-----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, JCKPM9clnbGn4kuY3eN+rp+zl74K1vnQ+Fe/0cZyRQIw94QUSyp5fu06lUTJNQhh bRqxDWED5UztEMoJpCUVDQ== 0000357261-04-000012.txt : 20040806 0000357261-04-000012.hdr.sgml : 20040806 20040806150511 ACCESSION NUMBER: 0000357261-04-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03274 FILM NUMBER: 04957716 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08349 FILM NUMBER: 04957715 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-Q 1 pei_fl2q0410q-.txt FPC/PEF 2004 2ND QTR FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . -------- ------- Exact name of registrants as specified in their charters, state Commission of incorporation, address of principal executive offices, and I.R.S. Employer File Number telephone number Identification Number 1-8349 Florida Progress Corporation 59-2147112 410 South Wilmington Street Raleigh, North Carolina 27601 Telephone (919) 546-6111 State of Incorporation: Florida 1-3274 Florida Power Corporation 59-0247770 d/b/a Progress Energy Florida, Inc. 100 Central Avenue St. Petersburg, Florida 33701 Telephone (727) 820-5151 State of Incorporation: Florida NONE (Former name, former address and former fiscal year, if changed since last report)
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 registrant was 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 whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X This combined Form 10-Q is filed separately by two registrants: Florida Progress Corporation and Florida Power Corporation d/b/a Progress Energy Florida (PEF). 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. Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date. As of July 31, 2004, each registrant had the following shares of common stock outstanding: Registrant Description Shares ---------- ----------- ------ Florida Progress Corporation Common Stock, without par value 98,616,658 (all of which were held by Progress Energy, Inc.) PEF Common Stock, without par value 100 (all of which were held by Florida Progress Corporation)
Florida Progress Corporation and Florida Power Corporation meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format. FLORIDA PROGRESS CORPORATION AND PROGRESS ENERGY FLORIDA, INC. FORM 10-Q - For the Quarter Ended June 30, 2004 Glossary of Terms Safe Harbor For Forward-Looking Statements PART I. FINANCIAL INFORMATION Item 1. Financial Statements Florida Progress Corporation Unaudited Consolidated Statements of Income Unaudited Consolidated Balance Sheets Unaudited Consolidated Statements of Cash Flows Florida Power Corporation d/b/a Progress Energy Florida, Inc. Unaudited Statements of Income Unaudited Balance Sheets Unaudited Statements of Cash Flows Notes to Financial Statements Florida Progress Corporation and Florida Power Corporation d/b/a Progress Energy Florida, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures 2 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined Form 10-Q are defined below: TERM DEFINITION AFUDC Allowance for funds used during construction the Agreement Stipulation and Settlement Agreement APB Accounting Principles Board BART Best available retrofit technology Bcf Billion cubic feet CAIR Clean Air Interstate Rule Colona Colona Synfuel Limited Partnership, L.L.L.P. the Company Florida Progress Corporation CR3 Progress Energy Florida Inc.'s nuclear generating plant, Crystal River Unit No. 3 DOE United States Department of Energy ECRC Environmental Cost Recovery Clause EIS Environmental Impact Statement EITF Emerging Issues Task Force EPA United States Environmental Protection Agency EPIK EPIK Communications, Inc. FASB Financial Accounting Standards Board FDEP Florida Department of Environmental Protection Federal Circuit United States Circuit Court of Appeals FERC Federal Energy Regulatory Commission FIN No. 46R FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51" Florida Progress or FPC Florida Progress Corporation FPSC Florida Public Service Commission Global U.S. Global LLC MACT Maximum Available Control Technology MGP Manufactured Gas Plant NOx Nitrogen oxide NRC United States Nuclear Regulatory Commission NSP Northern States Power PEF or the utility Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation PFA IRS Prefiling Agreement the Plan Revenue Sharing Incentive Plan PLRs Private Letter Rulings Progress Capital Progress Capital Holdings, Inc. Progress Energy or the Parent Progress Energy, Inc. Progress Fuels Progress Fuels Corporation PTC LLC Progress Telecom LLC PUHCA Public Utility Holding Company Act of 1935, as amended PWR Pressurized water reactor RAFT Railcar Asset Financing Trust Rail Services or Rail Rail Services business segment RTO Regional Transmission Organization SEC United States Securities and Exchange Commission Section 29 Section 29 of the Internal Revenue Code Service Company Progress Energy Service Company, LLC SFAS No. 5 Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" SFAS No. 71 Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" SFAS No. 123 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" 3 SFAS No. 133 Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities" 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. 148 Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123" SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination through Open Access Transmission and Standard Market Design SO2 Sulfur dioxide the Trust FPC Capital I trust
4 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 combined Form 10-Q that are not historical facts are forward-looking and, accordingly, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. In addition, forward-looking statements are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" including, but not limited to, statements under the sub-heading "Liquidity and Capital Resources" concerning operating cash flows. Any forward-looking statement speaks only as of the date on which such statement is made, and neither Florida Progress (the Company) nor Florida Power Corporation doing business as Progress Energy Florida, Inc. (PEF) 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; deregulation or restructuring in the electric industry that may result in increased competition and stranded costs; the uncertainty regarding the timing, creation and structure of regional transmission organizations; weather conditions that directly influence the demand for electricity; recurring seasonal fluctuations in demand for electricity; fluctuations in the price of energy commodities and purchased power; successful maintenance and operation of PEF's energy commodities and purchased power; economic fluctuations and the corresponding impact on PEF'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 PEF; the ability of the Company and PEF to maintain their current credit ratings; the impact of derivative contracts used in the normal course of business; investment performance of pension and benefit plans and the ability to control costs; the availability and use of Internal Revenue Code Section 29 (Section 29) tax credits by synthetic fuel producers and the Company's continued ability to use Section 29 tax credits related to its coal and synthetic fuel businesses; the impact to our financial condition and performance in the event it is determined the Company is not entitled to previously taken Section 29 tax credits; the Company's ability to successfully integrate newly acquired assets or properties into its operations as quickly or as profitably as expected; the outcome of any ongoing or future litigation or similar disputes and the impact of any such outcome or related settlements; and unanticipated changes in operating expenses and capital expenditures. Many of these risks similarly impact the Company's subsidiaries. These and other risks are detailed from time to time in Florida Progress' and PEF'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 the Company and PEF. Many, but not all of the factors that may impact actual results of the Company and PEF are discussed in the Risk Factors section of PEF's annual report on Form 10-K for the year ended December 31, 2003 which was filed with the SEC on March 12, 2004. You should carefully read these SEC reports. 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 PEF. 5 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Florida Progress Corporation CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2004 UNAUDITED CONSOLIDATED STATEMENTS of INCOME Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------- (in millions) 2004 2003 2004 2003 - --------------------------------------------------------------------------------------------------------- Operating Revenues Utility $ 860 $ 767 $ 1,644 $ 1,495 Diversified business 644 440 1,171 927 - --------------------------------------------------------------------------------------------------------- Total Operating Revenues 1,504 1,207 2,815 2,422 - --------------------------------------------------------------------------------------------------------- Operating Expenses Utility Fuel used in electric generation 276 217 545 402 Purchased power 139 141 260 271 Operation and maintenance 152 154 312 295 Depreciation and amortization 72 80 141 159 Taxes other than on income 64 59 126 117 Diversified business Cost of sales 562 388 1,033 826 Depreciation and amortization 27 22 52 43 Other 32 25 65 62 - --------------------------------------------------------------------------------------------------------- Total Operating Expenses 1,324 1,086 2,534 2,175 - --------------------------------------------------------------------------------------------------------- Operating Income 180 121 281 247 - --------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 1 1 2 2 Other, net (2) (1) (7) (7) - --------------------------------------------------------------------------------------------------------- Total Other Expense (1) - (5) (5) - --------------------------------------------------------------------------------------------------------- Interest Charges Interest charges 47 48 92 95 Allowance for borrowed funds used during construction (1) (2) (2) (4) - --------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 46 46 90 91 - --------------------------------------------------------------------------------------------------------- Income before Income Taxes 133 75 186 151 Income Tax Benefit (2) (39) (4) (55) - --------------------------------------------------------------------------------------------------------- Net Income $ 135 $ 114 $ 190 $ 206 - ---------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements. 6 Florida Progress Corporation UNAUDITED CONSOLIDATED BALANCE SHEETS (in millions) June 30 December 31 Assets 2004 2003 - ---------------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 8,281 $ 8,150 Accumulated depreciation (2,856) (2,828) - ---------------------------------------------------------------------------------------------------------- Utility plant in service, net 5,425 5,322 Held for future use 8 8 Construction work in progress 349 328 Nuclear fuel, net of amortization 57 69 - ---------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 5,839 5,727 - ---------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 30 27 Accounts receivable 540 487 Unbilled accounts receivable 77 59 Receivables from affiliated companies 45 43 Inventory 437 412 Deferred fuel cost 178 204 Assets held for sale 6 75 Prepayments and other current assets 166 137 - ---------------------------------------------------------------------------------------------------------- Total Current Assets 1,479 1,444 - ---------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 131 126 Nuclear decommissioning trust funds 436 433 Diversified business property, net 892 841 Miscellaneous other property and investments 95 90 Prepaid pension cost 226 223 Deferred tax asset 349 189 Other assets and deferred debits 130 132 - ---------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 2,259 2,034 - ---------------------------------------------------------------------------------------------------------- Total Assets $ 9,577 $ 9,205 - ---------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ---------------------------------------------------------------------------------------------------------- Common Stock Equity Common stock without par value $ 1,701 $ 1,699 Retained earnings 955 842 Accumulated other comprehensive loss (30) (17) - ---------------------------------------------------------------------------------------------------------- Total Common Stock Equity 2,626 2,524 - ---------------------------------------------------------------------------------------------------------- Preferred Stock of Subsidiaries - Not Subject to Mandatory Redemption 34 34 Long-Term Debt, Affiliate 809 809 Long-Term Debt, Net 2,045 2,045 - ---------------------------------------------------------------------------------------------------------- Total Capitalization 5,514 5,412 - ---------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 43 68 Accounts payable 458 415 Payables to affiliated companies 121 68 Notes payable to affiliated companies 327 636 Taxes accrued 177 16 Short-term obligations 231 - Customer deposits 130 127 Other current liabilities 341 279 - ---------------------------------------------------------------------------------------------------------- Total Current Liabilities 1,828 1,609 - ---------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes and investment tax credits 81 85 Regulatory liabilities 1,388 1,365 Asset retirement obligations 347 339 Other liabilities and deferred credits 419 395 - ---------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 2,235 2,184 - ---------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 12) - ---------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 9,577 $ 9,205 - ----------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements. 