital Holdings, Inc., the Lenders and Chase, as agent for the Lenders thereunder, as each of said agreements may be amended and supplemented and in effect from time to time. "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "Plan" shall mean an employee benefit or other plan established or maintained by the Company, the Parent or any ERISA Affiliate and which is covered by Title IV of ERISA, other than (a) a Multiemployer Plan and (b) any such plan established or maintained by the Company or any ERISA Affiliate that has assets and actuarial liabilities of less than $50,000,000 (a "Small Plan") unless the aggregate assets or aggregate actuarial liabilities of all Small Plans is in excess of $50,000,000. "Post-Default Rate" shall mean, in respect of any principal of any Loan or any other amount payable by the Company under this Agreement or any Note that is not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 1% above the Base Rate as in effect from time to time (provided that, if the amount so in default is principal of a Fixed Rate Loan or a Money Market Loan and the due date thereof is a day other than the last day of an Interest Period therefor, the "Post-Default Rate" for such principal shall be, for the period from and including such due date to but excluding the last day of such Interest Period, 1% above the interest rate for such Loan as provided in Section 3.02 hereof and, thereafter,'the rate provided for above in this definition). 9 "Prime Rate" shall mean the rate of interest from time to time announced by Chase at the Principal Office as its prime commercial lending rate. "Principal Office" shall mean the principal office of the Agent and Chase, presently located at 270 Park Avenue, New York, New York 10017. "Quarterly Dates" shall mean the first day of January, April, July and October in each year, the first of which shall be the first such day after the date of this Agreement; provided that if any such day is not a Business Day, then such Quarterly Date shall be the next succeeding Business Day. "Reference Lenders" shall mean Chase and Morgan Guaranty Trust Company of New York (or their Applicable Lending offices, as the case may be). "Regulation D", "Regulation U " and "Regulation X" shall mean, respectively, Regulation D, Regulation U and Regulation X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be amended or supplemented from time to time. "Regulatory Change" shall mean, with respect to any Lender, any change after the date of this Agreement in United States Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Lender of or under any United States Federal, state or foreign law or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reserve Requirement" shall mean, for any Interest Period for any Fixed Rate Loan or LIBOR Market Loan, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding one billion Dollars against (a) in the case of Eurodollar Loans or LIBOR Market Loans, "Eurocurrency liabilities" (as such term is used in Regulation D) or (b) in the case of CD Loans, non-personal Dollar time deposits in an amount of $100,000 or more. Without limiting the effect of the foregoing, the Reserve Requirement shall include any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the Fixed Base Rate for Eurodollar Loans, LIBOR Market Loans or CD Loans (as the case may be) is to be determined as provided in the definition of "Fixed Base Rate" in this Section 1.01 or (ii) any category of extensions of credit or other assets which includes Eurodollar Loans, CD Loans or LIBOR Market Loans. "S&P" shall mean Standard & Poor's Corporation. "Set Rate Auction" shall mean a solicitation of Money Market Quotes setting forth Money Market Rates pursuant to Section 2.03 hereof. 10 "Set Rate Loans" shall mean Money Market Loans the interest rates on which are determined on the basis of Money Market Rates pursuant to a Set Rate Auction. "Subsidiary" shall mean, as to any Person, any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Wholly-owned Subsidiary" shall mean any such corporation of which all of such shares, other than directors' qualifying shares, are so owned or controlled. "Syndicated Loans" shall mean the loans provided for by Section 2.01 hereof. "Syndicated Notes" shall mean the promissory notes provided for by Section 2.08(a) hereof. "Total Capitalization" shall mean, with respect to any Person, the sum of the value of the common stock, retained earnings, and preferred and preference stock of such Person (in each case, determined in accordance with GAAP) plus all Indebtedness of such Person. "Type" shall have the meaning given to that term in Section 1.03 hereof. 1.02 Accounting Terms and Determinations. (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall (unless otherwise disclosed to the Lenders in writing) be prepared, in accordance with generally accepted accounting principles applied on a basis consistent with that used in the preparation of the latest financial statements furnished to the Lenders hereunder after the date hereof. (b) The Company will not change the last day of its fiscal year from December 31 of each year, or the last days of the first three fiscal quarters in each of its fiscal years from March 31, June 30 and September 30 of each year, respectively. 1.03 Classes and Types of Loans. Loans hereunder are distinguished by "Class" and by "Type". The "Class" of a Loan (or of a Commitment to make a Loan) refers to whether such Loan is a Money Market Loan or a Syndicated Loan, each of which constitutes a Class. The "Type" of a Loan refers to whether such Loan is a Base Rate Loan, a CD Loan, a Eurodollar Loan, a Set Rate Loan, or a LIBOR Market Loan, each of which constitutes a Type. Loans may be identified by both Class and Type. 11 Section 2. Commitments. 2.01 Syndicated Loans. Each Lender severally agrees, on the terms of this Agreement, to make loans to the Company in Dollars during the period from and including the first Business Day of 1992 to but not including such Lender's Commitment Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount of such Lender's Commitment as then in effect. Subject to the terms of this Agreement, during such period the Company may borrow, repay and reborrow the amount of the Commitments by means of Base Rate Loans, CD Loans and Eurodollar Loans and may Convert Syndicated Loans of one Type into Syndicated Loans of another Type (as provided in Section 2.09 hereof) or Continue Syndicated Loans of one Type as Syndicated Loans of the same Type; provided that there may be no more than 15 different Interest Periods for Syndicated Loans outstanding at the same time. 2.02 Borrowings of Syndicated Loans. The Company shall give the Agent (which shall promptly notify the Lenders) notice of each borrowing hereunder of Syndicated Loans as provided in Section 4.05 hereof. Not later than noon New York time on the date specified for each borrowing of Syndicated Loans hereunder, each Lender shall make available the amount of the Syndicated Loan to be made by it on such date to the Agent, at account number NYAO-DI-900-9-000002 maintained by the Agent with Chase at the Principal Office, in immediately available funds. The amount so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of, and designated by, the Company maintained at a bank in New York City. 2.03 Money Market Loans. (a) In addition to borrowings of Syndicated Loans, the Company may, on or after the first Business Day of 1992, as set forth in this Section 2.03, request the Lenders to make offers to make Money Market Loans to the Company in Dollars. The Lenders may, but shall have no obligation to, make such offers and the Company may, but shall have no obligation to, accept any such offers in the manner set forth in this Section 2.03. Money Market Loans may be LIBOR Market Loans or Set Rate Loans, provided that: (i) there may be no more than 15 different Interest Periods for both Syndicated Loans and Money Market Loans outstanding at the same time (for which purpose Interest Periods described in different lettered clauses of the definition of the term "Interest Period" shall be deemed to be different Interest Periods even if they are coterminous); (ii) the aggregate principal amount of all Money Market Loans, together with the aggregate principal amount of all Syndicated Loans, at any one time outstanding shall not exceed the aggregate amount of the Commitments at such time. 12 (b) When the Company wishes to request offers to make Money Market Loans, it shall give the Agent (which shall promptly notify the Lenders) notice (a "Money Market Quote Request") so as to be received no later than 11:00 a.m. New York time on (x) the fourth Business Day prior to the date of borrowing proposed therein" in the case of a LIBOR Auction or (y) the Business Day next preceding the date of borrowing proposed therein, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Agent, with the consent of the Majority Lenders (and with notice to each Lender prior to the Money Market Quote Request for which such change is to be effective), may agree). The Company may request offers to make Money Market Loans for up to five different Interest Periods in a single notice (for which purpose Interest Periods in different lettered clauses of the definition of the term "Interest Period" shall be deemed to be different Interest Periods even if they are coterminous); provided that the request for each separate Interest Period shall be deemed to be a separate Money Market Quote Request for a separate borrowing (a "Money Market Borrowing"). Each such notice shall be substantially in the form of Exhibit C hereto and shall specify as to each Money Market Borrowing: (i) the proposed date of such borrowing, which shall be a Business Day; (ii) the aggregate amount of such Money Market Borrowing, which shall be at least $10,000,000 (or in larger multiples of $1,000,000) but shall not cause the limits specified in Section 2.03(a) hereof to be violated; (iii) the duration of the Interest Period applicable thereto; (iv) whether the Money Market Quotes requested for a particular Interest Period are seeking quotes for LIBOR Market Loans or Set Rate Loans; and (v) if the Money Market Quotes requested are seeking quotes for Set Rate Loans, the date on which the Money Market Quotes are to be submitted if it is before the proposed date of borrowing (the date on which such Money Market Quotes are to be submitted is called the "Quotation Date"). Except as otherwise provided in this Section 2.03(b), no Money Market Quote Request shall be given within five Business Days (or such other number of days as the Company and the Agent, with the consent of the Majority Lenders (and with notice to each Lender prior to the effectiveness of such consent), may agree) of any other Money Market Quote Request. (c) (i) Each Lender may submit one or more Money Market Quotes, each containing an offer to make a Money Market Loan in response to any Money Market Quote Request; provided that, if the Company's request under Section 2.03(b) hereof specified more than one Interest Period, such Lender may make a single submission containing one or more Money Market Quotes for each such Interest Period. Each Money Market Quote must be submitted to the Agent not later than (x) 2:00 p.m. New York time on the fourth Business Day prior to the proposed 13 date of borrowing, in the case of a LIBOR Auction or (y) 10:00 a.m. New York time on the Quotation Date, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Agent, with the consent of the Majority Lenders (and with notice to each Lender prior to the Money Market Quote Request for which such change is to be effective), may agree); provided that any Money Market Quote submitted by Chase (or its Applicable Lending Office) may be submitted, and may only be submitted, if Chase (or such Applicable Lending Office) notifies the Company of the terms of the offer contained therein not later than (x) 1:00 p.m. New York time on the fourth Business Day prior to the proposed date of borrowing, in the case of a LIBOR Auction or (y) 9:45 a.m. New York time on the Quotation Date, in the case of a Set Rate Auction. Subject to Sections 5.02(b), 5.03, 6.02 and 9 hereof, any Money Market Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Company. (ii) Each Money Market Quote shall be substantially in the form of Exhibit D hereto and shall specify: (A) the proposed date of borrowing and the Interest Period therefor; (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount shall be at least $5,000,000 or a larger multiple of $1,000,000; provided that the aggregate principal amount of all Money Market Loans for which a Lender submits Money Market Quotes (x) may be greater or less than the aggregate Commitments of such Lender but (y) may not exceed the principal amount of the Money Market Borrowing for a particular Interest Period for which offers were requested; (C) in the case of a LIBOR Auction, the margin above or below the applicable LIBO Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (rounded upwards, if necessary, to the nearest 1/10,000th of 1%) to be added to or subtracted from the applicable LIBO Rate; (D) in the case of a Set Rate Auction, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/10,000th of 1%) offered for each such Money Market Loan (the "Money Market Rate"); (E) the identity of the quoting Lender; and (F) the maximum aggregate principal amount of all Money Market Loans for which such offer is being made. 14 Unless otherwise agreed by the Agent and the Company, no Money Market Quote shall contain qualifying, conditional or similar language or propose terms other than or in addition to those set forth in the applicable Money Market Quote Request and, in particular, no Money Market Quote may be conditioned upon acceptance by the Company of all (or some specified minimum) of the principal amount of the Money Market Loan for which such Money Market Quote is being made. (d) The Agent shall (x) in the case of a Set Rate Auction, as promptly as practicable after the Money Market Quote is submitted (but in any event not later than 10:15 a.m. New York time on the Quotation Date) or (y) in the case of a LIBOR Auction, by 4:00 p.m. New York time on the day a Money Market Quote is submitted, notify the Company of the terms (i) of any Money Market Quote submitted by a Lender that is in accordance with Section 2.03(c) hereof and (ii) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Lender with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Agent's notice to the Company shall specify (A) the aggregate principal amount of the Money Market Borrowing for which offers have been received and (B) the respective principal amounts and Money Market Margins or Money Market Rates, as the case may be, so offered by each Lender (identifying the Lender that made each Money Market Quote). (e) Not later than 11:00 a.m. New York time on (x) the third Business Day prior to the proposed date of borrowing, in the case of a LIBOR Auction or (y) the Quotation Date, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Agent, with the consent of the Majority Lenders (and with notice to each Lender prior to the Money Market Quote Request for which such change is to be effective), may agree), the Company shall notify the Agent of its acceptance or nonacceptance of the offers so notified to it pursuant to Section 2.03(d) hereof (and the failure of the Company to give such notice by such time shall constitute nonacceptance) and the Agent shall promptly notify each affected Lender. In the case of acceptance, such notice shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Company may accept any Money Market Quote in whole or in part (provided that any Money Market Quote accepted in part shall be at least $5,000,000 or in larger multiples of $1,000,000); provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request; (ii) the aggregate principal amount of each Money Market Borrowing shall be at least $10,000,000 (or in larger multiples of $1,000,000) but shall not cause the limits specified in Section 2.03(a) hereof to be violated; and (iii) the Company may not accept any offer where the Agent has advised the Company that such offer fails to comply with Section 2.03(c)(ii) hereof or otherwise fails to comply with the requirements of this Agreement (including, without limitation, Section 2.03(a) hereof). 