-----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, JdROn0OjkiFfrmRNRFiCOvnX+1fx+ORSQzJxZNqWW7QNmcYayrb6V1E5YJTfhKmw sqNlzb2PBOsUDCJBWuGtmg== 0000357261-99-000043.txt : 19990322 0000357261-99-000043.hdr.sgml : 19990322 ACCESSION NUMBER: 0000357261-99-000043 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLORIDA PROGRESS CORP CENTRAL INDEX KEY: 0000357261 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 592147112 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08349 FILM NUMBER: 99569119 BUSINESS ADDRESS: STREET 1: ONE PROGRESS PLZ STREET 2: SUITE 2600 CITY: ST PETERSBURG STATE: FL ZIP: 33701 BUSINESS PHONE: 8138246400 MAIL ADDRESS: STREET 1: ONE PROGRESS PLZ STREET 2: SUITE 2600 CITY: ST PETERSBURG STATE: FL ZIP: 33701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLORIDA POWER CORP / CENTRAL INDEX KEY: 0000037637 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 590247770 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03274 FILM NUMBER: 99569120 BUSINESS ADDRESS: STREET 1: 3201 34TH ST SOUTH STREET 2: ONE PROGRESS PLAZA CITY: ST PETERSBURG STATE: FL ZIP: 33701 BUSINESS PHONE: 8138665151 10-K 1 FLORIDA PROGRESS/POWER 12/31/98 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to I.R.S. Exact name of each Registrant as specified in Employer Commission its charter, state of incorporation, address Identification File No. of principal executive offices, telephone Number - -------------- ---------------------------------------------- --------------- 1-8349 FLORIDA PROGRESS CORPORATION 59-2147112 A Florida Corporation One Progress Plaza St. Petersburg, Florida 33701 Telephone (727) 824-6400 1-3274 FLORIDA POWER CORPORATION 59-0247770 A Florida Corporation One Progress Plaza St. Petersburg, Florida 33701 Telephone (727) 820-5151 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered -------------------------------------- ---------------------- Florida Progress Corporation: Common Stock without par value and New York Stock Exchange Preferred Stock Purchase Rights Pacific Stock Exchange Florida Power Corporation: None Securities registered pursuant to Section 12(g) of the Act: Florida Progress Corporation: None Florida Power Corporation: Cumulative Preferred Stock, par value $100 per share Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. YES X . NO . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] (continued) The aggregate market value of the voting stock held by non-affiliates of Florida Progress Corporation as of December 31, 1998 was $4,288,659,140 (determined by subtracting the number of shares held by directors and executive officers of Florida Progress Corporation from the total number of shares outstanding, then multiplying the difference times the closing sale price from the New York Stock Exchange Composite Transactions). The aggregate market value of the voting stock held by non-affiliates of Florida Power Corporation as of February 28, 1999 was $-0-. As of February 28, 1999, there were issued and outstanding 100 shares of Florida Power Corporation's common stock, without par value, all of which were held, beneficially and of record, by Florida Progress Corporation. The number of shares of Florida Progress Corporation common stock without par value outstanding as of December 31, 1998 was 97,336,826. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for Florida Progress Corporation dated March 11, 1999, relating to the 1999 Annual Meeting of Shareholders, are incorporated by reference in Part III hereof. ---------------------------- This combined Form 10-K represents separate filings by Florida Progress Corporation and Florida Power Corporation. Florida Power Corporation makes no representations as to the information relating to Florida Progress Corporation's diversified operations. TABLE OF CONTENTS PART I. Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . 11 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 15 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 21 PART II. Item 5. Market for the Registrants' Common Equity and Related Stockholder Matters . . . . . . . . . . . 22 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . 24 Item 7a. Quantitative and Qualitative Disclosures About Market Risks. . . . . . . . . . . . . . . . . . . . . 41 Item 8. Financial Statements and Supplementary Data . . . . . . 42 Combined Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . . . . . . 42 Consolidated Financial Statements of Florida Progress 43 Financial Statements of Florida Power . . . . . . . . 48 Combined Notes to the Financial Statements. . . . . . 53 Quarterly Financial Data (unaudited). . . . . . . . . 74 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . 74 PART III. Item 10. Directors and Executive Officers of the Registrants . . 75 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . 77 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . . . . . 81 Item 13. Certain Relationships and Related Transactions. . . . . 82 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . 82 Signatures - Florida Progress Corporation . . . . . . . . . . . . 89 Signatures - Florida Power Corporation. . . . . . . . . . . . . . 91 Financial Statement Schedules . . . . . . . . . . . . . . . . . . 93 GLOSSARY When used herein, the following terms will have the meanings indicated: TERM MEANING 1935 Act. . . . . . . . . . . . .Public Utility Holding Company Act of 1935 ABC . . . . . . . . . . . . . . .ABC Rail Products Corporation AOC . . . . . . . . . . . . . . .Administrative Order on Consent AST . . . . . . . . . . . . . . .Advanced Separation Technologies, Incorporated Btu . . . . . . . . . . . . . . .British thermal units CAAA. . . . . . . . . . . . . . .Clean Air Act Amendments of 1990 Calgon. . . . . . . . . . . . . .Calgon Carbon Corporation CERCLA or Superfund . . . . . . .Comprehensive Environmental Response Compensation and Liability Act Commissioner. . . . . . . . . . .Insurance Commissioner of the State of Oklahoma CR3 or the nuclear plant . . . . .Florida Power's nuclear generating plant, Crystal River Unit No. 3 Dade. . . . . . . . . . . . . . .Metropolitan Dade County DOE . . . . . . . . . . . . . . .United States Department of Energy Echelon . . . . . . . . . . . . .Echelon International Corporation Electric Fuels. . . . . . . . . .Electric Fuels Corporation EMF . . . . . . . . . . . . . . .electromagnetic fields, or electric and magnetic fields EPA . . . . . . . . . . . . . . .United States Environmental Protection Agency EPS . . . . . . . . . . . . . . .Earnings per share FDEP. . . . . . . . . . . . . . .Florida Department of Environmental Protection FERC. . . . . . . . . . . . . . .Federal Energy Regulatory Commission Financial Statements. . . . . . .Florida Progress' Consolidated Financial Statements and Florida Power's Financial Statements, for the year ended December 31, 1998 contained under Item 8 herein Florida Power or the utility. . .Florida Power Corporation Florida Progress. . . . . . . . .Florida Progress Corporation FOCAS . . . . . . . . . . . . . .FOCAS, Inc. FPSC. . . . . . . . . . . . . . .Florida Public Service Commission FRCC. . . . . . . . . . . . . . .Florida Reliability Coordinating Council Georgia Power . . . . . . . . . .Georgia Power Company KV. . . . . . . . . . . . . . . .kilovolts KVA . . . . . . . . . . . . . . .kilovolt amperes KWH . . . . . . . . . . . . . . .kilowatt hours Lake. . . . . . . . . . . . . . .NCP Lake Power, Inc. Louisville. . . . . . . . . . . .Louisville Scrap Material Co., Inc. LTIP. . . . . . . . . . . . . . .Florida Progress Long-Term Incentive Plan MD&A. . . . . . . . . . . . . . .Management's Discussion and Analysis of Financial Condition and Results of Operations MEMCO . . . . . . . . . . . . . .MEMCO Barge Line, Inc. MICP. . . . . . . . . . . . . . .Management Incentive Compensation Plan Mid-Continent . . . . . . . . . .Mid-Continent Life Insurance Company Montenay. . . . . . . . . . . . .Montenay Power Corporation MW. . . . . . . . . . . . . . . .megawatts NEIL. . . . . . . . . . . . . . .Nuclear Electric Insurance Limited NERC. . . . . . . . . . . . . . .North American Electric Reliability Council NRC . . . . . . . . . . . . . . .United States Nuclear Regulatory Commission PCBs. . . . . . . . . . . . . . .polychlorinated biphenyls Progress Capital. . . . . . . . .Progress Capital Holdings, Inc. Progress Credit . . . . . . . . .Progress Credit Corporation Progress Rail . . . . . . . . . .Progress Rail Services Corporation Proxy Statement . . . . . . . . .The definitive proxy statement dated March 11, 1999, relating to Florida Progress' 1999 Annual Meeting of Shareholders PRP . . . . . . . . . . . . . . .potentially responsible party, as defined in CERCLA PURPA . . . . . . . . . . . . . .Public Utility Regulatory Policies Act of 1978 QFs . . . . . . . . . . . . . . .qualifying facilities Retirement Plan . . . . . . . . . Florida Progress Corporation Retirement Plan for Exempt and Nonexempt Employees RI/FS . . . . . . . . . . . . . .Remedial Investigation and Feasibility Study Sanford site. . . . . . . . . . .gasification plant site, Sanford, Florida SEC . . . . . . . . . . . . . . .United States Securities and Exchange Commission Seminole. . . . . . . . . . . . .Seminole Electric Cooperative, Inc. SERP. . . . . . . . . . . . . . .Florida Progress Corporation Supplemental Executive Retirement Plan SNF . . . . . . . . . . . . . . .spent nuclear fuel Title VI. . . . . . . . . . . . .Title VI, Acid Rain Control TRI . . . . . . . . . . . . . . .Toxic Release Inventory PART I ITEM 1. BUSINESS FLORIDA PROGRESS Florida Progress Corporation ("Florida Progress", which term includes consolidated subsidiaries unless otherwise indicated), is a diversified electric utility holding company. Florida Progress' revenues for the year ended December 31, 1998, were $3.6 billion and assets at year-end were $6.2 billion. Its principal executive offices are located at One Progress Plaza, St. Petersburg, Florida 33701, telephone number (727) 824-6400. The Florida Progress home page on the Internet's World Wide Web is located at http://www.fpc.com. Florida Progress was incorporated in Florida on January 21, 1982. Florida Progress defines its principal business segments as utility and diversified operations. Florida Power Corporation ("Florida Power" or "the utility"), Florida Progress' largest subsidiary, is the utility segment and encompasses all regulated public utility operations. (See Item 1 "Business Utility Operations - Florida Power".) Progress Capital Holdings, Inc. ("Progress Capital") is the downstream holding company for Florida Progress' diversified subsidiaries which consolidates the financing of non-utility operations. The diversified operations segment includes Electric Fuels Corporation ("Electric Fuels"), an energy and transportation company. The primary segments of Electric Fuels are: Energy and Related Services, Rail Services, and Inland Marine Transportation. (See Item 1 "Business-Diversified Operations.") For information concerning the revenues, operating profit and assets attributable to Florida Progress' business segments, see Note 8 to Florida Progress' consolidated financial statements and Florida Power's financial statements for the year ended December 31, 1998, contained herein under Item 8 (the "Financial Statements"). Cash from operations has been the primary source of working capital for Florida Progress. (See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") under the heading "Liquidity and Capital Resources.") Florida Progress is a public utility holding company under the Public Utility Holding Company Act of 1935 ("1935 Act"). Florida Progress is exempt from registration with the United States Securities and Exchange Commission ("SEC") under the 1935 Act and attendant regulation because its utility operations are primarily intrastate. UTILITY OPERATIONS - FLORIDA POWER Florida Power was incorporated in Florida in 1899, and is an operating public utility engaged in the generation, purchase, transmission, distribution and sale of electricity. Florida Power has a system generating capacity of 7,727 megawatts ("MW"). In 1998, the utility accounted for 73% of Florida Progress' consolidated revenues, 80% of its assets and 89% of its net income. Florida Power provided electric service during 1998 to an average of 1.3 million customers in west central Florida. The service area covers approximately 20,000 square miles and includes the densely populated areas around Orlando, as well as the cities of St. Petersburg and Clearwater. Of Florida Power's 1998 electric revenues billed, approximately 55% were derived from residential sales, 23% from commercial sales, 8% from industrial sales, 8% from wholesale sales and 6% from 1 other retail sales. Important industries in the territory include phosphate and rock mining and processing, electronics design and manufacturing, and citrus and other food processing. Other important commercial activities are tourism, health care, construction and agriculture. COMPETITION For a general discussion of Florida Power and competition, see Item 7 "MD&A" under the headings "Industry Restructuring" and "Industry Restructuring - Florida Progress' Strategic Initiatives". In March 1999, the Florida Public Service Commission ("FPSC") approved the petition by Duke Energy to build a merchant plant in New Smyrna Beach, Florida. The unit will have the capability to produce approximately 500 MW of power. The output will be sold in the wholesale power market. (See Item 3 "Legal Proceedings", paragraph 11.) FUEL AND PURCHASED POWER GENERAL: Florida Power's consumption of various types of fuel depends on several factors, the most important of which are the demand for electricity by Florida Power's customers, the availability of various generating units, the availability and cost of fuel, and the requirements of federal and state regulatory agencies. Florida Power's energy mix for the last three years is presented in the following table: ENERGY MIX PERCENTAGES Fuel Type 1998 1997 1996 --------- ---- ---- ---- Coal 38% 45% 43% Oil 20% 18% 16% Nuclear* 15% 0% 6% Gas 6% 6% 3% Purchased Power 21% 31% 32% * See "NUCLEAR" below for information regarding an extended outage at Florida Power's nuclear generating plant beginning in September 1996 and continuing until February 1998. Florida Power is generally permitted to pass the cost of recoverable fuel and purchased power to its customers through fuel adjustment clauses. In June 1997, Florida Power reached an agreement with all parties who intervened, which was approved by the FPSC, regarding costs related to its extended nuclear outage. This agreement resulted in charges to Florida Power's 1997 results. (See Note 9 to the Financial Statements.) The future prices for and availability of various fuels discussed in this report cannot be predicted with complete certainty. However, Florida Power believes that its fuel supply contracts, as described below, will be adequate to meet its fuel supply needs. 2 Florida Power's average fuel costs per million British thermal units ("Btu") for each year of the five-year period ended December 31, 1998, were as follows: AVERAGE FUEL COST (per million Btu) 1998 1997 1996 1995 1994 Coal $1.89 $1.91 $1.91 $1.93 $1.96 Oil 2.18 2.75 2.80 2.70 2.39 Nuclear .46 -- .50 .49 .55 Gas 3.22 2.87 2.78 1.98 2.46 Weighted Average 1.81 2.24 2.04 1.69 1.75 OIL AND GAS: Oil is purchased under contracts and in the spot market from several suppliers. The cost of Florida Power's oil is determined by world market conditions. Management believes that Florida Power has access to an adequate supply of oil for the reasonably foreseeable future. Florida Power's natural gas supply is purchased under firm contracts and in the spot market from numerous suppliers and is delivered under firm, released firm and interruptible transportation contracts. Florida Power believes that existing contracts for oil are sufficient to cover its requirements when natural gas transmission that is purchased on an interruptible basis is not available. NUCLEAR: Florida Power has one nuclear generating plant, Crystal River Unit No. 3 ("CR3" or "the nuclear plant"). After completing a record performance in 1995 by achieving a capacity factor of 100%, CR3 was shut down for much of 1996 and all of 1997. Beginning in February 1996, the plant underwent a scheduled refueling outage that lasted until May 1996, when the plant returned to service. In September 1996, an oil pressure problem in the main turbine forced the plant to shut down until repairs could be made. After the repairs were completed in October, the plant remained down while certain backup safety system design issues were addressed. CR3 returned on-line in February 1998 and achieved a capacity factor of 100% for the remaining portion of 1998. For more information regarding the outage, see Item 7 "MD&A - Operating Results" and Note 9 to the Financial Statements. Nuclear fuel is processed through four distinct stages. Stage I and Stage II involve the mining and milling of the natural uranium ore to produce a concentrate and the conversion of this uranium concentrate into uranium hexafluoride. Stage III and Stage IV entails the enrichment of the uranium hexafluoride, and the fabrication of the enriched uranium hexafluoride into usable fuel assemblies. Florida Power has contracts in place which provide for a supply of enriched uranium and fuel fabrication through 2004. It will be necessary for Florida Power to enter into future fuel contracts to cover the differences between the total unit lifetime requirements of CR3 and the requirements covered by existing contracts. Although no assurances can be given as to the future availability or costs of such contracts, Florida Power expects that future contract commitments will be obtained at the appropriate time. Spent nuclear fuel ("SNF") is stored at CR3 pending disposal under a contract with the United States Department of Energy ("DOE"). (See Note 4 to the Financial Statements.) At the present time, Florida Power has facilities on site for the temporary storage of SNF generated through the year 2011. Florida Power will expand the capacity of its facilities on site in 2000 to allow for the 3 temporary storage of SNF generated through the end of the license in 2016. Florida Power and 15 other utilities are involved in litigation against the United States challenging certain retroactive assessments imposed by the federal government on domestic nuclear power companies to fund the decommissioning and decontamination of the government's uranium enrichment facilities. (See Item 5 "Legal Proceedings", paragraph 4.) COAL: Florida Power anticipates a requirement of approximately 5.0 million to 5.5 million tons of coal in 1999. Most of the coal is expected to be supplied from the Appalachian coal fields of the United States. Approximately two-thirds of the coal is expected to be delivered by rail and the remainder by barge. The coal is supplied by Electric Fuels pursuant to contracts between Florida Power and Electric Fuels which expire in 2002 and 2004. (See Note 11 to the Financial Statements.) For 1999, Electric Fuels has long-term contracts with various sources for approximately 40% of the coal requirements of Florida Power's coal units. These long-term contracts have price adjustment provisions. Electric Fuels expects to acquire the remainder in the spot market and under short-term contracts. Electric Fuels does not anticipate any problems obtaining the remaining Florida Power requirements for 1999 through short-term contracts and purchases in the spot market. (See Note 11 to the Financial Statements.) PURCHASED POWER: Florida Power, along with other Florida utilities, buys and sells economy power through the Florida energy brokering system. In addition, Florida Power has long-term contracts for the purchase of approximately 460 MW of purchased power with other utilities, including a contract with The Southern Company for approximately 400 MW. Also, Florida Power has entered into purchased power contracts with certain qualifying facilities ("QFs") for approximately 871 MW of capacity. Facilities representing approximately 831 MW of the 871 MW have come on line and are currently operating. The capacity currently available from QFs represents about 9% of Florida Power's total system capacity. The purchased power component was reduced in 1997 primarily through the purchase of the Tiger Bay Cogeneration Facility. (See Item 2 "Properties - Utility Operations", Item 7 "MD&A - Fuel and Purchased Power" and Note 9 to the Financial Statements.) REGULATORY MATTERS AND FRANCHISES Florida Power is subject to the jurisdiction of the FPSC with respect to retail rates, customer service, planning, construction of facilities, accounting, issuance of securities and other matters. In addition, Florida Power is subject to regulation by the Federal Energy Regulatory Commission ("FERC") with respect to transmission and sales of wholesale power, accounting and certain other matters. The underlying concept of utility ratemaking is to set rates at a level that allows the utility to collect revenues equal to its cost of providing service plus a reasonable rate of return on its equity. Increased competition, as a result of industry restructuring, may affect the ratemaking process. (See Item 7 "MD&A - Industry Restructuring".) The FPSC oversees the retail sales of the state's investor-owned utilities. The FPSC authorizes retail "base rates" that are designed to provide a utility with the opportunity to earn a specific rate of return on its "rate base", or average investment in utility plant. These rates are intended to cover all reasonable and prudent expenses of utility operations and to provide investors with a fair rate of return. The FPSC generally allows utilities to recover fuel, purchased power and conservation costs through an adjustment charge on monthly electric bills. In June 1997, a settlement agreement pertaining to the extended nuclear 4 outage, with all parties who intervened, was approved by the FPSC. The parties to the agreement agreed not to seek or support any increase or reduction in Florida Power's base rates or the authorized range of its return on equity during a four year period beginning in mid-1997. For additional information on this agreement, see Note 9 to the Financial Statements. In other regulatory matters, beginning in 1995, the FPSC ordered Florida Power to conduct a three-year test of revenue decoupling for its residential customers. This test ended December 31, 1997. (See Item 7 "MD&A - Utility Revenues and Sales" and Note 1 to the Financial Statements.) In December 1998, Florida Power received approval from the FPSC to defer non-fuel revenues towards the development of a plan that would allow customers to realize benefits earlier than if they are used to accelerate the amortization of the Tiger Bay regulatory asset. (See Note 9 to the Financial Statements.) Florida Power is interconnected with 22 municipal and 9 rural electric cooperative systems. Major wholesale power sales customers include Seminole Electric Cooperative, Inc. ("Seminole"), Florida Municipal Power Agency and Reedy Creek Utilities District. During 1998, about 8% of Florida Power's electric revenues were from wholesale customers whose rates are subject to the jurisdiction of the FERC. For further information with respect to rates, see Note 9 to the Financial Statements. Florida Power's CR3 nuclear plant is subject to regulation by the United States Nuclear Regulatory Commission ("NRC"). The NRC's jurisdiction encompasses broad supervisory and regulatory powers over the construction and operation of nuclear reactors, including matters of health and safety, antitrust considerations and environmental impact. Florida Power currently has a 90.4% ownership interest in CR3. The purchase of the ownership interest of the city of Tallahassee (1.3%) is currently awaiting regulatory approval from the FPSC, FERC, and NRC. It is anticipated the purchase will be complete in the third quarter of 1999. There is no capital expenditure related to this purchase. (See Note 4 to the Financial Statements.) By virtue of state and municipal legislation, Florida Power holds franchises with varying expiration dates in nearly all municipalities in which it distributes electric energy. Approximately 40% of total utility revenues in 1998 is covered under the terms of 111 franchise agreements with various municipalities. The general effect of these franchises is to grant Florida Power the right to enter upon and use streets, alleys and other public places for erecting and maintaining poles, wires and other apparatus for the sale and distribution of electric energy. All but one of the existing franchises cover a 30-year period from the date granted, the maximum allowed by Florida law. The one exception is a franchise that covers a 10-year period from the date granted, and expires in 2005. Of the 111 franchises, 5 expire during 2000, 23 expire before December 31, 2001, 32 expire between January 1, 2002 and December 31, 2012, and 51 expire between January 1, 2013 and December 31, 2028. For additional information on franchises, see Item 7 "MD&A - Industry Restructuring". ENVIRONMENTAL MATTERS Florida Power is subject to federal, state and local regulations dealing with air and water quality and other environmental matters. Beginning July 1, 1999, seven new industries, including the electric utility industry, will submit for the first time, chemical release data to the United States Environmental Protection Agency ("EPA") as part of its Toxic Release Inventory ("TRI") reporting requirement. This process requires electric utilities that burn coal or oil for power generation to identify and report releases of more than 650 designated chemicals and chemical compounds, to the environment. Based on the 5 reporting criteria, Florida Power estimates that it will be required to report on approximately 18 to 20 compounds. Four facilities are currently subject to the reporting criteria. The total estimated cost to Florida Power of reporting under TRI rules is estimated to be approximately $350,000 in the first year and $250,000 each subsequent year. AIR: All of Florida Power's air emission