7 Florida Progress Corporation UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30 (in millions) 2004 2003 - ------------------------------------------------------------------------------------------------------------ Operating Activities Net income $ 190 $ 206 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 207 215 Deferred income taxes and investment tax credits, net (159) (44) Deferred fuel cost (credit) 26 (103) Cash provided (used) by changes in operating assets and liabilities: Accounts receivable (84) (78) Affiliate accounts receivable (2) (11) Inventories (23) 30 Prepayments and other current assets (46) (16) Accounts payable 51 37 Affiliate accounts payable 51 (58) Income taxes, net 162 38 Other current liabilities 45 56 Other 26 24 - ------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 444 296 - ------------------------------------------------------------------------------------------------------------ Investing Activities Utility property additions (235) (283) Diversified business property additions (103) (214) Nuclear fuel additions - (38) Proceeds from sale of assets 84 1 Other (13) (8) - ------------------------------------------------------------------------------------------------------------ Net Cash Used in Investing Activities (267) (542) - ------------------------------------------------------------------------------------------------------------ Financing Activities Proceeds from issuance of long-term debt 1 639 Net increase (decrease) in short-term obligations 231 (35) Retirement of long-term debt (26) (227) Net change in intercompany notes (309) (78) Equity contributions from parent 1 140 Dividends paid to parent (78) (203) Other 6 (2) - ------------------------------------------------------------------------------------------------------------ Net Cash (Used in) Provided by Financing Activities (174) 234 - ------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents 3 (12) Cash and Cash Equivalents at Beginning of Period 27 34 - ------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period $ 30 $ 22 - ------------------------------------------------------------------------------------------------------------ Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 92 $ 84 income taxes (net of refunds) $ (6) $ (1) - ------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements. 8 Florida Power Corporation d/b/a Progress Energy Florida, Inc. INTERIM FINANCIAL STATEMENTS June 30, 2004 UNAUDITED STATEMENTS of INCOME Three Months Ended Six Months Ended June 30 June 30 ------------------------------------------------------ (in millions) 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------------------- Operating Revenues $ 860 $ 767 $ 1,644 $ 1,495 Operating Expenses Fuel used in electric generation 276 217 545 402 Purchased power 139 141 260 271 Operation and maintenance 152 154 312 295 Depreciation and amortization 72 80 141 159 Taxes other than on income 64 59 126 117 - -------------------------------------------------------------------------------------------------------------- Total Operating Expenses 703 651 1,384 1,244 - -------------------------------------------------------------------------------------------------------------- Operating Income 157 116 260 251 - -------------------------------------------------------------------------------------------------------------- Other Income (Expense) Other, net - 1 (1) 1 - -------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) - 1 (1) 1 - -------------------------------------------------------------------------------------------------------------- Interest Charges Interest charges 29 29 60 58 Allowance for borrowed funds used during construction (1) (2) (2) (4) - -------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 28 27 58 54 - -------------------------------------------------------------------------------------------------------------- Income before Income Taxes 129 90 201 198 Income Tax Expense 45 28 67 65 - -------------------------------------------------------------------------------------------------------------- Net Income 84 62 134 133 Preferred Stock Dividend Requirement - 1 1 1 - -------------------------------------------------------------------------------------------------------------- Earnings for Common Stock $ 84 $ 61 $ 133 $ 132 - --------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements. 9 FLORIDA POWER CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC. UNAUDITED BALANCE SHEETS (in millions) June 30 December 31 Assets 2004 2003 - -------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 8,281 $ 8,150 Accumulated depreciation (2,856) (2,828) - -------------------------------------------------------------------------------------------------- Utility plant in service, net 5,425 5,322 Held for future use 8 8 Construction work in progress 349 328 Nuclear fuel, net of amortization 57 69 - -------------------------------------------------------------------------------------------------- Total Utility Plant, Net 5,839 5,727 - -------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 11 10 Accounts receivable 217 191 Unbilled accounts receivable 77 59 Receivables from affiliated companies 6 7 Deferred income taxes 23 39 Inventory 241 230 Deferred fuel cost 178 204 Prepayments and other current assets 4 6 - -------------------------------------------------------------------------------------------------- Total Current Assets 757 746 - -------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 131 126 Debt issuance costs 22 25 Nuclear decommissioning trust funds 436 433 Miscellaneous other property and investments 44 40 Prepaid pension cost 223 220 Other assets and deferred debits 5 6 - -------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 861 850 - -------------------------------------------------------------------------------------------------- Total Assets $ 7,457 $ 7,323 - -------------------------------------------------------------------------------------------------- Capitalization and Liabilities - -------------------------------------------------------------------------------------------------- Common Stock Equity Common stock without par value $ 1,081 $ 1,081 Retained earnings 1,117 1,062 Accumulated other comprehensive loss (4) (4) - -------------------------------------------------------------------------------------------------- Total Common Stock Equity 2,194 2,139 - -------------------------------------------------------------------------------------------------- Preferred Stock - Not Subject to Mandatory Redemption 34 34 Long-Term Debt, Net 1,902 1,904 - -------------------------------------------------------------------------------------------------- Total Capitalization 4,130 4,077 - -------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 43 43 Accounts payable 198 161 Payables to affiliated companies 132 75 Notes payable to affiliated companies - 363 Taxes accrued 76 20 Interest accrued 39 42 Short-term obligations 231 - Customer deposits 130 127 Other current liabilities 114 85 - -------------------------------------------------------------------------------------------------- Total Current Liabilities 963 916 - -------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 353 363 Accumulated deferred investment tax credits 39 41 Regulatory liabilities 1,388 1,365 Asset retirement obligations 328 319 Other liabilities and deferred credits 256 242 - -------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 2,364 2,330 - -------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 12) - -------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 7,457 $ 7,323 - --------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements. 10 FLORIDA POWER CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC. UNAUDITED STATEMENTS of CASH FLOWS Six Months Ended June 30 (in millions) 2004 2003 - ---------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 134 $ 133 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 155 172 Deferred income taxes and investment tax credits, net 1 1 Deferred fuel cost (credit) 26 (103) Cash provided (used) by changes in operating assets and liabilities: Accounts receivable (43) (18) Inventories (6) (4) Prepayments and other current assets 2 1 Accounts payable 87 (44) Other current liabilities 82 124 Other 9 7 - ---------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 447 269 - ---------------------------------------------------------------------------------------------------------------- Investing Activities Property additions (235) (283) Nuclear fuel additions - (38) Other - 1 - ---------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (235) (320) - ---------------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt 1 639 Net increase (decrease) in short-term obligations 231 (36) Retirement of long-term debt (1) (227) Net change in intercompany notes (363) (125) Dividends paid to parent (78) (203) Other (1) (1) - ---------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Financing Activities (211) 47 - ---------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 1 (4) - ---------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of Period 10 16 - ---------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 11 $ 12 - ---------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 62 $ 48 income taxes (net of refunds) $ 11 $ 15 - ----------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements. 11 Florida Progress Corporation and Florida Power Corporation d/b/a Progress Energy Florida, Inc. NOTES TO INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION 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 Progress Energy, Inc. (Progress Energy or the Parent). Florida Progress' two primary subsidiaries are Florida Power Corporation d/b/a Progress Energy Florida, Inc. (PEF) and Progress Fuels Corporation (Progress Fuels). PEF is a regulated public utility engaged in the generation, purchase, transmission, distribution and sale of electricity primarily in portions of Florida. PEF is regulated by the Florida Public Service Commission (FPSC), the Federal Energy Regulatory Commission (FERC) and the Nuclear Regulatory Commission (NRC). Progress Fuels is a diversified non-utility energy company, whose principal business segments are Energy and Related Services and Rail Services. Throughout the report, the terms utility and regulated will be used to discuss items pertaining to PEF. Diversified business and nonregulated will be used to discuss the subsidiaries of Florida Progress excluding PEF. B. Basis of Presentation These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying interim financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the audited financial statements and notes thereto included in Florida Progress' and PEF's Form 10-K for the year ended December 31, 2003. In accordance with the provisions of Accounting Principles Board Opinion (APB) No. 28, "Interim Financial Reporting," GAAP requires companies to apply a levelized effective tax rate to interim periods that is consistent with the estimated annual effective tax rate. The intra-period tax allocation, which will have no impact on total year net income, maintains an effective tax rate consistent with the estimated annual effective tax rate. For the three months ended June 30, 2004 and 2003, income tax expense was decreased by $11 million and $10 million, respectively. For the six months ended June 30, 2004 and 2003, income tax expense was increased by $23 million and decreased by $15 million, respectively. The income tax provisions for the Company differ from amounts computed by applying the federal statutory tax rate to income before income taxes, primarily due to the recognition of synthetic fuel tax credits. PEF collects from customers certain excise taxes, which include gross receipts tax, franchise taxes, and other excise taxes, levied by the state or local government upon the customers. PEF accounts for excise taxes on a gross basis. For the three months ended June 30, 2004 and 2003, excise taxes of approximately $37 million and $34 million, respectively, are included in taxes other than on income in the accompanying Statements of Income. For the six months ended June 30, 2004 and 2003, excise taxes of approximately $69 million and $64 million, respectively, are included in taxes other than on income in the accompanying Statements of Income. These approximate amounts are also included in utility revenues. The amounts included in the interim financial statements are unaudited but, in the opinion of management, reflect all normal recurring adjustments necessary to fairly present Florida Progress' and PEF's financial position and results of operations for the interim periods. Due to seasonal weather variations and the timing of outages of electric generating units, especially the nuclear-fueled unit, the results of operations for interim periods are not necessarily indicative of amounts expected for the entire year or future periods. 