15 (f) Any Lender whose offer to make any Money Market Loan has been accepted shall, not later than noon New York time on the date specified for the making of such Loan, make the amount of such Loan available to the Agent at account number NYAO-DI-900-9-000002 maintained by the Agent with Chase at the Principal Office in immediately available funds, for account of the Company. The amount so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company on such date by depositing the same, in immediately available funds, in an account of the Company maintained with a bank in New York City designated by the Company. (g) Except for the purpose and to the extent expressly stated in Section 2.04(b) hereof, the amount of any Money Market Loan made by any Lender shall not constitute a utilization of such Lender's Commitment. 2.04 Changes of Commitments. (a) The amount of each Lender's Commitment shall be automatically reduced to zero on such Lender's Commitment Termination Date. (b) The Company shall have the right at any time or from time to time (i) so long as no Syndicated Loans or Money Market Loans are outstanding, to terminate the Commitments and (ii) to reduce the aggregate unused amount of the Commitments (for which purpose use of the Commitments shall be deemed to include the aggregate principal amount of all Money Market Loans); provided that (x) the Company shall give notice of each such termination or reduction as provided in Section 4.05 hereof, and (y) each partial reduction shall be in aggregate amount at least equal to $10,000,000 and in multiples of $1,000,000 in excess thereof. (c) The Commitments once terminated or reduced may not be reinstated. 2.05 Facility Fee. The Company shall pay to the Agent for account of each Lender a facility fee on the amount of such Lender's Commitment, for the period from and including January 1, 1992 to but not including the earlier of the date such Commitment is terminated or such Lender's Commitment Termination Date, at a rate per annum equal to the Applicable Facility Fee Rate. Accrued facility fees payable to any Lender shall be payable on each Quarterly Date and on the earlier of the date the Commitments are terminated and such Lender's Commitment Termination Date. 2.06 Lending Offices. The Loans of each Type made by each Lender shall be made and maintained at such Lender's Applicable Lending Office for Loans of such Type. 16 2.07 Several Obligations; Remedies Independent. The failure of any Lender to make any Loan to be made by it on the date specified therefor shall not relieve any other Lender of its obligation to make its Loan on such date, but neither any Lender nor the Agent shall be responsible for the failure of any other Lender to make a Loan to be made by such other Lender. The amounts payable by the Company at any time hereunder and under the Notes to each Lender shall be a separate and independent debt and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and the Notes, and it shall not be necessary for any other Lender or the Agent to consent to, or be joined as an additional party in, any proceedings for such purposes. 2.08 Notes. (a) The Company's obligation to repay the Syndicated Loans made by each Lender, together with interest thereon, shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A-1 hereto, dated the date of delivery thereof, payable to such Lender in a principal amount equal to the aggregate amount of its Commitments as originally in effect and otherwise duly completed. The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Syndicated Loan made by each Lender to the Company, and each payment made on account of the principal thereof, shall be recorded by such Lender on its books. Any such recording of loans on a Lender's books shall be conclusive evidence of the amounts payable by the Company under such Note, absent manifest error. (b) The Company's obligation to repay the Money Market Loans made by any Lender, together with interest thereon, shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A-2 hereto, dated the date of delivery thereof, payable to such Lender and otherwise duly completed. The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Money Market Loan made by each Lender to the Company, and each payment made on account of the principal thereof, shall be recorded by such Lender on its books. Any such recording of loans on a Lender's books shall be conclusive evidence of the amounts payable by the Company under such Note, absent manifest error. 2.09 Prepayments and Conversions or Continuations of Loans. Subject to Section 4.04 hereof, the Company shall have the right to prepay Syndicated Loans, or to Convert Syndicated Loans of one Type into Syndicated Loans of another Type or Continue Syndicated Loans of one Type as Syndicated Loans of the same Type, at any time or from time to time, provided that: (i) the Company shall give the Agent notice of each such prepayment, Conversion or Continuation as provided in Section 4.05 hereof; and (ii) Fixed Rate Loans may be prepaid or Converted only on the last day of an Interest Period for such Loans. Section 3. Payments of Principal and Interest. 3.01 Repayment of Loans. (a) The Company hereby promises to pay to the Agent for account of each Lender the principal of each Syndicated Loan made by such Lender, and each Syndicated Loan made by such Lender shall mature, on such Lender's Commitment Termination Date. 17 (b) The Company hereby promises to pay to the Agent for account of each Lender that makes any Money Market Loan the principal amount of such Money Market Loan on the last day of the Interest Period for such Money Market Loan. 3.02 Interest. The Company hereby promises to pay to the Agent for account of each Lender interest on the unpaid principal amount of each Loan made by such Lender for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (a) during such periods as such Loan-is a Base Rate Loan, the Base Rate (as in effect from time to time) plus the Applicable Margin (if any); (b) during such periods as such Loan is a Fixed Rate Loan, for each Interest Period relating thereto, the Fixed Rate for such Loan for such Interest Period plus the Applicable Margin; (c) if such Loan is a LIBOR Market Loan, the LIBO Rate for such Loan for the Interest Period therefor plus (or minus) the Money Market Margin quoted by the Lender making such Loan in accordance with Section 2.03 hereof; and (d) if such Loan is a Set Rate Loan, the Set Rate for such Loan for the Interest Period therefor quoted by the Lender making such Loan in accordance with Section 2.03 hereof. Notwithstanding the foregoing, the Company hereby promises to pay to the Agent for account of each Lender interest at the applicable Post-Default Rate on any principal of any Loan made by such Lender, and on any other amount payable by the Company hereunder or under the Notes held by such Lender to or for account of such Lender, which shall not be paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable (i) in the case of a Base Rate Loan, quarterly on the Quarterly Dates, (ii) in the case of a Fixed Rate Loan or a Money Market Loan, on the last day of each Interest Period therefor and, if such Interest Period is longer than 90 days (in the case of a CD Loan or a Set Rate Loan) or three months (in the case of a Eurodollar Loan or a LIBOR Market Loan), at 90-day or three-month intervals, respectively, following the first day of such Interest Period, and (iii) in the case of any Loan, upon the payment or prepayment thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid or Converted), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Agent shall give notice thereof to the Lenders to which such interest is payable and to the Company. 18 Section 4. Payments; Pro Rata Treatment; Computations; Etc. 4.01 Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Company under this Agreement and the Notes shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Agent at account number NYAO-DI-900-9-000002 maintained by the Agent with Chase at the Principal Office, not later than 2:00 p.m. New York time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) Any Lender for whose account any such payment is to be made, may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Company (for purposes of this Section 4.01(b), "ordinary deposit account of the Company" shall not include any account in the name of a Person other than the Company) with such Lender (with notice to the Company). (c) The Company shall, at the time of making each payment under this Agreement or any Note, specify to the Agent (which shall promptly notify the intended recipients) thereof) the Loans or other amounts payable by the Company hereunder to which such payment is to be applied (and in the event that it fails to so specify, or if an Event of Default has occurred and is continuing, such Lender may apply the amount of such payment received by it from the Agent in such manner as such Lender may determine to be appropriate). (d) Each payment received by the Agent under this Agreement or any Note for account of a Lender shall be paid promptly to such Lender, in immediately available funds, for account of such Lender's Applicable Lending office for the Loan in respect of which such payment is made. (e) If the due date of any payment under this Agreement or any Note would otherwise fall on a day which is not a Business Day such date shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. 4.02 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each borrowing from the Lenders under Section 2.01 hereof shall be made from the Lenders, each payment of facility fee under Section 2.05 hereof shall be made for account of the Lenders, and each termination or reduction of the amount of the Commitments under Section 2.04 hereof shall be applied to the Commitments of the Lenders, pro rata according to the amounts of their respective Commitments; (b) the making, Conversion and Continuation of Syndicated Loans of a particular Type (other than Conversion provided for by Section 5.04 hereof) shall be made pro rata among the Lenders according to the amounts of their respective Commitments (in the case of making of Loans) or Syndicated Loans (in the case of Conversion and Continuation of Loans) and the 19 then current Interest Period for such Syndicated Loan of such Type shall be coterminous; (c) each payment of principal of Syndicated Loans by the Company shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Syndicated Loans held by the Lenders; and (d) each payment or prepayment of interest on Syndicated Loans by the Company shall be made for account of the Lenders pro rata in accordance with the amounts of interest on Syndicated Loans due and payable to the respective Lenders. 4.03 Computations. Interest on Loans shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable and facility fee shall be computed on the basis of a year of 365 or 366 days (as the case may be) and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. 4.04 Minimum Amounts. Except for Conversions or prepayments made pursuant to Section 5.04 hereof, each borrowing, Conversion and prepayment of principal of Loans shall be in an amount at least equal to $10,000,000 and in multiples of $1,000,000 in excess thereof (borrowings, Conversions or prepayments of or into Loans of different Types or, in the case of Fixed Rate Loans, having different Interest Periods at the same time hereunder to be deemed separate borrowings, Conversions and prepayments for purposes of the foregoing, one for each Type or Interest Period). Anything in this Agreement to the contrary notwithstanding, the aggregate principal amount of Fixed Rate Loans of each Type having the same Interest Period shall be in an amount at least equal to $10,000,000 and in multiples of $1,000,000 in excess thereof and, if any Fixed Rate Loans would otherwise be in a lesser principal amount for any period, such Loans shall be Base Rate Loans during such period. 4.05 Certain Notices. Except as otherwise provided in Section 2.03 hereof with respect to Money Market Loans, notices by the Company to the Agent of terminations or reductions of the Commitments, of borrowings, Conversions, Continuations and optional prepayments of Loans and of Types of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Agent not later than 10:00 a.m. New York time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing, Conversion, Continuation or prepayment or the first day of such Interest Period specified below: 20 Number of Business Notice Days Prior Termination or reduction of the Commitments five Borrowing or prepayment of, or Conversions into, Base Rate Loans same day Borrowing or prepayment of, Conversions into, Continuations as, or duration of Interest Period for, Eurodollar Loans three Borrowing or prepayment of, Conversions into, Continuations as, or duration of Interest Period for, CD Loans two Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing, Conversion, Continuation or optional prepayment shall specify the amount (subject to Section 4.04 hereof) and Type of each Loan to be borrowed, Converted, Continued or prepaid (and, in the case of a Conversion, the Type of Loan to result from such Conversion) and the date of borrowing, Conversion, Continuation or optional prepayment (which shall be a Business Day). Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Agent-shall promptly notify the Lenders of the contents of each such notice. In the event that the Company fails to select the Type of Loan, or the duration of any Interest Period, for any Fixed Rate Loan within the time period and otherwise as provided in this Section 4.05, such Loan (if outstanding as a Fixed Rate Loan) will be automatically Converted into a Base Rate Loan on the last day of the then current Interest Period for such Loan or (if outstanding as a Base Rate Loan) will remain as, or (if not then outstanding) will be made as, a Base Rate Loan. 4.06 Non-Receipt of Funds by the Agent. Unless the Agent shall have been notified by a Lender or the Company (the "Payor") prior to the date on which the Payor is to make payment to the Agent of (in the case of a Lender) the proceeds of a Loan to be made by it hereunder or (in the case of the Company) a payment to the Agent for account of one or more of the Lenders hereunder (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been 21 made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient(s) of such payment shall, on demand, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such day and, if such recipient(s) shall fail promptly to make such payment, the Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid. 4.07 Sharing of Payments, Etc. (a) The Company agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Lender may otherwise have, each Lender shall be entitled, at its option, to offset balances held by it for account of the Company (for purposes of this Section 4.07(a), "balances held for account of the Company" shall not include any balances held in an account in the name of a Person other than the Company) at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Lender's Loans, or any other amount payable to such Lender hereunder, which is not paid when due (regardless of whether such balances are then due to the Company), in which case it shall promptly notify the Company and the Agent thereof, provided that such Lender's failure to give such notice shall not affect the validity of such offset. (b) If any Lender shall obtain payment of any principal of or interest on any Loan made by it to the Company under this Agreement through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise, and, as a result of such payment, such Lender shall have received a greater percentage of the principal or interest then due hereunder by the Company to such Lender than the percentage received by any other Lenders, it shall promptly purchase from such other Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Loans owing to such other Lenders (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such excess payment (net of any expenses which may be incurred by such Lender in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans owing to each of the Lenders. To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Company agrees that any Lender so purchasing a participation (or direct interest) in the Loans made by other Lenders (or in interest due thereon, as the case may be) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans in the amount of such participation. 22 (d) Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. (e) If, under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim. Section 5. Yield Protection and Illegality. 5.01 Additional Costs. (a) The Company shall pay directly to each Lender from time to time such amounts as such Lender may determine to be necessary to compensate it for any costs which such Lender determines are attributable to its making or maintaining of any Fixed Rate Loans or its obligation to make any Fixed Rate Loans hereunder, or any reduction in any amount receivable by such Lender hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change which: (i) subjects any Lender to taxation on, or changes the basis of taxation of, any amounts payable to such Lender under this Agreement or its Notes in respect of any of such Loans (other than taxes imposed on or measured by the overall net income of such Lender or of its Applicable Lending Office for any of such Loans by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); or (ii) imposes or modifies any reserve, special deposit or similar requirements (other than the Reserve Requirement utilized in the determination of the Fixed Rate or LIBO Rate, as the case may be, for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender (including any of such Loans or any deposits referred to in the definition of "Fixed Base Rate" in Section 1.01 hereof), or any commitment of such Lender (including the Commitments of such Lender hereunder); or (iii) imposes any other condition affecting this Agreement or its Notes (or any of such extensions of credit or liabilities) or its Commitments. If any Lender requests compensation from the Company under this Section 5.01(a), the Company may, by notice to such Lender (with a copy to the Agent), suspend the obligation of such Lender to make or Continue Loans of the Type with respect to which such compensation is requested-until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.04 hereof shall be applicable). 23 (b) Without limiting the effect of the provisions of paragraph (a) of this Section 5.01, in the event that, by reason of any Regulatory Change, any Lender either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Lender which includes deposits by reference to which the interest rate on Eurodollar Loans or CD Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Lender which includes Eurodollar Loans or CD Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Lender so elects by notice to the Company (with a copy ..to the Agent), the obligation of such Lender to make or Continue Loans of such Type hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 5.04 hereof shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), the Company shall pay directly to each Lender from time to time on request such amounts as such Lender may determine to be necessary to compensate such Lender (or, without duplication, the bank holding company of which such Lender is a subsidiary) for any costs which it determines are attributable to the maintenance by such Lender (or any Applicable Lending Office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law) of any court or governmental or monetary authority (i) following any Regulatory Change, or (ii) implementing any risk-based capital guideline or requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) heretofore or hereafter issued by any government or governmental or supervisory authority implementing at the national level the Basle Accord (including, without limitation, the Final Risk-Based Capital Guidelines of the Board of Governors of the Federal Reserve System (12 CFR Part 208 ' Appendix A; 12 CFR Part 225, Appendix A) and the Final Risk-Based Capital Guidelines of the Office of the Comptroller of the Currency (12 CFR Part 3, Appendix A)), of capital in respect of its Commitment or Loans (such Compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Lender (or any Applicable Lending Office or such bank holding company) to a level below that which such Lender (or any Applicable Lending office or such bank holding company) could have achieved with respect to such Lender's Commitment or Loans hereunder but for such law, regulation, interpretation, directive or request). For purposes of this Section 5.01(c), "Basle Accord" shall mean the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time or any replacement thereof. 24 (d) Each Lender will notify the Company of any event occurring after the date of this Agreement that will entitle such Lender to compensation under paragraph (a) or (c) of this Section 5.01 as promptly as practicable, but in any event within 45 days, after such Lender obtains actual knowledge thereof; provided, however, that if any Lender fails to give such notice within 45 days after it obtains actual knowledge of such an event, such Lender shall, with respect to compensation payable pursuant to this Section 5.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.01 for costs incurred from and after the date 45 days prior to the date that such Lender does give such notice; and provided, further, that each Lender will designate a different Applicable Lending Office for the Loans of such Lender affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Lender, be disadvantageous to such Lender, except that such Lender shall have no obligation to designate an Applicable Lending Office located in the United States of America. Each Lender will furnish to the Company a certificate setting forth the basis and amount of each request by such Lender for compensation under paragraph (a) or (c) of this Section 5.01. Determinations and allocations by any Lender for purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to paragraph (a) or (b) of this Section 5.01, or of the effect of capital maintained pursuant to paragraph (c) of this Section 5.01, on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Lender under this Section 5.01, shall be conclusive, provided that such determinations and allocations are made on a reasonable basis and in a manner consistent with the determinations and allocations made by such Lender with respect to its other commitments and extensions of credit similarly affected. 5.02 Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Fixed Base Rate for any Interest Period: (a) the Agent determines, which determination shall be conclusive provided that it is made on a reasonable basis, that quotations of interest rates for the relevant deposits referred to in the definition of "Fixed Base Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for any Type of Fixed Rate Loans as provided herein; or (b) Lenders having more than 50% of the aggregate amount of the Commitments determine (or any Lender that has outstanding a Money Market Quote with respect to a LIBOR Market Loan determines), which determination shall be conclusive provided that it is made on a reasonable basis, and notify (or notifies, as the case may be) the Agent that the relevant rates of interest referred to in the definition of "Fixed Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Eurodollar Loans or CD Loans (or LIBOR Market Loans, as the case may be) for such Interest Period is to be determined are not likely adequately to cover the cost to such Lenders (or to such quoting Lender) of making or maintaining such Type of Loans for such Interest Period; 25 then the Agent shall give the Company and each Lender prompt notice thereof, and so long as such condition remains in effect, the Lenders (or such quoting Lender) shall be under no obligation to make additional Loans of such Type, to Continue Loans of such Type or to Convert Loans of any other Type into Loans of such Type and the Company shall, on the last day(s) of the then current Interest Period for the outstanding Loans of such Type, either prepay such Loans or Convert such Loans into another Type of Loan in accordance with Section 2.09 hereof. 5.03 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to honor its obligation to make or maintain Eurodollar Loans or LIBOR Market Loans hereunder, then such Lender shall promptly notify the Company thereof (with a copy to the Agent) and such Lender's obligation to make Eurodollar Loans shall be suspended until such time as such Lender may again make and maintain Eurodollar Loans (in which case the provisions of Section 5.04 hereof shall be applicable), and such Lender shall no longer be obligated to make any LIBOR Market Loan that it has offered to make. 5.04 Treatment of Affected Loans. If the obligation of any Lender to make a particular Type of Fixed Rate Loans shall be suspended pursuant to Section 5.01 or 5.03 hereof (Loans of such Type being herein called "Affected Loans" and such Type being herein called the "Affected Type"), such Lender's Affected Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for Affected Loans (or, in the case of a Conversion required by Section 5.01(b) or 5.03 hereof, on such earlier date as such Lender may specify to the Company with a copy to the Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 5.01 or 5.03 hereof which gave rise to such Conversion no longer exist: (a) to the extent that such Lender's Affected Loans have been so Converted, all payments and prepayments of principal which would otherwise be applied to such Lender's Affected Loans shall be applied instead to its Base Rate Loans; (b) all Loans which would otherwise be made or Continued by such Lender as Loans of the Affected Type shall be made or Continued instead as Base Rate Loans and all Loans of such Lender which would otherwise be Converted into Loans of the Affected Type shall be Converted instead (or shall remain as) Base Rate Loans; and (c) if Loans of other Lenders of the-Affected Type are subsequently Converted into Loans of another Type (other than Base Rate Loans), such Lender's Base Rate Loans shall be automatically Converted an the Conversion date for such Loans of the other Lenders into Loans of such other Type to the extent necessary so that, after giving effect thereto, all Loans held by such Lender and the Lenders whose Loans are so Converted are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. 26 5.05 Compensation. The Company shall pay to the Agent for account of each Lender, upon the request of such Lender through the Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost or expense which such Lender determines is attributable to: (a) any payment or conversion of a Fixed Rate Loan or a Set Rate Loan made by such Lender for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 9 hereof or the conversion of Loans pursuant to Section 5.04 hereof) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Company for any reason (including, without limitation, the failure of any of the conditions precedent specified in Section 6 hereof to be satisfied) to borrow a Fixed Rate Loan or a Set Rate Loan (with respect to which, in the case of a Money Market Loan, the Company has accepted a Money Market Quote) from such Lender on the date for such borrowing specified in the relevant notice of borrowing given pursuant to Section 2.02 or 2.03(b) hereof. Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest which otherwise would have accrued on the principal amount so paid or converted or not borrowed for the period from the date of such payment, conversion or failure to borrow to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan which would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the interest component of the amount such Lender would have bid in the London interbank market (if such Loan is a Eurodollar Loan or a LIBOR Market Loan) or the United States secondary certificate of deposit market (if such Loan is a CD Loan or a Set Rate Loan) for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Lender). Section 6. Conditions Precedent. 