sources meet the air quality standards currently set by the Florida Department of Environmental Protection ("FDEP") and/or the EPA. The Clean Air Act Amendments of 1990 ("CAAA"), under Title IV, Acid Rain Control ("Title IV"), set a permanent cap on emissions of sulfur dioxide. The cap is to be implemented in two phases. Phase I limitations became effective in 1995. Florida Power does not have any Phase I units and is not affected. Phase II, which begins in 2000 will impose an annual cap on sulfur dioxide emissions. Florida Power expects to be able to meet its emission limitations without significant capital investments. Florida Power will use a combination of lower emitting fuels, such as natural gas, low sulfur coal and oil, along with limited use of allowance credits to meet its annual emission obligations. Also in Phase II, emissions of nitrogen oxides from coal fired power plants are limited. Florida Power is already meeting federal limits on three of its four coal units. To meet Phase II limitations on the fourth unit, Florida Power is planning to make burner modifications to lower emissions. The capital cost of this project is approximately $5 million, of which the majority of costs were incurred prior to 1999. The project is scheduled for completion in 1999. Under Title III of the CAAA, the EPA is studying the emission of hazardous air pollutants and, where appropriate, promulgating emission limitations for specific source categories. Depending on the results of these studies and the EPA's determination of the need for additional limitations, Florida Power could be required to incur additional capital expenditures and operating expenses. Under Title V of the CAAA, Florida Power is required to pay annual operating fees based on the previous year's emissions. For 1998, these fees totaled approximately $790,000. It is anticipated that the costs for 1999 will be a similar amount. In addition to the Title IV projects discussed above, Florida Power's construction program includes approximately $4 million of planned environmental expenditures for air quality improvement projects for the two-year period ending December 31, 2000. WATER: To help meet the future electricity needs of its customers, Florida Power has built a new power plant complex in Polk County, Florida, named the Hines Energy Complex. (See Item 2, "Properties - Utility Operations - Planned Generation".) Approximately $28.4 million was spent through December 31, 1998 on environmental projects related to site development at the Hines Energy Complex, mainly for water resource related facilities. Florida Power's construction program includes approximately $1.4 million of environmental expenditures for water resource projects at other Florida Power facilities for the two-year period ending December 31, 2000. WASTE MATERIALS: Florida Power is nearing completion of its program to reduce electrical equipment utilizing polychlorinated biphenyls ("PCB"). All regulatory compliance dates have been met. All PCB transformers (i.e. those havin greater than 500 ppm PCB) have been removed from Florida Power's electric generating plants, except for one small plant. Removal of PCB transformers from this final 6 plant will be delayed until Florida Power decides whether and for how long the plant will remain in operation. STORAGE TANK PROGRAM: The regulation of underground and aboveground storage tanks has expanded to affect virtually every Florida Power pollutant storage tank with a capacity of 100 gallons or greater, including vehicular fuel tanks, bulk fuel storage tanks, mineral acid tanks, hazardous material tanks and compression vessels. The FDEP's storage tank regulations require the replacement or upgrading of tanks that are not protected from corrosion, and the installation of release detection and secondary containment systems. These requirements must be met by the end of 1999. Florida Power expects the annual operating expense to be immaterial and construction expenditures through 1999 related to compliance with these regulations to be approximately $300,000. As of January 1, 1999, there no longer exists any state funded petroleum cleanup programs for new contaminations. However, Florida Power believes that for the majority of past storage tank contamination cleanup expenditures it will qualify under one of two programs. Under one program, Florida Power is required to pay a deductible and the State of Florida will pay for the remaining portion of the cleanup. Under the second program, Florida Power would be responsible for a Contamination Assessment and 25% of the total remediation, with the state of Florida funding the remaining 75% of the cleanup. ELECTROMAGNETIC FIELDS: The potential adverse effect of electromagnetic fields, or electric and magnetic fields ("EMF"), upon human health continues to be an important issue in the siting, construction and operation of electric transmission and distribution systems. EMF from a variety of sources, including transmission and distribution lines, has been the subject of many studies and much public discussion in recent years. The National EMF Research and Public Information Dissemination Program has completed an in depth research program. This program was co-funded by federal and private utilities, including Florida Power. The findings, to be presented to the U.S. Congress in 1999, could have a major impact on the EMF issue. Because of its exclusive jurisdiction to regulate EMF associated with electric transmission and distribution lines and substation facilities in Florida, the Florida Department of Environmental Protection ("FDEP") has adopted rules that establish certain EMF limits for new transmission lines and substations. The rules also require an annual review of the state of the scientific research into the potential adverse effects of EMF upon human health. The staff of the FDEP provides an annual progress report to the Environmental Regulation Commission. In February 1998, based on its review of the scientific research, the staff recommended that no revision of the current EMF standards be made at that time. The 1999 report has not yet been released. The Environmental Regulation Commission adopted the staff's recommendation and made no revision to EMF standards. Florida Power believes that compliance with these EMF rules, which at present essentially maintain the status quo with respect to regulated EMF exposure levels, will not have a material adverse effect on the cost of constructing or maintaining new transmission lines or substations. However, there always is a potential for lawsuits brought by plaintiffs alleging damages caused by EMF. Florida Power's management monitors developments in research concerning the potential health effects of EMF, EMF mitigation technologies and procedures, and significant actions by principal federal and Florida agencies related to EMF. 7 OTHER ENVIRONMENTAL MATTERS: Florida Power has received notices from the EPA that it is or could be a potentially responsible party ("PRP") under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA" or "Superfund") and the Superfund Amendment and Reauthorization Act ("SARA") and may be liable, together with others, for the costs of cleaning up several contaminated sites identified by the state and federal agencies. In addition to these designated sites, there are other sites where Florida Progress affiliates may be responsible for additional environmental cleanup. For further information concerning certain environmental matters relating to Florida Power, see paragraphs 5 and 7 under Item 3 "Legal Proceedings" and Note 11 to the Financial Statements. EMPLOYEES As of December 31, 1998, Florida Power had 4,740 full-time employees. The International Brotherhood of Electrical Workers represents approximately 2,016 of these full-time employees. The current union contract was ratified in May 1997 and expires in December 1999. DIVERSIFIED OPERATIONS Florida Progress' diversified operations are owned directly or indirectly through Progress Capital, a Florida corporation and wholly owned subsidiary of Florida Progress. Progress Capital holds the capital stock of, and provides funding for, Florida Progress' non-utility subsidiaries. Its primary subsidiary is Electric Fuels. Formed in 1976, Electric Fuels is an energy and transportation company with operations organized into three business units. Electric Fuels' energy and related services business unit supplies coal to Florida Power's Crystal River Energy Complex and other utility and industrial customers. Electric Fuels' inland marine transportation business unit, MEMCO Barge Line, Inc. ("MEMCO"), transports coal and dry-bulk cargoes primarily along the Mississippi and Ohio rivers. The rail services business unit, led by Progress Rail Services Corporation ("Progress Rail"), is one of the largest integrated processors and suppliers of railroad materials in the country. With operations in 20 states, Progress Rail offers a full range of railcar parts, maintenance-of-way equipment, rail and other track material, railcar repair facilities, railcar scrapping and metal recycling as well as railcar sales and leasing. In November 1998, Florida Progress formed a new subsidiary, Progress Telecommunications Corporation. This subsidiary was formed to sell wholesale fiber-optic-based capacity service in Florida to long-distance carriers, Internet service providers, and other telecommunications companies, as well as large industrial, commercial and government entities. Progress Telecommunications will also sell wireless structure attachments to wireless communication companies and government entities. As of December 31, 1998, Progress Capital and its subsidiaries had 4,385 full-time employees. (For additional information with respect to Progress Capital and its subsidiaries, see Item 7 "MD&A - Operating Results - Diversified Operations"), Note 8 to the Financial Statements and paragraph 10 of Item 3 "Legal Proceedings.") COMPETITION Florida Progress' non-utility subsidiaries compete in their respective marketplaces in terms of price, quality of service, location and other factors. Electric Fuels competes in several distinct markets: its coal operations compete 8 in the eastern United States utility and industrial coal markets; its marine transportation and barge operations compete in the coal, grain and bulk products transportation markets on the Ohio and lower Mississippi rivers; its marine equipment repair business competes in the inland river and gulf coast repair markets; and its rail operations compete in the railcar repair, parts and associated services markets in the eastern United States, in the midwest and west. Factors contributing to Electric Fuels' success in these markets include a competitive cost structure, strategic locations and, in the case of its marine transportation operations, a modern fleet. There are, however, numerous competitors in each of these markets, although no one competitor is dominant in any industry. The business of Electric Fuels and its subsidiaries, taken as a whole, is not subject to significant seasonal fluctuation. For further information with respect to Florida Progress' non-utility subsidiaries and competition, see Item 7 "MD&A - Diversified Operations". ENVIRONMENTAL MATTERS Electric Fuels is subject to federal, state and local regulations which govern air and water quality, waste disposal and other environmental matters. The coal mining business is affected primarily by the Clean Water Act, the Clean Air Act and the Surface Mining Control and Reclamation Act of 1977. The transportation and the railcar and marine repair businesses are primarily affected by the Resource Conservation and Recovery Act, the Emergency Planning and Community Right-To-Know Act and the Clean Water Act. The Environmental Services Department of Electric Fuels reviews existing and emerging environmental regulations, disseminates applicable environmental information throughout the organization and conducts site specific environmental compliance audits. Transactional environmental assessments are performed on new acquisitions to determine the potential environmental liabilities associated with the facilities being considered. Compliance with environmental laws and regulations has not had a material effect on Electric Fuels' capital expenditures, earnings or competitive position, and Electric Fuels does not anticipate making any material capital expenditures for environmental facilities through the end of 2000. For further information concerning certain environmental matters relating to Florida Progress' diversified operations, see Note 11 to the Financial Statements. 9 EXECUTIVE OFFICERS Roy A. Anderson, Senior Vice President, Energy Supply of Florida Power, Age 50. Mr. Anderson became Senior Vice President, Nuclear Operations, effective January 20, 1997, and now serves as the Senior Vice President of Energy Supply. From April 1, 1997 to April 17, 1998, he served as Chief Nuclear Officer. Prior to joining Florida Power, Mr. Anderson was employed by Carolina Power and Light, where he held numerous executive officer positions since 1993 in the areas of nuclear operations, fossil generation, and distribution and customer service. From 1987 to 1993, he was employed by Boston Edison Company, where he served as Plant Manager, Vice President and ultimately as Senior Vice President, Nuclear Operations. Kenneth E. Armstrong, Vice President and General Counsel of Florida Progress and Florida Power, Age 51. Mr. Armstrong has served as General Counsel of Florida Progress since July 1990 and as Vice President since April 1992. In April 1995, he became Vice President and General Counsel of Florida Power. In addition to these positions, Mr. Armstrong served as Assistant Secretary of Florida Progress from April 1992 to April 1993 and as Secretary from April 1993 to April 1996. He also served as Assistant Secretary of Florida Power from 1987 until April 1993 and as Secretary from April 1993 until April 1996. Janice B. Case, Senior Vice President, Energy SolutionsSM of Florida Power, Age 46. Mrs. Case was named Senior Vice President, Energy SolutionsSM effective June 1, 1997, after serving as Vice President since 1996. From October 1990 until July 1996, she served as Vice President, Suncoast Florida Region of Florida Power. Michael B. Foley, Jr., Senior Vice President, Energy Delivery of Florida Power, Age 55. Since July 1996, Mr. Foley's principal occupation has been as shown above. Mr. Foley served as Vice President in that position since February 1995. From October 1988 until February 1995, Mr. Foley served as Director of System Planning of Florida Power. Jeffrey R. Heinicka, Senior Vice President and Chief Financial Officer of Florida Power, Age 44. Since March 15, 1999, Mr. Heinicka's principal occupation has been as shown above. From March 1994 to March 1999, Mr. Heinicka was Chief Financial Officer of both Florida Progress and Florida Power. From December 1990 to March 1994, Mr. Heinicka served as Vice President and Treasurer of Florida Progress. Mr. Heinicka also served as Vice President and Treasurer of Florida Power from April 1993 to March 1994, a position he held concurrently with his Vice President and Treasurer position at Florida Progress. Richard D. Keller, Group Vice President, Energy and Transportation of Florida Progress, and President and Chief Executive Officer, Electric Fuels, Age 45. Since May 1990, Mr. Keller's principal occupation has been as shown above.He has served as President and Chief Executive Officer of Electric Fuels since February 1988. 10 William G. Kelley, Vice President, Human Resources of Florida Progress and Florida Power, Age 51. Mr. Kelley was appointed Vice President, Human Resources of Florida Progress and Florida Power, effective October 27, 1997. From 1992 to 1997, he was employed by Goulds Pumps,Inc., an international pump company, as Vice President of Human Resources. From 1989 to 1992 he served as Director of Human Resources for The Quaker Oats Company and headed the human resources function of the European Headquarters in the United Kingdom of its Fisher Price Division. Richard Korpan, Chairman, President and Chief Executive Officer of Florida Progress, and Chairman of the Board of Florida Power, Age 57. Mr. Korpan was appointed Chairman of the Board of Florida Progress, effective July 1, 1998. He has held the position of President since 1991, and became Chief Executive Officer of Florida Progress in June 1997. Since April 1996 he has also served as Chairman of the Board of Florida Power, and until June 1, 1997, as Chief Executive Officer of Florida Power. He joined Florida Progress in 1989 as Executive Vice President and Chief Financial Officer. He is a director of SunTrust Bank of Tampa Bay and a member of the Business Roundtable. Edward W. Moneypenny, Senior Vice President and Chief Financial Officer of Florida Progress, Age 57. Edward W. Moneypenny became Senior Vice President and Chief Financial Officer of Florida Progress, effective March 15, 1999. Prior to joining Florida Progress, Mr. Moneypenny was employed by Oryx Energy Company, an independent oil and natural gas exploration company, where he held numerous executive officer and chief financial positions since 1988. He served as a member of Oryx's board of directors from 1994 until February 1999. Joseph H. Richardson, Group Vice President, Utility Group of Florida Progress and President and Chief Executive Officer of Florida Power, Age 49. Since 1996, Mr. Richardson's principal occupation has been as shown above. Effective June 1, 1997, he was appointed Chief Executive Officer, in addition to President, of Florida Power. From April 1995 to April 1996, he served as Senior Vice President, Energy Distribution of Florida Power. From October 1993 to April 1995, he served as Senior Vice President, Legal and Administrative Services, and General Counsel of Florida Power. From August 1991 through April 1995, Mr. Richardson also held the position of Senior Vice President of Florida Progress. He is a director of Echelon. Dr. Jack Critchfiled retired as Chairman of the Board of Florida Progress effective July 1, 1998. There are no family relationships between any director or any executive officer of Florida Progress or Florida Power. The executive officers serve at the pleasure of their respective Boards of Directors. Each executive officer is appointed annually. ITEM 2. PROPERTIES Florida Progress believes that its physical properties and those of its subsidiaries are adequate to carry on its and their businesses as currently conducted. Florida Progress and its subsidiaries maintain property insurance against loss or damage by fire or other perils to the extent that such property 11 is usually insured. (See Note 11 to the Financial Statements.) Substantially all of Florida Power's utility plant is pledged as collateral for Florida Power's First Mortgage Bonds. Certain river barges and tug/barge units owned or operated by Electric Fuels are subject to liens in favor of certain lenders. UTILITY OPERATIONS GENERATION: As of December 31, 1998, the total net winter generating capacity of Florida Power's generating facilities, including CR3, was 7,727 MW. This capacity was generated by 13 steam units with a capacity of 4,661 MW and 45 combustion turbine units with a capacity of 3,066 MW. Florida Power's ability to use its generating units may be adversely impacted by various governmental regulations affecting nuclear operations and other aspects of Florida Power's business. (See "Regulatory Matters and Franchises" and "Environmental Matters" under Item 1 "Business Utility Operations - Florida Power.") Operation of these generating units may also be substantially curtailed by unanticipated equipment failures or interruption of fuel supplies. Florida Power expects to have sufficient system capacity, access to purchased power and demand-side management capabilities to meet anticipated future demand. (See Item 2 "Planned Generation and Energy Sales" below.) Florida Power's generating plants (all located in Florida) and their capacities at December 31, 1998, were as follows: Winter Net Maximum Primary/ Combustion Dependable Alternate Location Steam Turbine Capacity Plants Fuel (County) MW MW MW - ---------------- ------- ------------- ------- ------- ---------- Crystal River: Citrus Unit #1 Coal 373 - 373 Unit #2 Coal 469 - 469 Unit #3 Uranium 755* - 755 Unit #4 Coal 717 - 717 Unit #5 Coal 717 - 717 ----- ----- 3,031 3,031 Anclote: Pasco Unit #1 Oil 517 - 517 Unit #2 Oil/Gas 517 - 517 Bartow Oil/Gas Pinellas 449 217 666 Turner Oil Volusia - 200 200 Intercession City** Oil/Gas Osceola - 912 912 DeBary Oil/Gas Volusia - 786 786 Higgins Gas Pinellas - 148 148 Bayboro Oil Pinellas - 232 232 Avon Park Oil/Gas Highlands - 64 64 Rio Pinar Oil Orange - 18 18 Suwannee River Gas/Oil Suwannee 147 201 348 Tiger Bay Gas Polk - 246 246 University of Fla. Gas Alachua - 42 42 ----- ----- ----- 4,661 3,066 7,727 ===== ===== ===== * Represents 90.4% of total plant capacity. The remaining 9.6% of capacity is owned by other parties. 12 ** Florida Power and Georgia Power Company ("Georgia Power") are co-owners of a 168-MW advanced combustion turbine located at Florida Power's Intercession City site. Georgia Power has the exclusive right to the output of this unit during the months of June through September. Florida Power has that right for the remainder of the year. PLANNED GENERATION AND ENERGY SALES: Through a competitive bidding process, Florida Power signed a contract with the city of Bartow to supply wholesale power and energy-related services for another five years, beginning in November 1999. Current requirements for Bartow are 55 MW, which is expected to grow to over 70 MW over the life of the contract. In 1995, Florida Power agreed to sell 605 MW of year round capacity to Seminole from 1999 through 2001. While 150 MW of this transaction represents a continuation of existing business, 455 MW represents new sales to Seminole. In addition, Florida Power has agreed to sell from 150 to 300 MW to Seminole from 2000-2002. This contract was awarded to Florida Power as a result of a competitive bidding process initiated by Seminole. Additionally, Florida Power is in the final year of a three year contract to sell between 150 and 400 MW of summer-peaking capacity annually to Georgia Power. The committed capacity for 1999 is 200 MW. In 1992, the FPSC granted Florida Power a certificate of need to build 470 MW of new generation using combined cycle technology. In September 1994, Florida Power purchased approximately 8,100 acres of mined-out phosphate land for the new power plant site. The site is located in Polk County, Florida, approximately 50 miles east of Tampa, and has been designated the Hines Energy Complex. Construction of the unit was completed in December 1998. The first power block is a nominal 500 MW combined cycle unit which is expected to be placed into commercial operation in the spring of 1999. Florida Power plans to use natural gas to fuel the unit. Florida Power has obtained capacity on the Florida Gas Transmission Company's system for the transportation of natural gas to the Hines Energy Complex in Polk County. Florida Power began using the capacity in January 1998. This transportation will serve a portion of the plant's requirements. Florida Power also has contracted for natural gas supply and its transportation for the remaining portion of the plant's requirements. Some of the capacity at the Hines Energy Complex will be used to meet the requirements of a wholesale contract signed in 1995, in which Florida Power agreed to sell an additional 455 MWs to Seminole, beginning in 1999(previously mentioned herein). In February 1999, Florida Power announced that it plans to build three peaking power generation units at Florida Power's Intercession City site. The units are designed to provide electricity during periods of peak customer demand and are projected to provide a total of 300 MW of power beginning in December 2000. The new units are combustion turbine units capable of using either natural gas or oil, depending on cost and availability of those fuel sources. In connection with the construction of new power plants in Florida, the FPSC requires each investor-owned electric utility to engage in a competitive bidding process for the construction of new generation, unless the utility demonstrates on a case-by-case basis that such a process is not in the best interests of the utility's ratepayers. See Item 3 "Legal Proceedings", Paragraph 12. The construction of peaking units does not fall under this requirement. 