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. Certain reclassifications for 2003 have been made to conform to the 2004 presentation. 12 The results of operations of the Rail Services segment are reported one month in arrears. C. Subsidiary Reporting Period Change In the fourth quarter of 2003, the Company ceased recording portions of Fuels' segment operations, primarily synthetic fuel operations, one month in arrears. As a result, earnings for the year ended December 31, 2003 as reported in the Company's Form 10-K, included 13 months of results for these operations. The 2003 quarterly results for periods ended March 31, June 30 and September 30 have been restated for the above-mentioned reporting period change. This resulted in four months of earnings in the first quarter of 2003. The reclassification of earnings between quarters resulted in a $4 million and a $15 million increase in net income for the quarter and year to date periods, respectively, from $110 million to $114 million for the second quarter of 2003, and from $191 million to $206 million for the six months ended June 30, 2003. D. Stock-Based Compensation The Company measures compensation expense for stock options as the difference between the market price of its common stock and the exercise price of the option at the grant date. The exercise price at which options are granted by the Company equals the market price at the grant date, and accordingly, no compensation expense has been recognized for stock option grants. For purposes of the pro forma disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123" (SFAS No. 148), the estimated fair value of the Company's stock options is amortized to expense over the options' vesting period. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period: Three Months Ended Six Months Ended (in millions) June 30 June 30 --------------------------- ------------------------- FLORIDA PROGRESS CORPORATION 2004 2003 2004 2003 -------------- ----------- ------------- ----------- Net Income, as reported $ 135 $ 114 $ 190 $ 206 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 1 - 2 1 -------------- ----------- ------------- ----------- Pro forma net income $ 134 $ 114 $ 188 $ 205 ============== =========== ============= =========== Three Months Ended Six Months Ended (in millions) June 30 June 30 --------------------------- ------------------------- PROGRESS ENERGY FLORIDA, INC. 2004 2003 2004 2003 -------------- ----------- ------------- ----------- Earnings for Common Stock, as reported $ 84 $ 61 $ 133 $ 132 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 1 - 2 1 -------------- ----------- ------------- ----------- Pro forma earnings for common stock $ 83 $ 61 $ 131 $ 131 ============== =========== ============= ===========
E. Consolidation of Variable Interest Entities Florida Progress and PEF consolidate all voting interest entities in which they own a majority voting interest and all variable interest entities for which they are the primary beneficiary in accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46R). During the first six months of 2004 and 2003, Florida Progress or PEF did not participate in the creation of, or obtain a significant new variable interest in, any variable interest entity. A subsidiary of Florida Progress is the primary beneficiary of Colona Synfuel Limited Partnership LLLP (Colona), a synthetic fuel production facility that qualifies for federal tax credits under Section 29 of the Internal Revenue Code and therefore has consolidated the entity under FIN No. 46R. As of June 30, 2004, Colona's total assets were $16 million. None of Florida Progress' consolidated assets are collateral for Colona's obligations. Florida Progress and PEF have interests in several variable interest entities for which they are not the primary beneficiary. These arrangements include investments in approximately six limited partnerships, limited liability corporations and venture capital funds. The aggregate maximum loss exposure at June 30, 2004, that Florida Progress could be required to record in its consolidated income statement as a result of these arrangements totals approximately $15 million. The aggregate maximum loss 13 exposure at June 30, 2004, that PEF could be required to record in its income statement as a result of these arrangements totals approximately $5 million. The creditors of these variable interest entities do not have recourse to the general credit of Florida Progress or PEF in excess of the aggregate maximum loss exposure. 2. NEW ACCOUNTING STANDARDS In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. In accordance with guidance issued by the FASB in FASB Staff Position FAS 106-1, the Company elected to defer accounting for the effects of the Act due to uncertainties regarding the effects of the implementation of the Act and the accounting for certain provisions of the Act. Therefore, OPEB information presented in the financial statements does not reflect the effects of the Act. The FASB recently issued definitive accounting guidance for the Act in FASB Staff Position 106-2, which is effective for the Company in the third quarter of 2004. FASB Staff Position 106-2 will result in the recognition of lower OPEB costs to reflect prescription drug-related federal subsidies to be received under the Act. The Company is in the process of quantifying the impact of the Act on OPEB costs. 3. DIVESTITURES A. Divestiture of Synfuel Partnership Interests In June 2004, the Company through its subsidiary, Progress Fuels sold, in two transactions, a combined 49.8 percent partnership interest in Colona Synfuel Limited Partnership, LLLP, one of its synthetic fuel facilities. Substantially all proceeds from the sales will be received over time, which is typical of such sales in the industry. Gain from the sales will be recognized on a cost recovery basis. The Company's book value of the interests sold totaled approximately $3 million. Based on projected production levels, the Company anticipates receiving total gross proceeds of approximately $30 million per year, on an annualized basis. Under the agreements, the buyers have a right to unwind the transactions if an IRS reconfirmation private letter ruling (PLR) is not received by October 15, 2004. Therefore, no gain would be recognized prior to the expiration of that right. B. 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. In March 2003, the Company signed a letter of intent to sell the majority of Railcar Ltd. assets to The Andersons, Inc., and the transaction closed in February 2004. Proceeds from the sale were approximately $82 million before transaction costs and taxes of approximately $13 million. The assets of Railcar Ltd. were grouped as assets held for sale and are included in other current assets on the Company's Consolidated Balance Sheets at June 30, 2004 and December 31, 2003. The assets were recorded at approximately $6 million and $75 million at June 30, 2004 and December 31, 2003, respectively, which reflects the Company's estimates of the fair value expected to be realized from the sale of these assets less costs to sell. In July 2004, the Company sold the remaining assets classified as held for sale to a third-party for net proceeds of $6 million. 4. REGULATORY MATTERS A. Retail Rate Matters On June 29, 2004, the FPSC approved a Stipulation and Settlement Agreement, executed on April 29, 2004, by PEF, the Office of Public Counsel and the Florida Industrial Power Users Group. The stipulation and settlement resolved the issue currently pending before the FPSC regarding the costs PEF will be allowed to recover through its Fuel and Purchased Power Cost Recovery clause in 2004 and beyond for waterborne coal deliveries by the Company's affiliated coal supplier, Progress Fuels Corporation. The settlement sets fixed per ton prices based on point of origin for all waterborne coal deliveries in 2004, and establishes a market-based pricing methodology for determining recoverable waterborne coal transportation costs through a competitive solicitation process or market price proxies beginning in 2005 and thereafter. The settlement will reduce the amount that PEF will charge to the Fuel and Purchased Power Cost Recovery clause for waterborne transportation by approximately $13 million beginning in 2004. This concludes the FPSC's investigation of PEF's recoverable waterborne coal transportation costs. 14 In March 2002, the parties in PEF's rate case entered into a Stipulation and Settlement Agreement (the Agreement) related to retail rate matters. The Agreement was approved by the FPSC and is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if PEF's base rate earnings fall below a 10% return on equity, PEF may petition the FPSC to amend its base rates. B. Regional Transmission Organizations In 2000, the FERC issued Order No. 2000 on Regional Transmission Organizations (RTOs), which set minimum characteristics and functions that RTOs must meet, including independent transmission service. In July 2002, 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). 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. PEF filed comments in November 2002 and supplement comments in January 2003. In April 2003, the FERC released a White Paper on the Wholesale Market Platform. The White Paper provides an overview of what the FERC currently intends to include in a final rule in the SMD NOPR docket. The White Paper retains the fundamental and most protested aspects of SMD NOPR, including mandatory RTOs and the FERC's assertion of jurisdiction over certain aspects of retail service. FERC has not yet issued a final rule on SMD NOPR. In December 2003, the FPSC issued an order requiring further state proceedings. The Company cannot predict the outcome of these matters or the effect that they may have on the GridFlorida proceedings currently ongoing before the FERC. It is unknown what impact the future proceedings will have on the Company's earnings, revenues or prices. PEF has $4 million invested in GridFlorida related to startup costs at June 30, 2004. PEF expects to recover these startup costs in conjunction with the GridFlorida original structure or in conjunction with any alternate combined transmission structure that emerges. 5. GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill, by reportable segment, are as follows: Energy and Related (in millions) Services Other Total ---------------------------------- Balance as of January 1, 2003 $ 11 $ - $ 11 Divestitures (1) - (1) Acquisition - 7 7 ---------------------------------- Balance as of December 31, 2003 $ 10 $ 7 $ 17 Purchase accounting adjustment - 4 4 ---------------------------------- Balance as of June 30, 2004 $ 10 $ 11 $ 21 ================================== In December 2003, $7 million in goodwill was acquired as part of the Progress Telecommunications Corporation business combination and is in the Other segment. The $4 million purchase accounting adjustment during the first half of 2004 resulted primarily from changes in the estimated restructuring costs related to the partial acquisition of EPIK in December 2003. The Company has $9 million of net intangible assets at June 30, 2004 and December 31, 2003. All of the Company's intangibles are subject to amortization. The Company's intangibles are primarily acquired customer contracts that are amortized over their respective lives. Amortization expense recorded on intangible assets for the three and six months ended June 30, 2004 and 2003, and estimated annual amortization expense for intangible assets for 2004 through 2008 are not material to the results of operations. PEF has no goodwill or significant intangible assets at June 30, 2004 or December 31, 2003. 15 6. COMPREHENSIVE INCOME Comprehensive income for Florida Progress for the three months ended June 30, 2004 and 2003 was $131 million and $113 million, respectively, and $177 million and $204 million for the six months ended June 30, 2004 and June 2003, respectively. Comprehensive income for PEF for the three months ended June 30, 2004 and 2003 was $84 million and $62 million, respectively, and $134 million and $133 million for the six months ended June 30, 2004 and 2003, respectively. Items of other comprehensive income consisted primarily of changes in fair value of derivatives used to hedge cash flows related to interest on long-term debt and gas sales, and to foreign currency translation adjustments. 7. FINANCING ACTIVITIES On February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25 million 6.48% medium term notes with excess cash. 8. BENEFIT PLANS The Company and some of its subsidiaries (including PEF) have a non-contributory defined benefit retirement (pension) plan for substantially all full-time employees. The Company also has supplementary defined benefit pension plans that provide benefits to higher-level employees. In addition to pension benefits, the Company and some of its subsidiaries (including PEF) provide contributory other postretirement benefits (OPEB), including certain health care and life insurance benefits, for retired employees who meet specified criteria. The components of the net periodic benefit cost for the three and six months ended June 30 are: Three Months Ended June 30, Other Postretirement Pension Benefits Benefits --------------------- -------------------- (in millions) 2004 2003 2004 2003 --------------------- -------------------- Service cost $ 5 $ 5 $ 1 $ 1 Interest cost 12 11 4 4 Expected return on plan assets (18) (15) - - Net amortization 1 - 1 1 --------------------- -------------------- Net cost recognized by Florida Progress $ - $ 1 $ 6 $ 6 --------------------- -------------------- Net cost/(benefit) recognized by PEF $ (1) $ - $ 6 $ 6 ===================== ==================== Six Months Ended June 30, Other Postretirement Pension Benefits Benefits --------------------- -------------------- (in millions) 2004 2003 2004 2003 --------------------- -------------------- Service cost $ 11 $ 10 $ 3 $ 3 Interest cost 23 23 8 7 Expected return on plan assets (36) (31) - - Net amortization 1 - 2 2 --------------------- -------------------- Net cost/(benefit) recognized by Florida Progress $ (1) $ 2 $ 13 $ 12 --------------------- -------------------- Net cost/(benefit) recognized by PEF $ (2) $ 1 $ 12 $ 12 ===================== ====================
9. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS Progress Energy and its subsidiaries, including the Company and PEF, are exposed to various risks related to changes in market conditions. The Company has a risk management committee that includes senior executives from various business groups. The risk management committee is responsible for administering risk management policies and monitoring compliance with those policies by all subsidiaries. The Company, under its risk management policy, may use a variety of instruments to manage exposure to fluctuations in commodity prices and interest rates. The Company uses interest rate derivative instruments to adjust the fixed and variable rate debt components of its debt portfolio and to hedge interest rates with regard to future fixed rate debt issuances. 16 As of June 30, 2004, there were no outstanding interest rate derivatives at PEF. PEF has entered into derivative instruments to hedge its exposure to price fluctuations on fuel oil purchases. These instruments did not have a material impact on the Company's consolidated and PEF's financial position or results of operations. Progress Fuels Corporation, through an affiliate, periodically enters into derivative instruments to hedge its exposure to price fluctuations on natural gas sales. As of June 30, 2004, Progress Fuels Corporation has executed cash flow hedges of natural gas sales through December 2005. These instruments did not have a material impact on the Company's consolidated financial position or results of operations. 10. FINANCIAL INFORMATION BY BUSINESS SEGMENT The Company's principal business segment is PEF, 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 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, providing rail and track material, and scrap metal recycling. The Other category consists primarily of PTC LLC, the Company's telecommunications subsidiary, and the holding company, Florida Progress Corporation. PTC LLC 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 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 PEF. The price Progress Fuels charges PEF is based on market rates for coal procurement. Prices for water-borne transportation in 2003 were based on a methodology approved by the FPSC. In April 2004, PEF executed a Stipulation and Settlement agreement with the Office of Public Counsel and the Florida Industrial Power Users Group which amends the transportation rate. On June 29, 2004, the FPSC approved the Stipulation and Settlement. This concludes the FPSC's investigation of PEF's recoverable waterborne coal transportation costs. See discussion at Note 4A. 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 PEF. The allowed rate of return is currently 12%. No single customer accounted for 10% or more of unaffiliated revenues. The following summarizes the revenues and segment profits or losses for the reportable business segments. The combined segment profits and losses represents Florida Progress' total income. Energy and (in millions) PEF Related Rail Other Consolidated Services ----------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 2004: Revenues $ 860 $ 343 $ 285 $ 16 $ 1,504 Intersegment revenues - 69 - (69) - Total revenues 860 412 285 (53) 1,504 Segment profit 84 41 4 6 135 Total segment assets $ 7,457 $ 1,002 $ 532 $ 586 $ 9,577 Three Months Ended June 30, 2003: Revenues $ 767 $ 219 $ 214 $ 7 $ 1,207 Intersegment revenues - 88 - (88) - Total revenues 767 307 214 (81) 1,207 Segment profit (loss) 61 42 2 9 114
17 Energy and PEF Related Rail Other Consolidated Services ----------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 2004: Revenues $ 1,644 $ 616 $ 523 $ 32 $ 2,815 Intersegment revenues - 151 - (151) - Total revenues 1,644 767 523 (119) 2,815 Segment profit 133 79 9 (31) 190 ----------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 2003: Revenues $ 1,495 $ 522 $ 392 $ 13 $ 2,422 Intersegment revenues - 169 - (169) - Total revenues 1,495 691 392 (156) 2,422 Segment profit (loss) 132 67 (1) 8 206
11. 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 accompanying Statements of Income for the three and six months ended June 30, 2004 and 2003, are as follows: Three Months Ended Six Months Ended (in millions) June 30 June 30 ---------------------------- --------------------------- 2004 2003 2004 2003 ------------ ------------ ----------- ----------- Other income Nonregulated energy and delivery services income 3 3 7 7 AFUDC equity 1 3 2 4 Other 1 1 2 2 ------------ ------------ ----------- ----------- Total other income - PEF $ 5 $ 7 $ 11 $ 13 Other income - Florida Progress 3 4 2 2 ------------ ------------ ----------- ----------- Total other income - PEF and Florida Progress $ 8 $ 11 $ 13 $ 15 ------------ ------------ ----------- ----------- Other expense Nonregulated energy and delivery services expenses $ 3 $ 3 $ 5 $ 6 Donations 1 2 5 4 Other 1 1 2 2 ------------ ------------ ----------- ----------- Total other expense - PEF $ 5 $ 6 $ 12 $ 12 Loss from equity investments 4 4 7 7 Other expense - Florida Progress 1 2 1 3 ------------ ------------ ----------- ----------- Total other expense - PEF and Florida Progress $ 10 $ 12 $ 20 $ 22 ------------ ------------ ----------- ----------- Other, net $ (2) $ (1) $ (7) $ (7) ============ ============ =========== ===========
Nonregulated energy and delivery services include power protection services and mass market programs such as surge protection, appliance services and area light sales, and delivery, transmission and substation work for other utilities. 12. COMMITMENTS AND CONTINGENCIES Contingencies and significant changes to the commitments discussed in Note 19 of the Company's 2003 Annual Report on Form 10-K are described below. A. Guarantees As a part of normal business, Florida Progress and certain subsidiaries including PEF enter into various agreements providing financial or performance assurances to third parties. Such agreements include guarantees, standby 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 June 30, 2004, management does not believe conditions are likely for significant performance under these agreements. 18 Guarantees at June 30, 2004, are summarized in the table below and discussed more fully in the subsequent paragraphs: (in millions) Guarantees issued on behalf of the Company and affiliates Standby letters of credit $ 27 Surety bonds - Other guarantees 20 Guarantees issued on behalf of third parties Securities of affiliated trust 300 Other guarantees 24 ----------- Total $ 371 =========== Standby Letters of Credit Financial institutions have issued standby letters of credit for the Company 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. Of the total standby letters of credit issued, PEF has outstanding letters of credit totaling $2 million. Any amounts owed by the Company's subsidiaries are reflected in the Company's Consolidated Balance Sheets. Other Guarantees The Company has total other guarantees outstanding of approximately $44 million. Included are $10 million of guarantees in support of synthetic fuel operations at a third party plant. The remaining $34 million in other guarantees is related primarily to prompt performance payments and other payments subject to contingencies. In connection with the sale of partnership interests in Colona (see Note 3.A), Progress Fuels indemnified the buyers against any claims related to Colona resulting from violations of any environmental laws. Although the terms of the agreement provide for no limitation to the maximum potential future payments under the indemnification, the Company has estimated that the maximum total of such payments would be insignificant. Securities of Affiliated Trust The Company has guaranteed certain payments of an affiliated company, FPC Capital I (the Trust). Due to the nature of the relationship between the Trust and Florida Progress Funding Corporation, the Company has guaranteed the payment of all distributions related to the Trust's outstanding mandatorily redeemable preferred securities. At June 30, 2004, the Trust had outstanding 12 million shares of the securities with a liquidation value of $300 million. Guarantees Issued by Progress Energy Progress Energy has issued approximately $46 million of guarantees on behalf of Progress Fuels and its subsidiaries for obligations under coal brokering operations. B. Insurance PEF is insured against public liability for a nuclear incident up to $10.76 billion per occurrence. Under the current provisions of the Price Anderson Act, which limits liability for accidents at nuclear power plants, PEF, as owner of a nuclear unit, can be assessed 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), each company would be subject to assessments of up to $101 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 considering revisions to the Price Anderson Act during 2004, that could include increased limits and assessments per reactor owned. The final outcome of this matter cannot be predicted at this time. 19 PEF self-insures their transmission and distribution lines against loss due to storm damage and other natural disasters. PEF accrues $6 million annually to a storm damage reserve pursuant to a regulatory order and may defer losses in excess of the reserve. C. 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, PEF 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, PEF is periodically notified by regulators such as the EPA and various state agencies of its involvement or potential involvement in sites, other than MGP sites, that may require investigation and/or remediation. PEF 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. The Company cannot predict the outcome of this matter. PEF At June 30, 2004, PEF has accrued $27 million for probable and estimable costs related to various environmental sites. Of this accrual, $17 million is for costs associated with the remediation of distribution and substation transformers for which PEF has received approval by the FPSC for recovery through the Environmental Cost Recovery Clause (ECRC). For the six months ended June 30, 2004, PEF accrued an additional $8 million related to the remediation of transformers and a regulatory asset for the probable recovery through the ECRC. The remaining $10 million is related to two former MGP sites and other sites associated with PEF that have required or are anticipated to require investigation and/or remediation costs. PEF is unable to provide an estimate of the reasonably possible total remediation costs beyond what is currently accrued. These accruals have been recorded on an undiscounted basis. PEF 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. Presently, PEF cannot determine the total costs that may be incurred in connection with the remediation of all sites. As more activity occurs at these sites, PEF will assess the need to adjust the accruals. Florida Progress In 2001, Progress Fuels sold its Inland Marine Transportation business to AEP Resources, Inc. Progress Fuels established an accrual to address indemnities and retained environmental liability associated with the transaction. Progress Fuels estimates that its contractual liability to AEP Resources, Inc. associated with Inland Marine Transportation is $4 million at June 30, 2004 and has accrued such amount. The previous accrual of $10 million was reduced in 2003 based on a change in estimate. This accrual has been determined on an undiscounted basis. Progress Fuels measures its liability for this site based on estimable and probable remediation scenarios. The Company cannot predict the outcome of this matter. Certain historical sites exist that are being addressed voluntarily by Progress Fuels and FPC. An immaterial 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. The Company cannot predict the outcome of this matter. Rail Rail Services is voluntarily addressing certain historical waste sites. The Company cannot determine the total costs that may be incurred in connection with these sites. 