6.01 Initial Loan. The obligation of any Lender to make its initial Loan hereunder is subject to the receipt by the Agent of the following documents, each of which shall be satisfactory to the Agent in form and substance: (a) Corporate Action. Certified copies of the articles of incorporation and by-laws of the Company and all corporate action taken by the Company approving this Agreement and the Notes and borrowings by the Company hereunder (including, without limitation, a certificate setting forth the resolutions of the Board of Directors of the Company adopted in respect of the transactions contemplated hereby). 27 (b) Incumbency. A certificate of the Company in respect of each of the officers (i) who is authorized to sign on its behalf this Agreement or the Notes and (ii) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with this Agreement and the transactions contemplated hereby (and the Agent and each Lender may conclusively rely on such certificate until it receives notice in writing from the Company to the contrary). (c) Officer's Certificate. A certificate of a vice president or treasurer or assistant treasurer of the Company to the effect set forth in the first sentence of Section 6.02 hereof. (d) Notes. The Notes, duly completed and executed and delivered. (e) Opinion of Counsel to the Company. An opinion of Kenneth E. Armstrong, Esq., Vice President and General Counsel of the Company, substantially in the form of Exhibit B hereto. (f) PSC Approval. A copy of the order of the Florida Public Service Commission authorizing the execution and delivery by the Company of the Notes and its borrowings hereunder. (g) Other Documents. Such other documents as the Agent or any Lender may reasonably request. 6.02 Initial and Subsequent Loans. The obligation of any Lender to make any Loan (including any Money Market Loan and such Lender's initial Syndicated Loan) to the Company upon the occasion of each borrowing hereunder is subject to the further conditions precedent that, both immediately prior to such Loan and also after giving effect thereto: (i) no Default shall have occurred and be continuing; and (ii) the representations and warranties made by the Company in Section 7 hereof shall be true and complete on and as of the date of the making of such Loan with the same force and effect as if made on and as of such date. Each notice of borrowing by the Company hereunder shall constitute a certification by the Company to the effect set forth in the preceding sentence (both as of the date of such notice and, unless the Company otherwise notifies the Agent prior to the date of such borrowing, as of the date of such borrowing). 28 Section 7. Representations and Warranties. The Company represents and warrants to the Lenders that: 7.01 Corporate Existence. The Company: (a) is a corporation duly organized and validly existing under the laws of the State of Florida; (b) has all requisite corporate power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a material adverse effect on the consolidated financial condition, operations or business taken as a whole of the Company and its Consolidated Subsidiaries. 7.02 Financial Condition. The audited consolidated balance sheet of the Company and its Consolidated Subsidiaries as at December 31, 1997 and the related consolidated statements of income, shareholders' equity and cash flow of the Company and its Consolidated Subsidiaries for the fiscal year ended on said date, with the opinion thereon of KPMG Peat Marwick LLP, and the unaudited consolidated balance sheet of the Company and its Consolidated Subsidiaries as at September 30, 1998 and the related consolidated statements of income and cash flow of the Company and its Consolidated Subsidiaries for the nine-month period ended on such date, heretofore furnished to each of the Lenders, are complete and correct and fairly present the consolidated financial condition of the Company and its Consolidated Subsidiaries as at said dates and the consolidated results of their operations for the fiscal year and nine-month period ended on said dates (subject, in the case of such financial statements as at September 30, 1998, to normal year-end audit adjustments), all in accordance with generally accepted accounting principles and practices applied on a consistent basis (provided that such financial statements may contain condensed footnotes prepared in accordance with Rule 10-01(a)(5) of Securities and Exchange Commission Regulation S-X). Neither the Company nor any of its Subsidiaries had on said dates any contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, in each case material to the Company and its Consolidated Subsidiaries taken as a whole, except as referred to or reflected or provided for in said balance sheets as at said dates. Since September 30, 1998, there has been no material adverse change in the consolidated financial condition, operations or business taken as a whole of the Company and its Consolidated Subsidiaries from that set forth in said financial statements as at said date. 7.03 Litigation. Except for the matters disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 1998, there are no legal or arbitral proceedings or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of the Company) threatened against the Company or any of the Company's Subsidiaries which, if adversely determined, could have a material adverse effect on the consolidated financial condition, operations or business taken as a whole of the Company and its Consolidated Subsidiaries. 29 7.04 No Breach. None of the execution and delivery of this Agreement and the Notes, the consummation of the transactions herein contemplated and compliance with the terms and provisions hereof and thereof will conflict with or result in a breach of, or require any consent under, the articles of incorporation or by-laws of the Company, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Company or any of the Company's Subsidiaries is a party or by which any of them is bound or to which any of them is subject, or constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien upon any of the revenues or assets of the Company or any of the Company's Subsidiaries pursuant to the terms of any such agreement or instrument. 7.05 Corporate Action. The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under this Agreement and the Notes; the execution, delivery and performance by the Company of this Agreement and the Notes have been duly authorized by all necessary corporate action on the part of the Company; and this Agreement has been duly and validly executed and delivered by the Company and each such document constitutes, and each of the Notes when executed by the Company and delivered for value will constitute, the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except to the extent that enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. 7.06 Approvals. Other than the approval of the Florida Public Service Commission, no authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by the Company of this Agreement or the Notes, or for the validity or enforceability of any thereof. 7.07 Use of Loans. The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock and no part of the proceeds of any Loan hereunder will be used to buy or carry any Margin Stock. 7.08 ERISA. The Company and the ERISA Affiliates have fulfilled their respective obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or any Plan or Multiemployer Plan (other than to make contributions in the ordinary course of business). 30 7.09 Taxes. United States Federal income tax returns of the Parent and its Subsidiaries have been examined and closed through the fiscal year of the Parent ended December 31, 1985. The Parent and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Parent or any of its Subsidiaries. The charges, accruals and reserves on the books of the Parent and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Company, adequate. If the Parent is a member of an affiliated group of corporations filing consolidated returns for United States Federal income tax purposes, it is the "common parent" of such group. 7.10 Investment Company Act. The Company is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 7.11 Public Utility Holding Company Act. The Company is a "public utility company" within the meaning of Section 2(a)(5) of the Public Utility Holding Company Act of 1935 (the "1935 Act"). The Company is not a "holding company" within the meaning of Section 2(a)(7) of the 1935 Act. The Company is an "affiliate" within the meaning of Section 2(a)(11) of the 1935 Act of the Parent and is a "subsidiary company" of the Parent within the meaning of Section 2(a)(8) of the 1935 Act. The Parent is a "holding company" within the meaning of Section 2(a)(7) of the 1935 Act, but is entitled to and currently claims the benefits of an exemption from the requirements of the 1935 Act (other than Section 9(a)(2) thereof) pursuant to Rule 2 under Section 3(a)(1) of the 1935 Act. The Parent has filed with the Securities and Exchange Commission all documents that are necessary to maintain such exemption in full force and effect and such exemption is in full force and effect. Such exemption also provides the Company with an exemption from all requirements of the 1935 Act relating to the Company's status as a "subsidiary company" of the Parent. Neither the Company nor the Parent has received any notification from the Securities and Exchange Commission under Rule 6 under the 1935 Act with respect to its status under the 1935 Act. Except for proceedings that may arise should the Securities and Exchange Commission adopt proposed Rule 17 under the 1935 Act, neither the Company nor the Parent has any knowledge of any fact or other circumstance that would provide the Securities and Exchange Commission with a basis for seeking to regulate the Company as a holding company under the 1935 Act or for seeking to revoke the exemption under the 1935 Act presently claimed by the Parent. No Loan will be made in violation of the provisions of the 1935 Act or any rule or regulation thereunder, for purposes of Section 26(c) thereof. Section 8. Covenants of the Company. The Company agrees that, so long as any of the Commitments are in effect and until payment in full of all Loans hereunder, all interest thereon and all other amounts payable by the Company hereunder: 8.01 Financial Statements. The Company shall deliver to each of the Lenders: (a) as soon as available and in any event within 60 days after the end of each quarterly fiscal period of each fiscal year of the Company, consolidated statements of income and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated balance sheet as at the end of such period, setting forth in each case in comparative form the corresponding consolidated figures for the corresponding period in the preceding fiscal year, accompanied by a certificate of the Treasurer, an Assistant Treasurer, the Chief Financial officer or the Controller of the Company, which certificate shall state that said financial statements fairly present the consolidated financial condition and results of operations of the Company and its 31 Consolidated Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments and provided that such financial statements may contain condensed footnotes prepared in accordance with Rule 10-01(a)(5) of Securities and Exchange Commission Regulation S-X); (b) as soon as available and in any event within 120 days after the end of each fiscal year of the Company, consolidated statements of income, shareholders' equity and cash flow of the Company and its Consolidated Subsidiaries for such year and the related consolidated balance sheet as at the end of such year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied, in the case of said consolidated statements and balance sheet, by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries as at the end of, and for, such fiscal year; (c) promptly upon their becoming available, copies of all registration statements and regular periodic reports, if any, which the Company shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange; (d) promptly upon the mailing thereof to the shareholders of the Parent generally, copies of all financial statements, reports and proxy statements so mailed; (e) if any of the events or conditions specified below with respect to any Plan or Multiemployer Plan shall have occurred or exist, promptly upon filing any required notice thereof with PBGC, a copy of such notice or other report to PBGC and a statement signed by a senior financial officer of the Company setting forth details respecting such event or condition and the action, if any, which the Company or an ERISA Affiliate proposes to take with respect thereto: (i) any reportable event, as defined in Section 4043(b) of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); (ii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; 32 (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal by the Company, the Parent or any ERISA Affiliate under Section 4201 or 4204 of ERISA from a Multiemployer Plan, or the receipt by the Company or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; and (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Company or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; (f) promptly after the Company knows or has reason to know that any Default has occurred, a notice of such Default describing the same in reasonable detail, specifying that such notice is a "Notice of Default" and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken and proposes to take with respect thereto; and (g) from time to time such other information regarding the business, affairs or financial condition of the Company or any of the Company's Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as any Lender or the Agent may reasonably request. The Company will furnish to each Lender, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate of the Treasurer, an Assistant Treasurer, the Chief Financial Officer or the Controller of the Company to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken and proposes to take with respect thereto). 8.02 Litigation. The Company will promptly give to each Lender notice (which notice may be given by the Company through the Parent and may be in the form of the Company's or the Parent's 1934 Act Reports) of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting the Company or any of the Company's Subsidiaries, except proceedings which, if adversely determined, would not have a material adverse effect on the consolidated financial condition, operations or business taken as a whole of the Company and its Consolidated Subsidiaries. 