13 NUCLEAR PLANT AND NUCLEAR INSURANCE: Information regarding nuclear plant and nuclear insurance is contained in Note 4 and Note 11 to the Financial Statements. TRANSMISSION AND DISTRIBUTION: As of December 31, 1998, Florida Power distributed electricity through 363 substations with an installed transformer capacity of 43,255,840 kilovolt amperes ("KVA"). Of this capacity, 29,399,250 KVA is located in transmission substations and 13,856,590 KVA in distribution substations. Florida Power has the second largest transmission network in Florida. Florida Power has 4,669 circuit miles of transmission lines, of which 2,646 circuit miles are operated at 500, 230, or 115 kilovolts ("KV") and the balance at 69 KV. Florida Power has 24,723 circuit miles of distribution lines which operate at various voltages ranging from 2.4 to 25 KV. Florida Power along with 21 other in-state electric utilities and 14 non-utilities comprise the Florida Reliability Coordinating Council ("FRCC"), which was approved by the North American Electric Reliability Council ("NERC") as the tenth region of NERC. The FRCC is responsible for ensuring the reliability of the bulk power electric system in peninsular Florida. Florida Power and five other FRCC transmission providers have established Florida Open Access Sametime Information System. This is an internet location where transmission customers may obtain transmission information and submit requests for service or resell service rights. DIVERSIFIED OPERATIONS Electric Fuels owns and/or operates approximately 5,000 railcars, 50 locomotives, 1,100 river barges and 27 river towboats that are used for the transportation and shipping of coal, steel and other bulk products. Through joint ventures, Electric Fuels has five oceangoing tug/barge units. An Electric Fuels subsidiary, through another joint venture, owns one third of a large bulk products terminal located on the Mississippi River south of New Orleans, which handles coal and other products. Electric Fuels provides drydocking and repair services to towboats, offshore supply vessels and barges through operations it owns near New Orleans, Louisiana. Electric Fuels controls, either directly or through subsidiaries, coal reserves located in eastern Kentucky and southwestern Virginia. Electric Fuels owns, in fee, properties that contain estimated proven and probable coal reserves of approximately 185 million tons and controls, through mineral leases, additional estimated proven and probable coal reserves of approximately 30 million tons. The reserves controlled by Electric Fuels include substantial quantities of high quality, low sulfur coal that is appropriate for use at Florida Power's existing generating units. Electric Fuels' total production of coal during 1998 was approximately 3.0 million tons. In connection with its coal operations, Electric Fuels subsidiaries own and operate an underground mining complex located in southeastern Kentucky and southwestern Virginia. Other Electric Fuels subsidiaries own and operate surface and underground mines, coal processing and loadout facilities and a river terminal facility in eastern Kentucky, a railcar-to-barge loading facility in West Virginia, and three bulk commodity terminals: one on the Ohio River in Cincinnati, Ohio, and two on the Kanawha River near Charleston, West Virginia. Electric Fuels and its subsidiaries employ both company and contract miners in their mining activities. 14 Another Electric Fuels subsidiary owns an interest in a partnership, located in eastern Kentucky, which produces synthetic fuels that qualify for Federal tax credits under Section 29 of the Internal Revenue Code. A subsidiary of Electric Fuels has acquired oil and gas leases on 1,920 acres in Garfield County, Colorado, containing proven natural gas reserves of 37.6 billion cubic feet. Progress Rail, an Electric Fuels subsidiary is one of the largest integrated processors of railroad materials in the United States, and is a leading supplier of new and reconditioned freight car parts, rail, rail welding and track work components, railcar repair facilities, railcar and locomotive leasing, maintenance-of-way equipment and scrap metal recycling. It has facilities in 20 states, Mexico and Canada. Another subsidiary of Electric Fuels owns and operates a manufacturing facility at the Florida Power Energy Complex in Crystal River, Florida. The manufacturing process utilizes the fly ash generated by the burning of coal as the major raw material in the production of lightweight aggregate used in construction building blocks. Electric Fuels also operates an environmental testing laboratory in Tampa, Florida. ITEM 3. LEGAL PROCEEDINGS Purchased Power Contracts with Qualifying Facilities Florida Power has interpreted the pricing provision in its QF contracts to allow it to pay an as-available energy price rather than a higher firm energy price when the avoided unit upon which the contract is based would not have been operated. Two QFs have suits pending against Florida Power over the level of payments made by Florida Power under the contracts, as discussed in paragraphs 1 and 2 below: 1. Metropolitan Dade County and Montenay Power Corp. v. Florida Power Corporation, Circuit Court of the Eleventh Circuit for Dade County, Florida, Case No. 96-09598-CA-30 Metropolitan Dade County and Montenay Power Corp. v. Florida Power Corporation, U.S. District Court, Southern District, Miami Division, Case No. 96-0594-C.V.-LENNARD In re: Petition for Declaratory Statement That Energy Payments Are Limited to Analysis of Avoided Unit's Contractually Specified Characteristics, Florida Public Service Commission, Docket No.980283-EQ. On February 13, 1996, Metropolitan Dade County ("Dade") and Montenay Power Corp. ("Montenay") filed a complaint in the above-referenced state court seeking a declaratory judgment that their interpretation of the energy pricing provision in their QF contract is correct, and damages in excess of $1.3 million for breach of that contract. No trial date has as yet been set in the State Court action. On May 14, 1996, Dade and Montenay filed suit against Florida Power in the above-referenced federal district court based on essentially the same facts as presented in the state court case, but alleging violations of federal antitrust laws and demanding unspecified treble damages. In March 1997, the plaintiffs 15 amended the federal court case to include Florida Progress and Electric Fuels. In June 1998, the judge granted the defendants' Motion for Summary Judgement and dismissed the case. Dade and Montenay filed a Notice of Appeal with the 11th Circuit Court of Appeals in October 1998. On February 23, 1998, Florida Power filed a petition with the FPSC for a Declaratory Statement that the previous FPSC - approved negotiated contract between the parties limits energy payments thereunder to the avoided costs based upon an analysis of a hypothetical unit having the characteristics specified in the contract. In October 1998, the FPSC denied the Florida Power petition for declaratory statement. In January 1999, Florida Power filed a Notice of Appeal of the FPSC denial with the Florida Supreme Court. (See Note 11 to the Financial Statements.) 2. NCP Lake Power, Inc. v. Florida Power Corporation, Florida Circuit Court, Fifth Judicial Circuit for Lake County, Case No. 94-2354-CA-01 In re: Petition for Declaratory Statement Regarding the Negotiated Contract for Purchase of Firm Capacity and Energy between Florida Power Corporation and Lake Cogen, LTD., Florida Public Service Commission, Docket No. 980509-EQ. On October 21, 1994, NCP Lake Power, Inc. ("Lake"), a general partner of Lake Cogen, Ltd., filed the above-referenced suit against Florida Power asserting breach of its QF contract and requesting a declaratory judgment. A bench trial in the case concluded in December 1998, but the court has not yet ruled. On April 9, 1998, Florida Power filed a petition with the FPSC for a Declaratory Statement that the contract between the parties limits energy payments thereunder to the avoided costs based upon an analysis of a hypothetical unit having the characteristics specified in the contract. In October 1998, the FPSC denied the petition. In January 1999, Florida Power filed a Notice of Appeal of this FPSC order with the Florida Supreme Court. (See Note 11 to the Financial Statements.) 3. Wanda L. Adams, et al. v. Florida Power Corporation and Florida Progress Corporation, U.S. District Court, Middle District of Florida, Ocala Division, Case No. 95-123-C.V.-OC-10. On October 13, 1995, Florida Power and Florida Progress were served with a multi-party lawsuit involving 17 former Florida Power employees. The plaintiffs generally alleged discrimination in violation of the Age Discrimination and Employment Act and wrongful interference with pension rights in violation of the Employee Retirement Income Security Act as a result of their involuntary terminations during Florida Power's reduction in force. While no dollar amount is specified, each Plaintiff seeks back pay, reinstatement or front pay through their projected dates of normal retirement, costs and attorney's fees. The Plaintiffs subsequently filed motions adding 39 additional plaintiffs. In November 1995, Florida Power filed its answer, a motion to dismiss Florida Progress, and a counterclaim against five of the plaintiffs who signed releases, promising, among other things, not to sue Florida Power with respect to matters involving their employment or termination. The counterclaim sought enforcement of the agreement, dismissal of plaintiffs' complaints, and an award of attorneys fees and costs of litigation. In October 1996, a joint stipulation to provisionally certify the case as a class action pursuant to the Age Discrimination in Employment Act was approved. 16 By May 28, 1997, the final day for individuals to "opt into" this action, 61 additional former employees elected to do so, for a total of 117 plaintiffs. In June 1998, the judge issued an order on several pending motions. The motion to dismiss Florida Progress was denied, but all the ERISA claims were dismissed and the state age claims of 5 plaintiffs were dismissed. The Motion to Dismiss 4 plaintiffs' federal age claims based on Statute of Limitations violations was granted. In October 1998, Florida Power filed a motion for summary judgement on its counterclaim and on the state law claims of 69 plaintiffs, who are similarly situated to the 5 plaintiffs who have had their state claims dismissed. In December 1998, Florida Power and the plaintiff's engaged in informal settlement discussions, which were terminated on December 22, 1998. However, plaintiffs have filed a motion to enforce a purported $11 million settlement agreement. Florida Power denies that such an agreement exists and has filed responsive pleadings to that effect.(See Note 11 to the Financial Statements.) 4. Florida Power Corporation v. United States, U.S. Court of Federal Claims, Civil Action No. 96-702C. Consolidated Edison Co., et al v. United States, United States District Court, Southern District of New York, Case No. 98-CIV-4115 On November 1, 1996, Florida Power filed suit against the U.S. Government in the U.S. Federal Court of Claims alleging breach of contract and illegal taking of property without just compensation. The suit arises out of several contracts under which the government provided uranium enrichment services at fixed prices. After Florida Power paid for all services provided under the contracts, the government, through federal legislation enacted in 1992, imposed a retroactive price increase in order to fund the decontamination and decommissioning of the government's gaseous diffusion uranium enrichment facilities. The government is collecting this increase through an annual "special assessment" levied upon all utilities that had enrichment services contracts with the government. Collection of the special assessments began in 1992 and is scheduled to continue for a fifteen-year period. To date, Florida Power has paid more than $11.0 million in special assessments, and if continued throughout the anticipated fifteen-year life, the special assessments would increase the cost of Florida Power's contracts by more than $23 million. Florida Power seeks an order declaring that all such special assessments are unlawful, and an injunction prohibiting the government from collecting future special assessments, and damages of approximately $11.0 million, plus interest. In February 1999, the court granted Florida Power's motion to stay, pending resolution of the Consolidated Edison case, sited below. In June 1998, Florida Power, Consolidated Edison Co. and 15 other utilities filed a declaratory judgement action against the United States in the Southern District Court of New York, challenging the constitutionality of the $2.25 billion retroactive assessment imposed by the federal government on domestic nuclear power companies to fund the decommissioning and decontamination of the government's uranium enrichment facilities. 17 5. Sanford Gasification Plant Site, Sanford, Florida ("Sanford Site") The Sanford Site is a former manufactured gas site located in the city of Sanford, Florida. Sanford Gas Company, which merged into Florida Power in 1944, operated the plant until 1946 when it was sold to South Atlantic Gas Company (later Atlanta Gas Company). The plant was conveyed three more times, being purchased by the current owner, Florida Public Utilities, in 1965. In June 1996, the EPA completed an Expanded Site Investigation/Remedial Investigation at the site. In July 1997, the EPA sent a general and special notice letter which advised Florida Power and other PRPs of their potential liability for cleanup. The investigation concluded that the release or threatened release of contaminants includes the site itself and down gradient contamination of an unnamed tributary used for storm water drainage. Water flows from the tributary into Cloud Branch Creek and ultimately Lake Monroe. Florida Power, Florida Power and Light Company, Atlanta Gas Company, Florida Public Utilities Company and the City of Sanford executed an Administrative Order on Consent ("AOC") and a Site Participation Agreement with EPA. By signing the AOC, the PRPs agreed, jointly and severally, to perform the Remedial Investigation and Feasibility Study ("RI/FS") at the Sanford site. By executing the Site Participation Agreement, the PRPs agreed to an allocation of costs for a RI/FS for up to $1.5 million. Florida Power's share is approximately 39.7% of these costs. In September 1998, the EPA formally approved the PRP RI/FS Work Plan. The RI field work was completed in January 1999. The EPA is expected to review the final Treatability Study report and provide further guidance to the PRPs by August 1999. Additional contributions for subsequent cleanup costs will be negotiated among the PRPs as the scope of clean-up efforts become more defined. (See Note 11 to the Financial Statements.) 6. State of Oklahoma, ex rel. John P. Crawford, Insurance Commissioner v. Mid-Continent Life Insurance Company, District Court of Oklahoma County, State of Oklahoma, Case No. CJ-97-2518-62 State of Oklahoma, ex rel, John P. Crawford, Insurance Commissioner as Receiver for Mid-Continent Life Insurance Company v. Florida Progress Corporation, a Florida corporation, Jack Barron Critchfield, George Ruppel, Thomas Steven Krzesinski, Richard Korpan, Richard Donald Keller, James Lacy Harlan, Gerald William McRae, Thomas Richard Dlouhy, Andrew Joseph Beal and Robert Terry Stuart, Jr., District Court of Oklahoma County, State of Oklahoma, Case No. CJ-97-2518-62 (part of the same case noted above). Michael Farrimond, Pamela S. Farrimond, Angela Fry, Jowhna Hill, and Barbara Hodges, for themselves and all others similarly situated v. Florida Progress Corporation, a Florida corporation, Jack Barron Critchfield, George Ruppel, Thomas Steven Krzesinski, Richard Korpan, Richard Donald Keller, James Lacy Harlan, Gerald William McRae, Thomas Richard Dlouhy, Andrew Joseph Beal and Robert Terry Stuart, Jr., District Court of Oklahoma County, State of Oklahoma, Case No. CJ-99-130-65 On April 14, 1997, the Insurance Commissioner of the State of Oklahoma ("Commissioner") received approval from the Oklahoma County District Court to temporarily seize control of the operations of Mid-Continent Life Insurance Company ("Mid-Continent"). On May 23, 1997, the District Court of Oklahoma County granted the application of the Commissioner to place Mid-Continent into receivership and ordered the Commissioner to develop a plan of rehabilitation for Mid-Continent. Inconsistently, the court ruled that premiums could be raised 18 on Mid-Continent policies. Both parties appealed to the Oklahoma Supreme Court, but these appeals were withdrawn in February 1999. On December 22, 1997, the Commissioner filed with the court a petition for damages against Florida Progress and certain former Mid-Continent directors and officers of Florida Progress, alleging alter ego, negligence, breach of fiduciary duty, misappropriation of funds, unjust enrichment, ultra vires, violation of Oklahoma statutory insurance law, violation of Oklahoma statutory corporate law, and seeking equitable relief. On April 17, 1998, the court granted motions to dismiss the individual defendants, leaving Florida Progress as the sole remaining defendant in the lawsuit. This lawsuit has been stayed by agreement of the parties and is expected to be resolved in the context of the rehabilitation plan. A new Commissioner was elected in November 1998 and has stated his intention to work with Florida Progress and others to develop a plan to rehabilitate Mid-Continent rather than pursue litigation against Florida Progress. Florida Progress is working with the new Commissioner to develop a viable plan to rehabilitate Mid-Continent, which would include a sale of that company. On January 19, 1999, five Mid-Continent policyholders filed a purported class action against Mid-Continent and the same defendants named in the former case filed by Commissioner Crawford. The complaint contains substantially the same factual allegations as the December 22, 1997 case. Defendants have filed a motion to transfer the case to the receivership court and will seek to have it resolved in the context of the rehabilitation plan. Florida Progress intends to vigorously defend itself and other defendants against outstanding charges and cooperate with the receiver to gain the court's approval of a rehabilitation plan that serves its best interests and those of the policy holders. (See Item 7 MD&A, "Diversified Operations - Mid-Continent Life Insurance Company" and Note 11 to the Financial Statements.) 7. Peak Oil Company, Missouri Electric Works, 62nd Street, AKO Bayside, Bluff Electric and Holloway Superfund Sites. Florida Power has been notified by the EPA that it is or could be a PRP with respect to each of the above Superfund sites. Based upon the information presently available, Florida Power has no reason to believe that its total liability for the cleanup of these sites will be material or that it will be required to pay a significantly disproportionate share of those costs. However, these matters are being reported because liability for cleanup of certain sites is technically joint and several, and because the extent to which Florida Power may ultimately have to participate in those cleanup costs is not presently determinable. 8. Calgon Carbon Corporation v. Potomac Capital Investment Corporation, Potomac Electric Power Company, Progress Capital Holdings, Inc., and Florida Progress Corporation, United States District Court for the Western District of Pennsylvania, Civil Action No. 98-0072. Calgon Carbon Corporation ("Calgon") filed a complaint on January 12, 1998, asserting securities fraud, breach of contract and other claims in connection with the sale to it by two of the defendants in December 1996 of their interests in Advanced Separation Technologies, Incorporated ("AST"), a corporation engaged in the business of designing and assembling proprietary separation equipment. Prior to closing, Progress Capital, a wholly owned subsidiary of Florida Progress, owned 80 percent of the outstanding stock of AST and Potomac Capital Investment Corporation (an entity unaffiliated with PCH or Florida Progress) 19 owned 20 percent. Calgon paid PCH an aggregate of approximately $57.5 million (producing net proceeds of approximately $56 million after certain fees and expenses) in respect of PCH's share of AST's stock. Calgon claims that AST's assets and revenues were overstated and liabilities and expenses were understated for 1996. Calgon also alleges undisclosed facts relating to accounting methodology, poor products, manufacturing and quality control problems and undisclosed warranty claims. Calgon seeks damages, punitive damages and the right to rescind the purchase. The defendants have filed a motion to dismiss all claims, which is pending. 9. FOCAS, Inc. v. Florida Power Corporation, U.S. District Court, Northern District of Georgia, Atlanta Division, Case No. CV-822-CC Florida Power entered into a contract with FOCAS, Inc. ("FOCAS") for the supply of fiberoptic cable. A portion of the cable was found to be defective, and was replaced. FOCAS invoiced Florida Power for the defective cable in the amount of approximately $2 million. While discussions proceeded regarding the matter, FOCAS sued Florida Power alleging breach of contract, unjust enrichment and fraudulent inducement, and requesting up to approximately $76 million in damages, representing, among other things, Florida Power's alleged profits over the estimated fifteen year life of the cable. Florida Power filed its Answer on December 12, 1998, generally denying the allegations. 10. ABC Rail Products Corporation v. Progress Rail Services Corporation and Louisville Scrap Material Co., Inc., U.S. District Court, Northern District of Illinois, Eastern Division, Civ. Action No. 98C3663. On June 12, 1998, ABC Rail Products Corporation ("ABC") brought an action against Progress Rail and Louisville Scrap Material Co., Inc. ("Louisville") seeking injunctive and declaratory relief and treble damages based on alleged violations of federal and state antitrust statutes as well as damages under other state law claims. The complaint sought to enjoin Progress Rail's acquisition of certain assets and business of Louisville and several affiliated corporations known as the Blue Industrial Group. The parties subsequently agreed on the terms of settlement, and the case was dismissed. This concludes this matter for reporting purposes. 11. In Re: Joint Petition for Determination of Need for an Electrical Power Plant in Volusia County by the Utilities Commission, City of New Smyrna Beach, and Duke Energy New Smyrna Beach Power Company Ltd., L.L.P. Public Service Commission, Docket No. 981042-EM. On August 28, 1998, Duke Energy New Smyrna Beach Power Company and the Utilities Commission of New Smyrna Beach filed a petition with the FPSC seeking a determination of need to build a 514 MW combined cycle electric power plant with an in-service date of November 1, 2001. In September 1998, Florida Power filed a Motion to Intervene and a Motion to Dismiss in that action. Florida Power believed that granting the petition would profoundly restructure Florida's statutorily mandated approach to planning and siting generating capacity by contradicting a long standing FPSC interpretation of the Florida Power Plant Siting Act that has been affirmed by the Florida Supreme Court. Florida Power also believed that granting the petition would raise a host of significant related policy issues that are beyond the scope of this proceeding. On March 4, 1999, the FPSC voted to grant the Duke petition. Florida Power intends to appeal this decision. 20 12. In Re: Petition of Florida Power Corporation for Waiver of Rule 25-22.082 F.A.C. Selection of Generating Capacity, Florida Public Service Commission, Docket No. 98-1360-EI. On October 20, 1998, Florida Power filed a Petition with the FPSC seeking a waiver of the Commission rules which require an electric utility to solicit and evaluate bids for new generating capacity as a prerequisite to constructing a power plant with steam capacity in excess of 75 MW. This petition was filed to facilitate the start of construction of a second unit at the Hines Energy Complex in Polk County. On January 19, 1999, the FPSC voted to deny the Florida Power Petition. This report concludes this matter for reporting purposes. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 21 PART II ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS FLORIDA PROGRESS Florida Progress' common stock is listed on the New York Stock Exchange and the Pacific Stock Exchange. The high and low price per share of Florida Progress' common stock for each quarterly period and the dividends per common share paid on shares of Florida Progress' common stock during the last two fiscal years appear in Item 8 on the "Quarterly Financial Data" table for Florida Progress at the end of the Notes to the Financial Statements, and is incorporated herein by reference. In February 1999, Florida Progress' Board announced an increase of one cent per share in the common stock quarterly dividend, which on an annual basis would increase the dividend from $2.14 to $2.18 per share. This represents an annual dividend growth rate of 1.9%. In 1998, Florida Progress' dividend payout ratio was approximately 74% of earnings. Information concerning the Florida Progress dividend policy is set forth in Item 7 "MD&A - Liquidity and Capital Resources". Florida Progress' Restated Articles of Incorporation do not limit the dividends that may be paid on its common stock. However, the primary source for payment of Florida Progress' dividends consists of dividends paid to it by Florida Power. Florida Power's Amended Articles of Incorporation and its Indenture dated as of January 1, 1944, under which it issues first mortgage bonds, contain provisions restricting dividends in certain circumstances. At December 31, 1998, Florida Power's ability to pay dividends was not limited by these restrictions. Florida Progress and Progress Capital have entered into a Second Amended and Restated Guaranty and Support Agreement dated as of August 7, 1996, pursuant to which Florida Progress has unconditionally guaranteed the payment of Progress Capital's debt (as defined in the agreement). Florida Progress did not issue any equity securities during 1998 that were not registered under the Securities Act. Progress Capital, however, has a privately-placed medium-term note program. (See Item 7 "Liquidity and Capital Resources-Diversified Operations", and Note 6 to the Financial Statements.) The approximate number of equity security holders of Florida Progress is as follows: Number of Registered Holders* Title of Class as of December 31, 1998 - ------------------------------- ---------------------------- Common Stock without par value 44,757 * The computation of registered holders includes record holders as well as individual positions in the Progress Plus Stock Plan. 22 FLORIDA POWER All of Florida Power's common stock is owned by Florida Progress, and as a result there is no established public trading market for the stock. For the past three years, Florida Power has paid quarterly dividends to Florida Progress totaling the amounts shown in the Statements of Shareholder's Equity in the Financial Statements. Florida Power's amended articles of incorporation, and its Indenture dated as of January 1, 1944, as supplemented, under which it issues first mortgage bonds, contain provisions restricting dividends in certain circumstances. At December 31, 1998, Florida Power's ability to pay dividends was not limited by these restrictions.