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. 20 Air Quality There has been and may be further proposed 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 and PEF's 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. PEF was asked to provide information to the EPA as part of this initiative and cooperated in providing the requested information. During 2003, PEF received a supplemental information request from the EPA and responded to it. 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 the EPA's initiative or its impact, if any, on the Company. In 2003, the EPA published a final rule addressing routine equipment replacement under the New Source Review program. The rule defines routine equipment replacement and the types of activities that are not subject to New Source Review requirements or New Source Performance Standards under the Clean Air Act. The rule was challenged in the Federal Appeals Court and its implementation stayed. In July 2004, the EPA announced it will reconsider certain issues arising from the final routine equipment replacement rule. Reconsideration does not impact the court-approved stay. The agency plans to issue a final decision on these reconsidered issues by year end. 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. In 2003, the EPA proposed, and solicited comment on, alternative control plans that would limit mercury emissions from coal-fired power plants. The first, a Maximum Achievable Control Technology (MACT) standard applicable to every coal-fired plant, would require compliance in 2008. The second, which the EPA has stated it prefers, is a mercury cap and trade program that would require limits to be met in two phases, 2010 and 2018. The EPA expects to finalize the mercury rule in March 2005. Achieving compliance with either proposal could involve significant capital costs which could be material and adverse to the Company's and PEF's financial condition or results of operations. However, the Company cannot predict the outcome of this matter. In conjunction with the proposed mercury rule, the EPA proposed a Maximum Available Control Technology (MACT) standard to regulate nickel emissions from residual oil-fired units. The agency estimates the proposal will reduce national nickel emissions to approximately 103 tons. The EPA expects to finalize the nickel rule in March 2005. The Company cannot predict the outcome of this matter. In December 2003, the EPA released its proposed Interstate Air Quality Rule, currently referred to as the Clean Air Interstate Rule (CAIR). The EPA's proposal requires 28 jurisdictions, including North Carolina, South Carolina, Georgia and Florida, to further reduce nitrogen oxide (NOx) and sulfur dioxide (SO2) emissions in order to attain pre-set NOx and SO2 emissions levels. The rule is expected to become final in 2004. In a supplemental notice of proposed rulemaking on the CAIR, the EPA indicated that compliance with the rule would meet the best available retrofit technology (BART) requirements of its regional haze rule, as the emissions controls to be installed for the CAIR are roughly equivalent to the regional haze BART provisions. The installation of controls necessary to comply with the rule could involve significant capital costs. 21 Water Quality As a result of the operation of certain control equipment needed to address the air quality issues outlined above, new wastewater streams may be generated. Integration of these new wastewater streams into existing wastewater treatment processes may result in permitting, construction and water treatment requirements imposed on the Company in the immediate and extended future. After many years of litigation and settlement negotiations, the EPA adopted final regulations in February 2004 for the implementation of Section 316(b) of the Clean Water Act. These regulations become effective September 7, 2004. The purpose of these regulations is to minimize adverse environmental impacts caused by cooling water intake structures and intake systems located at existing facilities. Over the next several years, these regulations may require the facilities to mitigate the effects to aquatic organisms by undertaking intake modifications or other restorative activities. Substantial costs could be incurred by the facilities in order to comply with the new regulations. The Company cannot predict the outcome and impacts to the facilities at this time. The EPA has published for comment a draft Environmental Impact Statement (EIS) for surface coal mining (sometimes referred to as "mountaintop mining") and valley fills in the Appalachian coal region, where Progress Fuels currently operates a surface mine and may operate others in the future. The final EIS, when published, may affect regulations for the permitting of mining operations and the cost of compliance with environmental regulations. Regulatory changes for mining may also affect the cost of fuel for the coal-fueled electric generating plant. The Company cannot predict the outcome of this matter. Other Environmental Matters 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 has stated it 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. Other Contingencies 1. Franchise Litigation Three cities, with a total of approximately 18,000 customers, have litigation pending against PEF in various circuit courts in Florida. As discussed below, three other cities, with a total of approximately 30,000 customers, have subsequently settled their lawsuits with PEF and signed new, 30-year franchise agreements. The lawsuits principally seek (1) a declaratory judgment that the cities have the right to purchase PEF'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 PEF to continue to collect from PEF's customers and remit to the cities, franchise fees during the pending litigation, and as long as PEF continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of the franchise ordinances under which PEF had agreed to collect such fees. Five circuit courts have entered orders requiring arbitration to establish the purchase price of PEF's electric distribution system within five cities. Two appellate courts have upheld those circuit court decisions and authorized cities to determine the value of PEF's electric distribution system within the cities through arbitration. Arbitration in one of the cases (the City of Casselberry) was held in August 2002. Following arbitration, the parties entered settlement discussions, and in July 2003 the City approved a settlement agreement and a new, 30-year franchise agreement with PEF. The settlement resolves all pending litigation with that City. A second arbitration (with the 13,000-customer City of Winter Park) was completed in February 2003. That arbitration panel issued an award in May 2003 setting the value of PEF's distribution system within the City of Winter Park at approximately $32 million, not including separation and reintegration and construction work in progress, which could add several million dollars to the award. The panel also awarded PEF approximately $11 million in stranded costs, which according to the award decreases over time. In September 2003, Winter Park 22 voters passed a referendum that would authorize the City to issue bonds of up to approximately $50 million to acquire PEF's electric distribution system. While the City has not yet definitively decided whether it will acquire the system, on April 26, 2004, the City Commission voted to enter into a hedge agreement to lock into interest rates for the acquisition of the system and to proceed with the acquisition. The City sought and received wholesale power supply bids and on June 23, 2004, executed a wholesale power supply contract with PEF. On May 12, 2004, the City solicited bids to operate and maintain the distribution system. The City received bids on July 1, 2004, and expects to make its selection in August 2004. The City has indicated that its goal is to begin electric operations in June 2005. At this time, whether and when there will be further proceedings regarding the bids on City of Winter Park cannot be determined. A third arbitration (with the 2,500-customer Town of Belleair) was completed in June 2003. In September 2003, the arbitration panel issued an award in that case setting the value of the electric distribution system within the Town at approximately $6 million. The panel further required the Town to pay to PEF its requested $1 million in separation and reintegration costs and $2 million in stranded costs. The Town has not yet decided whether it will attempt to acquire the system. At this time, whether and when there will be further proceedings regarding the Town of Belleair cannot be determined. A fourth arbitration (with the 13,000-customer City of Apopka) had been scheduled for January 2004. In December 2003, the Apopka City Commission voted on first reading to approve a settlement agreement and a 30-year franchise with PEF. The settlement and franchise became effective upon approval by the Commission at a second reading of the franchise in January 2004. The settlement resolves all outstanding litigation between the parties. Arbitration in the remaining city's litigation (the 1,500-customer City of Edgewood) has not yet been scheduled. As part of the above litigation, two appellate courts have also reached opposite conclusions regarding whether PEF must continue to collect from its customers and remit to the cities "franchise fees" under the expired franchise ordinances. PEF has filed an appeal with the Florida Supreme Court to resolve the conflict between the two appellate courts. The Florida Supreme Court held oral argument in one of the appeals in August 2003. Subsequently, the Court requested briefing from the parties in the other appeal, which was completed in November 2003. The Court has not yet issued a decision in these cases. PEF cannot predict the outcome of these matters at this time. 2. DOE Litigation As required under the Nuclear Waste Policy Act of 1982, PEF entered into a contract with the U.S. Department of Energy (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 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. The U.S. Circuit Court of Appeals (Federal Circuit) has ruled that utilities may sue the DOE for damages in the Federal Court of Claims instead of having to file an administrative claim with the DOE. 23 In January 2004, PEF filed a complaint with the DOE claiming that the DOE breached the Standard Contract for Disposal of Spent Nuclear Fuel by failing to accept spent nuclear fuel from various Progress Energy facilities on or before January 31, 1998. Damages due to DOE's breach will likely exceed $100 million. Similar suits have been initiated by over two dozen other utilities. In July 2002, Congress passed an override resolution to Nevada's veto of DOE's proposal to locate a permanent underground nuclear waste storage facility at Yucca Mountain, Nevada. DOE plans to submit a license application for the Yucca Mountain facility by the end of 2004. On November 5, 2003, Congressional negotiators approved $580 million for fiscal year 2004 for the Yucca Mountain project, $123 million more than the previous year. In January 2003, the State of Nevada, Clark County, Nevada, and the City of Las Vegas petitioned the U.S. Court of Appeals for the District of Columbia Circuit for review of the Congressional override resolution. On July 9, 2004, the Court rejected the challenge to the constitutionality of the resolution approving Yucca Mountain, but ruled that the EPA was wrong to set a 10,000-year compliance period. The DOE continues to state it plans to begin operation of the repository at Yucca Mountain in 2010. PEF cannot predict the outcome of this matter. PEF is currently storing spent nuclear fuel onsite in spent fuel pools. PEF's nuclear unit, Crystal River Unit No. 3, (CR3) has sufficient storage capacity in place for fuel consumed through the end of the expiration of the current license in 2016. PEF will seek renewal of the CR3 operating license and if approved, additional dry storage may be necessary. 3. 