33 8.03 Corporate Existence, Etc. The Company will: preserve and maintain its corporate existence and all of its material rights, privileges and franchises; comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements would materially and adversely affect the consolidated financial condition, operations or business taken as a whole of the Company and its Consolidated Subsidiaries, except for any such laws, rules, regulations or orders that the Company is contesting in good faith and by proper proceedings; pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; maintain all of its properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; and permit representatives of any Lender or the Agent, during normal business hours, to examine, copy and make extracts from its books and records, to inspect its properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Lender or the Agent (as the case may be). 8.04 Prohibition of Fundamental Changes. The Company will not enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), except that the Company may merge into the Parent so long as the Parent is the surviving corporation and assumes all of the Company's obligations under this Agreement and the Notes and so long as both prior to such merger and after giving effect thereto no Default shall have occurred and be continuing. The Company will not convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business or assets, whether now owned or hereafter acquired. 8.05 Use of Proceeds. The Company will use the proceeds of the Loans hereunder for its general corporate purposes (in compliance with all applicable legal and regulatory requirements); provided that neither the Agent nor any Lender shall have any responsibility as to the use of any of such proceeds. 8.06 Indebtedness to Capitalization Ratio. The Company will not permit the ratio of (a) all Indebtedness of the Company and its Consolidated Subsidiaries to (b) the Total Capitalization of the Company and its Consolidated Subsidiaries to exceed .65 to 1 at any time. 8.07 Negative Pledge. The Company will not, and will not permit any Subsidiary to, create, assume or suffer to exist any Lien on any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens existing on the date hereof securing Indebtedness, other than Indebtedness secured by the Existing Indenture, outstanding on November 17, 1998 in an aggregate principal amount not in excess of $240,865,000; 34 (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary of the Company and not created in contemplation of such event; (c) any Lien on any asset securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within 90 days after the acquisition thereof; (d) any Lien on any asset of any corporation existing at the time such corporation is merged into or is consolidated with the Company or one of its Subsidiaries and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Company or one of its Subsidiaries and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Indebtedness is not increased and is not secured by any additional assets; (g) any Lien arising pursuant to any order of attachment, distraint or similar legal process arising in connection with court proceedings so long as the execution or other enforcement thereof is effectively stayed and the claims secured thereby are being contested in good faith by appropriate proceedings; (h) Liens incidental to conduct of its business or the ownership of its assets which (i) do not secure Indebtedness and (ii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (i) the Liens created by the Existing Indenture; and (j) Liens upon rights-of-way for transmission or distribution line purposes; provided that the Company or one of its Consolidated Subsidiaries, as the case may be has, in the opinion of counsel for the Company, power under eminent domain or similar statutes to condemn and acquire easements or rights-of-way sufficient for its purposes over the land covered by the rights-of-way in question or other lands adjacent thereto. Section 9. Events of Default. If one or more of the following events (herein called "Events of Default") shall occur and be continuing: (a) The Company shall default in the payment when due of any principal of or interest on any Loan or any other amount payable by it hereunder; or 35 (b) The Company or any of its Subsidiaries shall default in the payment when due of any principal of or interest on any of its other indebtedness aggregating $10,000,000 or more; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such indebtedness in the aggregate amount set forth above in this clause (b) shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such indebtedness to become due, or to be prepaid in full (whether by redemption, purchase or otherwise), prior to its stated maturity; or (c) Any representation, warranty or certification made or deemed made herein (or in any modification or supplement hereto) by the Company, or any certificate furnished to any Lender or the Agent pursuant to the provisions hereof (or thereof), shall prove to have been false or misleading as of the time made or furnished in any material respect; or (d) The Company shall default in the performance of any of its obligations under any of Sections 8.01(f) or 8.04 hereof; or the Company shall default in the performance of any of its other obligations in this Agreement and such default shall continue unremedied for a period of 30 days after notice thereof to the Company by the Agent or any Lender (through the Agent); or any "Event of Default" under and as defined in the Other FPC Agreement shall be continuing; or (e) The Company or any of the Company's Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) The Company or any of the Company's Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code (as now or hereafter in effect), or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) A proceeding or case shall be commenced, without the application or consent of the Company or any of the Company's Subsidiaries, in any court of competent jurisdiction seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Company or such Subsidiary or of 36 all or any substantial part of its assets, or (iii) similar relief in respect of the Company or such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Company or such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code (as now or hereafter in effect); or (h) A final judgment or judgments for the payment of money in excess of $10,000,000 in the aggregate shall be rendered by a court or courts against the Company and/or any of the Company's Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company or the relevant Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (i) An event or condition specified in Section 8.01(e) hereof shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company, the Parent or any ERISA Affiliate shall incur or in the opinion of the Majority Lenders shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or PBGC (or any combination of the foregoing) which is, in the determination of the Majority Lenders, material in relation to the consolidated financial condition, operations or business taken as a whole of the Company and its Consolidated Subsidiaries or of the Parent and its Consolidated Subsidiaries; or (j) Any authorization, approval or consent of any Governmental or regulatory authority or agency necessary for the execution, delivery or performance by the Company of this Agreement or the Notes, or for the validity or enforceability thereof, shall, after the date of the receipt by the Agent of the order referred to in Section 6.01(g) hereof, cease to be in full force and effect; or (k) The Company shall cease to be a Wholly-owned Subsidiary of the Parent; THEREUPON: (1) in the case of an Event of Default other than one referred to in clause (f) or (g) of this Section 9 with respect to the Company, (A) the Agent may and, upon request of the Majority Lenders, shall, by notice to the Company, cancel the Commitments and they shall thereupon terminate, and (B) the Agent may and, upon request of the Majority Lenders shall, by notice to the Company declare the principal amount then outstanding of, and the accrued interest on, 37 the Loans and all other amounts payable by the Company hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.05 hereof) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company; and (2) in the case of the occurrence of an Event of Default referred to in clause (f) or (g) of this Section 9 with respect to the Company, the Commitments shall automatically be canceled and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.05 hereof) shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company. Section 10. The Agent. 10.01 Appointment, Powers and Immunities. Each Lender hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder with such powers as are specifically delegated to the Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. The Agent (which term as used in this sentence and in Section 10.05 and the first sentence of Section 10.06 hereof shall include reference to its affiliates and its own and its affiliates' officers, directors, employees and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this Agreement be a trustee for any Lender; (b) shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note or any other document referred to or provided for herein or for any failure by the Company or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Agent, together with the written consent of the Company to such assignment or transfer. 10.02 Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by this Agreement, the Agent shall in all cases be fully protected in 38 acting, or in refraining from acting, hereunder in accordance with instructions signed by the Majority Lenders, and such instructions of the Majority Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. 10.03 Defaults. The Agent shall not be deemed to have knowledge or notice of the occurrence of a Default (other than the non-payment of principal of or interest on Loans or of facility fees) unless the Agent has received notice from a Lender or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Lenders (and shall give each Lender prompt notice of each such non-payment). The Agent shall (subject to Section 10.07 hereof) take such action with respect to Default as shall be directed by the Majority Lenders, provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Lenders. 10.04 Rights as a Lender. With respect to its Commitment and the Loans made by it, Chase (and any successor acting as Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. Chase (and any successor acting as Agent) and its affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with the Company (and any of its Subsidiaries or Affiliates) as if it were not acting as the Agent, and Chase and its affiliates may accept fees and other consideration from the Company for services in connection with this Agreement or otherwise without having-to account for the same to the Lenders. 10.05 Indemnification. The Lenders agree to indemnify the Agent (to the extent not reimbursed under Section 11.03 hereof, but without limiting the obligations of the Company under said Section 11.03) ratably in accordance with the aggregate amount of their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other documents contemplated by or referred to herein or the transactions contemplated hereby (including, without limitation, the costs and expenses which the Company is obligated to pay under Section 11.03 hereof but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. 39 10.06 Non-Reliance on Agent and Other Lenders. Each Lender agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by the Company of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries (or any of their affiliates) which may come into the possession of the Agent or any of its affiliates. 10.07 Failure to Act. Except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall receive further assurances to its satisfaction from the Lenders of their indemnification obligations under Section 10.05 hereof against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 10.08 Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Lenders and the Company, and the Agent may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Lenders and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a bank which has an office in New York, New York and (unless it is a Lender) a combined capital and surplus of at least $200,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section 10.08 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. 10.09 Agency Fee. So long as the Commitments are in effect and until payment in full of the principal of and interest on the Loans and all other amounts payable by the Company hereunder, the Company will pay to the Agent an agency fee in an amount previously agreed, payable annually in advance on the Quarterly Date falling on or nearest to December 1 in each year. Such fee, once paid, shall be non-refundable. The appointment of a successor Agent under Section 10.08 hereof shall not increase or otherwise modify the Company's obligations under this Section 10.09. 40 10.10 Auction Fee. The Company agrees to pay to the Agent an auction fee in an amount previously agreed, payable on each day that the Company delivers a Money Market Quote Request. Section 11. Miscellaneous. 11.01 Waiver. No failure on the part of the Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any Note preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02 Notices. All notices and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under,. this Agreement) shall be given or made by telex, telecopy, telegraph, cable or in writing (or, with respect to notices given pursuant to Section 2.03 hereof, by telephone, confirmed in writing by telex by the close of business on the day the notice is given) and telexed, telecopied, telegraphed, cabled, mailed or delivered (or telephoned, as the case may be) to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopier, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 11.03. Expenses, Etc. (a) The Company agrees to pay or reimburse each of the Lenders and the Agent for all reasonable out-of-pocket costs and expenses of the Agent (including, without limitation, the reasonable fees and expenses of counsel to the Agent), in connection with the negotiation, preparation, execution and delivery of this Agreement and the Notes and the making of the Loans hereunder. (b) The Company agrees to pay or reimburse each of the Lenders and the Agent for (i) all reasonable out-of-pocket costs and expenses of the Agent (including reasonable counsel's fees) in connection with any amendment, modification or waiver of any of the terms of this Agreement or any of the Notes and (ii) all costs and expenses of the Lenders and the Agent (including reasonable counsel's fees for each Lender and for the Agent) in connection with any Default and any enforcement or collection proceedings resulting therefrom. (c) The Company agrees to pay all transfer, stamp,, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any of the Notes or any other document referred to herein. 