ITEM 6. SELECTED FINANCIAL DATA Annual Growth Rates (in percent) 1993-1998 1998 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- FLORIDA PROGRESS CORPORATION Summary of operations (in millions) Utility revenues 6.2 $2,648.2 $2,448.4 $2,393.6 $2,271.7 $2,080.5 $1,957.6 Diversified revenues (continuing) 17.7 972.1 868.0 764.3 736.1 644.8 430.3 Income from continuing operations Before non-recurring items 7.5 281.7 254.3 252.4 238.9 212.0 196.0 Income from continuing operations 7.5 281.7 54.3 250.7 238.9 212.0 196.0 Income (loss)from discontinued operations and change in accounting (26.3) 0.6 Net income 7.5 281.7 54.3 224.4 238.9 212.0 196.6 ------------------------------------------------------------------------------------------------------------------------- Balance sheet data (in millions): Total assets 2.9 $6,160.8 $5,760.0 $5,348.4 $5,550.4 $5,453.1 $5,338.0 Capitalization: Short-term capital 14.4 $ 382.1 $ 230.0 $ 39.0 $173.7 $ 99.9 $195.2 Long-term debt 4.1 2,250.4 2,377.8 1,776.9 1,662.3 1,835.2 1,840.5 Preferred stock (25.8) 33.5 33.5 33.5 138.5 143.5 148.5 Common stock equity .5 1,862.0 1,776.0 1,924.2 2,078.1 1,984.4 1,820.5 ------------------------------------------------------------------------------------------------------------------------- Total capitalization 2.5 $4,528.0 $4,417.3 $3,773.6 $4,052.6 $4,063.0 $4,004.7 - -------------------------------------------------------------------------------------------------------------------------- Common stock data: Average shares outstanding (in millions) 1.9 97.1 97.1 96.8 95.7 93.0 88.3 Earnings per share: Utility before non-recurring 4.4 $2.56 $2.48 $2.40 $2.27 $2.05 $2.06 Diversified continuing before non-recurring items 16.3 .34 .14 .21 .23 .23 .16 Consolidated continuing before non-recurring items 5.5 2.90 2.62 2.61 2.50 2.28 2.22 Consolidated continuing 5.5 2.90 .56 2.59 2.50 2.28 2.22 Discontinued operations and change in accounting - - (.27) - - .01 Consolidated 5.4 2.90 .56 2.32 2.50 2.28 2.23 Dividends per common share 1.9 2.14 2.10 2.06 2.02 1.99 1.95 Dividend payout 73.8% 375.3% 88.9% 81.0% 87.7% 87.6% Dividend yield 4.8% 5.4% 6.4% 5.7% 6.7% 5.9% Book value per share of common stock (1.3) $19.13 $18.30 $19.84 $21.55 $20.85 $20.40 Return on common equity 15.6% 2.9% 10.9% 11.8% 11.1% 11.1% ------------------------------------------------------------------------------------------------------------------------- Common stock price per share: High 47 1/8 39 1/4 36 1/2 35 3/4 33 5/8 36 3/8 Low 37 11/16 27 3/4 31 1/2 29 3/8 24 3/4 31 1/4 Close 5.9 44 13/16 39 1/4 32 1/4 35 3/8 30 33 5/8 Price earnings ratio (year-end) 15.5 70.1 13.9 14.2 13.2 15.1 - -------------------------------------------------------------------------------------------------------------------------- Other year-end data: Number of employees 3.1 9,125 7,990 7,291 7,174 7,394 7,825 - -------------------------------------------------------------------------------------------------------------------------- [CONTINUED ON NEXT PAGE]
23
Annual Growth Rates (in percent) 1993-1998 1998 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- FLORIDA POWER CORPORATION Electric sales (million of KWH) Residential 4.3 16,526.3 15,079.8 15,481.4 14,938.0 13,863.4 13,372.6 Commercial 4.9 9,999.3 9,257.3 8,848.0 8,612.1 8,252.1 7,884.8 Industrial 5.3 4,375.4 4,187.8 4,223.7 3,864.4 3,579.6 3,380.8 Total retail sales 4.7 33,386.6 30,850.3 30,784.8 29,499.5 27,675.2 26,528.3 Total electric sales 5.4 37,251.1 33,289.9 33,492.5 32,402.6 30,014.6 28,647.8 - -------------------------------------------------------------------------------------------------------------------------- Residential service (average annual): KWH sales per customer 2.4 13,972 12,993 13,560 13,282 12,597 12,420 Revenue per customer 4.1 $1,204 $1,115 $1,138 $1,114 $1,038 $983 Revenue per KWH 1.7 $0.0862 $0.0858 $0.0839 $0.0839 $0.0824 $0.0792 - -------------------------------------------------------------------------------------------------------------------------- Financial Data: Operating revenues 6.2 $2,648.2 $ 2448.4 $2,393.6 $2,271.7 $2,080.5 $1,957.6 Net income after dividends on preferred stock 6.5 $248.6 $ 134.4 $ 232.6 $217.3 $190.7 $181.5 Total assets 3.0 $4,928.1 $4,900.8 $4,264.0 $4,284.9 $4,284.5 $4,259.5 Long-term debt and preferred stock subject to mandatory redemption 1.6 $1,555.1 $1,745.4 $1,296.4 $1,304.1 $1,393.8 $1,433.6 Total capitalization including short-term debt (in millions) 1.8 $3,547.6 $3,727.7 $3,180.8 $3,202.2 $3,265.4 $3,240.4 Capitalization ratios: Short-term capital (6.0) 3.9% 4.9% 0.8% 1.0% 2.8% 5.3% Long-term debt .3 43.8% 46.8% 40.8% 39.9% 41.7% 43.1% Preferred stock (27.8) 0.9% 0.9% 1.1% 4.3% 4.4% 4.6% Common stock equity 1.8 51.3% 47.4% 57.4% 54.8% 51.1% 47.0% Ratio of earnings to fixed charges (SEC method) .2 3.87 2.75 4.80 4.41 3.90 3.83 Embedded cost of long-term debt 6.8% 7.0% 7.2% 7.2% 7.1% 6.8% Embedded cost of preferred stock (7.5) 4.6% 4.6% 4.6% 6.8% 6.8% 6.8% - -------------------------------------------------------------------------------------------------------------------------- Operating Data: Net system capacity (MW) .4 7,727 7,717 7,341 7,347 7,295 7,563 Net system peak load (MW) 3.5 8,004 8,066 8,807 7,722 6,955 6,729 Capital expenditures (in millions) (6.2) $310.2 $387.2 $217.3 $283.4 $319.5 $426.4 Net cash flow to capital expenditures 21.8 169% 76% 175% 125% 103% 63% Average number of customers 2.0 1,340,853 1,314,508 1,292,075 1,271,784 1,243,891 1,214,653 Number of full-time employees (4.0) 4,740 4,799 4,629 4,658 4,972 5,807 - --------------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS Florida Progress' 1998 consolidated earnings from continuing operations were $281.7 million. This compared with $54.3 million in 1997 and $250.7 million in 1996. Florida Progress' 1998 earnings per share of $2.90 increased 10.7 percent over 1997's earnings of $2.62 per share, before nonrecurring charges. The increase reflected the customer growth in the utility's service territory and the growth of its diversified operations. Operating results for 1997 were negatively impacted by the extended outage of Florida Power's Crystal River nuclear plant and the provision for loss on the company's investment in Mid-Continent. These two events reduced Florida Progress' 1997 earnings by $200 million, or $2.06 per share. In 1996, Florida Progress reported an after-tax charge of $25.2 million for a provision for loss on unprofitable coal properties owned by Electric Fuels, and an after-tax gain of $23.5 million for the sale of AST. 24 Excluding the nonrecurring items, Florida Progress' 1997 and 1996 consolidated earnings from continuing operations were $254.3 million and $252.4 million, respectively. Florida Power earned $248.6 million in 1998, compared with $240.9 million, before nuclear outage costs in 1997 and $232.6 million in 1996. Earnings from recurring diversified operations were $33.1 million in 1998, compared with $13.4 million in 1997 and $19.8 million in 1996. EARNINGS PER SHARE 1998 1997 1996 - --------------------------------------------------------------------------- Florida Power Corporation $2.56 $2.48 $2.40 - --------------------------------------------------------------------------- Electric Fuels Corporation .44 .33 .28 Mid-Continent Life Ins. Co. - - .02 Other (.10) (.19) (.09) - --------------------------------------------------------------------------- Diversified .34 .14 .21 - --------------------------------------------------------------------------- Continuing operations before nonrecurring items 2.90 2.62 2.61 Nuclear outage costs - (1.10) - Loss related to Mid-Continent Life Ins. Co. - (.96) - Provision for loss on coal properties - - (.26) Gain on sale of business - - .24 - --------------------------------------------------------------------------- Total continuing operations 2.90 .56 2.59 Discontinued operations - - (.27) - --------------------------------------------------------------------------- Consolidated $2.90 $ .56 $2.32 - --------------------------------------------------------------------------- Florida Power's 1998 earnings per share were up 3.2 percent over 1997, before nuclear outage costs, primarily due to strong customer growth and usage growth. Demand for electricity during 1998 reached record levels as hotter-than-normal weather during much of the year resulted in record annual usage by residential and commercial customers. The benefit of the hotter-than-normal weather was offset by several items including the accelerated amortization of certain regulatory assets, additional spending for maintenance and reliability projects, and the deferral of revenues as allowed by state regulators. Electric Fuels' earnings per share were up 33 percent over 1997. This increase was driven by improved results from all three of its business units, including an expanded barge fleet, increased coal deliveries and an increase in demand for railcar and track parts and services. Florida Power's Crystal River nuclear plant was out of service during 1997 to address design issues related to the plant's safety systems. As a result of the outage, Florida Power's 1997 earnings were reduced by $1.10 per share. This resulted from $100 million in additional nuclear operations and maintenance expenses and $73 million of nonrecoverable replacement power costs. (See Item 7, MD&A - "Extended Nuclear Outage Costs".) In 1997, Florida Progress recorded a provision for the loss on its investment in Mid-Continent as well as an accrual for legal fees for pending litigation. This resulted in a $.96 per share after-tax charge to 1997 earnings. (See Item 7, MD&A - "Mid-Continent Life Insurance Company".) 25 In 1996, Florida Progress divested Echelon, formerly Progress Credit, through a tax-free stock dividend. This resulted in a $.27 per share charge to earnings for the write-down of certain assets of Echelon and other costs. Also in 1996, Florida Progress sold its 80-percent interest in AST for $56 million and realized an after-tax gain of $.24 per share. In 1996, Electric Fuels recorded a $.26 per share after-tax charge to earnings to establish a provision for loss on its unprofitable coal properties. The provision was necessary because management did not consider the unfavorable market conditions for low-sulfur coal to be temporary. Florida Progress' 1998 results reflected the strong fundamentals inherent in Florida Power's growing customer base and the expanding operations of Electric Fuels. This growth should help Florida Progress achieve its aggressive five-year objective of consistent annual earnings per share growth of 5 percent or better. The financial return on Florida Power's common equity was 13.7 percent in 1998, compared with 13 percent in 1997, before considering nonrecurring items, and 12.9 percent in 1996. Florida Power expects its average annual customer growth rate of 2 percent to continue in the near future. When combined with good cost control, Florida Power should be able to maintain an earnings growth rate of about 3 percent. Return on equity for Electric Fuels was 19.6 percent in 1998, 17.3 percent in 1997 and 14 percent in 1996, before its provision for loss on coal properties. Industry Restructuring The electric utility industry is undergoing changes designed to increase competition in the wholesale and retail electricity markets. The wholesale power market includes sales of electricity to utilities from other utilities and non-utility generators. The wholesale market is regulated by the FERC. The retail electricity market includes sales of electricity to end-use customers, i.e., residential, commercial and industrial customers, and is regulated by state public utility commissions. As a result of the Public Utilities Regulatory Policies Act of 1978 ("PURPA") and the Energy Policy Act of 1992, competition in the wholesale electricity market has greatly increased, especially from non-utility generators of electricity. In 1996, FERC issued new rules on transmission service to facilitate competition in the wholesale market on a nationwide basis. The rules give greater flexibility and more choices to wholesale power customers. The effect of these changes on the wholesale market has been significant. From 1990 through 1997, non-utility generation capacity grew in the U.S. at a rate of 54 percent, compared with utility generation capacity, which grew at a rate of 2 percent. The development of merchant plants, which is a non-utility generating plant without the benefit of a long-term contract for the sale of most of the plant's generating capacity, has contributed to the growth of capacity in this market. In a move the company believes is contrary to existing state law, Duke Energy filed a petition with the FPSC in August 1998 to build Florida's first merchant power plant. The FPSC voted to grant the Duke petition in March 1999. Florida Power intends to contest this decision. (See Item 3 "Legal Proceedings", paragraph 11). 26 To date, several states have adopted legislation that would give retail customers the right to choose their electricity provider (retail choice) and essentially every other state has, in some form, considered the issue. In 1998, Rhode Island, California and Massachusetts implemented retail competition while in a number of other states, either the legislature or the state commission developed a plan for retail competition. In states where electricity rates are more competitive, such as in Florida, there has been less incentive to push forward legislative proposals concerning retail choice. During Florida's 1998 legislative session, a bill to restructure the industry was sponsored by one senator but was never considered by the legislative body. The FPSC monitors, through a staff committee, the restructuring activities in other states. In addition to restructuring activity in various states, there have been several industry restructuring bills introduced in Congress. Several of the federal bills being considered would require states to implement retail choice sometime between 2000 and 2003. In March 1998, the Department of Energy announced the Administration's "Comprehensive Electricity Competition Plan," which would require retail competition by 2003 but permit states to opt out under certain conditions. Another issue encompassed by industry restructuring concerns franchise agreements. Most investor-owned utilities pay franchise fees to governments, including municipalities, for the right to install equipment to deliver electricity to retail customers. Industry restructuring (and other factors, such as reliability) could encourage municipalities to consider not renewing existing franchise agreements, and thus provide an opportunity for others to provide electric service to retail customers. A major portion of Florida Power's retail business, representing approximately 40 percent of total 1998 utility revenues, is covered under the terms of 111 franchise agreements with various municipalities. Although no franchise agreements are due to expire in 1999, five are due to expire in 2000 (representing about 1 percent of total 1998 utility revenues), 23 are due to expire in 2001 (about 6.9 percent of total utility revenues), 14 are due to expire in 2002(about 4.7 percent of total utility revenues), one is due to expire in 2003(about .4 percent of total utility revenues) and four are due to expire in 2004(about 1.9 percent of total utility revenues). All of the franchise agreements that expire by 2004 contain a clause that gives the municipality the right to purchase Florida Power's distribution system within the municipality at the expiration of the franchise. Although the exercise of that right would require complex financial arrangements and otherwise might be difficult, Florida Power believes that quality service and competitive rates will continue to be important factors as franchise agreements come up for renewal. The issue of industry restructuring has caused many companies to develop new corporate strategies. Some of these strategies include alliances, mergers with or acquisitions of other electric or gas utilities, or other types of service providers, that can offer not only the commodity but other unregulated products and services. Many electric utility analysts expect that, once existing regulatory barriers are removed, a significant amount of consolidation will occur among the nearly 100 investor-owned electric utilities that exist today. During the last five 27 years, approximately 40 electric utilities have announced either mergers with or acquisitions of other electric or gas utilities. About half of these transactions have been completed; the others are either pending regulatory approval or have been withdrawn. Industry Restructuring - Florida Progress' Strategic Initiatives While it may be several years before retail choice exists in Florida, Florida Progress believes that retail choice will eventually exist in every state. Anticipating this change, Florida Progress has developed a corporate strategy to position itself for a more competitive marketplace. Long term, Florida Progress is focused on establishing a national retail energy services business - which includes transportation of the commodity to the customer as well as offering nonregulated products and services. To be successful in this market, a retail services company will likely need a sizable number of customers in order to realize the economies of scale necessary to keep its costs competitive. As such, part of Florida Progress' corporate strategy includes the possibility of mergers or acquisitions that would expand its customer base. In addition to considering mergers and acquisitions, Florida Progress has entered into two joint ventures with two other utilities, Cinergy Corp. and New Century Energies. The first joint venture, formed in September 1997 and named Cadence, is a marketing alliance aimed at providing national chain account customers with energy management and energy information systems. The other joint venture, Centrus, began operating in July 1998 and was established to develop products and services for residential and small commercial customers. In March 1999, Florida Progress and its utility partners decided to dissolve the Centrus joint venture, due in part to changing strategic viewpoints among the partners. Florida Progress remains committed, however, to its long-term objective to establish a national retail energy services business, and intends to continue developing products and services for residential and small commercial customers. In May 1998, Florida Power formed a power marketing alliance with Dynegy to capitalize on developing wholesale energy markets in Florida and in the Southeast U.S. Forming joint ventures and alliances can be a quicker way to achieve many of the benefits sought through mergers and acquisitions including economies of scale, scope and new market presence and skills. An important issue encompassed by industry restructuring is the recovery of "stranded costs." Stranded costs include the generation assets of utilities whose value in a competitive marketplace would be less than their current book value as well as above-market purchased power commitments to the QFs. Thus far, all states that have passed restructuring legislation have provided for the opportunity to recover a substantial portion of stranded costs. Assessing the amount of stranded costs for a utility requires various assumptions about future market conditions including the future price of electricity. For Florida Power, the single largest stranded cost exposure is its commitments to QFs. Florida Power has taken a proactive approach to this industry issue. Since 1996, Florida Power has been seeking ways to address the impact of escalating payments from contracts it was obligated to sign under provisions of PURPA. 28 These efforts have resulted in Florida Power successfully mitigating, through buy-outs and buy-downs of these contracts, more than 20 percent of its purchased power commitments to QFs. (See Note 9 and Note 11 to the Financial Statements.) Florida Power Corporation Florida Power's operating results and capital requirements are largely influenced by its customers' demand for electricity. That annual demand for electricity is based on the number of customers and their annual usage; usage is largely influenced by weather. During 1998, Florida Power, as well as other electric utilities in Florida and in the Southeast, experienced periods of extreme demand for electricity due to hotter-than-normal summer temperatures. In planning for its future generation needs, Florida Power develops a forecast of annual demand for electricity, including a forecast of the level and duration of peak demands during the year. Florida Power relies, in part, upon the use of its Energy Management program during peak demands. This program enables Florida Power to reduce the amount of demand for electricity by remotely reducing energy usage of residential customers who agree to participate in the program. Florida Power utilized Energy Management last summer to a much greater degree than in the past, which resulted in a number of complaints from customers on the program. Florida Power is exploring several alternatives to add new generation that will provide greater flexibility in meeting the electricity needs of its customers. Utility Revenues and Sales Florida Power's operating revenues were $2.6 billion in 1998, and $2.4 billion in 1997 and in 1996. The utility's kilowatt-hour sales were up 11.9 percent in 1998 over 1997. The increase in sales was largely due to the hotter-than-normal weather experienced from May through October. As a result of the unusually hot weather, usage by residential customers, the single-largest customer class, increased approximately 9 percent over 1997. Kilowatt-hour sales in 1997 were essentially level with 1996. Mild weather in 1997, compared with 1996, offset the increase in kilowatt-hour sales that would have been realized from normal customer growth, which is around 2 percent or more than 20,000 new customers each year. Florida Power's wholesale kilowatt-hour sales were up 57.2 percent in 1998, compared with 1997. The primary reason for the increase was, unlike 1997, that the company's nuclear power plant was in service for most of 1998. This enabled Florida Power to sell excess generating capacity in the short-term wholesale energy market, after meeting the needs of its customers. However, the impact on earnings of these short-term bulk sales was minimal because essentially all revenues and costs associated with this activity are passed through to retail customers whose rates are adjusted accordingly. The increase in revenues resulting from the higher demand for electricity was offset by several actions taken in 1998, including steps taken to improve the utility's overall quality of service to its customers. (See Item 7 "MD&A - Other Utility Expenses".) In addition to these costs, Florida Power deferred $10 million of non-fuel revenues for either future accelerated amortization of the Tiger Bay regulatory asset or other regulatory initiatives, as approved by the FPSC. 29 As indicated above, the impact of extreme weather on Florida Power's sales can be significant. However, the impact of weather on non-fuel revenues for 1997 and 1996 was minimized because of a ratemaking concept called residential revenue decoupling. This concept was designed to eliminate the direct link between kilowatt-hour sales and non-fuel revenues. Under revenue decoupling, abnormal weather does not impact earnings from residential sales. Over the three-year period, which ended December 31, 1997, the earnings impact of residential revenue decoupling was not material. The termination of residential revenue decoupling will likely result in Florida Power's earnings being subject to greater fluctuation due to changes in weather. (See Note 1 to the Financial Statements.) Fuel and Purchased Power Fuel and purchased power costs are recovered primarily through a fuel cost recovery clause established by state and federal regulators. Fluctuations in these costs have little impact year to year on net income, but might impact net income in a more competitive environment. (See Item 7 "MD&A - Extended Nuclear Outage Costs" for discussion of replacement power costs not recovered through the fuel cost recovery clause.) Factors influencing fuel and purchased power costs include demand for electricity, fuel prices, the availability of generating plants and the amount and price of electricity purchased from QFs and other utilities. Total fuel and purchased power expenses were $1.03 billion in 1998, less than 1 percent higher than 1997's fuel and purchased power costs. The slight increase, despite an 11.9-percent increase in total kilowatt-hours sold, was due largely to the availability of Florida Power's Crystal River nuclear plant. The lack of nuclear generation throughout 1997 forced Florida Power to replace this generation with other, higher-cost replacement power. As previously discussed, a key factor influencing Florida Power's purchased power costs are the prices paid to QFs for electricity. Currently, Florida Power receives 831 MW of total capacity from QFs. In 1998, Florida Power spent $204.6 million for purchased power capacity payments under all QF contracts. This represented approximately 20 percent of system fuel and purchased power expenses for the year. Costs associated with these contracts raised Florida Power's system average cost for generation in 1998 and 1997, and this trend is expected to continue based on the contracts currently in place and the escalating payment schedules associated with each contract. Florida Power will continue its effort to mitigate the impact of escalating payments from its QF contracts. 