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 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 million, and accordingly, accrued $3 million in the third quarter of 1999 as an estimate of probable loss. All parties filed motions for summary judgment in July 2001. The summary judgment motions of Calgon and the other selling shareholder were denied in April 2002. The summary judgment motion of Florida Progress was withdrawn pending a legal challenge to portions of the report of Calgon's expert, Arthur Andersen, which had been used to oppose summary judgment. In September 2003, the United States District Court for the Western District of Pennsylvania issued final orders excluding from evidence in the case that portion of Arthur Andersen's damage analysis based on the discounted cash flow methodology of valuation. The Court did not exclude Arthur Andersen's use of the guideline publicly traded company methodology in its damage analysis. Florida Progress filed a renewed motion for summary judgment in October 2003, which is pending. The Company cannot predict the outcome of this matter, but will present a vigorous defense. 4. Synthetic Fuel Tax Credits At December 31, 2003, Florida Progress, through its subsidiaries, was 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 Code (Code). In June 2004, Progress Fuels sold, in two transactions, a combined 49.8 percent partnership interest in Colona Synfuel Limited Partnership, LLLP (Colona), one of its majority owned synthetic fuel operations. The Company is now a minority owner in Colona, but continues to consolidate Colona in accordance with FASB Interpretation No. 46R. Florida Progress, through its subsidiaries, is currently a majority owner in two synthetic fuel entities and a minority owner in four synthetic fuel entities, including Colona. 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 and that the fuel was produced from a facility that was placed in service before July 1, 1998. Synthetic fuel tax credit amounts not utilized are carried forward indefinitely as alternative minimum tax credits. All majority-owned and minority-owned entities received private letter rulings (PLRs) from the Internal Revenue Service (IRS) with respect to their synthetic fuel operations. The PLRs do not limit the production on which synthetic fuel credits may be claimed. 24 In September 2002, all of Florida Progress' majority-owned synthetic fuel entities at that time, 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. In July 2004, Progress Energy was notified that the Internal Revenue Service (IRS) field auditors anticipate taking an adverse position regarding the placed-in-service date of the Company's four Earthco synthetic fuel facilities. Due to the auditors' position, the IRS has decided to exercise its right to withdraw from the Pre-Filing Agreement (PFA) program with Progress Energy. With the IRS's withdrawal from the PFA program, the review of Progress Energy's Earthco facilities is back on the normal procedural audit path of the Company's tax returns. The IRS has indicated that the field audit team will provide its written recommendation later this year. After the field audit team's written recommendation is received, the Company will begin the Appeals process within the IRS. Through June 30, 2004, based on its ownership percentage, the Company has claimed $528 million of tax credits generated by Earthco facilities. If these credits were disallowed, the Company's one time exposure for cash tax payments would be $64 million (excluding interest), and earnings and equity would be reduced by $528 million, excluding interest. The Company believes that the appeals process could take up to two years to complete, however, it cannot control the actual timing of resolution and cannot predict the outcome of this matter. In February 2004, subsidiaries of the Company finalized execution of the Colona Closing Agreement with the IRS concerning their Colona synthetic fuel facilities. The Closing Agreement provided that the Colona facilities were placed in service before July 1, 1998, which is one of the qualification requirements for tax credits under Section 29 of the Code. The Closing Agreement further provides that the fuel produced by the Colona facilities in 2001 is a "qualified fuel" for purposes of the Section 29 tax credits. This action concluded the IRS PFA program with respect to Colona. In October 2003, the United States Senate Permanent Subcommittee on Investigations began a general investigation concerning synthetic fuel tax credits claimed under Section 29 of the Code. The investigation is examining the utilization of the credits, the nature of the technologies and fuels created, the use of the synthetic fuel, and other aspects of Section 29 and is not specific to the Company's synthetic fuel operations. Progress Energy is providing information in connection with this investigation. The Company cannot predict the outcome of this matter. In management's opinion, the Company is complying with all the necessary requirements to be allowed such credits under Section 29, and, although it cannot provide certainty, it believes that it will prevail in these matters. Accordingly, the Company has no current plans to alter its synthetic fuel production schedule as a result of these matters. However, should the Company fail to prevail in these matters, there could be a material liability for previously taken Section 29 credits, with a material adverse impact on earnings and cash flows. 5. Other Legal Matters Florida Progress and PEF are involved in various other claims and legal actions arising in the ordinary course of business, some of which involve claims for substantial amounts. Where appropriate, accruals have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. Florida Progress and PEF believe the ultimate disposition of these matters will not have a material adverse effect upon either Company's consolidated and PEF's financial position or results of operations. 25 Item 2. 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. Many, but not all of the factors that may impact actual results of the Company and PEF are discussed in the Risk Factors section of PEF's annual report on Form 10-K for the year ended December 31, 2003 which was filed with the SEC on March 12, 2004. You should carefully read these SEC reports. Please review "SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion of the factors that may impact any such forward-looking statements made herein. Amounts reported in the interim Consolidated Statements of Income for Florida Progress Corporation (Florida Progress) and the interim Statements of Income for Progress Energy Florida, Inc. (PEF) are not necessarily indicative of amounts expected for the respective annual or future periods due to the effects of seasonal temperature variations on energy consumption and the timing of maintenance on electric generating units, among other factors. This discussion should be read in conjunction with the accompanying financial statements found elsewhere in this report and in conjunction with the 2003 Form 10-K. OPERATING RESULTS Beginning in the fourth quarter of 2003, the Company ceased recording portions of Energy and Related Services segment's operations, primarily synthetic fuel facilities, one month in arrears. As a result, earnings for the year ended December 31, 2003 included 13 months of operations, resulting in a net income increase of $2 million for the year. The Company restated previously reported consolidated quarterly earnings to reflect the new reporting periods which resulted in four months of earnings in the first quarter of 2003 and changed reported net income for subsequent quarters. Earnings increased $4 million and $15 million, respectively, for the three and six months ended June 30, 2003 as compared to amounts originally reported. The Company's segments contributed segment profits or losses for the three and six months ended June 30, 2004 and 2003 as follows: - --------------------------------------------------------------------------------------- (in millions) Three Months Ended June 30 Six Months Ended June 30 - --------------------------------------------------------------------------------------- Business Segment 2004 2003 2004 2003 - --------------------------------------------------------------------------------------- PEF $ 84 $ 61 $ 133 $ 132 Energy and Related Services 41 42 79 67 Rail 4 2 9 (1) Other 6 9 (31) 8 ------------------------------------------------------ Segment profit/(loss) $ 135 $ 114 $ 190 $ 206 - ---------------------------------------------------------------------------------------
Progress Energy Florida PEF contributed segment profits of $84 million and $61 million for the three months ended June 30, 2004 and 2003, respectively, and $133 million and $132 million for the six months ended June 30, 2004 and 2003, respectively. The increase in profits for the three months ended June 30, 2004 when compared to 2003 is primarily due to a reduction in the provision for revenue sharing, the additional return on investment for Hines 2 plant and favorable customer growth. Profits for six months ended June 30, 2004 increased slightly due to a reduction in the provision for revenue sharing, favorable customer growth and the additional return on investment on the Hines 2 plant, partially offset by higher operations and maintenance (O&M) charges and increased depreciation expense from assets placed in service. 26 PEF's electric revenues for the three and six months ended June 30, 2004 and 2003, and the amount and percentage change by customer class are as follows: - --------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30 Six Months Ended June 30 (in millions of $) - --------------------------------------------------------------------------------------------------------------------- Customer Class 2004 Change % Change 2003 2004 Change % Change 2003 - --------------------------------------------------------------------------------------------------------------------- Residential $ 422 $ 8 1.9 $ 414 $ 824 $ 26 3.3 $ 798 Commercial 214 22 11.5 192 395 53 15.5 342 Industrial 66 10 17.9 56 128 24 23.1 104 Governmental 52 6 13.0 46 99 15 17.9 84 Retail revenue sharing (3) 25 (28) (7) 21 (28) -------------------- ------------------------------- ---------- Total retail revenues 751 71 10.4 $ 680 1,439 139 10.7 1,300 Wholesale 53 3 6.0 50 120 (1) (0.8) 121 Unbilled 24 17 7 18 11 7 Miscellaneous 32 2 6.7 30 67 - - 67 -------------------- ------------------------------- ---------- Total electric revenues $ 860 $ 93 12.1 $ 767 $ 1,644 $ 149 10.0 $ 1,495 - ---------------------------------------------------------------------------------------------------------------------
PEF's electric energy sales for the three and six months ended June 30, 2004 and 2003, and the amount and percentage change by customer class are as follows: - --------------------------------------------------------------------------------------------------------------------- (in thousands of mWh) Three Months Ended June 30 Six Months Ended June 30 - --------------------------------------------------------------------------------------------------------------------- Customer Class 2004 Change % Change 2003 2004 Change % Change 2003 - --------------------------------------------------- ------------------------------------------ ---------------------- Residential 4,505 (198) (4.2) 4,703 8,797 (459) (5.0) 9,256 Commercial 2,941 (10) (0.3) 2,951 5,431 38 0.7 5,393 Industrial 1,051 43 4.3 1,008 2,074 150 7.8 1,924 Governmental 751 9 1.2 742 1,423 25 1.8 1,398 --------------------- ------------------------------ ---------- Total retail energy sales 9,248 (156) (1.7) 9,404 17,725 (246) (1.4) 17,971 Wholesale 1,093 203 22.8 890 2,415 249 11.5 2,166 Unbilled 790 292 498 655 101 554 --------------------- ------------------------------ ---------- Total mWh sales 11,131 339 3.1 10,792 20,795 104 0.5 20,691 - ---------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2004 compared to the three months ended June 30, 2003 PEF's revenues, excluding recoverable fuel and other pass-through revenues of $479 million and $422 million for the three months ended June 30, 2004 and 2003, respectively, increased $36 million. This increase was due primarily to a reduction in the provision for revenue sharing of $25 million. The provision for revenue sharing recorded in the prior year included an additional $18 million related to 2002 as ordered by the FPSC and the year to date accrual for 2003 which was $7 million higher than the provisions recorded during 2004. Revenues also increased $1l million and $10 million, respectively, due to favorable customer growth and the return on investment on Hines 2 Plant which was placed in service in December 2003. PEF has approximately 37,000 additional customers as of June 30, 2004 compared to June 30, 2003. Based on the Stipulation and Settlement Agreement reached with the FPSC in April 2002, beginning with the in-service date of PEF's Hines Unit 2 and continuing through December 2005, PEF 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. These increases were partially offset by the impact of milder weather in the current year of approximately $5 million. Fuel and purchased power costs represent the costs of generation, which includes fuel purchases for generation, as well as energy purchased in the market to meet customer load. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, changes in these expenses, do not have a material impact on earnings. The difference between fuel and purchased power costs incurred and associated fuel revenues is deferred for future collection or refund to customers. 