41 11.04 Amendments, Etc. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be amended or modified only by an instrument in writing signed by the Company, the Agent and the Majority Lenders, or by the Company and the Agent acting with the consent of the Majority Lenders, and any provision of this Agreement may be waived by the Majority Lenders or by the Agent acting with the consent of the Majority Lenders; provided that no amendment, modification or waiver shall, unless by an instrument signed by all of the Lenders or by the Agent acting with the consent of all of the Lenders: (i) extend the term, or extend the time or waive any requirement for the reduction or termination, of, or increase, the Commitments (except to the extent contemplated by the definition of "Commitment Termination Date" in Section 1.01 hereof); (ii) extend the date fixed for the payment of principal of or interest on any Loan or any fees or other amounts payable hereunder; (iii) reduce the amount of any payment of principal thereof or the rate at which interest is payable thereon or any fee is payable hereunder; (iv) alter the terms of Section 8.06 or 11.06(a) hereof or of this Section 11.04; or (v) amend the definition of the term "Majority Lenders"; and provided, further, that any amendment of Section 10 hereof shall also require the consent of the Agent. 11.05 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06 Assignments and Participations. (a) The Company may not assign its rights or obligations hereunder or under the Notes without the prior consent of all of the Lenders and the Agent. (b) No Lender may assign any of its Loans, its Notes, or its Commitment in whole or in part without the prior consent of the Company and the Agent (such consent of the Agent not to be unreasonably withheld); provided that, (i) each such assignment by a Lender of its Syndicated Loans or its Commitment shall be made so that the assignee holds the same pro rata portions of the Syndicated Loans and the Commitments; and (ii) each such assignment by a Lender of its Syndicated Loans and Commitment shall be made concurrently with an assignment by it to the same assignee of the same pro rata portion of its outstanding "Syndicated Loans" and its "Commitment" under and as defined in the Other FPC Agreement. Upon execution and delivery by the assignee to the Company and the Agent of an instrument in writing pursuant to which such assignee agrees to become a "Lender" hereunder (if not already a Lender) having the Commitment(s) and Loans specified in such instrument, and upon consent thereto by the Company and the Agent to the extent required above, the assignee shall have, to the extent of such assignment (unless otherwise provided in such assignment with the consent of the Company and the Agent), the obligations, rights and benefits of a Lender hereunder holding the Commitment(s) and Loans (or portions thereof) assigned to it (in addition to the Commitment(s) and Loans, if any, theretofore held by such assignee) and the assigning Lender shall, to the extent of such assignment, be released from the Commitment(s) (or portion(s) thereof) so assigned. In connection with any assignment pursuant to this Section 11-06(b), the Company agrees to issue replacement Notes in the State of New York, in the appropriate principal amounts and payable to the appropriate Lenders, upon the request of any assigning Lender or assignee Lender. Upon each such assignment the assigning Lender shall pay the Agent an assignment fee of $3,500. 42 (c) A Lender may sell or agree to sell a participation in all or any part of any Loan held by it or Loans made or to be made by it. In the event of such a participation, no such participant shall have any rights or benefits under this Agreement or any Note (the participant's rights against such Lender in respect of such participation to be those set forth in the agreement (the "Participation Agreement") executed by such Lender in favor of the participant). The granting of a participation by a Lender hereunder shall not in any way release such Lender from any of its obligations under this Agreement. All amounts payable by the Company to any Lender under Section 5 hereof shall be determined as if such Lender had not sold or agreed to sell any participations in such Loan and as if such Lender were funding all of such Loan in the same way that it is funding the portion of such Loan in which no participations have been sold. In no event shall a Lender that sells a participation be obligated to the participant under the Participation Agreement to take or refrain from taking any action hereunder or under such Lender's Notes except that such Lender may agree in the Participation Agreement that it will not, without the consent of the participant, agree to (i) the extension of any date fixed for the payment of principal of or interest on the related Loan or Loans or any portion of any fees payable to the participant, (ii) the reduction of any payment of principal thereof, or (iii) the reduction of the rate at which either interest is payable thereon or (if the participant is entitled to any part thereof) facility fee is payable hereunder to a level below the rate at which the participant is entitled to receive interest or facility fee (as the case may be) in respect of such participation. (d) Anything in this Section 11.06 to the contrary notwithstanding, any Lender may assign and pledge all or any portion of its Loans and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations hereunder. (e) A Lender may furnish any information concerning the Company, the Parent or any of their respective Subsidiaries in the possession of such Lender from time to time to assignees and participants and, with notice to the Company, to prospective participants and, with the consent of the Company, to prospective assignees. (f) If: (i) any Lender makes a demand for payment under Section 5.01 hereof, (ii) Loans of any Lender are Converted into Base Rate Loans pursuant to Section 5.04 hereof, or 43 (iii) any Lender does not become a Consenting Lender (as that term is used in the definition of "Commitment Termination Date" in Section 1.01 hereof), does not become a "Consenting Lender" under (and as defined in) the Other FPC Agreement or either of the PCH Agreements, in each case within the required periods set forth in the relevant definitions thereof; then, in the case of clause (i) above, within 60 days after the Company makes the payment demanded; in the case of clause (ii) above, within 60 days after the last of the relevant Conversions; and, in the case of clause (iii) above, at any time thereafter, the Company may, so long as no Default shall be continuing and subject to the consent of the Agent (which consent shall not be unreasonably withheld), demand that such Lender assign, pursuant to this Section 11.06 and documentation reasonably acceptable to such Lender, all (but not less than all) of such Lender's Commitment and outstanding Loans hereunder to one or more banks or financial institutions designated by the Company, for a purchase price not less than the principal amount of such outstanding Loans, accrued interest thereon and all other amounts payable by the Company to such Lender hereunder (including amounts payable under Section 5.05 hereof) and under the Notes held by such Lender, such assignment to take place no later than 30 days after the Company's demand. 11.07 Survival. The obligations of the Company under Sections 5.01, 5.05 and 11-03 hereof shall survive the repayment of the Loans and the termination of the Commitments. 11.08 Captions. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 11.09 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 11.10 Governing Law; Submission to Jurisdiction. This Agreement and the Notes shall be governed by, and construed in accordance with, the law of the State of New York. The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York City for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 11.11 Waiver of Jury Trial. EACH OF THE COMPANY, THE AGENT AND THE LENDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 44 [This space intentionally left blank.] 45 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. FLORIDA POWER CORPORATION By:___________________________________ Print Name: Pamela A. Saari Print Title: Treasurer Address for Notices: Post Office Box 14042 St. Petersburg, Florida 33733 Telecopier No.: 727-820-5918 Telephone No.: 727-820-5875 Attention: Mr. Kenneth E. McDonald Sworn to and subscribed before me on this 13th day of November, 1998, in the State of New York, County of New York. --------------------------- Notary Public 46 Commitment $33,750,000 THE CHASE MANHATTAN BANK By ___________________________________ Print Name: Print Title: Lending Office for all Loans (other than Eurodollar Loans): The Chase Manhattan Bank 270 Park Avenue New York, New York 10017-2070 Lending Office for Eurodollar Loans: The Chase Manhattan Bank Cayman Islands, British West Indies Branch c/o The Chase Manhattan Bank One Chase Manhattan Plaza New York, New York 10081 Address for Notices: The Chase Manhattan Bank Global Power & Environmental Group 270 Park Avenue New York, New York 10017-2070 Telecopier No.: 212/270-3089 Telephone No.: 212/270-7653 Attention: Mr. Paul V. Farrell 47 Commitment $25,000,000 NATIONSBANK, N.A. By ___________________________________ Print Name: Print Title: Lending Office for all Loans: NationsBank, N.A. 101 North Tryon Street Charlotte, NC 28255 Attn: Marcella Graham Credit Services Address for Notices: NationsBank, N.A. Corporate Center NC1-007-08-08 100 North Tryon Street Charlotte, NC 28255 Telecopier No.: 704/386-1270 Telephone No.: 704/386-8394 Attention: Ms. Gretchen P. Burud 48 Commitment $25,000,000 FIRST UNION NATIONAL BANK By ___________________________________ Print Name: Print Title: Lending Office for all Loans First Union National Bank One First Union Center 301 South College Street Charlotte, North Carolina 28288-0735 Address for Notices: First Union National Bank One First Union Center 301 South College Street Charlotte, North Carolina 28288-0735 Telecopier No.: 704/383-6670 Telephone No.: 704/383-8225 Attention: Mr. Michael J. Kolosowsky 49 Commitment $23,750,000 SUNTRUST BANK, TAMPA BAY By ___________________________________ Print Name: Print Title: Lending Office for all Loans: SunTrust Bank, Tampa Bay 300 1st Avenue South St. Petersburg, Florida 33701 Address for Notices: SunTrust Bank, Tampa Bay 300 1st Avenue South St. Petersburg, Florida 33701 Telecopier No.: 813/892-4810 Telephone No.: 813/892-4958 Attention: Ms. Brigitta A. Lawton 50 Commitment $23,750,000 THE FIRST NATIONAL BANK OF CHICAGO By ___________________________________ Print Name: Print Title: Lending Office for all Loans: The First National Bank of Chicago One First National Plaza Suite 0363 Chicago, Illinois 60670-0363 Address for Notices: The First National Bank of Chicago One First National Plaza Suite 0363 Chicago, Illinois 60670-0363 Telecopier No.: 312/732-3055 Telephone No.: 312/732-9781 Attention: Mr. William N. Banks 51 Commitment $18,750,000 REVOLVING COMMITMENT VEHICLE CORPORATION By ___________________________________ Print Name: Print Title: Lending Office for all Loans: Revolving Commitment Vehicle Corporation 500 Stanton Christiana Road Newark, Delaware 19713 Address for Notices: Morgan Guaranty Trust Company of New York 60 Wall Street New York, New York 10260-0060 Telecopier No.: 212/648-5014 Telephone No.: 212/648-9036 Attention: Ms. Kathryn Sayko-Yanes 52 Commitment $18,750,000 PNC BANK, NATIONAL ASSOCIATION By ___________________________________ Print Name: Print Title: Lending Office for all Loans: PNC Bank, National Association One PNC Plaza 3rd Floor 249 - 5th Avenue Pittsburgh, PA 15222-2707 Address for Notices: PNC Bank, National Association One PNC Plaza 3rd Floor 249 - 5th Avenue Pittsburgh, PA 15222-2707 Telecopier No.: 412/762-2571 Telephone No.: 412/762-2540 Attention: Mr. Christopher N. Moravec 53 Commitment $18,750,000 WACHOVIA BANK, N.A. By ___________________________________ Print Name: Print Title: Lending Office for all Loans: Wachovia Bank, N.A. 191 Peachtree Street, N.E. Atlanta, GA 30303-1757 Address for Notices: Wachovia Bank, N.A. 191 Peachtree Street, N.E. Atlanta, GA 30303-1757 Telecopier No.: 404/332-5016 Telephone No.: 404/332-5134 Attention: Ms. Tammy F. Hughes 54 Commitment $12,500,000 THE NORTHERN TRUST COMPANY By ___________________________________ Print Name: Print Title: Lending Office for all Loans: The Northern Trust Company 50 South LaSalle Street Chicago, Illinois 60675 Address for Notices: The Northern Trust Company 50 South LaSalle Street Chicago, Illinois 60675 Telecopier No.: 312/630-6062 Telephone No.: 312/444-3455 Attention: Ms. Christina L. Jakuc 55 THE CHASE MANHATTAN BANK as Agent By ___________________________________ Print Name: Print Title: Address for Notices to Chase as Agent: The Chase Manhattan Bank 1 Chase Manhattan Plaza - 8th Floor New York, New York 10081 Telecopier No.: 212/552-7490 Telephone No.: 212/552-7943 Attention: Mr. Muniram Appanna 56 EXHIBIT A-1 [Form of Note for Syndicated Loans] PROMISSORY NOTE $_________________ ___________, 199__ New York, New York FOR VALUE RECEIVED, FLORIDA POWER CORPORATION, a Florida corporation (the "Company"), hereby promises to pay to (the "Lender"), for account of its respective Applicable Lending Offices provided for by the Credit Agreement referred to below, at the principal office of The Chase Manhattan Bank at 270 Park Avenue, New York, New York 10017, the principal sum of _________________ Dollars (or such lesser amount as shall equal the aggregate unpaid principal amount of the Syndicated Loans made by the Lender to the Company under the Credit Agreement), in lawful money of the United States of America and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Syndicated Loan, at such office, in like money and funds, for the period commencing on the date of such Syndicated Loan until such Syndicated Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Syndicated Loan made by the Lender to the Company, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, endorsed by the Lender on the schedule attached hereto or any continuation thereof, provided that any failure by the Lender to make any such endorsement shall not affect the obligations of the Company hereunder. This Note is one of the Notes referred to in the Third Amended and Restated Credit Agreement B (as modified and supplemented and in effect from time to time, the "Credit