30 Other Utility Expenses The increase in revenues in 1998, as previously discussed, enabled Florida Power to take several actions to better position itself for the future. The following items largely offset the increase in revenues attributable to the hotter-than-normal weather ($ in millions): Accelerated amortization of regulatory assets and write-off of related taxes $21 Accelerated 1999 expenditures to enhance reliability $17 Accelerated 1999 lump-sum pay increase $ 7 Utility operations and maintenance expenses increased by $49 million during 1998, compared with 1997. The increase was due to the acceleration of certain expenses noted above and additional operations and maintenance costs related to the Tiger Bay plant acquired in July 1997. In addition, Florida Power wrote off $7 million of inventory deemed obsolete. In 1997, operations and maintenance expenses, before nuclear outage costs, increased by $8.9 million over 1996. The increase was due primarily to costs associated with planned fossil plant outages and expenditures designed to improve reliability and customer service. Changes from year to year in the amount of energy conservation costs have no significant impact on earnings because Florida Power recovers substantially all of these costs through a clause in electric rates similar to the fuel recovery clause. Florida Power does not expect the level of energy conservation costs to vary materially in the future. Depreciation of $347.1 million for 1998 included $19 million of accelerated amortization of regulatory assets, $14 million of which was related to contract termination costs for the Tiger Bay buy-out. (See Item 7 "MD&A - Impact of Tiger Bay Buy-Out.") In 1997, Florida Power wrote off approximately $20 million related to these costs. In 1996, Florida Power amortized approximately $31 million related to two oil-fired power plants and a canceled transmission line. Excluding these and other write-offs, Florida Power's annual depreciation for 1998, 1997 and 1996 would have been $328.6 million, $305.9 million and $293.2 million, respectively. Florida Power's interest expense in 1998 increased over 1997 primarily due to higher debt balances resulting from the July 1997 Tiger Bay transaction. The higher debt balances from the Tiger Bay transaction, as well as additional costs associated with the 1997 extended nuclear outage, also resulted in increased 1997 interest expense, compared with 1996. Extended Nuclear Outage Costs In September 1996, Florida Power's Crystal River nuclear plant was taken out of service to fix an oil pressure problem in the main turbine. When the repairs were completed in October 1996, Florida Power decided to keep the plant shut down to address certain backup safety system design issues. 31 The NRC had been critical of the plant's overall performance in 1996, and in January 1997 placed the nuclear plant on its "Watch List" as a plant whose operations would be monitored closely until Florida Power demonstrated a period of improved performance. The nuclear plant was returned to service in February 1998 after being out of service about 16 months. In July 1998, the NRC removed the plant from its "Watch List," citing the unit's improved physical condition, more effective management oversight and improved operator training. Florida Power's operating results for 1997 were significantly impacted by the costs associated with the extended outage. These costs included $100 million in additional operations and maintenance expenses and approximately $173 million in replacement power costs. Capital expenditures related to the outage were $42 million in 1997. (See Note 9 to the Financial Statements.) Impact of Tiger Bay Buy-Out In July 1997, Florida Power bought out the purchased power contracts related to a 220-megawatt cogeneration facility (Tiger Bay). In addition to buying out the purchased power contracts, Florida Power acquired the facility. Costs associated with the termination of the purchased power contracts and the acquisition of the facility totaled $445 million. The FPSC-approved purchase allowed Florida Power to record a regulatory asset of approximately $350 million for contract termination costs and add $75 million to its electric plant. Florida Power continues to collect from customers an amount equal to what it would have been allowed to recover for capacity and energy payments made in accordance with the original Tiger Bay purchased power contract. Based on these payments, Florida Power is projected to recover enough revenues by the year 2008 to fully amortize the regulatory asset and related interest charges. The regulatory asset balance as of December 31, 1998, was $321 million and reflected normal amortization of $13.2 million and $4.4 million in 1998 and 1997, respectively, and accelerated amortization of $14 million in 1998. (See Note 9 to the Financial Statements.) DIVERSIFIED OPERATIONS Overview In 1998, Electric Fuels earned $42.3 million, or $.44 per share, compared with $32.1 million, or $.33 per share, in 1997 and $27.1 million, or $.28 per share, in 1996. Electric Fuels' operations include Rail Services, Inland Marine Transportation and Energy and Related Services. In 1997, Florida Progress established a provision for loss on its $87 million investment in Mid-Continent and accrued for litigation costs. (See Item 7 "MD&A - - Mid-Continent Life Insurance Company") In 1996, Florida Progress made two restructuring decisions that had a significant impact on earnings from diversified operations. The spin-off of Echelon resulted in a $26.3 million after-tax charge to earnings while the sale of AST contributed an after-tax gain of $23.5 million. Another item that affected 1996 diversified earnings was the provision for loss on unprofitable coal properties owned by Electric Fuels. This resulted in an after-tax charge of $25.2 million. The diversified operations of Electric Fuels can be more volatile when compared to the operations of an electric utility. Factors that can influence its 32 operating results include weather conditions that affect barge transportation along the Mississippi and Ohio rivers, and economic conditions that affect the supply and demand for the various products and services offered by the three business units. Electric Fuels Corporation The expansion of Electric Fuels is one of Florida Progress' key strategic objectives. Double-digit earnings growth of Electric Fuels would enable Florida Progress to achieve its five-year objective of consistent annual earnings per share growth of 5 percent or better. Over the last five years Electric Fuels has grown significantly: Five-Year 1998 1997 1996 1995 1994 Growth Rate (In millions) Revenues $1,234 $1,037 $ 881 $ 844 $ 784 16.3% Earnings $42.3 $32.1 $27.1* $24.0 $ 22.6 23.2% *Before provision for loss on coal properties The growth of Electric Fuels has come from growth in its Rail Services business unit, expansion of its Inland Marine Transportation fleet and improved operations in its Energy and Related Services group. During 1998, Progress Rail completed approximately $200 million in acquisitions across its various business segments. This level of activity was substantially higher than previous years. During 1997 and 1996, Progress Rail's acquisitions totaled $71 million. Today, Progress Rail is one of the largest integrated suppliers of rail services in the United States, with locations in 20 states, Mexico and Canada. Earnings from the Rail Services unit were $15.9 million, $13.3 million and $9.7 million in 1998, 1997 and 1996, respectively. The growth in earnings has come mostly from acquisitions and internal expansion. In 1998, this group was negatively impacted by substantial declines in scrap steel prices during the second half of the year. However, the earnings improvement from increased demand for its railcar and track parts and services, sales of railcars from its lease portfolio and increases resulting from its 1997 acquisitions more than offset the effects of the lower scrap steel prices. Expansion of MEMCO, Electric Fuels' Inland Marine Transportation unit, has been achieved primarily through the purchase of river barges. Since 1992, MEMCO's fleet of barges, which haul coal, agricultural products and other dry bulk products along the Ohio and lower Mississippi rivers, has nearly tripled. During 1998, MEMCO acquired approximately 200 new barges and two new towboats, raising its fleet to 1,100 barges and 27 towboats. During 1999, MEMCO plans to acquire approximately 100 more barges and one new towboat. Further expansion of the barge fleet after 1999 depends largely on the future demand for barge capacity and MEMCO's ability to secure additional long-term contracts. MEMCO's objective is to achieve and maintain approximately 70 percent of its barge capacity under long-term contracts typically ranging from three to five years. The remaining capacity is used to take advantage of new market opportunities as they arise. 33 Earnings from the Inland Marine Transportation unit were $10.3 million in 1998, compared with $5.9 million in 1997. The increase was due to the expanded fleet and the negative impact high-water conditions in March 1997 had on 1997's results. The March floods temporarily disrupted barge traffic and terminal services and kept 1997 earnings below 1996 earnings of $7.1 million. Electric Fuels' Energy and Related Services business unit includes coal mining, river terminal services and off-shore marine transportation. Annual sales of coal average about 12 million tons, of which 5 to 6 million tons are sold to Florida Power and the rest is sold to unaffiliated customers. Earnings from this unit were $20.4 million in 1998, compared with $16.8 million in 1997. The increase was due to improved productivity, higher coal deliveries and an increase in river terminal services. In September 1997, Electric Fuels bought out its 50-percent partner in a coal mining joint venture and now recognizes 100 percent of the sales and earnings from that property. In the first half of 1998, Electric Fuels completed the expansion of its Ceredo River terminal in West Virginia, increasing its capacity by 33 percent. In 1996, the earnings from this unit were $12.7 million, before a provision for loss on unprofitable coal properties. In December 1996, Electric Fuels established a provision for loss on certain coal properties after it determined that depressed market conditions for low-sulfur coal were not temporary. The impact of the write-down was a one-time after-tax charge to earnings of $25.2 million. Mid-Continent Life Insurance Company In 1997, Florida Progress recorded a provision for a loss on its investment in Mid-Continent and accrued for estimated legal expenses, reducing 1997 earnings by $.96 per share. This action was prompted by Mid-Continent being placed in receivership in the spring of 1997 and subsequent events in 1997. The receivership was based on Oklahoma Insurance Commissioner John Crawford's contention that Mid-Continent's policy reserves were understated and that it could not raise premiums to address the issue. Although the Oklahoma District Court granted the Commissioner's request to place Mid-Continent in receivership, the court ruled that premiums could be raised. Mid-Continent had planned to raise premiums and eliminate policyholder dividends in order to avoid a projected reserve shortfall in 2020. After placing the company in receivership, Commissioner Crawford's principal action towards rehabilitation was to file a lawsuit seeking to use the assets of Florida Progress for the benefit of policyholder and creditor claims. Commissioner Crawford was defeated in his bid for re-election in November 1998 and new Commissioner, Carroll Fisher, has stated his intention to work with Florida Progress and others to develop a plan to rehabilitate Mid-Continent rather than pursue litigation against Florida Progress. Although Florida Progress hasn't had access to recent Mid-Continent data, its estimate of the present value of the projected deficiency, after applying Mid-Continent's statutory surplus, is in the range of $100 million, rather than the $348 million alleged by former Commissioner Crawford. Florida Progress is working with Commissioner Fisher to develop a viable plan to rehabilitate Mid-Continent, which would include the sale of that company. (See Note 11 to the Financial Statements.) 34 Year 2000 Florida Progress is in the process of addressing Year 2000 (Y2K) issues and establishing procedures to mitigate its risks. Y2K issues exist because, historically, many computer systems have used two digits to represent a year. With the change of the century, a two-digit year may present calculation or sequencing errors in computer software and embedded technology. The Florida Progress Y2K effort is overseen by the Vice President, Information Technology of Florida Power, who provides status reports to Florida Progress' board of directors and outside regulatory agencies and other entities such as the FPSC, the NRC and the NERC. Florida Progress has taken a comprehensive approach in developing its Y2K plans. Resources have been dedicated to reviewing systems throughout all areas of the company, with an emphasis on testing of systems, to the extent possible. Florida Progress expects that preparations for Y2K issues, including contingency plans, will be completed by the end of the third quarter of 1999 for Florida Power and during the fourth quarter of 1999 for Electric Fuels. All areas of Florida Progress are involved in identifying and addressing software, infrastructure and embedded technology issues. The Information Technology (IT) focus is on application and operating software, data storage capabilities and technology infrastructure (workstations, servers, voice and data networks, and communications equipment). Embedded systems are internal components used to control, monitor or assist the operation of equipment, machinery and plants including process controls used for energy production and delivery. They are integral parts of systems, and in many cases their presence is not obvious. Florida Progress' methodology for identification and remediation of Y2K issues is a five-step process, which includes: 1.) Awareness - The communication of Y2K issues and their importance throughout Florida Power and Electric Fuels. 2.) Inventory - The itemized tabulation of all Y2K-suspect software, infrastructure and embedded systems. 3.) Assessment and prioritization - Performing an evaluation of all technology components, obtaining compliance information through analysis and certifications from suppliers, product vendors, and other third parties, to the extent possible, with which Florida Progress conducts business, reviewing interfaces and categorizing whether identified issues are mission critical. 4.) Remediation and verification - Correcting or upgrading systems and components, and where possible, end-to-end integration testing. 5.) Contingency planning - Establishing contingency plans for all key operating functions. 35 The following chart represents an estimate of the current status of Florida Progress' Y2K progress and planned completion dates for each phase as of December 31, 1998: Florida Power Electric Fuels Percent Planned Percent Planned Complete Completion Complete Completion (12/31/98) Date (12/31/98) Date Awareness - * * * * Inventory - 98% Jan. 1999 70% Mar. 1999 Assessment and prioritization - 75% Mar. 1999 50% Jun. 1999 Remediation and verification - 40% Sep. 1999 30% Sep. 1999 Contingency planning - 20% Sep. 1999 10% Dec. 1999 * To continue through duration of project. Florida Progress has given the highest priority to addressing mission critical processes for Y2K readiness. At Florida Power, these include systems and processes that support the monitoring and control of the electric grid, maintain generating facility control, output and safety, facilitate security and telecommunications capabilities, and provide critical customer service functions. While the diversified operations of Electric Fuels have some of the same technology-related issues as Florida Power, the risk is substantially less due to the fact that its operations are less reliant upon integrated technology-driven processes. Florida Progress is in the process of developing corporate-wide contingency plans. The objective of contingency planning is to minimize the duration and extent of any material impacts resulting from a Y2K-induced problem. Due to the speculative nature of contingency planning, Florida Progress cannot ensure the extent to which such plans will in fact mitigate the risk of material impacts on Florida Progress' operations due to Y2K issues. Florida Progress is in the process of identifying and assessing third-party vulnerabilities. Highest vulnerabilities from third-party vendors for Florida Power exist in the fuel supply and telecommunications industries. Florida Power has begun a program of working with these vendors to try to determine potential risks and Y2K readiness. Also, Florida Power is working with industry groups such as the FRCC, Nuclear Energy Institute/Nuclear Utility Software Management Group, and Electric Power Research Institute to ensure the safety and reliability of power generation and the integrity of the transmission grid. In addition, Florida Power has initiated and participated in utility sharing strategy sessions to identify issues with third parties. Florida Power has also begun to request status information from significant vendors to determine potential third-party Y2K risks. Florida Progress' current estimate of the total costs of addressing Y2K issues, including expenses to remedy both embedded systems and computer information systems, is between $15 million and $25 million. No Florida Progress systems 36 have been replaced on an accelerated basis due to the Y2K issue. As of December 31, 1998, Florida Progress has incurred a total of approximately $6 million of internal and external costs related to Y2K. Currently, the company does not separately track internal costs related to this issue. Florida Progress has expensed all Y2K costs as incurred. In the electric utility industry, there are many computers and software programs that are susceptible to Y2K issues, as well as a multitude of individual computer chips within equipment that may have Y2K implications. Computers and computer chips are used in power plants that generate electricity, in systems that handle billing and customer information, and in many other common devices such as telephones, security systems and building elevators. While the potential effects could be widespread and the exact nature of those effects is unknown, Florida Progress does not expect the potential effect to be severe. Florida Progress is making every effort to remediate issues and provide contingency plans for the possibility of any disruption that could occur. Nevertheless, achieving Y2K readiness is subject to various risks and uncertainties, many of which are described above. It is difficult to provide a detailed, meaningful description of the most reasonably likely worst case Y2K scenarios. Florida Progress is not able to predict all of the factors that could cause actual results to differ materially from its current expectations as to its Y2K readiness. If Florida Progress, or third parties with whom it has significant business relationships, fail to achieve Y2K readiness with respect to critical systems, there could be a material adverse impact on Florida Progress' financial position, results of operations and cash flows. However, based on the milestones that have been achieved to date and the planned completion of the Y2K project, Florida Progress is confident that it is taking the necessary steps to minimize the impact of Y2K. Other Florida Progress adopted several new accounting standards during 1998. (See Note 1 to the Financial Statements.) Florida Power and a former subsidiary of Florida Progress have been notified by the EPA that each is or may be a potentially responsible party for the cleanup costs of several contaminated sites. (See Note 11 to the Financial Statements.) Florida Progress has off-balance sheet risk related to debt of unconsolidated partnerships. (See Note 11 to the Financial Statements.) Florida Progress is involved in other litigation. (See Note 11 to the Financial Statements.) Even though the inflation rate has been relatively low during the last three years, inflation continues to affect Florida Progress by reducing the purchasing power of the dollar and increasing the cost of replacing assets used in the business. This has a negative effect on Florida Power because regulators generally do not consider this economic loss when setting utility rates. However, such losses are partly offset by the economic gains that result from the repayment of long-term debt with inflated dollars. 37 LIQUIDITY AND CAPITAL RESOURCES Cash from operations has been the primary source of capital for Florida Progress. Cash from operations in 1998 increased $435.3 million over 1997. The significant increase was due largely to the absence of costs associated with the 1997 extended nuclear outage and tax benefits received in 1998 related to the 1997 Tiger Bay transaction. Other sources of capital over the last three years include debt financing, proceeds from the sale and leaseback of equipment, proceeds from the sale of properties and businesses, and the issuance of common stock. Florida Progress' capital requirements are primarily influenced by Florida Power's construction program and the expansion activities of Electric Fuels. Florida Power's construction program is not expected to require any significant increase in equity or debt over the next several years. The expansion activities of Electric Fuels will be financed with internally generated funds, debt and equity contributions. In November 1998, the Progress Plus Stock Plan and Employee Savings Plan (the Plans) began issuing new shares of common stock instead of purchasing shares in the open market. Florida Progress expects to receive about $50 million of new equity annually through the Plans. Florida Progress also is considering issuing other equity alternatives during 1999. The funds from these sources will be used primarily to reduce debt at Progress Capital, the holding company for the diversified operations. Florida Progress' capital structure as of December 31, 1998, was 41.1 percent common equity, 58.1 percent debt and .8 percent preferred stock. Total debt at Florida Power was reduced by $233 million in 1998. This decrease was offset by an increase of $257 million at Progress Capital. Listed below are the credit ratings for Florida Power and Progress Capital as of December 31, 1998: CREDIT RATINGS Standard Duff & & Poor's Moody's Phelps Florida Power Corporation First mortgage bonds AA- Aa3 AA- Medium-term notes A+ A1 A+ Commercial paper A-1+ P-1 D-1+ Progress Capital Holdings, Inc. Medium-term notes A A2 Commercial paper A-1 P-1 Florida Power Corporation Florida Power's construction expenditures in 1998 totaled about $310 million. This was primarily for distribution lines related to the utility's growing customer base and the construction of a new 500-megawatt power plant that is planned for commercial operation in the first quarter of 1999. Florida Power's three-year construction program totals approximately $1 billion for the 1999-2001 forecast period. It includes planned expenditures of $323 million, $342 million and $300 million for 1999 through 2001. Florida Power expects these 38 construction expenditures will be financed primarily with internally generated funds. In 1998, Florida Power redeemed $250 million of first mortgage bonds. The redemption of these bonds was principally funded through the issuance of $150 million of 30-year medium-term notes bearing an interest rate of 6 3/4 percent and commercial paper. In July 1997, Florida Power issued $450 million of medium-term notes primarily to finance the buy-out of purchased power contracts associated with the 220-megawatt Tiger Bay cogeneration facility. (See "MD&A - Impact of Tiger Bay Buy-Out".) Amendments to the Clean Air Act in 1990 require electric utilities to reduce sulfur dioxide emissions. Florida Power is meeting these requirements with minimal capital expenditures. In addition to funding its construction commitments with cash from operations, Florida Power accesses the capital markets through the issuance of commercial paper and medium-term notes. Florida Power's interim financing needs are funded primarily through its commercial paper program. The utility has a $200-million, 364-day revolving bank credit facility and a $200-million, five-year facility, which are used to back up commercial paper. (See Note 6 to the Financial Statements.) Florida Power's medium-term note program provides for the issuance of either fixed or floating interest rate notes, with maturities that may range from nine months to 30 years. Florida Power has available for issuance $250 