27 Fuel and purchased power expenses increased $57 million from $358 million for the three months ended June 30, 2003 to $415 million for the three months ended June 30, 2004. This increase is attributable primarily to an increase in fuel used in electric generation which increased $59 million. Higher system requirements and increased fuel costs in the current year account for $32 million of the increase in fuel used in electric generation. The remaining increase is due to the recovery of fuel expenses that were deferred in the prior year, as well as the deferral of fuel expenses in the current year. O&M costs decreased $2 million, when compared to the $154 million incurred during the three months ended June 30, 2003. This decrease is primarily related to the timing of outages and maintenance at generation facilities of $3 million and a reduction in costs allocated from the Service Company of $1 million partially offset by higher costs associated with planned reliability improvements of approximately $2 million. Depreciation and amortization decreased $8 million when compared to the $80 million incurred during the three months ended June 30, 2003, primarily due to the amortization of the Tiger Bay regulatory asset in the prior year. The Tiger Bay regulatory asset, for contract termination costs, was recovered pursuant to an agreement between PEF which was approved by the FPSC in 1997, and as such fluctuations in this expense did not have an impact on earnings. During the second quarter of 2003, Tiger Bay amortization was $15 million. The Tiger Bay asset was fully amortized in September 2003. The decrease in Tiger Bay amortization was partially offset by additional depreciation for assets placed in service. Six months ended June 30, 2004 compared to the six months ended June 30, 2003 PEF's revenues, excluding recoverable fuel and other pass-through revenues of $926 million and $794 million for the six months ended June 30, 2004 and 2003, respectively, increased $17 million. This increase was due primarily to a reduction in the provision for revenue sharing of $21 million. Results for 2003 included the accrual of an additional $18 million related to the 2002 revenue sharing provision as ordered by the FPSC in June of 2003. In addition, the return on investment in Hines 2 and favorable customer growth increased revenues by $19 million and $9 million, respectively. These increases were partially offset by the impact of milder weather in the current year of approximately $17 million. Fuel and purchased power costs represent the costs of generation, which includes fuel purchases for generation, as well as energy purchased in the market to meet customer load. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, changes in these expenses, do not have a material impact on earnings. The difference between fuel and purchased power costs incurred and associated fuel revenues is deferred for future collection or refund to customers. Fuel and purchased power expenses were $805 million for the six months ended June 30, 2004, which represents a $132 million increase compared to the same period in the prior year. This increase is due to an increase in fuel used in electric generation of $143 million offset by a reduction in purchased power costs. This increase in fuel used in electric generation is due to the recovery of fuel expenses that were deferred in the prior year as well as the deferral of current year fuel expenses. In November 2003, the FPSC approved PEF's request for a cost adjustment in its annual fuel filing due to the rising costs of fuel. The new rates became effective January 2004. The decrease in purchased power expense of $11 million is attributable primarily to the Hines 2 Plant being placed in service in December of 2003, thereby reducing the need for purchased power. O&M costs increased $17 million, when compared to the $295 million incurred during the six months ended June 30, 2003. This increase is primarily related to higher costs associated with plant outages and planned reliability improvements of approximately $9 million each. Depreciation and amortization decreased $18 million when compared to the $159 million incurred during the six months ended June 30, 2003, primarily due to the amortization of the Tiger Bay regulatory asset in the prior year. The Tiger Bay regulatory asset, for contract termination costs, was recovered pursuant to an agreement between PEF which was approved by the FPSC in 1997 and as such fluctuations in this expense did not have an impact on earnings. During the six months ended June 30, 2003, Tiger Bay amortization was $30 million. The Tiger Bay asset was fully amortized in September 2003. The decrease in Tiger Bay amortization was partially offset by additional depreciation for assets placed in service. 28 ENERGY AND RELATED SERVICES The Energy and Related Services segment operations include synthetic fuels production, natural gas production, coal extraction and terminal operations. Energy and Related Services results for the six months ended June 30, 2003 were restated to reflect seven months of earnings for certain operations, primarily synthetic fuel facilities as discussed previously. The following summarizes Energy and Related Services' segment profits for the three and six months ended June 30, 2004 and 2003: - ----------------------------------------------------------------------------------------------- Three Months Ended June 30 Six Months Ended June 30 - ----------------------------------------------------------------------------------------------- (in millions) 2004 2003 2004 2003 - ----------------------------------------------------------------------------------------------- Synthetic fuel operations $ 21 $ 33 $ 47 $ 54 Gas production 12 9 25 16 Coal fuel and other operations 8 - 7 (3) --------------------------------------------------------- Segments Profits $ 41 $ 42 $ 79 $ 67 - -----------------------------------------------------------------------------------------------
Synthetic Fuel Operations The synthetic fuel operations generated net profits of $21 million and $33 million for the three months ended June 30, 2004 and 2003, respectively, and $47 million and $54 million for the six months ended June 30, 2004 and 2003, respectively. The production and sale of synthetic fuel generate operating losses, but qualify for tax credits under Section 29 of the Code, which more than offset the effect of such losses. See Note 12 of the Notes to the Interim Financial Statements for further discussion of synthetic fuel tax credit matters. The operations resulted in the following for the three and six months ended June 30, 2004 and 2003: - ----------------------------------------------------------------------------------------------------- Three Months Ended June 30 Six Months Ended June 30 - ----------------------------------------------------------------------------------------------------- (in millions) 2004 2003 2004 2003 - ----------------------------------------------------------------------------------------------------- Tons sold 1.5 1.8 3.4 3.2 ----------------------------------------------------------- Operating losses, excluding tax credits $ (16) $ (17) $ (40) $ (33) Tax credits generated 37 50 87 87 ----------------------------------------------------------- Net profits $ 21 $ 33 $ 47 $ 54 - -----------------------------------------------------------------------------------------------------
Synthetic fuels' tons net profits decreased in the three months ended June 30, 2004 as compared to the same period in 2003 due primarily to a reduction in credits earned of as a result of a decrease in tons sold and an increase in operating cost. Synthetic fuel profits decreased in the six months ended June 30, 2004 due primarily to increases in operating cost Natural Gas Operations Natural gas operations generated profits of $12 million and $9 million for the three months ended June 30, 2004 and 2003, respectively, and $25 million and $16 million for the six months ended June 30, 2004 and 2003. The increase in production resulting from the acquisition of North Texas Gas in late February 2003 and increased drilling, and higher gas prices in 2004 contributed to increased earnings in 2004 as compared to 2003. In October 2003, the Company completed the sale of certain gas producing properties owned by Mesa Hydrocarbons, LLC. The following summarizes the gas production, revenues and gross margins for the three and six months ended June 30, 2004 and 2003 by production facility: 29 - ------------------------------------------------------------------------------------------------- Three Months Ended June 30 Six Months Ended June 30 - ------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------- Production in Bcf equivalent Mesa - 1.5 - 3.2 Westchester 4.9 3.1 9.0 6.3 North Texas Gas 2.7 1.8 5.3 2.4 -------------------------------------------------------- Total Production 7.6 6.4 14.3 11.9 -------------------------------------------------------- Revenues in millions Mesa $ - $ 3 $ - $ 8 Westchester 26 16 48 31 North Texas Gas 14 10 27 14 -------------------------------------------------------- Total Revenues $ 40 $ 29 $ 75 $ 53 -------------------------------------------------------- Gross Margin in millions of $ $ 33 $ 24 $ 60 $ 43 As a % of revenues 83% 83% 80% 81% - -------------------------------------------------------------------------------------------------
Coal Fuel and Other Operations Coal fuel and other operations generated segment profits of $8 million for the three months ended June 30, 2004 compared to zero profit for the comparable period in the prior year. For the six months ended June 30, 2004, coal fuel and other operations generated segment profits of $7 million compared to a segment loss of $3 million for the comparable period in the prior year. This increase in profits for the quarter and year to date is due to higher volumes and margin for coal fuel operations of $9 million after-tax offset by a reduction in profits of $4 million after-tax for fuel transportation operations related to the waterborne transportation ruling by the FPSC. See Note 4A of the Interim Financial Statements. The increase in net income is also due to the impact of the retroactive Service Company allocation in the prior year. Results in the same period for the prior year were negatively impacted by the retroactive reallocation of Service Company costs of $4 million after-tax. Rail Rail's operations include railcar and locomotive repair, trackwork, rail parts reconditioning and sales, scrap metal recycling and other rail related services. The Company sold the majority of the assets of Railcar Ltd., a leasing subsidiary, in 2004. See Note 3B of the Notes to the Consolidated Interim Financial Statements. Rail contributed segment profit of $4 million and $2 million for the three months ended June 30, 2004 and 2003, respectively. Revenues have increased $71 million to $285 million for the three months ended June 30, 2004 compared to the same period in the prior year. This increase is due primarily to increased volumes and higher prices in recycling operations and in part to increased production and sales in locomotive and railcar services and engineering and track services. Cost of goods sold increased $62 million compared to $188 million in the prior year. The increase in costs of good sold is due to increased costs for inventory, labor and operations as a result of the increased volume in the recycling operations, locomotive and railcar services and engineering and track services. The increase in margins of $9 million was partially offset by an increase in general and administrative costs related primarily to higher professional fees. Rail contributed segment profit of $9 million for the six months ended June 30, 2004 compared with a net loss of $1 million for the same period in the prior year. Revenues have increased $130 million to $523 million for the six months ended June 30, 2004 compared to the same period in the prior year. This increase is due primarily to increased volumes and higher prices in recycling operations and in part to increased production and sales in locomotive and railcar services and engineering and track services. Cost of goods sold increased $112 million compared to $455 million in the prior year. The increase in costs of good sold is due to increased costs for inventory, labor and operations as a result of the increased volume in the recycling operations, locomotive and railcar services and engineering and track services. Results in the prior year were negatively impacted by the retroactive reallocation of Service Company costs of $3 million after-tax. The favorability related to the reallocation was offset by an increase in general and administrative costs in the current year related primarily to higher professional fees. 30 OTHER The Other segment includes telecommunications, holding company and financing expenses. Other segment profits decreased $3 million for the three months ended June 30, 2004 compared to the same period in the prior year. Other segment profits decreased $39 million for the six months ended June 30, 2004 compared to the same period in the prior year. The