Agreement") dated as of November 17, 1998, between the Company, the lenders named therein and The Chase Manhattan Bank, as Agent, and evidences the Company's obligation to repay the Syndicated Loans made by the Lender thereunder and interest thereon. Capitalized terms used in this Note have the respective meanings assigned to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Loans upon the terms and conditions specified therein. Except as permitted by Section 11.06(b) of the Credit Agreement, this Note may not be assigned by the Lender to any other Person. This Note shall be governed by, and construed in accordance with, the law of the State of New York. FLORIDA POWER CORPORATION By:___________________________________ Title: A1-2 SCHEDULE OF LOANS This Note Schedule describes Loans made, Continued or Converted under the within-described Credit Agreement to the Company, on the dates, in the principal amounts, of the Types, bearing interest at the rates and maturing on the dates set forth below, subject to the payments and prepayments of principal set forth below: Date Made Cont- Principal Duration Date and inued Amount Type of Amount Unpaid or Con- of of Interest Interest Paid or Principal Notation verted Loan Loan Rate Period Prepaid Amount Made by - ------ ------ ---- ---- ------- ------- --------- -------- A1-3 EXHIBIT A-2 [Form of Note for Money Market Loans] PROMISSORY NOTE ___________, 199__ New York, New York FOR VALUE RECEIVED, FLORIDA POWER CORPORATION, a Florida corporation (the "Company"), hereby promises to pay to ____________________ (the "Lender"), for account of its respective Applicable Lending Offices provided for by the Credit Agreement referred to below, at the principal office of The Chase Manhattan Bank at 270 Park Avenue, New York, New York 10017, the aggregate unpaid principal amount of the Money Market Loans made by the Lender to the Company under the Credit Agreement, in lawful money of the United States of America and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Money Market Loan, at such office, in like money and funds, for the period commencing on the date of such Money Market Loan until such Money Market Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The date, amount, Type, interest rate and maturity date of each Money Market Loan made by the Lender to the Company, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, endorsed by the Lender on the schedule attached hereto or any continuation thereof, provided that any failure by the Lender to make any such endorsement shall not affect the obligations of the Company hereunder. This Note is one of the Notes referred to in the Third Amended and Restated Credit Agreement B (as modified and supplemented and in effect from time to time, the "Credit Agreement") dated as of November 17, 1998, between the Company, the lenders named therein (including the Lender) and The Chase Manhattan Bank, as Agent, and evidences the Company's obligation-to repay the Money Market Loans made by the Lender thereunder and interest thereon. Capitalized terms used in this Note have the respective meanings assigned to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Loans upon the terms and conditions specified therein. Except as permitted by Section 11.06(b) of the Credit Agreement, this Note may not be assigned by the Lender to any other Person. This Note shall be governed by, and construed in accordance with, the law of the State of New York. FLORIDA POWER CORPORATION By:___________________________________ Title: A2-2 SCHEDULE OF LOANS This Note Schedule describes Loans made under the within-described Credit Agreement to the Company, on the dates, in the principal amounts, of the Types, bearing interest at the rates and maturing on the dates set forth below, subject to the payments and prepayments of principal set forth below: Principal Date and Date Amount Type Maturity Amount Unpaid of of of Interest Date of Paid or Principal Notation Loan Loan Loan Rate Loan Prepaid Amount Made by - ---- --------- ---- -------- -------- -------- --------- -------- A2-3 EXHIBIT B [Form of Opinion of Counsel to the Parent] _________________, 199__ To: the Lenders party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Agent Ladies and Gentlemen: I am Vice President and General Counsel of Florida Power Corporation (the "Company"), a wholly owned subsidiary of Florida Progress Corporation (the "Parent"), and am rendering this opinion in connection with Credit Agreement B dated as of November 26, 1991 (the "Original Agreement"), between the Company, the lenders named therein and The Chase Manhattan Bank, as Agent, as amended and restated by the Third Amended and Restated Credit Agreement B dated as of November 17, 1998 (the Original Agreement, as amended and restated, being hereinafter referred to as the "Credit Agreement") providing for loans to be made by said lenders to the Company in an aggregate principal amount not exceeding $200,000,000. I have represented the Company in connection with the negotiation of the Credit Agreement. Terms defined in the Credit Agreement are used herein as defined therein. In rendering the opinion expressed below, I have examined the originals or conformed copies of such corporate records, agreements and instruments of the Company and the Parent, certificates of public officials and of officers of the Company and the Parent, and such other documents and records, and such matters of law, as I have deemed appropriate as a basis for the opinions hereinafter expressed. Based upon the foregoing, I am of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Florida and has the necessary corporate power to make and perform the Credit Agreement and the Notes (collectively, the "Credit Documents") and to borrow under the Credit Agreement. 2. The making and performance by the Company of the Credit Agreement and the borrowings thereunder-have been duly authorized by all necessary corporate action, and do not and will not violate any provision of law or regulation or any provision of its articles or by-laws or result in the breach of, or constitute a default or require any consent under, or result in the creation of any Lien upon any of its properties, revenues or assets pursuant to, any indenture or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or their respective properties may be bound. 3. The Credit Agreement has been duly executed and delivered by the Company and constitutes, and the Notes when executed and delivered for value will constitute, legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), and except that no opinion is expressed as to (i) Section 4.07(c) of the Credit Agreement or (ii) the effect of the law of any jurisdiction (other than the State of Florida) wherein any Lender (including any of its Applicable Lending offices) may be located which limits rates of interest which may be charged or collected by such Lender. I express no opinion as to (i) whether a Federal or state court outside of the State of New York would give effect to the choice of New York law provided for in the Credit Agreement and the Notes, (ii) the second sentence of Section 11.10 of the Credit Agreement, insofar as such sentence relates to the subject matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to the Credit Agreement or the Notes, (iii) the waiver of inconvenient forum set forth in Section 11.10 of the Credit Agreement with respect to proceedings in the United States District Court for the Southern District of New York, or (iv) Section 11.11 of the Credit Agreement. 4. In connection with the above, I wish to point out that provisions of the Credit Agreement that permit the Agent or any Lender to take action or make determinations, or to benefit from indemnities and similar undertakings of the Company, may be subject to a requirement that such action or inaction by the Agent or a Lender which may give rise to a request for payment under such an undertaking be taken or not taken, on a reasonable basis and in good faith. 5. Except for the matters disclosed (i) under the heading "Legal Proceedings" in Part I, Item 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and (ii) under the heading "Legal Proceedings" in Part II, Item 1 of the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 1998, there are no legal or arbitral proceedings, and no proceedings by or before any governmental or regulatory authority or agency, pending or (to my knowledge) threatened against or affecting the Company or any of the Company's Subsidiaries, or any properties or rights of the Company or any of the Company's Subsidiaries, which, if adversely determined, would have a material adverse effect on the consolidated financial condition, operations or business taken as a whole of the Company and its Consolidated Subsidiaries. 6. Other than the approval of the Florida Public Service Commission (which approval has been duly obtained and is in full force and effect), no authorizations, consents, approvals, licenses, filings or registrations with, any governmental or regulatory authority or agency are required in connection with the execution, delivery or performance by the Company of the Credit Documents. B-2 7. The Parent is a "holding company" within the meaning of Section 2(a)(7) of the 1935 Act and the Parent and the Company are exempt from all of the requirements of the 1935 Act other than Section 9(a)(2) thereof by virtue of the filing of an exemption statement on Form U-3A-2 under Rule 2 under Section 3(a)(1) of the 1935 Act. Such Form U-3A-2 exemption statement was completed in compliance with all applicable rules and regulations of the Securities and Exchange Commission under the 1935 Act and was filed on June 23, 1998. I wish to point out that the exemption provided by such filing may be terminated by the Securities and Exchange Commission pursuant to Rule 6 under the 1935 Act thirty days after notification by the Securities and Exchange Commission by registered mail to the Parent that a substantial question of law or fact exists as to whether or not the Parent is within the exemption afforded by Rule 2 under Section 3(a)(1) of the 1935 Act or any question exists as to whether or not the exemption of the Parent afforded by Rule 2 under the 1935 Act may be detrimental to the public interest or the interest of investors or consumers. Such termination would be without prejudice to the right of the Parent to file an application for an order granting an exemption pursuant to any applicable section of the 1935 Act and without prejudice to any temporary exemption provided for by the 1935 Act if such application is filed in good faith. As of the date hereof, no such notification has been received by the Parent, and (except for proceedings that may arise should the Securities and Exchange Commission adopt proposed Rule 17 under the 1935 Act) I am not aware of any facts or circumstances that would currently provide a basis for the Securities and Exchange Commission to initiate proceedings to revoke the exemption claimed by the Parent under Rule 2 under Section 3(a)(1) of the 1935 Act. 8. None of the Lenders nor the Agent will solely as a result of the participation by them and the Parent and the Company in the transactions contemplated by the Credit Agreement and the Notes be subject to regulation by any governmental authority as an "electric utility company", a "public utility company," a "holding company" or a "subsidiary company" or "affiliate" of any of the foregoing under the 1935 Act. I am a member of the bar of the State of Florida and I do not herein intend to express any opinion as to any matters governed by any laws other than the law of the State of Florida and the Federal law of the United States of America. Very truly yours, B-3 EXHIBIT C [Form of Money Market Quote Request] [Date] To: The Chase Manhattan Bank, as Agent From: Florida Power Corporation, Inc. Re: Money Market Quote Request Pursuant to Section 2.03 of the Third Amended and Restated Credit Agreement B (the "Credit Agreement") dated as of November 17, 1998, as amended or restated from time to time, between Florida Power Corporation, the lenders named therein and The Chase Manhattan Bank, as Agent, we hereby give notice that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Borrowing Quotation Interest Date Date[*l] Amount[*2] Type [*3] Period[*4] - --------- -------- ---------- --------- ---------- Terms used herein have the meanings assigned to them in the Credit Agreement. FLORIDA POWER CORPORATION By:___________________________________ Title: - --------------------------- * All numbered footnotes appear on the last page of this Exhibit. - ---------------------- [1] For use if a Money Market Rate in a Set Rate Auction is requested to be submitted before the Borrowing Date. [2] Each amount must be $10,000,000 or a larger multiple of $1,000,000. [3] Insert either "Margin" (in the case of LIBOR Market Loans) or "Rate" (in the case of Set Rate Loans). [4] One, two, three or six months, in the case of a LIBOR Market Loan or, in the case of a Set Rate Loan, a period of up to 180 days after the making of such Set Rate Loan and ending on a Business Day. C-2 EXHIBIT D [Form of Money Market Quote] To: The chase Manhattan Bank, as Agent Attention: Re: Money Market Quote to Florida Power Corporation (the "Borrower") This Money Market Quote is given in accordance with Section 2.03(c) of the Third Amended and Restated Credit Agreement B (the "Credit Agreement") dated as of November 17, 1998, as amended or restated from time to time, between Florida Power Corporation, the lenders named therein and The Chase Manhattan Bank, as Agent. Terms defined in the Credit Agreement are used herein as defined therein. In response to the Borrower's invitation dated ___________, 19__, we hereby make the following Money Market Quote(s) on the following terms: 1. Quoting Lender: 2. Person to contact at Quoting Lender: 3. We hereby offer to make Money Market Loan(s) in the following principal amount(s], for the following Interest Period(s) and at the following rate(s): Borrowing Quotation Interest Date Date[*1] Amount[*2] Type[*3] Period[*4] Rate[*5] - --------- -------- ---------- -------- ---------- -------- 4. The maximum aggregate principal amount of all Money Market Loans: - ----------------------- * All numbered footnotes appear on the last page of this Exhibit. We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Credit Agreement, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) (is/are) accepted, in whole or in part (subject to the third sentence of Section 2.03(e) of the Credit Agreement). Very truly yours, [Name of Lender] By:___________________________________ Authorized officer Dated: ______________, ____ [1] As specified in the related Money Market Quote Request. [2] The principal amount bid for each Interest Period may not exceed the principal amount