million of medium-term notes. In 1998, debt levels decreased at Florida Power largely due to the improved operating results stemming from hotter-than-normal weather, which increased funds from operations. In 1997, debt levels increased over 1996 at Florida Power largely due to the costs associated with the extended nuclear outage and the buy-out of purchased power contracts with the Tiger Bay plant. Florida Power's embedded cost of long-term debt was 6.8 percent as of December 31, 1998, and 7 percent as of December 31, 1997. Diversified Operations Progress Capital provides short- and long-term financing facilities for Florida Progress' diversified operations and, with the benefit of a guaranty and support agreement with Florida Progress, helps to lower the cost of capital of the diversified businesses. Progress Capital funds diversified operations primarily through the issuance of commercial paper and medium-term notes. (See Note 6 to the Financial Statements.) Progress Capital has a medium-term note program for the issuance of either fixed or floating interest rate notes, with maturities that may range from nine months to 30 years. In 1998 and 1997, Progress Capital issued $115 million and $35 million of medium-term notes, respectively, with maturities ranging from two to 10 years, leaving $185 million of medium-term notes available for issuance. The proceeds 39 were primarily used to repay maturing medium-term notes and for other corporate purposes. In 1998, MEMCO entered into a $200-million synthetic lease financing for approximately $175 million in barges and $25 million in towboats. The lease financing was accomplished through a sale and leaseback, and involved the issuance of $126 million of secured notes and $74 million in equipment trust certificates by a special purpose Delaware trust. The notes and certificates bear a weighted average interest rate of 6.8 percent with a final maturity in 2014. MEMCO's payment obligations under the operating lease are guaranteed by Progress Capital. (See Note 11 to the Financial Statements.) Progress Capital has two revolving bank credit facilities: a 364-day, $100-million facility and a five-year, $300-million facility. These facilities are used to back up commercial paper. (See Note 6 in Notes to the Financial Statements.) Progress Capital also has uncommitted bank bid facilities that authorize it to borrow and re-borrow, and have outstanding at any time, up to $300 million. As of December 31, 1998, $150 million was outstanding. The facilities were established to temporarily supplement commercial paper borrowings. In 1998, total diversified capital expenditures were $217 million, including approximately $92 million for the purchase of barges and towboats and $125 million for property additions at Electric Fuels' diversified operations. In 1997, diversified capital expenditures were about $120 million, primarily for the purchase of barges. In 1999, diversified capital expenditures are expected to be approximately $155 million, most of which is for Electric Fuels. The Inland Marine Transportation unit plans to add approximately 100 new barges and one towboat in 1999 as it continues to take advantage of market opportunities to expand its business. Electric Fuels' Rail Services unit is expected to continue to grow by expanding geographically. These expenditures are expected to be funded through cash generated internally, through Progress Capital from outside financing sources, and through equity contributions from Florida Progress. Dividend Policy and Earnings Outlook Florida Progress evaluates its dividend policy on an annual basis to ensure that the dividend payout and dividend rate are appropriate given the business plan, projected earnings growth and outlook for the electric utility industry. Florida Progress' business plan forecasts sustained earnings per share growth, a key factor in determining dividend policy. FORWARD-LOOKING STATEMENTS In this report, Florida Progress has stated an aggressive five-year objective of consistent annual earnings per share growth of 5 percent or better, and established goals to build a national retail energy services business in the utilities sector, and continue to support the growth at Electric Fuels. Florida Progress has made various estimates regarding its Y2K preparedness, projected that retail choice eventually will exist in every state, and indicated its assessment that the lawsuits related to Mid-Continent are without merit. Florida Power has indicated that it expects to have sufficient system capacity to meet anticipated future demand. 40 These statements, and any other statements contained in this report that are not historical facts, are forward-looking statements that are based on a series of projections and estimates regarding the economy, the electric utility industry and the company's other businesses in general, actions of regulatory bodies and courts, and on key factors which impact the company directly. The projections and estimates relate to the pricing of services, the actions of courts and regulatory bodies, the success of new products and services, and the effects of competition. Key factors that have a direct bearing on the company's ability to attain these projections include continued annual growth in customers; economic and weather conditions affecting the demand for and supply of not only electricity but also Electric Fuels' barge, rail and other services; successful cost containment efforts; and the efficient operation and/or construction of Florida Power's existing and planned generating units. Also, in developing its forward-looking statements, the company has made certain assumptions relating to productivity improvements and the favorable outcome of various commercial, legal and regulatory proceedings, and the lack of disruption to its markets. If the company's projections and estimates regarding the economy, the electric utility industry and key factors differ materially from what actually occurs, or if various proceedings have unfavorable outcomes, the company's actual results could vary significantly from the performance projected. Market Risks Interest rate risk Florida Progress is exposed to changes in interest rates primarily as a result of its borrowing activities. A hypothetical 54 basis point increase in interest rates (10 percent of Florida Progress' weighted average interest rate) affecting its variable rate debt ($739.7 million as of December 31, 1998) would have an immaterial effect on Florida Progress' pre-tax earnings over the next fiscal year. A hypothetical 10-percent decrease in interest rates would also have an immaterial effect on the estimated fair value of Florida Progress' long-term debt as of December 31, 1998. Commodity price risk Currently at Florida Power, commodity price risk due to changes in market conditions for fuel and purchased power are recovered through the fuel cost recovery clause, with no effect on earnings. Electric Fuels is exposed to commodity price risk through coal sales, the scrap steel market and fuel for its marine transportation business. A 10-percent change in the market price of those commodities would have an immaterial effect on the earnings of Florida Progress. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For discussion of interest rate risk and commodity risk, see "MD&A - Market Risks". 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AUDITORS' REPORT To the Shareholders of Florida Progress Corporation and Florida Power Corporation: We have audited the accompanying consolidated balance sheets of Florida Progress Corporation and subsidiaries, and of Florida Power Corporation, as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows, and common equity and comprehensive income for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the financial statements, we also have audited the financial statement schedules listed in Item 14 therein. These financial statements and financial statement schedules are the responsibility of the respective managements of Florida Progress Corporation and Florida Power Corporation. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Florida Progress Corporation and subsidiaries, and Florida Power Corporation, as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/KPMG LLP - --------------------------- KPMG LLP St. Petersburg, Florida January 25, 1999 42 FLORIDA PROGRESS Consolidated Financial Statements FLORIDA PROGRESS CORPORATION Consolidated Statements of Income For the years ended December 31, 1998, 1997 and 1996 (In millions, except per share amounts) 1998 1997 1996 --------- --------- --------- REVENUES: Electric utility $2,648.2 $2,448.4 $2,393.6 Diversified 972.1 868.0 764.3 --------- --------- --------- 3,620.3 3,316.4 3,157.9 --------- --------- --------- EXPENSES: Electric utility: Fuel 595.7 458.1 409.7 Purchased power 433.8 490.6 531.6 Energy conservation cost 79.6 67.0 62.6 Operation and maintenance 471.6 422.3 413.4 Extended nuclear outage - O&M and replacement power costs 5.1 173.3 - Depreciation 347.1 325.9 324.2 Taxes other than income taxes 203.6 193.6 183.6 ---------- --------- --------- 2,136.5 2,130.8 1,925.1 ---------- --------- --------- Diversified: Cost of sales 827.2 753.9 642.9 Provision for loss on coal properties - - 40.9 Loss related to life insurance subsidiary - 97.6 - Other 56.3 60.4 66.6 ---------- --------- --------- 883.5 911.9 750.4 ---------- --------- --------- INCOME FROM OPERATIONS 600.3 273.7 482.4 ---------- --------- --------- INTEREST EXPENSE AND OTHER: Interest expense 187.1 158.7 135.9 Allowance for funds used during construction (16.9) (9.7) (7.5) (Gain) on sale of business - - (44.2) Other expense (income), net (.2) 4.0 1.6 ---------- --------- --------- 170.0 153.0 85.8 ---------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 430.3 120.7 396.6 Income taxes 148.6 66.4 145.9 ---------- --------- --------- INCOME FROM CONTINUING OPERATIONS 281.7 54.3 250.7 DISCONTINUED OPERATIONS, NET OF INCOME TAXES - - (26.3) ---------- --------- --------- NET INCOME $ 281.7 $ 54.3 $ 224.4 ========== ========= ========= AVERAGE SHARES OF COMMON STOCK OUTSTANDING 97.1 97.1 96.8 ========== ========= ========= EARNINGS PER AVERAGE COMMON SHARE: Continuing operations $ 2.90 $ .56 $ 2.59 Discontinued operations - - (.27) ---------- --------- --------- $ 2.90 $ .56 $ 2.32 ========== ========= ========= The accompanying notes are an integral part of these financial statements. 43 FLORIDA PROGRESS CORPORATION Consolidated Balance Sheets December 31, 1998 and 1997 (Dollars in millions) 1998 1997 --------- --------- ASSETS PROPERTY, PLANT AND EQUIPMENT: Electric utility plant in service and held for future use $6,307.8 $6,166.8 Less: Accumulated depreciation 2,716.0 2,511.0 Accumulated decommissioning for nuclear plant 254.8 223.7 Accumulated dismantlement for fossil plants 130.7 128.5 --------- --------- 3,206.3 3,303.6 Construction work in progress 378.3 279.4 Nuclear fuel, net of amortization of $377.2 in 1998 and $356.7 in 1997 45.9 66.5 --------- --------- Net electric utility plant 3,630.5 3,649.5 Other property, net of depreciation of $234.6 in 1998 and $219.3 in 1997 560.1 437.7 --------- --------- 4,190.6 4,087.2 --------- --------- CURRENT ASSETS: Cash and equivalents 2.5 3.1 Accounts receivable, net 413.4 373.7 Inventories, primarily at average cost: Fuel 69.8 77.6 Utility materials and supplies 83.3 91.9 Diversified materials 137.0 126.8 Underrecovered utility fuel costs - 34.5 Income taxes receivable 23.4 16.8 Deferred income taxes 55.9 5.8 Prepayments and other 68.8 45.1 --------- --------- 854.1 775.3 --------- --------- DEFERRED CHARGES AND OTHER ASSETS: Costs deferred pursuant to regulation: Deferred purchase power contract termination costs 321.0 348.2 Other 113.6 126.4 Investments in nuclear decommissioning fund 332.1 266.7 Goodwill 139.8 55.2 Joint ventures and partnerships 71.5 54.6 Other 138.1 46.4 ---------- --------- 1,116.1 897.5 ---------- --------- $6,160.8 $5,760.0 ========== ========= The accompanying notes are an integral part of these financial statements. 44 FLORIDA PROGRESS CORPORATION Consolidated Balance Sheets December 31, 1998 and 1997 (Dollars in millions) 1998 1997 -------- -------- CAPITAL AND LIABILITIES COMMON STOCK EQUITY: Common stock without par value, 250,000,000 shares authorized, 97,336,826 shares outstanding in 1998 and 97,062,954 in 1997 $1,221.1 $1,209.0 Retained earnings 640.9 567.0 --------- -------- 1,862.0 1,776.0 CUMULATIVE PREFERRED STOCK OF FLORIDA POWER: Without sinking funds 33.5 33.5 LONG-TERM DEBT 2,250.4 2,377.8 --------- -------- TOTAL CAPITAL 4,145.9 4,187.3 --------- -------- CURRENT LIABILITIES: Accounts payable 297.9 253.2 Customers' deposits 104.1 97.1 Taxes payable 10.1 12.0 Accrued interest 70.4 56.8 Overrecovered utility fuel costs 22.2 - Other 85.8 74.8 --------- -------- 590.5 493.9 Notes payable 236.2 214.8 Current portion of long-term debt 145.9 15.2 --------- -------- 972.6 723.9 --------- -------- DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes 595.4 471.2 Unamortized investment tax credits 77.8 85.7 Other postretirement benefit costs 116.1 107.4 Other 253.0 184.5 --------- -------- 1,042.3 848.8 --------- -------- COMMITMENTS AND CONTINGENCIES (Note 11) --------- -------- $6,160.8 $5,760.0 ========= ======== The accompanying notes are an integral part of these financial statements. 45
FLORIDA PROGRESS CORPORATION Consolidated Statements of Cash Flows For the years ended December 31, 1998, 1997 and 1996 (In millions) 1998 1997 1996 ------- ------ ------ OPERATING ACTIVITIES: Income from continuing operations $ 281.7 $ 54.3 $250.7 Adjustments for noncash items: Depreciation and amortization 424.6 364.2 366.7 Extended nuclear outage - replacement power cost - 73.3 - Provision for loss on investment in life insurance subsidiary - 86.9 - (Gain) on sale of business - - (44.2) Provision for loss on coal properties - - 40.9 Deferred income taxes and investment tax credits, net 44.8 (30.7) (56.6) Increase in accrued post-employment benefit costs 8.7 8.6 15.5 Changes in working capital, net of effects from acquisition or sale of businesses: Accounts receivable (2.5) (108.3) 35.4 Inventories 51.1 2.2 (10.9) Overrecovery (underrecovery) of fuel cost 51.7 (33.1) (82.3) Accounts payable 17.8 58.3 21.6 Taxes payable (8.2) (47.1) 21.0 Other 3.1 1.2 (13.5) Other operating activities 5.1 12.8 26.6 -------- ------ ------ Cash provided by continuing operations 877.9 442.6 570.9 -------- ------ ------ Cash used by discontinued operations - - (8.9) -------- ------ ------ 877.9 442.6 562.0 -------- ------ ------ INVESTING ACTIVITIES: Property additions (including allowance for borrowed funds used during construction) (543.3) (513.6) (264.0) Acquisition of businesses (206.6) (32.7) (53.8) Cogeneration facility acquisition and contract termination costs - (445.0) - Proceeds from sales of properties and businesses 40.6 24.3 61.1 Proceeds from sale and leaseback 153.0 - - Investing activities of discontinued operations - - 56.5 Other investing activities (129.3) (63.7) (107.4) -------- ------ ------ (685.6)(1,030.7) (307.6) -------- -------- ------ FINANCING ACTIVITIES: Issuance of long-term debt 259.1 482.8 178.0 Repayment of long-term debt (275.1) (34.9) (190.4) Increase (decrease) in commercial paper with long-term support - 130.6 (15.3) Redemption of preferred stock - - (106.4) Sale of common stock 12.7 - 18.5 Dividends paid on common stock (207.8) (203.8) (199.5) Increase in short-term debt 21.4 210.8 4.1 Financing activities of discontinued operations - - 61.5 Other financing activities (3.2) .5 (4.0) -------- ------ ------ (192.9) 586.0 (253.5) -------- ------ ------ NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (.6) (2.1) .9 Beginning cash and equivalents 3.1 5.2 4.3 -------- ------ ------ ENDING CASH AND EQUIVALENTS $ 2.5 $ 3.1 $ 5.2 ======== ====== ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 159.7 $142.7 $128.7 Income taxes (net of refunds) $ 110.4 $141.7 $189.3 The accompanying notes are an integral part of these financial statements.
46
FLORIDA PROGRESS CORPORATION Consolidated Statements of Common Equity and Comprehensive Income For the years ended December 31, 1998, 1997 and 1996 (Dollars in millions, except per share amounts) Accumulated Other Common Retained Comprehensive Total Stock Earnings Income - -------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $2,078.1 $1,187.6 $ 888.4 $ 2.1 Net income 224.4 224.4 Common stock issued - 586,555 shares 20.7 20.7 Echelon International stock dividend (194.5) (194.5) Cash dividends on common stock ($2.06 per share) (199.5) (199.5) Unrealized gain on marketable securities (2.7) (2.7) Preferred stock redeemed - 1,050,000 shares (2.3) (2.3) - -------------------------------------------------------------------------------------------------------------- Balance December 31, 1996 1,924.2 1,208.3 716.5 (.6) Net income 54.3 54.3 Common stock issued - 55,772 shares .7 .7 Cash dividends on common stock ($2.10 per share) (203.8) (203.8) Reversal of unrealized loss on marketable securities due to deconsolidation .6 .6 - -------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 1,776.0 1,209.0 567.0 - Net income 281.7 281.7 Common stock issued - 273,872 shares 12.1 12.1 Cash dividends on common stock ($2.14 per share) (207.8) (207.8) - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $1,862.0 $1,221.1 $640.9 $ - - ------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
47
FLORIDA POWER CORPORATION Statements of Income For the years ended December 31, 1998, 1997 and 1996 (In millions) 1998 1997 1996 --------- --------- --------- OPERATING REVENUES: $2,648.2 $2,448.4 $2,393.6 --------- --------- --------- OPERATING EXPENSES: Operation: Fuel used in generation 595.7 458.1 409.7 Purchased power 433.8 490.6 531.6 Energy Conservation Cost Recovery 79.6 67.0 62.6 Operations and maintenance 471.6 422.3 413.4 Extended nuclear outage - O&M and replacement fuel costs 5.1 173.3 - Depreciation 347.1 325.9 324.2 Taxes other than income taxes 203.6 193.6 183.6 Income taxes 140.3 69.9 135.8 --------- --------- --------- 2,276.8 2,200.7 2,060.9 --------- --------- --------- OPERATING INCOME 371.4 247.7 332.7 --------- --------- --------- OTHER INCOME AND DEDUCTIONS: Allowance for equity funds used During construction 7.5 5.4 4.6 Miscellaneous other expense, net (1.7) (4.2) (3.4) --------- --------- --------- 5.8 1.2 1.2 --------- --------- --------- INTEREST CHARGES Interest on long-term debt 115.6 102.4 86.6 Other interest expense 20.9 14.9 11.8 --------- --------- --------- 136.5 117.3 98.4 Allowance for borrowed funds used during construction (9.4) (4.3) (2.9) --------- --------- --------- 127.1 113.0 95.5 --------- --------- --------- NET INCOME 250.1 135.9 238.4 DIVIDENDS ON PREFERRED STOCK 1.5 1.5 5.8 --------- --------- --------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $248.6 $134.4 $232.6 ========= ========= ========= The accompanying notes are an integral part of these financial statements.
48 FLORIDA POWER CORPORATION Balance Sheets For the years ended December 31, 1998, and 1997 (Dollars in millions) 1998 1997 -------- --------- ASSETS PROPERTY, PLANT AND EQUIPMENT: Electric utility plant in service and held $6,307.8 $6,166.8 for future use Less - Accumulated depreciation 2,716.0 2,511.0 Accumulated decommissioning for nuclear plant 254.8 223.7 Accumulated dismantlement for fossil plants 130.7 128.5 --------- ---------- 3,206.3 3,303.6 Construction work in progress 378.3 279.4 Nuclear fuel, net of amortization of $377.2 in 1998 and $356.7 in 1997 45.9 66.5 --------- ---------- 3,630.5 3,649.5 Other property, net 11.5 33.2 ---------- --------- 3,642.0 3,682.7 ---------- --------- CURRENT ASSETS: Accounts receivable, less reserve of $3.8 in 1998 and $3.2 in 1997 206.0 243.9 Inventories at average cost: Fuel 48.4 44.0 Materials and supplies 83.3 91.9 Underrecovered utility fuel cost - 34.5 Income tax receivable 16.0 13.5 Deferred income taxes 56.0 5.8 Prepaid and other 53.5 32.2 ---------- -------- 463.2 465.8 ---------- -------- DEFERRED CHARGES AND OTHER ASSETS: Costs deferred pursuant to regulation: Deferred purchased power contract termination costs 321.0 348.2 Other 113.6 126.4 Nuclear plant decommissioning fund 332.1 266.7 Other 56.2 11.0 ---------- -------- 822.9 752.3 ---------- -------- $4,928.1 $4,900.8 =========== ========= The accompanying notes are an integral part of these financial statements. 49 FLORIDA POWER CORPORATION Balance Sheets For the years ended December 31, 1998, and 1997 (Dollars in millions) 1998 1997 ----------- ---------- CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common stock $1,004.4 $1,004.4 Retained earnings 815.7 763.1 ---------- ---------- 1,820.1 1,767.5 CUMULATIVE PREFERRED STOCK: Without sinking funds 33.5 33.5 LONG-TERM DEBT 1,555.1 1,745.4 ---------- ---------- TOTAL CAPITAL 3,408.7 3,546.4 ---------- ---------- CURRENT LIABILITIES: Accounts payable 173.0 161.9 Accounts payable to associated companies 27.2 26.5 Customers' deposits 104.1 97.1 Accrued other taxes 6.3 7.9 Accrued interest 55.8 45.7 Overrecovered utility fuel cost 22.2 - Other 51.8 59.2 ---------- ---------- 440.4 398.3 Notes payable 47.3 179.8 Current portion of long-term debt 91.6 1.5 ---------- ---------- 579.3 579.6 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes 563.2 451.3 Unamortized investment tax credits 77.2 85.1 Other postretirement benefit costs 112.9 104.7 Other 186.8 133.7 ---------- ---------- 940.1 774.8 ---------- ---------- $4,928.1 $4,900.8 ========== ========== The accompanying notes are an integral part of these financial statements. 50
FLORIDA POWER CORPORATION Statements of Cash Flows For the years ended December 31, 1998, 1997 and 1996 (In millions) 1998 1997 1996 -------- -------- ------- OPERATING ACTIVITIES: Net income after dividends on preferred stock $ 248.6 $ 134.4 $ 232.6 Adjustments for noncash items: Depreciation and amortization 382.7 333.8 341.1 Extended nuclear outage - Replacement power costs - 73.3 - Deferred income taxes and investment tax credits, net 36.5 (15.2) ( 32.8) Increase in accrued other postretirement benefit costs 8.2 8.3 14.9 Allowance for equity funds used during construction (7.5) (5.4) (4.6) Changes in working capital: Accounts receivable 37.9 (69.2) 16.2 Inventories 4.2 6.7 (.5) Overrecovery (underrecovery) of fuel cost 51.7 (33.1) (82.3) Accounts payable 11.1 46.4 25.7 Accounts payable to associated companies .7 5.3 (3.5) Taxes payable (4.2) (26.0) (.8) Other (11.6) 12.3 (12.1) Other operating activities 20.7 (38.8) 3.8 --------- --------- -------- 779.0 432.8 497.7 --------- --------- -------- INVESTING ACTIVITIES: Construction expenditures (310.2) (387.2) (217.3) Allowance for borrowed funds used during construction (9.4) (4.3) (2.9) Additions to non-utility property (6.4) (3.5) (2.7) Acquisition cogeneration facility and Payment of contract termination costs - (445.0) - Proceeds from sale of properties 12.2 19.7 5.5 Other investing activities (62.6) (22.2) (27.6) --------- --------- ------- (376.4) (842.5) (245.0) -------- --------- ------- FINANCING ACTIVITIES: Issuance of long-term debt 144.1 447.7 - Repayment of long-term debt (259.3) (21.3) (47.3) Increase in commercial paper with Long term support - - 54.8 Redemption of preferred stock - - (106.3) Dividends paid on common stock (154.9) (192.4) (171.3) Equity contributions from parent - - 12.5 Increase (decrease) in short-term debt (132.5) 175.7 4.1 --------- --------- -------- (402.6) 409.7 (253.5) --------- --------- -------- NET INCREASE IN CASH AND EQUIVALENTS - - (.8) Beginning cash and equivalents - - .8 --------- --------- -------- ENDING CASH AND EQUIVALENTS $ - $ - $ - ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 112.6 $ 98.9 $ 90.7 Income taxes (net of refunds) 107.3 108.4 166.9 Non-Cash Investing Activities: Property Dividend to Parent $ 41.1 $ - $ - The accompanying notes are an integral part of these financial statements
51
FLORIDA POWER CORPORATION Statements of Common Equity and Comprehensive Income For the years ended December 31, 1998, 1997 and 1996 (Dollars in millions, except share amounts) Accumulated Other Common Retained Comprehensive Total Stock Earnings Income ------------- ----------- ---------- ------------ Balance, December 31, 1995 $1,754.0 $992.9 $761.1 $ - Net income after dividends on preferred stock 232.6 232.6 Capital contribution by parent company 12.5 12.5 Dividends paid to parent (171.3) (171.3) Preferred stock redemption costs (1.3) (1.3) Premium on preferred stock redemption (1.0) (1.0) Preferred stock redeemed - 1,050,000 shares ------------- ----------- ---------- ------------ Balance, December 31, 1996 1,825.5 1,004.4 821.1 - Net income after dividends on preferred stock 134.4 134.4 Capital contribution by parent company Dividends paid to parent (192.4) (192.4) Preferred stock redemption costs Premium on preferred stock redemption Preferred stock redeemed - 1,050,000 shares ------------- ----------- ---------- ------------ Balance, December 31, 1997 1,767.5 1,004.4 763.1 - Net income after dividends on preferred stock 248.6 248.6 Dividends paid to parent (196.0) (196.0) ------------- ----------- ---------- ------------ Balance, December 31, 1998 $1,820.1 $1,004.4 $815.7 $ - ============= =========== ========== ============ The accompanying notes are an integral part of these financial statements.