decreases were due primarily to the impact of tax levelization adjustments booked each quarter. GAAP requires companies to apply a levelized effective tax rate to interim periods that is consistent with the estimated annual effective tax rate. Income tax expense was decreased by $11 million and decreased by $10 million for the three months ended June 30, 2004 and 2003, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was increased by $23 million and decreased by $15 million for the six months ended June 30, 2004 and 2003, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. The tax credits associated with the Company's synthetic fuel operations primarily drive the required levelization amount. Fluctuations in estimated annual earnings and tax credits can also cause large swings in the effective tax rate for interim periods. Therefore, this adjustment will vary each quarter, but will have no effect on net income for the year. LIQUIDITY AND CAPITAL RESOURCES Statements of Cash Flows and Financing Activities Florida Progress Cash provided by operating activities increased $148 million for the six months ended June 30, 2004, when compared to the six months ended June 30, 2003. The increase in operating cash flow was due primarily to the recovery of previously deferred fuel costs. Net cash used in investing activities decreased $275 million for the six months ended June 30, 2004, when compared to the three months ended June 30, 2003. The decrease is primarily due to reduced nonregulated capital expenditures, primarily the purchase of North Texas Gas assets in the first quarter of 2003 and proceeds from the sale of Railcar Ltd. in 2004. On February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25 million 6.48% medium term notes with excess cash. PEF Cash provided by operating activities increased $178 million for the six months ended June 30, 2004, when compared to the six months ended June 30, 2003. The increase in operating cash flow was due primarily to approximately $100 million of lower operating cash flow at PEF for the period in 2003, which resulted from an under recovery of fuel costs. Net cash used in investing activities decreased $85 million for the six months ended June 30, 2004, when compared to the three months ended June 30, 2003. The decrease is due to the absence of nuclear fuel purchases and reduced capital spending in 2004. The amount and timing of future sales of company securities will depend on market conditions, operating cash flow, asset sales and the specific needs of the Company and PEF. The Company and PEF may from time to time sell securities beyond the amount needed to meet capital requirements in order to allow for the early redemption of long-term debt, the redemption of preferred stock, the reduction of short-term debt or for other generation corporate purposes. Future Commitments As of June 30, 2004, both Florida Progress' and PEF's contractual cash obligations and other commercial commitments have not changed materially from what was reported in the 2003 Annual Report on Form 10-K. 31 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by ITEM 3 is omitted pursuant to Instruction H(2)(c) to Form 10-Q (Omission of Information by Certain Wholly Owned Subsidiaries). Item 4. CONTROLS AND PROCEDURES Florida Progress Corporation Pursuant to the Securities Exchange Act of 1934, Florida Progress carried out an evaluation, with the participation of Florida Progress' management, including Florida Progress' President and Chief Executive Officer, and Chief Financial Officer, of the effectiveness of Florida Progress' disclosure controls and procedures (as defined under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, Florida Progress' President and Chief Executive Officer, and Chief Financial Officer concluded that Florida Progress' 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 Florida Progress' periodic SEC filings. There has been no change in Florida Progress' internal control over financial reporting during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, Florida Progress' internal control over financial reporting. Progress Energy Florida, Inc. Pursuant to the Securities Exchange Act of 1934, PEF carried out an evaluation, with the participation of PEF's management, including PEF's President and Chief Executive Officer, and Chief Financial Officer, of the effectiveness of PEF's disclosure controls and procedures (as defined under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, PEF's President and Chief Executive Officer, and Chief Financial Officer concluded that PEF's disclosure controls and procedures are effective in timely alerting them to material information relating to PEF required to be included in PEF's periodic SEC filings. There has been no change in PEF's internal control over financial reporting during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, PEF's internal control over financial reporting. 32 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Legal aspects of certain matters are set forth in Part I, Item 1. See Note 12 to the Florida Progress Corporation and PEF Interim Financial Statements. 1. U.S. Global, LLC v. Progress Energy, Inc. et al, Case No. 03004028-03 and Progress Synfuel Holdings, Inc. et al, v. U.S. Global, LLC, Case No. 03004028-03 A number of Progress Energy, Inc. subsidiaries and affiliates are parties to two lawsuits arising out of an Asset Purchase Agreement dated as of October 19, 1999, by and among U.S. Global LLC (Global), EARTHCO, certain affiliates of EARTHCO (collectively the EARTHCO Sellers), EFC Synfuel LLC (which is owned indirectly be Progress Energy, Inc.) and certain of its affiliates, including Solid Energy LLC, Solid Fuel LLC, Ceredo Synfuel LLC, Gulf Coast Synfuel LLC (currently named Sandy River Synfuel LLC) (Collectively the Progress Affiliates), as amended by an amendment to Purchase Agreement as of August 23, 2000 (the Asset Purchase Agreement). Global has asserted that pursuant to the Asset Purchase Agreement it is entitled to (1) interest in two synthetic fuel facilities currently owned by the Progress Affiliates, and (2) an option to purchase additional interests in the two synthetic fuel facilities. The first suit, U.S. Global, LLC v. Progress Energy, Inc. et al, was filed in the Circuit Court for Broward County, Florida in March 2003 (the Florida Global Case). The Florida Global Case asserts claims for breach of the Asset Purchase Agreement and other contract and tort claims related to the Progress Affiliates' alleged interference with Global's rights under the Asset Purchase Agreement. The Florida Global Case requests an unspecified amount of compensatory damages, as well as declaratory relief. On December 15, 2003, the Progress Affiliates filed a motion to dismiss the Third Amended Complaint in the Florida Global Case. The motion to dismiss filed on behalf of the Progress Energy, Inc. subsidiaries and affiliates that are parties to the case will be heard by the Circuit Court of Broward County, Florida on June 7, 2004. The case was dismissed on procedural issues, but allowed the plaintiff to refile. The case was refiled on June 23, 2004. The second suit, Progress Synfuel Holdings, Inc. et al. v. U.S. Global, LLC, was filed by the Progress Affiliates in the Superior Court for Wake County, North Carolina seeking declaratory relief consistent with the Company's interpretation of the asset Purchase Agreement (the North Carolina Global Case). Global was served with the North Carolina Global Case on April 17, 2003. On May 15, 2003, Global moved to dismiss the North Carolina Global Case for lack of personal jurisdiction over Global. In the alternative, Global requested that the court decline to exercise its discretion to hear the Progress Affiliates' declaratory judgment action. On August 7, 2003, the Wake County Superior court denied Global's motion to dismiss and entered an order staying the North Carolina Global Case, pending the outcome of the Florida Global Case. The Progress Affiliates have appealed the Superior court's order staying the case; Global has cross appealed the denial of its motion to dismiss for lack of personal jurisdiction. The North Carolina Court of Appeals heard argument on the Progress Affiliates' Appeal and the Global's cross appeal on May 26, 2004. There has been no ruling on the appeal or the cross appeal. The Company cannot predict the outcome of these matters, but will vigorously defend against the allegations. On July 29, 2004, the Progress Affiliates filed a motion to dismiss. 33 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit Florida Progress Progress Energy Number Description Corporation Florida, Inc. ------ ----------- ----------- ------------- 31(a) Certifications pursuant to Section 302 of the X X Sarbanes-Oxley Action of 2002 - Chairman, President and Chief Executive Officer 31(b) Certifications pursuant to Section 302 of the X X Sarbanes-Oxley Action of 2002 - Executive Vice President and Chief Financial Officer 32(a) Certifications pursuant to Section 906 of the X X Sarbanes-Oxley Action of 2002 - Chairman, President and Chief Executive Officer 32(b) Certifications pursuant to Section 906 of the X X Sarbanes-Oxley Action of 2002 - Executive Vice President and Chief Financial Officer
(b) Reports filed or furnished on Form 8-K since the beginning of the quarter: Florida Progress Corporation Financial Item Statements Reported Included Date of Event Date Filed or Furnished 9, 12 Yes July 21, 2004 July 21, 2004 5, 9 No July 7, 2004 July 7, 2004 9, 12 Yes April 21, 2004 April 21, 2004 Florida Power Corporation d/b/a Progress Energy Florida, Inc. Financial Item Statements Reported Included Date of Event Date Filed or Furnished 9, 12 Yes July 21, 2004 July 21, 2004 9, 12 Yes April 21, 2004 April 21, 2004
34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLORIDA PROGRESS CORPORATION FLORIDA POWER CORPORATION (Registrants) Date: August 6, 2004 By: /s/ Geoffrey S. Chatas ---------------------- Geoffrey Chatas Executive Vice President and Chief Financial Officer By: /s/Robert H. Bazemore, Jr. -------------------------- Robert H. Bazemore, Jr. Vice President and Controller Chief Accounting Officer EX-31 2 pei_2qflexhibit31-.txt EXHIBIT 31 CERTIFICATIONS Exhibit 31(a) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert B. McGehee, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Florida Progress Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosu-re controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2004 /s/ Robert B. McGehee --------------------- Robert B. McGehee Chairman, President & Chief Executive Officer Exhibit 31(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Geoffrey S. Chatas, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Florida Progress Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2004 /s/ Geoffrey S. Chatas ---------------------- Geoffrey S. Chatas Executive Vice President & Chief Financial Officer Exhibit 31(a) 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 quarterly report on Form 10-Q of Florida Power Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2004 /s/ H. William Habermeyer, Jr. ------------------------------ H. William Habermeyer, Jr. President and Chief Executive Officer Exhibit 31(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Geoffrey S. Chatas, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Florida Power Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2004 /s/ Geoffrey S. Chatas ---------------------- Geoffrey S. Chatas Executive Vice President & Chief Financial Officer EX-32 3 pei_2qflexhibit32-.txt EXHIBIT 32 CERTIFICATIONS Exhibit 32(a) CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Florida Progress Corporation (the "Company") for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert B. McGehee, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Robert B. McGehee Robert B. McGehee Chairman, President & Chief Executive Officer August 6, 2004 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32(b) CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Florida Progress Corporation (the "Company") for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey S. Chatas, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Geoffrey S. Chatas Geoffrey S. Chatas Executive Vice President and Chief Financial Officer August 6, 2004 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32(a) CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Florida Power Corporation (the "Company") for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, H. William Habermeyer, Jr., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ H. William Habermeyer, Jr. H. William Habermeyer, Jr. President and Chief Executive Officer August 6, 2004 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32(b) CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Florida Power Corporation (the "Company") for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey S. Chatas, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Geoffrey S. Chatas Geoffrey S. Chatas Executive Vice President and Chief Financial Officer August 6, 2004 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----