requested. Bids must be made for at least $5,000,000 or a larger multiple of $1,000,000.00. [3] Indicate "Margin" (in the case of LIBOR Market Loans) or "Rate" (in the case of Set Rate Loans). [4] One, two, three or six months, in the case of a LIBOR Market Loan or, in the case of a Set Rate Loan, a period of up to 180 days after the making of such Set Rate Loan and ending on a Business Day, as specified in the related Money Market Quote Request. [5] For a LIBOR Market Loan, specify margin over or under the London interbank offered rate determined for the applicable Interest Period. Specify percentage (rounded to the nearest 1/10,000th of 1%) and specify whether "PLUS" or "MINUS". For a Set Rate Loan, specify rate of interest per annum (rounded to the nearest 1/10,000th of 1%). D-2 EX-10 4 pei_fp10kexhibit10a4-.txt EXHIBIT 10(A)(4) EXHIBIT 10(a)(4) FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into and effective as of December 10, 2002 among FLORIDA POWER CORPORATION, a Florida corporation (the "Borrower"), the Lenders party hereto and BANK OF AMERICA, N.A., as agent for the Lenders (the "Administrative Agent"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement (as defined below). RECITALS WHEREAS, the Borrower, the Lenders party thereto and the Administrative Agent entered into that certain Credit Agreement dated as of December 18, 2001 (the "Credit Agreement"); WHEREAS, on December 9, 2002, Merrill Lynch Bank USA ("Merrill Lynch") (i) assigned $20,000,000 of its Commitment to The Bank of New York, (ii) assigned $13,000,000 of its Commitment to Mellon Bank, N.A. and (iii) and Northern Trust Bank ("Northern Trust") entered into that certain letter agreement (the "Letter Agreement") with the Borrower and the Lenders, attached hereto as Annex A, whereby (A) the aggregate Commitment was reduced on a non-pro-rata basis such that each of Merrill Lynch's remaining $67,000,000 Commitment and Northern Trust's $12,500,000 Commitment was terminated and (B) each of Merrill Lynch and Northern Trust relinquished all of its respective rights, privileges, powers, obligations, responsibilities and status as a Lender under the Credit Agreement; WHEREAS, the Borrower has requested that the Lenders agree to extend the Termination Date to April 1, 2003; and WHEREAS, the Borrower and the Lenders have agreed to certain modifications to the Credit Agreement subject to the terms and conditions set forth below. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: AGREEMENT SECTION 1. Amendments. Section 1.1. Termination Date. The definition of "Termination Date" in Section 1.01 of the Credit Agreement is amended and restated in its entirety to read as follows: "Termination Date" means, with respect to a Lender, the earlier to occur of (i) April 1, 2003 and (ii) the date of termination in whole of the Commitments pursuant to Section 2.04 or 6.01. Section 1.2. Commitment Schedule. Schedule I to the Credit Agreement is deleted in its entirety and replaced with Schedule I attached hereto. The Commitment of each respective Lender is as set forth on such Schedule I and the aggregate Commitments of the Lenders equals $90,500,000. Section 1.3. Lenders. In each of the instances in the Credit Agreement where the terms "Bank" and "Banks" appear, such terms are deleted and replaced with the terms "Lender" and "Lenders", respectively. SECTION 2. Consent. The Lenders and the Borrower consent to the terms set forth in the Letter Agreement, including the $79,500,000 non-pro-rata reduction in the aggregate Commitment. SECTION 3. Conditions Precedent. This Amendment shall not be effective until the following conditions have been satisfied or waived by the Lenders: (a) Receipt by the Administrative Agent of copies of this Amendment duly executed by the Borrower and the Lenders. (b) Receipt by the Administrative Agent of a certificate of the corporate secretary of the Borrower certifying as to resolutions of the Board of Directors of the Borrower approving and adopting this Amendment and the transactions contemplated herein and authorizing the execution, delivery and performance hereof. (c) Receipt by the Administrative Agent of an opinion or opinions from counsel to the Borrower relating to this Amendment and the transactions contemplated herein, in form and substance satisfactory to the Administrative Agent, addressed to the Administrative Agent on behalf of the Lenders and dated as of the date hereof. (d) The payment by the Borrower of (i) an amendment fee in an amount equal to 0.04% of the aggregate amount of the Commitments of those Lenders who execute and deliver this Amendment on or before 5:00 p.m. (EST) on December 9, 2002, to be shared pro rata among such Lenders in accordance with their respective Commitments and (ii) the reasonable out-of-pocket expenses of the Administrative Agent in connection with the negotiation, preparation, execution and delivery of this Amendment and the other transactions contemplated herein, including, without limitation, reasonable legal fees and expenses. SECTION 4. Ratification of Credit Agreement. The terms "Agreement" and "Credit Agreement" as used in the Credit Agreement, the promissory notes and the related certificates, agreements and documents issued or delivered in connection with the Credit Agreement shall hereafter mean the Credit Agreement as amended 2 by this Amendment. Except as herein specifically agreed, the Credit Agreement is hereby ratified and confirmed and shall remain in full force and effect according to its terms. SECTION 5. Authority/Enforceability. The Borrower represents and warrants as follows: (a) It has taken all necessary action to authorize the execution, delivery and performance of this Amendment. (b) This Amendment has been duly executed and delivered by the Borrower and constitutes the Borrower's legal, valid and binding obligations, enforceable in accordance with its terms, except as such enforceability may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). (c) No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by the Borrower of this Amendment. SECTION 6. No Default. The Borrower represents and warrants to the Lenders that (a) the representations and warranties of the Borrower set forth in Article IV of the Credit Agreement are true and correct as of the date hereof; (b) no event has occurred and is continuing which constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both; and (c) it has no claims, counterclaims, offsets, credits or defenses to its obligations under the Credit Agreement or to the extent it has any they are hereby released in consideration of the Lenders entering into this Amendment. SECTION 7. No Conflicts. Neither the execution and delivery of this Amendment, nor the consummation of the transactions contemplated herein, nor performance of and compliance with the terms and provisions hereof by the Borrower will (a) violate, contravene or conflict with any provision of its charter, bylaws or other organizational or governing document, (b) violate, contravene or conflict with any law, rule, regulation, order, writ, judgment, injunction, decree or permit applicable to the Borrower, (c) violate, contravene or conflict with any contractual provisions of, or cause an event of default under, any material indenture, loan agreement, mortgage, deed of trust, contract or other agreement or instrument to which the Borrower is a party or by which it or its properties may be bound or (d) result in or require the creation of any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind upon or with respect to the Borrower's properties. 3 SECTION 8. Counterparts/Telecopy. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. Delivery of executed counterparts by telecopy shall be effective as an original and shall constitute a representation that an original will be delivered. SECTION 9. General Release. In consideration of the Lenders entering into this Amendment, the Borrower hereby releases the Administrative Agent, the Lenders and the Administrative Agent's and the Lenders' respective officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises from any action or failure to act under the Credit Agreement or any related documents on or prior to the date hereof. SECTION 10. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. [remainder of page intentionally left blank] 4 FLORIDA POWER CORPORATION FIRST AMENDMENT TO CREDIT AGREEMENT IN WITNESS WHEREOF, the parties to this Amendment have caused this Amendment to be duly executed as of the day and year fast above written. FLORIDA POWER CORPORATION By: ----------------------------------- Name: Thomas R. Sullivan Title: Treasurer FLORIDA POWER CORPORATION FIRST AMENDMENT TO CREDIT AGREEMENT BANK OF AMERICA, N.A., in its capacity as Administrative Agent and in its capacity as Lender By: ----------------------------------- Name: Gretchen P. Burud Title: Managing Director FLORIDA POWER CORPORATION FIRST AMENDMENT TO CREDIT AGREEMENT BANK ONE, NA By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- FLORIDA POWER CORPORATION FIRST AMENDMENT TO CREDIT AGREEMENT SUNTRUST BANK By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- FLORIDA POWER CORPORATION FIRST AMENDMENT TO CREDIT AGREEMENT THE BANK OF NEW YORK By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- FLORIDA POWER CORPORATION FIRST AMENDMENT TO CREDIT AGREEMENT MELLON BANK, N.A. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- SCHEDULE I FLORIDA POWER CORPORATION List of Commitments and Applicable Lending Offices - ------------------------------------------------------------------------------------------------------------------------- Eurodollar Domestic Name of Bank Credit Contact Lending Office Lending Office Commitment - ------------------------------------------------------------------------------------------------------------------------- Bank of America, N.A. 100 N. Tryon Street Bank of America Plaza Same as Eurodollar Lending $21,900,000 16th Floor 901 Main Street Office Charlotte, NC 28255 Dallas, TX 75202-3714 Attn: Gretchen Burud Attn: Taelitha Harris Phone: 704/386-8394 Phone: 214/209-3645 Fax: 704/386-1319 Fax: 214/290-9644 - ------------------------------------------------------------------------------------------------------------------------- Bank One, NA 1 Bank One Plaza 1 Bank Plaza Same as Eurodollar Lending $17,800,000 MC IL1=0363 Suite 0363 Office Chicago, IL 60670 Chicago, IL 606-0363 Attn: William Banks Attn: Robert G. Brussa Phone: 312/732-9781 Fax: 212/732-3055 - ------------------------------------------------------------------------------------------------------------------------- SunTrust Bank MC- FL-Orlando-1044 MC- FL-Orlando-1044 Same as Eurodollar Lending $17,800,000 200 South Orange Avenue 200 South Orange Avenue Office Orlando, FL 32801 Orlando, FL 32801 Attn: William Barr Attn: William Barr Phone: 407/237-4636 Fax: 407/237-4076 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- The Bank of New York One Wall Street One Wall Street Same as Eurodollar Lending $20,000,000 New York, NY 10286 New York, NY 10286 Office Attn: Jesus Williams Attn: Lisa Williams Phone: 212/635-7609 Phone: 212/635-7535 Fax: 212/635-7923 Fax: 212/635-7552 - ------------------------------------------------------------------------------------------------------------------------- Mellon Bank, N.A. One Mellon Center (Room 525 William Penn Place Same as Eurodollar Lending $13,000,000 4530) Room 153-1203 Office Pittsburgh, PA 15258 Pittsburgh, PA 15259-0003 Attn: Scott Hennessee Phone: 412/234-4458 Attn: Brenda Leierzapf Fax: 412/236-1840 Phone: 412/234-8161 Fax: 412/209-6146 - -------------------------------------------------------------------------------------------------------------------------
Annex A December 9, 2002 Bank of America, N.A., as Administrative Agent, and the other Lenders party to the Credit Agreement (defined below) 901 Main Street Dallas, TX 7502 Florida Power Company c/o Progress Energy, Inc. 410 S. Wilmington Street PEB 19A3 Raleigh, NC 27601 Re: Florida Power Corporation Credit Facility Dear Ladies and Gentlemen: Reference is hereby made to that certain Credit Agreement, dated as of December 18, 2001 (the "Credit Agreement"), among Florida Power Corporation, as the Borrower, Merrill Lynch Bank USA ("Merrill Lynch"), Northern Trust Bank ("Northern Trust") and the other financial institutions identified therein, as Lenders, and Bank of America, N.A., as Administrative Agent for the Lenders. Capitalized terms used herein without definition shall have the meanings given to them in the Credit Agreement. Merrill Lynch, Northern Trust, the Borrower, the Administrative Agent and the Lenders hereby acknowledge and agree that, as of December 5, 2002, the aggregate Commitment shall be irrevocably reduced from $170,000,000 to $90,500,000 on a non-pro-rata basis and each of Merrill Lynch's $67,000,000 Commitment and Northern Trust's $12,500,000 Commitment shall be terminated. Each of Merrill Lynch and Northern Trust hereby relinquishes all of its rights, privileges, powers, obligations, responsibilities and status as a Lender under the Credit Agreement (except those that by the express terms of the Credit Agreement shall survive termination of the Commitments of Merrill Lynch and Northern Trust). This letter shall be governed by, and construed in accordance with, the laws of the State of New York. This letter may be executed in any number of counterparts, each of which shall constitute an original and all of which when taken together shall constitute one instrument. Very truly yours, --------------------------------------------------------------------------- MERRILL LYNCH BANK USA NORTHERN TRUST BANK By: By: --------------------------------- ----------------------------------- Name: Name: ------------------------------- -------------------------------- Title: Title: ------------------------------ ------------------------------- --------------------------------------------------------------------------- Accepted and Agreed to as of December 9, 2002: FLORIDA POWER CORPORATION, BANK OF AMERICA, N.A., as Borrower as Administrative Agent and as a Lender By: By: ----------------------------------- ----------------------------------- Name: Thomas R. Sullivan Name: Gretchen P. Burud Title: Treasurer Title: Managing Director SUNTRUST BANK BANK ONE, NA By: By: ----------------------------------- ----------------------------------- Name: Name: --------------------------------- --------------------------------- Title: Title: -------------------------------- -------------------------------- MELLON BANK, N.A. THE BANK OF NEW YORK By: By: ------------------------------------ ---------------------------------- Name: Name: ---------------------------------- -------------------------------- Title: Title: --------------------------------- ------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----