52 FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General - Florida Progress is an exempt holding company under the Public Utility Holding Company Act of 1935. Its two primary subsidiaries are Florida Power and Electric Fuels. Florida Power is a public utility engaged in the generation, purchase, transmission, distribution and sale of electricity primarily within Florida. Electric Fuels' operations include the mining, processing and procurement of coal, marine and rail transportation, transfer and storage of coal and other bulk commodities, railcar leasing and railcar maintenance and repair. Electric Fuels reports the results of its Rail Services, Inland Marine Transportation, and the non-Florida Power portion of its Energy and Related Services operations one month in arrears. The consolidated financial statements include the financial results of Florida Progress and its majority-owned operations. All significant intercompany balances and transactions have been eliminated. Investments in 20%- to 50%-owned joint ventures are accounted for using the equity method. Effective December 31, 1997, Florida Progress deconsolidated the financial statements of Mid-Continent, and the investment in Mid-Continent is accounted for under the cost method. The deconsolidation has not been reflected in the financial statements of prior periods. Certain reclassifications have been made to prior-year amounts to conform to the current year's presentation. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. This could affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. These estimates involve judgments with respect to various items including future economic factors that are difficult to predict and are beyond the control of Florida Progress. Therefore actual results could differ from these estimates. Regulation - Florida Power is regulated by the FPSC and the FERC. The utility follows the accounting practices set forth in Financial Accounting Standard (FAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This standard allows utilities to capitalize or defer certain costs or revenues based on regulatory approval and management's ongoing assessment that it is probable these items will be recovered through the ratemaking process. 53 Florida Power has total regulatory assets (liabilities) at December 31, 1998 and 1997 as detailed below: 1998 1997 (In millions) ----------------- Deferred purchased power contract termination costs $321.0 $ 348.2 Replacement fuel (extended nuclear outage) 39.3 55.0 Underrecovered/(overrecovered)utility fuel costs (22.2) 34.5 Revenue decoupling - 21.8 Unamortized loss on reacquired debt 25.2 16.8 Other regulatory assets, net 27.7 25.2 ------------------ Net regulatory assets $391.0 $501.5 ================== Florida Power expects to fully recover these assets and refund the liabilities through customer rates under current regulatory practice. If Florida Power no longer applied FAS No. 71 due to competition, regulatory changes or other reasons, the utility would make certain adjustments. These adjustments could include the write-off of all or a portion of its regulatory assets and liabilities, the evaluation of utility plant, contracts and commitments and the recognition, if necessary, of any losses to reflect market conditions. Property, Plant and Equipment Electric Utility Plant - Utility plant is stated at the original cost of construction, which includes payroll and related costs such as taxes, pensions and other fringe benefits, general and administrative costs, and an allowance for funds used during construction. Substantially all of the utility plant is pledged as collateral for Florida Power's first mortgage bonds. The allowance for funds used during construction represents the estimated cost of equity and debt for utility plant under construction. Florida Power is permitted to earn a return on these costs and recover them in the rates charged for utility services while the plant is in service. The average rate used in computing the allowance for funds was 7.8%. The cost of nuclear fuel is amortized to expense based on the quantity of heat produced for the generation of electric energy in relation to the quantity of heat expected to be produced over the life of the nuclear fuel core. Florida Power's annual provision for depreciation, including a provision for nuclear plant decommissioning costs and fossil plant dismantlement costs, expressed as a percentage of the average balances of depreciable utility plant, was 4.7% for 1998, 4.8% for 1997 and 4.9% for 1996. The fossil plant dismantlement accrual has been suspended for a period of four years, effective July 1, 1997. (See Note 9 contained herein.) Florida Power charges maintenance expense with the cost of repairs and minor renewals of property. The plant accounts are charged with the cost of renewals and replacements of property units. Accumulated depreciation is charged with the cost, less the net salvage, of property units retired. 54 Florida Power accrues a reserve for maintenance and refueling expenses anticipated to be incurred during scheduled nuclear plant outages. Other Property - Other property consists primarily of railcar and recycling equipment, barges, towboats, land, mineral rights and telecommunications equipment. Depreciation on other property is calculated principally on the straight-line method over the estimated useful lives of assets. Depletion is provided on the units-of-production method based upon the estimates of recoverable tons of clean coal. Utility Revenues, Fuel and Purchased Power Expenses - Revenues include amounts resulting from fuel, purchased power and energy conservation cost recovery clauses, which generally are designed to permit full recovery of these costs. The adjustment factors are based on projected costs for a 12-month period. The cumulative difference between actual and billed costs is included on the balance sheet as a current regulatory asset or liability. Any difference is billed or refunded to customers during the subsequent period. In December 1997, Florida Power ended the three-year test period for residential revenue decoupling, which was ordered by the FPSC and began in January 1995. Revenue decoupling eliminated the effect of abnormal weather from revenues and earnings. The difference between target revenues and actual revenues is included as a current asset on the balance sheet for the period ended December 31, 1997. The regulatory asset of $21.8 million at December 31, 1997, is currently being recovered from customers over a two-year period, ending in the year 2000, through the energy conservation cost recovery clause as directed by the FPSC decoupling order. Florida Power accrues the non-fuel portion of base revenues for services rendered but unbilled. Diversified Revenues - Revenues are recognized at the time products are shipped or as services are rendered. Leasing activities are accounted for in accordance with FAS No. 13, "Accounting for Leases." Income Taxes - Deferred income taxes are provided on all significant temporary differences between the financial and tax basis of assets and liabilities using presently enacted tax rates. Deferred investment tax credits, subject to regulatory accounting practices, are amortized to income over the lives of the related properties. Accounting for Certain Investments - Florida Progress considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Florida Progress' investments in debt and equity securities are classified and accounted for as follows: Type of Security Accounting Treatment - ------------------- ----------------------------- Debt securities held to maturity Amortized cost - -------------------------------------------------------------------- Trading securities Fair value with unrealized gains and losses included in earnings - -------------------------------------------------------------------- 55 Securities available for sale Fair value with unrealized gains and losses, net of taxes, reported separately in comprehensive income - ---------------------------------------------------------------------- Florida Progress held only securities classified as available for sale at both December 31, 1998 and 1997. A decline in the market value of any security available for sale below cost results in a reduction in carrying amount to fair value if the decline is not considered temporary. The impairment is charged to earnings and a new cost basis for the security is established. (See Note 2 contained herein.) Dividend and interest income are recognized when earned. Accounting for Long-Lived Assets - Long-lived assets and certain identifiable intangibles subject to the provisions of FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. FAS No. 121 also amends FAS No. 71, "Accounting for the Effects of Certain Types of Regulation," to require that regulatory assets, which include certain deferred charges, be charged to earnings if such assets are no longer considered probable of recovery. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Acquisitions - During 1998 and 1997, subsidiaries of Electric Fuels acquired 13 and three businesses, respectively, in separate transactions. The cash paid for the 1998 and 1997 acquisitions was $206.6 million and $32.7 million, respectively. The excess of the aggregate purchase price over the fair value of net assets acquired was approximately $87.8 million and $15.6 million in 1998 and 1997, respectively. The acquisitions were accounted for under the purchase method of accounting and, accordingly, the operating results of the acquired businesses have been included in Florida Progress' consolidated financial statements since the date of acquisition. Each of the acquired companies conducted operations similar to those of the subsidiaries and has been integrated into their operations. The pro forma results of consolidated operations for 1998 and 1997, assuming the 1998 acquisitions were made at the beginning of each year, would not differ significantly from the historical results. Goodwill - Goodwill is being amortized on a straight-line basis over the expected periods to be benefited, generally 40 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Stock-Based Compensation - Florida Progress' Long-Term Incentive Plan ("LTIP") authorizes the granting of up to 2,250,000 shares of common stock to certain executives in various forms, including stock options, stock appreciation rights, 56 restricted stock and performance shares. Currently, the Company has only granted performance shares, which upon achievement of performance criteria for a three-year performance cycle, can result in the award of shares of common stock of Florida Progress or cash if certain stock ownership requirements are met. Florida Progress accounts for its LTIP in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed under FAS No. 123, "Accounting for Stock Based Compensation." Compensation costs for performance shares have been recognized at the fair market value of the Company's stock and are recognized over the performance cycle. Environmental - Florida Progress accrues environmental remediation liabilities when the criteria of FAS No. 5, "Accounting for Contingencies," have been met. Environmental expenditures are expensed as incurred or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. New Accounting Standards - Florida Progress adopted FAS No. 130, "Reporting Comprehensive Income," on January 1, 1998. The standard defines comprehensive income as all changes in equity of an enterprise during a period except those resulting from shareholder transactions. As the standard addresses reporting and presentation issues only, there was no impact on earnings from the adoption of this standard. Comprehensive income is included for Florida Progress in the accompanying Consolidated Statements of Common Equity and Comprehensive Income. Prior-year financial statements have been reclassified to conform to the requirements of FAS No. 130. Florida Progress adopted FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for the year ended December 31, 1998. The standard requires financial and descriptive information be disclosed for segments meeting certain materiality criteria whose operating results are reviewed for decisions on resource allocation and for which discrete financial information is available. It also establishes standards for related disclosures about products and services, geographic areas and major customers. As the standard addresses reporting and disclosure issues only, there was no impact on earnings. (See Note 8 contained herein.) Florida Progress adopted FAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" for the year ended December 31, 1998. As the standard addresses reporting and disclosure issues only, there was no impact on earnings. (See Note 7 contained herein.) In June 1998, the Financial Accounting Standards Board issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair values. Florida Progress will be required to adopt this standard for financial statements issued beginning the first quarter of fiscal year 2000. Florida Progress is currently evaluating the effect the standard will have on its financial statements. 57 Note 2: Financial Instruments Estimated fair value amounts have been determined by Florida Progress using available market information and discounted cash-flow analysis. Judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates may be different than the amounts that Florida Progress could realize in a current market exchange. Florida Progress' exposure to market risk for changes in interest rates relates primarily to Florida Progress' marketable securities and long-term debt obligations. At December 31, 1998 and 1997, Florida Progress had the following financial instruments with estimated fair values and carrying amounts: 1998 1997 Carrying Fair Carrying Fair (In millions) Amount Value Amount Value ASSETS: - ----------------------------------------------------------------------------- Investments for nonqualified retirement plans $80.4 $80.4 $5.0 $5.0 Nuclear decommissioning fund 332.1 332.1 266.7 266.7 - ----------------------------------------------------------------------------- CAPITAL AND LIABILITIES: Long-term debt: Florida Power Corporation $1,646.7 $1,740.4 $1,746.9 $1,801.1 Progress Capital Holdings 749.6 763.9 646.1 656.5 - ---------------------------------------------------------------------------- NOTE 3: INCOME TAXES FLORIDA PROGRESS (In millions) 1998 1997 1996 - ---------------------------------------------------------------------------- Components of income tax expense: Payable currently: Federal $ 85.8 $ 86.6 $179.7 State 15.3 10.5 23.0 - ---------------------------------------------------------------------------- 101.1 97.1 202.7 - ---------------------------------------------------------------------------- Deferred, net: Federal 47.2 (22.4) (41.9) State 8.2 (.5) (6.9) - ---------------------------------------------------------------------------- 55.4 (22.9) (48.8) - ---------------------------------------------------------------------------- Amortization of investment tax credits, net (7.9) (7.8) (8.0) - ---------------------------------------------------------------------------- $ 148.6 $ 66.4 $ 145.9 ============================================================================ 58 FLORIDA POWER (In millions) 1998 1997 1996 - ---------------------------------------------------------------------------- Components of income tax expense: Payable currently: Federal $ 89.2 $ 73.5 $143.6 State 15.3 11.6 24.9 - ---------------------------------------------------------------------------- 104.5 85.1 168.5 - ---------------------------------------------------------------------------- Deferred, net: Federal 37.7 (7.6) (20.9) State 6.6 .2 (4.0) - ---------------------------------------------------------------------------- 44.3 ( 7.4) (24.9) - ---------------------------------------------------------------------------- Amortization of investment tax credits, net (7.9) (7.8) (7.9) - ---------------------------------------------------------------------------- Total income tax expense 140.9 69.9 135.7 Less: Amounts charged or (credited) to non-operating income .7 -- (.1) - ---------------------------------------------------------------------------- Amounts charged to operating income $ 140.2 $ 69.9 $ 135.8 ============================================================================ The primary differences between the statutory rates and the effective income tax rates are detailed below: FLORIDA PROGRESS 1998 1997 1996 - ---------------------------------------------------------------------------- Federal statutory income tax rate 35.0% 35.0% 35.0% State income tax, net of federal income tax benefits 3.5 5.4 2.6 Amortization of investment tax credits (1.8) (6.4) (2.0) Other income tax credits (1.9) (2.7) - Provision for loss on investment in life insurance subsidiary - 24.9 - Preferred dividends .1 - - Other (.4) (1.8) .6 - ---------------------------------------------------------------------------- Effective income tax rates 34.5% 54.4% 36.2% ============================================================================ FLORIDA POWER 1998 1997 1996 - ---------------------------------------------------------------------------- Federal statutory income tax rate 35.0% 35.0% 35.0% State income tax, net of federal income tax benefits 3.6 3.7 3.6 Amortization of investment tax credits (2.0) (3.8) (2.2) Other (.4) (.9) - - ---------------------------------------------------------------------------- Effective income tax rates 36.2% 34.0% 36.4% ============================================================================ 59 The following summarizes the components of deferred tax liabilities and assets at December 31, 1998 and 1997: FLORIDA PROGRESS (In millions) 1998 1997 - --------------------------------------------------------------------------- Deferred tax liabilities: Difference in tax basis of property, plant and equipment $624.5 $539.0 Investment in partnerships 19.2 19.7 Deferred book expenses 23.4 34.1 Other 47.2 29.7 - --------------------------------------------------------------------------- Total deferred tax liabilities $ 714.3 $ 622.5 =========================================================================== Deferred tax assets: Loss reserves not currently deductible $ 18.0 $ 17.0 Accrued book expenses 108.7 110.8 Unbilled revenues 17.6 17.6 Other 30.5 11.7 - --------------------------------------------------------------------------- Total deferred tax assets $ 174.8 $ 157.1 =========================================================================== At December 31, 1998 and 1997, Florida Progress had net noncurrent deferred tax liabilities of $595.4 million and $471.2 million and net current deferred tax assets of $55.9 million and $5.8 million, respectively. Florida Progress believes it is more likely than not that the results of future operations will generate sufficient taxable income to allow for the utilization of deferred tax assets. FLORIDA POWER (In millions) 1998 1997 - -------------------------------------------------------------------------- Deferred tax liabilities: Difference in tax basis of property, plant and equipment $ 575.1 $ 506.3 Deferred book expenses 23.3 34.1 Under recovery of fuel 3.8 2.8 Carrying value of securities over cost 22.0 15.0 Other 10.5 1.5 ------------------------------------------------------------------------- Total deferred tax liabilities $ 634.7 $ 559.7 ========================================================================== Deferred tax assets: Accrued book expenses $ 90.2 $ 95.0 Unbilled revenues 17.6 17.6 Regulatory liability for deferred income taxes - 1.6 Other 19.7 - - -------------------------------------------------------------------------- Total deferred tax assets $ 127.5 $ 114.2 ========================================================================== At December 31, 1998 and 1997, Florida Power had net noncurrent deferred tax liabilities of $563.1 million and $451.3 million and net current deferred tax assets of $55.9 million and $5.8 million, respectively. Florida Power expects the results of future operations will generate sufficient taxable income to allow the utilization of deferred tax assets. 60 NOTE 4: NUCLEAR OPERATIONS Florida Power's Crystal River nuclear plant began an extended outage in September 1996, which caused Florida Power to incur $100 million in additional operation and maintenance expenses in 1997. The plant was placed on the NRC's "Watch List," as a plant whose operations will be closely monitored until the plant demonstrates a period of improved performance. In January 1998, the NRC granted Florida Power permission to restart the plant. On February 15, 1998, the plant returned to service. On July 29, 1998, the NRC removed CR3 from the "Watch List." Earlier in July 1998, the NRC gave CR3 an overall report of good performance and improvements in all areas assessed for the agency's Systematic Assessment of Licensee Performance (SALP) ratings. CR3 has produced more than 100% of its rated capacity since its restart in February 1998. (See Note 9 contained herein.) Jointly Owned Plant - The following information relates to Florida Power's 90.4% proportionate share of the nuclear plant at December 31, 1998 and 1997: (In millions) 1998 1997 - ---------------------------------------------------------------------- Utility plant in service $708.9 $673.8 Construction work in progress 44.2 49.3 Unamortized nuclear fuel 45.9 66.5 Accumulated depreciation 368.7 341.0 Accumulated decommissioning 254.8 223.7 ====================================================================== Net capital additions for Florida Power were $30.0 million in 1998 and $64.7 million in 1997. Depreciation expense, exclusive of nuclear decommissioning, was $32.8 million in 1998 and $29 million in 1997. Each co-owner provides for its own financing of their investment. Florida Power's share of the asset balances and operating costs is included in the appropriate consolidated financial statements. Amounts exclude any allocation of costs related to common facilities. Decommissioning Costs - Florida Power's nuclear plant depreciation expenses include a provision for future decommissioning costs, which are recoverable through rates charged to customers. Florida Power is placing amounts collected in an externally managed trust fund. The recovery from customers, plus income earned on the trust fund, is intended to be sufficient to cover Florida Power's share of the future dismantlement, removal and land restoration costs. Florida Power has a license to operate the nuclear unit through December 3, 2016, and contemplates decommissioning beginning at that time. In November 1995, the FPSC approved the current site-specific study that estimates total future decommissioning costs at approximately $2 billion, which corresponds to $464.8 million in 1998 dollars. Florida Power's share of the total annual decommissioning expense is $21.7 million. Florida Power is required to file a new site-specific study with the FPSC at least every five years, which will incorporate current cost factors, technology and radiological criteria. Fuel Disposal Costs - Florida Power has entered into a contract with the U.S. Department of Energy for the transportation and disposal of SNF. Disposal costs for nuclear fuel consumed are being collected from customers through the fuel adjustment clause at a rate of $.001 per net nuclear kilowatt-hour sold and are paid to the DOE quarterly. Florida Power currently is storing SNF on-site and has sufficient storage capacity in place for fuel consumed through the year 2011. 61 NOTE 5 PREFERRED AND PREFERENCE STOCK AND SHAREHOLDER RIGHTS The authorized capital stock of Florida Progress includes 10 million shares of preferred stock, without par value, including 2 million shares designated as Series A Junior Participating Preferred Stock. No shares of Florida Progress' preferred stock are issued and outstanding. However, under Florida Progress' Shareholder Rights Agreement, each share of common stock has associated with it approximately two-thirds of one right to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, subject to adjustment, which is exercisable in the event of certain attempted business combinations. If exercised, the rights would cause substantial dilution of ownership, thus adversely affecting any attempt to acquire the Company on terms not approved by the Company's Board of Directors. The rights have no voting or dividend rights and expire in December 2001, unless redeemed earlier by the Company. The authorized capital stock of Florida Power includes three classes of preferred stock: 4 million shares of Cumulative Preferred Stock, $100 par value; 5 million shares of Cumulative Preferred Stock, without par value; and 1 million shares of Preference Stock, $100 par value. No shares of Florida Power's Cumulative Preferred Stock, without par value, or Preference Stock are issued and outstanding. A total of 334,967 shares of Cumulative Preferred Stock, $100 par value, were issued and outstanding at December 31, 1998 and 1997. Florida Power redeemed 1,050,000 shares of its Cumulative Preferred Stock in 1996 for $106.4 million Cumulative Preferred Stock for Florida Power is detailed below: Current Outstanding at Dividend Redemption Shares December 31, Rate Price Outstanding 1998 & 1997 (In millions) - ------------------------------------------------------------------ 4.00% $104.25 39,980 $ 4.0 4.40% $102.00 75,000 7.5 4.58% $101.00 99,990 10.0 4.60% $103.25 39,997 4.0 4.75% $102.00 80,000 8.0 - ------------------------------------------------------------------ 334,967 $33.5 ================================================================== All Cumulative Preferred Stock series are without sinking funds and are not subject to mandatory redemption. NOTE 6 DEBT Florida Progress' long-term debt at December 31, 1998 and 1997, is scheduled to mature as follows:
Interest Rate(a) 1998 1997 - ----------------------------------------------------------------------------------------------- Florida Power Corporation (In millions) First mortgage bonds, maturing 1999-2023 6.88% $585.0 $835.0 Pollution control revenue bonds, maturing 2014-2027 6.59% 240.9 240.9 Medium-term notes, maturing 1999-2028 6.63% 624.5 476.0 Commercial paper, supported by revolver maturing November 30, 2003 5.25% 200.0 200.0 Discount, net of premium, being amortized over term of bonds (3.7) (5.0) - ---------------------------------------------------------------------------------------------- 1,646.7 1,746.9 62 Progress Capital Holdings: Medium-term notes,maturing 1999-2008 6.63% 444.0 339.0 Commercial paper, supported by revolver maturing November 30, 2003 5.38% 300.0 300.0 Other debt, maturing 1999-2006 6.13% 5.6 7.1 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- 2,396.3 2393.0 Less: Current portion of long-term debt 145.9 15.2 - --------------------------------------------------------------------------------------------- $2,250.4 $2,377.8
(a)Weighted average interest rate at December 31, 1998. Florida Progress' consolidated subsidiaries have lines of credit totaling $800 million, which are used to support commercial paper. The lines of credit were not drawn on as of December 31, 1998. Interest rate options under the lines of credit arrangements vary from subprime or money market rates to the prime rate. Banks providing lines of credit are compensated through fees. Commitment fees on lines of credit vary between .06 and .10 of 1%. The lines of credit consist of four revolving bank credit facilities, two each for Florida Power and Progress Capital. The Florida Power facilities consist of $200 million with a 364-day term and $200 million with a five-year term. The Progress Capital facilities consist of $100 million with a 364-day term and $300 million with a five-year term. In 1998, both 364-day facilities were extended to November 1999. In addition, both five-year facilities were extended to November 2003. Based on the duration of the underlying backup credit facilities, $500 million of outstanding commercial paper at December 31, 1998, and December 31, 1997, are classified as long-term debt. Additionally, as of December 31, 1998, Florida Power and Progress Capital had an additional $47.3 million and $38.9 million, respectively, of outstanding commercial paper classified as short-term debt. Progress Capital has uncommitted bank bid facilities authorizing it to borrow and re-borrow, and have outstanding at any time, up to $300 million. As of December 31, 1998, $150 million was outstanding under these bid facilities. Florida Power has a public medium-term note program providing for the issuance of either fixed or floating interest rate notes. These notes have maturities ranging from nine months to 30 years. A balance of $250 million is available for issuance. In March 1998, Florida Power redeemed all of its $150 million principal amount of first mortgage bonds, 8 5/8% series due November 2021 at a redemption price of 105.17% of the principal amount thereof. Substantially all of this redemption was funded from the net proceeds of $150 million of medium-term notes issued in February 1998, which bear an interest rate of 6 3/4% and mature in February 2028. Florida Power also redeemed in November 1998, an additional $100 million of first mortgage bonds. The entire $50 million principal of the 7 3/8% series was redeemed at a price of 100.93%, and the entire $50 million principal of the 7 1/4% series was redeemed at a price of 100.86%. Both issues were due in 2002. The redemption was funded from internally generated funds and commercial paper. Florida Power has registered $370 million of first mortgage bonds, which are unissued and available for issuance. Progress Capital has a private medium-term note program providing for the issuance of either fixed or floating interest rate notes, with maturities ranging from nine months to 30 years. A balance of $185 million is available for issuance under this program. 63 The combined aggregate maturities of long-term debt for 1999 through 2003 are $145.9 million, $147.6 million, $183 million, $32.2 million and $775.4 million, respectively. Florida Progress and Progress Capital entered into an amended guaranty and support agreement in 1996, pursuant to which Florida Progress has unconditionally guaranteed the payment of Progress Capital's debt. NOTE 7 RETIREMENT BENEFIT PLANS Pension Benefits - Florida Progress and some of its subsidiaries have a noncontributory defined benefit pension plan (Retirement Plan) covering most employees. Florida Progress also has two supplementary defined benefit pension plans that provide benefits to higher-level employees. Effective January 1, 1998, the Retirement Plan was split into two separate plans, one covering eligible bargaining unit employees and the other covering all other eligible employees. Plan assets were allocated to each plan in accordance with applicable law. Other Postretirement Benefits - Florida Progress and some of its subsidiaries also provide certain health care and life insurance benefits for retired employees when they reach retirement age while working for Florida Progress. Shown below are the components of the net pension expense and net postretirement benefit expense calculations for 1998, 1997 and 1996:
Pension Benefits Other Postretirement Benefits (In millions) 1998 1997 1996 1998 1997 1996 Service cost $ 22.3 $ 18.7 $ 18.3 $ 3.5 $ 3.2 $ 5.3 Interest cost 37.7 34.9 32.3 10.5 10.4 12.4 Expected return on plan assets (68.5) (58.4) (52.0) (.3) (.4) (.3) Net amortization and deferral (12.5) (6.5) (6.5) 3.2 3.4 6.1 Net cost/(benefit) recognized $(21.0) $(11.3) $ (7.9) $16.9 $16.6 $23.5
The following weighted average actuarial assumptions at December 31 were used in the calculation of the year-end funded status:
Pension Benefits Other Postretirement Benefits 1998 1997 1996 1998 1997 1996 Discount rate 7.00% 7.25% 7.50% 7.00% 7.25% 7.50% Expected long-term rate of return 9.00% 9.00% 9.00% 5.00% 5.00% 5.00% Rate of compensation increase: Bargaining unit employees 3.50% 4.50% 4.50% 3.50% 4.50% 4.50% Nonbargaining unit employees 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% Nonqualified plans 4.00% 4.00% 4.00% N/A N/A N/A
64 The following summarizes the change in the benefit obligation and plan assets for both the pension plan and postretirement benefit plan for 1998 and 1997:
Pension Benefits Other Benefits (In millions) 1998 1997 1998 1997 Change in benefit obligation Benefit obligation at beginning of year $523.9 $472.0 $ 153.2 $ 182.6 Service cost 22.3 18.7 3.5 3.2 Interest cost 37.7 34.9 10.5 10.4 Plan amendment - 9.5 - (36.1) Actuarial (gain)/loss 16.1 12.6 1.2 (.3) Benefits paid (25.8) (23.8) (6.9) (6.6) Benefit obligation at end of year 574.2 523.9 161.5 153.2 Change in plan assets Fair value of plan assets at beginning of year 769.0 655.0 6.4 4.7 Return on plan assets (net of expenses) 140.2 136.6 .4 .4 Employer contributions - - 1.3 1.3 Benefits paid (24.2) (22.6) - - Fair value of plan assets at end of year 885.0 769.0 8.1 6.4 Funded status 310.8 245.1 (153.4) (146.8) Unrecognized transition (asset) obligation (20.5) (25.4) 51.4 55.0 Unrecognized prior service cost 13.3 14.5 - - Unrecognized net actuarial (gain)/loss (283.5) (236.6) (14.1) (15.6) Prepaid (accrued) benefit cost $ 20.1 $ (2.4) $(116.1) $(107.4)
Between 1996 and 1998, Florida Progress set assets aside in a rabbi trust for the purpose of providing benefits to the participants in the supplementary retirement plans. The assets of the rabbi trust are not reflected as plan assets because the assets could be subject to creditors' claims. The assets and liabilities of the supplementary defined benefit retirement plans are included in Other Assets and Other Liabilities on the accompanying Consolidated Balance Sheets. A one-percentage point increase or decrease in the assumed health care cost trend rate would change the total service and interest cost by approximately $1 million and the postretirement benefit obligation by approximately $10 million. Due to different retail and wholesale regulatory rate requirements, Florida Power began making quarterly contributions for the postretirement benefit plan in 1995 to an irrevocable external trust fund for wholesale ratemaking, while continuing to accrue postretirement benefit costs to an unfunded reserve for retail ratemaking. Florida Power contributed approximately $1.3 million annually in both 1998 and 1997 to the trust fund. NOTE 8 BUSINESS SEGMENTS Florida Progress' principal business segment is Florida Power, an electric utility engaged in the generation, purchase, transmission, distribution and sale of electricity. The other reportable business segments are Electric Fuels' Energy and Related Services, Rail Services and Inland Marine Transportation units. Energy and Related Services includes coal operations, river terminal services and off-shore marine transportation. Rail Services' operations include railcar repair, rail parts reconditioning and sales, railcar leasing and sales, providing rail and track material, and metal recycling. Inland Marine provides transportation of coal, agricultural and other dry-bulk commodities as well as fleet management services. The other category includes the parent holding company Florida Progress, which allocates a portion of its operating expenses to 65 business segments. This category also includes segments below the quantitative threshold required for separate disclosure. Florida Progress' business segment information for 1998, 1997 and 1996 is summarized below. Florida Progress' significant operations are geographically located in the United States. Florida Progess' segments are based on differences in products and services, and therefore no additional disclosures are presented. Intersegment sales and transfers consist of coal sales from Electric Fuels to Florida Power. The price Electric Fuels charges Florida Power is based on market rates for coal procurement and for water borne transportation under a methodology approved by the FPSC. Rail transportation is also based on market rates plus a return allowed by the FPSC on equity utilized in transporting coal to Florida Power. The allowed rate of return is currently 12%. No single customer accounted for 10% or more of unaffiliated revenues.
Energy and Rail Inland Marine (In millions) Utility Related Services Services Transportation Other Eliminations Consolidated 1998 Revenues $2,648.2 $173.8 $658.5 $124.6 $ 10.9 $ 4.3 $3,620.3 Intersegment revenues - 273.9 1.3 14.0 - (289.2) - Depreciation and amortization 382.7 14.4 19.4 4.5 3.6 - 424.6 Interest expense 136.5 5.8 21.3 4.4 20.8 (1.7) 187.1 Income taxes 141.0 6.3 12.3 6.3 (17.3) - 148.6 Segment net income (loss) 248.6 20.4 15.9 10.3 (13.5) - 281.7 Total assets 4,928.1 316.5 680.0 99.5 334.0 (197.3) 6,160.8 Property additions 326.0 32.0 91.0 93.6 .7 - 543.3 1997 Revenues $2,448.4 $165.6 $477.1 $105.5 $115.7 $ 4.1 $3,316.4 Intersegment revenues - 286.0 1.3 14.2 - (301.5) - Depreciation and amortization 333.8 11.7 11.2 4.3 3.2 - 364.2 Interest expense 117.3 6.5 13.9 2.5 19.1 (.6) 158.7 Income taxes 69.9 8.4 9.8 3.3 (25.0) - 66.4 Segment net income (loss) 134.4 16.8 13.3 5.9 (116.1) - 54.3 Total assets 4,900.8 299.2 385.3 138.9 210.4 (174.6) 5,760.0 Property additions 395.0 16.8 41.6 59.0 1.2 - 513.6 1996 Revenues $2,393.6 $165.6 $353.7 $ 86.4 $155.2 $ 3.4 $3,157.9 Intersegment revenues - 273.2 .8 13.7 - (287.7) - Depreciation and amortization 341.1 11.4 7.4 4.5 2.3 - 366.7 Interest expense 98.4 6.3 9.9 1.9 20.5 (1.1) 135.9 Income taxes 135.7 (9.3) 6.9 4.4 8.2 - 145.9 Segment net income (loss) 232.6 (12.5) 9.7 7.1 (12.5) - 224.4 Total assets 4,264.0 272.4 294.2 79.0 577.2 (138.4) 5,348.4 Property additions 222.9 11.7 16.1 12.7 .6 - 264.0
In December 1996, the Energy and Related Services segment of Electric Fuels revised its assessment that low-sulfur coal market prices were depressed temporarily. Electric Fuels decided to close and dispose of its unprofitable coal operations and recorded a provision for loss of $40.9 million. NOTE 9 RATES Florida Power's retail rates are set by the FPSC, while its wholesale rates are governed by the FERC. Florida Power's last general rate case was approved in 1992 and allowed a 12% regulatory return on equity with an allowed range between 11% and 13%. Tiger Bay Buy-Out - In 1997, Florida Power bought out the Tiger Bay purchased power contracts for $370 million and acquired the cogeneration facility for $75 million, for a total of $445 million. Of the $370 million of contract 66 termination costs, $350 million was recorded as a regulatory asset and the remaining $20 million was written off. Florida Power recorded $75 million as electric plant. The regulatory asset is being recovered pursuant to an agreement between Florida Power and several intervening parties, which was approved by the FPSC in June 1997. The amortization of the regulatory asset is calculated using revenues collected under the fuel adjustment clause as if the purchased power agreements related to the facility were still in effect, less the actual fuel costs and the related debt interest expense. This will continue until the regulatory asset is fully amortized. Florida Power has the option to accelerate the amortization. Approximately $27.2 million and $4.4 million of amortization expense was recorded in 1998 and 1997, respectively. In December 1998, Florida Power received approval from the FPSC to defer non-fuel revenues towards the development of a plan that would allow customers to realize the benefits earlier than if they are used to accelerate the amortization of the Tiger Bay regulatory asset. If this plan is not submitted by May 1, 1999, or not approved by the FPSC, then deferred revenues of $10.1 million plus interest will be applied towards the amortization of Tiger Bay. Extended Nuclear Outage - In June 1997, a settlement agreement between Florida Power and all parties who intervened in Florida Power's request to recover replacement fuel and purchased power costs resulting from the extended outage of its nuclear plant was approved by the FPSC. The plant was taken off-line in September 1996 to address certain design issues related to its safety systems. In late January 1998, Florida Power notified the NRC that it had completed all of the requirements and was subsequently granted permission to restart the plant. The plant returned to service in February 1998. Florida Power incurred approximately $174 million in 1997 and an additional $5 million in 1998 in total system replacement power costs. In accordance with the settlement agreement, Florida Power recorded a charge of approximately $73 million in 1997 and $5 million in 1998 for retail replacement power costs incurred that will not be recovered through its fuel cost recovery clause. Florida Power is currently recovering approximately $38 million through its fuel cost recovery clause, and approximately $63 million of replacement power costs were recorded as a regulatory asset in 1997. The regulatory asset is being amortized for a period of up to four years. The amortization is being recovered by the suspension of fossil plant dismantlement accruals during the amortization period. The parties to the settlement agreement agreed not to seek or support any increase or reduction in Florida Power's base rates or the authorized range of its return on equity during the four-year amortization period. The settlement agreement also provided that for purposes of monitoring Florida Power's future earnings, the FPSC will exclude the nuclear outage costs when assessing Florida Power's regulatory return on equity. The agreement resolved all present and future disputed issues between the parties regarding the extended outage of the nuclear plant. NOTE 10 DISCONTINUED OPERATIONS On November 21, 1996, Florida Progress' Board of Directors declared a spin-off distribution to common shareholders of record on December 5, 1996, of the common shares of Echelon, which comprised the Company's lending, leasing and real estate operations. Common shares were distributed on the basis of one share of Echelon common stock for every 15 shares of Florida Progress' common stock. 67 In connection with the spin-off in 1996, Florida Progress has presented Echelon as a discontinued operation in the accompanying Consolidated Statements of Income. Summarized income statement information relating to Echelon's results of operations (as reported in discontinued operations) for the year ended December 31 is as follows: (In millions) 1996 - --------------------------------------------------------------------- Sales and revenues $ 63.2 - --------------------------------------------------------------------- Loss from operations (net of income tax) - Provision for loss on disposition of assets (net of income tax benefits of $11.3) (18.0) Spin-off transaction costs (net of income tax benefits of $1.8) (8.3) - --------------------------------------------------------------------- Total discontinued operations $(26.3) ===================================================================== NOTE 11 COMMITMENTS AND CONTINGENCIES Fuel, Coal and Purchased Power Commitments - Florida Power has entered into various long-term contracts to provide the fossil and nuclear fuel requirements of its generating plants and to reserve pipeline capacity for natural gas. In most cases, such contracts contain provisions for price escalation, minimum purchase levels and other financial commitments. Estimated annual payments, based on current market prices, for Florida Power's firm commitments for fuel purchases and transportation costs, excluding delivered coal and purchased power, are $56 million, $56 million, $62 million, $63 million and $64 million for 1999 through 2003, respectively, and $499 million in total thereafter. Additional commitments will be required in the future to supply Florida Power's fuel needs. Electric Fuels has two coal supply contracts with Florida Power, the provisions of which require Florida Power to buy and Electric Fuels to supply substantially all of the coal requirements of four of Florida Power's power plants, two through 2002 and two through 2004. In connection with these contracts, Electric Fuels has entered into several contracts with outside parties for the purchase of coal. The annual obligations for coal purchases and transportation under these contracts are $107.1 million, $61 million, $48.9 million and $22.7 million for 1999 through 2002, respectively, with no further obligations thereafter. The total cost incurred for these commitments was $117.7 million in 1998, $156.8 million in 1997 and $161.5 million in 1996. Florida Power has long-term contracts for about 460 MW of purchased power with other utilities, including a contract with The Southern Company for approximately 400 MW of purchased power annually through 2010. This represents 4.5% of Florida Power's total current system capacity. Florida Power has an option to lower these Southern purchases to approximately 200 MW annually with a three-year notice. The purchased power from Southern is supplied by generating units with a capacity of approximately 3,500 MW and is guaranteed by Southern's entire system, totaling more than 30,000 MW. As of December 31, 1998, Florida Power had entered into purchased power contracts with certain qualifying facilities for 871 MW of capacity with 68 expiration dates ranging from 2002 to 2025. The purchased power contracts provide for capacity and energy payments. Energy payments are based on the actual power taken under these contracts. Capacity payments are subject to the qualifying facilities meeting certain contract performance obligations. In most cases, these contracts account for 100% of the generating capacity of each of the facilities. Of the 871 MW under contract, approximately 831 MW currently are available to Florida Power. All commitments have been approved by the FPSC. The FPSC allows the capacity payments to be recovered through a capacity cost recovery clause, which is similar to, and works in conjunction with, energy payments recovered through the fuel cost recovery clause. In 1997, through the buy-out of the Tiger Bay purchased power contracts, Florida Power reduced its long-term purchased power commitments by 20 percent. Florida Power incurred purchased power capacity costs totaling $260.1 million in 1998, $292.3 million in 1997 and $284 million in 1996. The following table shows minimum expected future capacity payments for purchased power commitments. Because the purchased power commitments have relatively long durations, the total present value of these payments using a 10% discount rate also is presented. These amounts assume that all units are brought into service as contracted and meet contract performance requirements: Purchased Power Capacity Payments (In millions) Utilities Cogenerators Total - ---------------------------------------------------------------------------- 1999 58 215 273 2000 59 223 282 2001 58 230 288 2002 32 236 268 2003 32 244 276 2004-2025 212 5,555 5,767 - ---------------------------------------------------------------------------- Total $451 $6,703 $ 7,154 ============================================================================ Total net present value $ 2,577 ============================================================================ Leases - Electric Fuels has several noncancelable operating leases, primarily for transportation equipment, with varying terms extending to 2015, and generally require Electric Fuels to pay all executory costs such as maintenance and insurance. Some rental payments include minimum rentals plus contingent rentals based on mileage. Contingent rentals were not significant. The minimum future lease payments under noncancelable operating leases, including the synthetic lease described below, are $38.7 million, $31.7 million, $27.7 million, $23.4 million and $23.4 million for 1999 through 2003, respectively, with a $227 million total obligation thereafter. The total costs incurred under these commitments were $30.9 million, $34.8 million and $33.3 million during 1998, 1997 and 1996, respectively. On August 6, 1998, MEMCO, a wholly owned subsidiary of Electric Fuels, entered into a synthetic lease financing, accomplished via a sale and leaseback, for an aggregate of approximately $175 million in inland river barges and $25 million in towboats (vessels). As of December 31, 1998, MEMCO had sold and leased back $153 million of vessels. Acquisition and subsequent sale and leaseback of the remaining $47 million of vessels are expected to occur by June 30, 1999. The lease (charter) is an operating lease for financial reporting purposes and a secured financing for tax purposes. 69 The term of the noncancelable charter expires on December 30, 2012, and provides MEMCO one 18-month renewal option on the same terms and conditions. MEMCO is responsible for all executory costs, including insurance, maintenance and taxes, in addition to the charter payments. MEMCO has options to purchase the vessels throughout the term of the charter, as well as an option to purchase at the termination of the charter. Assuming MEMCO exercises no purchase options during the term of the charter, the purchase price for all vessels aggregates $141.8 million at June 30, 2014. In the event that MEMCO does not exercise its purchase option for all vessels, it will be obligated to remarket the vessels, and, at the expiration of the charter, pay a maximum residual guarantee amount of $89.3 million. The minimum future charter payments as of December 31, 1998 are $14.4 million, $15.3 million, $15.4 million, $15.4 million and $15.8 million for 1999 through 2003 and $172.2 million thereafter (excluding the purchase option payment). All MEMCO payment obligations under the transaction documents are unconditionally guaranteed by Progress Capital; those obligations in turn are guaranteed by Florida Progress. Construction Program - Substantial commitments have been made in connection with the Company's construction program. In 1999, Florida Power has projected construction expenditures of $323 million, primarily for electric plant and nuclear fuel. Diversified operations have projected capital additions of $155 million in 1999, primarily for barges and equipment. Off-Balance Sheet Risk - Several of Florida Progress' subsidiaries are general partners in unconsolidated partnerships and joint ventures. Florida Progress or subsidiaries have agreed to support certain loan agreements of the partnerships and joint ventures. These credit risks are not material to the financial statements and Florida Progress considers these credit risks to be minimal, based upon the asset values supporting the partnership liabilities. Insurance - Florida Progress and its subsidiaries utilize various risk management techniques to protect assets from risk of loss, including the purchase of insurance. Risk avoidance, risk transfer and self-insurance techniques are utilized depending on Florida Progress' ability to assume risk, the relative cost and availability of methods for transferring risk to third parties, and the requirements of applicable regulatory bodies. Florida Power self-insures its transmission and distribution lines against loss due to storm damage and other natural disasters. Pursuant to a regulatory order, Florida Power is accruing $6 million annually to a storm damage reserve and may defer any losses in excess of the reserve. The reserve balance at December 31, 1998 and 1997 was $24.1 million and $18.1 million, respectively. Under the provisions of the Price Anderson Act, which limits liability for accidents at nuclear power plants, Florida Power, as an owner of a nuclear plant, can be assessed for a portion of any third-party liability claims arising from an accident at any commercial nuclear power plant in the United States. If total third-party claims relating to a single nuclear incident exceed $200 million (the amount of currently available commercial liability insurance), Florida Power could be assessed up to $88.1 million per incident, with a maximum assessment of $10 million per year. Florida Power is a member of the Nuclear Electric Insurance, Ltd. ("NEIL"), an industry mutual insurer, which provides business interruption and extra expense coverage in the event of a major accidental outage at a covered nuclear power 70 plant. Florida Power is subject to a retroactive premium assessment by NEIL under this policy in the event loss experience exceeds NEIL's available surplus. Florida Power's present maximum share of any such retroactive assessment is $2.7 million per policy year. Florida Power also maintains nuclear property damage insurance and decontamination and decommissioning liability insurance totaling $2.1 billion. The first layer of $500 million is purchased in the commercial insurance market with the remaining excess coverage purchased from NEIL. Florida Power is self-insured for any losses that are in excess of this coverage. Under the terms of the NEIL policy, Florida Power could be assessed up to a maximum of $9.5 million in any policy year if losses in excess of NEIL's available surplus are incurred. Florida Power has never been assessed under these nuclear indemnities or insurance policies. Contaminated Site Cleanup - The Company is subject to regulation with respect to the environmental impact of its operations. The Company's disposal of hazardous waste through third-party vendors can result in costs to clean up facilities found to be contaminated. Federal and state statutes authorize governmental agencies to compel responsible parties to pay for cleanup of these hazardous waste sites. Florida Power and former subsidiaries of Florida Progress, whose properties were sold in prior years, have been identified by the U.S. EPA as PRPs at certain sites, including the Sanford, Florida that Florida Power previously owned and operated. There are five parties, including Florida Power, that have been identified as PRPs at the Sanford site. Liability for the cleanup costs of these sites is joint and several. An agreement has been reached among the PRPs to spend up to $1.5 million to perform the Risk Investigation and Feasibility Study (RI/FS). Florida Power is liable for 39.7% of those costs. On September 25, 1998, the EPA formally approved the PRP RI/FS Work Plan. The RI/FS field work was completed in January 1999. The EPA is expected to review the final Treatability Study report and provide further guidance to the PRPs by August 1999. The discussions and resolution of liability for cleanup costs could cause Florida Power to increase its estimate of its liability for those costs. Although estimates of any additional costs are not currently available, the outcome is not expected to have a material effect on Florida Progress' financial position, results of operations or liquidity. In addition to these designated sites, there are other sites where affiliates may be responsible for additional environmental cleanup. Florida Progress believes that its subsidiaries will not be required to pay a disproportionate share of the costs for cleanup of any of these designated sites. Florida Progress' best estimates indicate that its proportionate share of liability for cleaning up all designated sites ranges from $2.5 million to $7.5 million. It has accrued $4.4 million against these potential costs. Legal Matters Age Discrimination Suit - Florida Power and Florida Progress have been named defendants in an age discrimination lawsuit. The number of plaintiffs remains at 116, however, four of those plaintiffs have had their federal claims dismissed and five others have had their state age claims dismissed. While no dollar amount was requested, each plaintiff seeks back pay, reinstatement or front pay 71 through their projected dates of normal retirement, costs and attorneys' fees. In October 1996, the court approved an agreement between parties to provisionally certify this case as a class action suit under the Age Discrimination in Employment Act. On August 10, 1998, Florida Power filed a motion to decertify the class, and the plaintiffs filed their response in opposition on September 30, 1998. A hearing date for the motion has not yet been set. Florida Power has entered into settlement discussions with the plaintiffs. In December 1998, plaintiffs alleged damages of $100 million. Company management, while not believing plaintiffs' claim to have merit, offered $5 million in an attempted settlement of all claims. Plaintiffs rejected that offer. As a result, management has identified a probable range of $5 million to $100 million with no amount within that range a better estimate of probable loss than any other amount; accordingly, Florida Power has accrued $5 million. There can be no assurance that this litigation will be settled, or if settled, that the settlement will not exceed $5 million. Additionally, the ultimate outcome, if litigated, cannot presently be determined. Advanced Separation Technologies, Inc. - In 1996, Florida Progress sold its 80%-interest in AST to Calgon for $56 million in cash. Calgon filed a lawsuit in January 1998, 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 accuses Florida Progress of failing to disclose flaws in AST's manufacturing process and a lack of quality control. No projection of an outcome or estimate of a potential liability, if any, can be determined at the date of issuance of these financial statements. Florida Progress believes the lawsuit is without merit and intends to vigorously defend itself. Accordingly, Florida Progress has not made provision for any loss for this matter. Qualifying Facilities Contracts - The purchased power contracts with qualifying facilities employ separate pricing methodologies for capacity payments and energy payments. Florida Power has interpreted the pricing provision in these contracts to allow it to pay an as-available energy price rather than a higher firm energy price when the avoided unit upon which the applicable contract is based would not have been operated. Owners of four qualifying facilities filed suit against Florida Power in state court over the contract payment terms, one of which also filed in federal court. Two of the suits have been settled, and the federal case was dismissed, although the plaintiff has appealed. Of the two remaining suits, one trial concluded in December 1998. The other remaining suit remains with no date presently set for trial. Management does not expect that the results of these legal actions will have a material impact on Florida Power's financial position, operations or liquidity. Florida Power anticipates that all fuel and capacity expenses will be recovered from its customers. Mid-Continent Life Insurance Company - A series of events in 1997 as discussed below, significantly jeopardized the ability of Mid-Continent to implement a plan to eliminate a projected reserve deficiency resulting in the impairment of Florida Progress' investment in Mid-Continent. Therefore, the Company recorded a provision for loss on investment of $86.9 million in 1997. In addition, tax benefits of approximately $11 million related to the excess of the tax basis over the book value in the investment in Mid-Continent as of December 31, 1997, were not recorded because of uncertainties associated with the timing of a tax deduction. Florida Progress also recorded an accrual at December 31, 1997, for legal fees associated with defending its position in current Mid-Continent legal proceedings. 72 In the spring of 1997, the Commissioner received court approval to seize control of the operations of Mid-Continent. The Commissioner had alleged that Mid-Continent's reserves were understated by more than $125 million, thus causing Mid-Continent to be statutorily impaired. The Commissioner further alleged that Mid-Continent had violated Oklahoma law relating to deceptive trade practices in connection with the sale of its "Extra Life" insurance policies and was not entitled to raise premiums, a key element to Mid-Continent's plan to address the projected reserve deficiency. While sustaining the receivership, the court also ruled that premiums could be raised. Although both sides appealed the decision to the Oklahoma Supreme Court, those appeals were withdrawn in early 1999. In December 1997, the Commissioner filed a lawsuit against Florida Progress, certain of its directors and officers, and certain former Mid-Continent officers, making a number of allegations and seeking access to Florida Progress' assets to satisfy policyholder and creditor claims. On April 17, 1998, the court granted motions to dismiss the individual defendants, leaving Florida Progress as the sole remaining defendant in the lawsuit. A new Commissioner was elected in November 1998 and has stated his intention to work with Florida Progress and others to develop a plan to rehabilitate Mid-Continent rather than pursue litigation against Florida Progress. Although Florida Progress hasn't had access to recent Mid-Continent data, its estimate of the present value of the projected deficiency, after applying Mid-Continent's statutory surplus, is in the range of $100 million, rather than the $348 million alleged by the former Commissioner. Florida Progress believes that the former Commissioner's estimate is untenable and not based on sound actuarial principles. Florida Progress is working with the new Commissioner to develop a viable plan to rehabilitate Mid-Continent, which would include the sale of that company. In January 1999, five Mid-Continent policyholders filed a purported class action against Mid-Continent and the same defendants named in the case filed by the former Commissioner. The complaint contains substantially the same factual allegations as those made by the Commissioner. The suit asserts "Extra Life" policyholders have been injured as a result of representations made in connection with the sale of that policy. The suit seeks unspecified actual and punitive damages. Although Florida Progress hopes to reach a negotiated resolution of these matters, it would continue to vigorously defend itself against the two lawsuits should negotiations fail, since it believes they are without merit. Because neither the outcome of the litigation nor the ultimate effects of any rehabilitation plan, including the possible sale of Mid-Continent, can be estimated, Florida Progress has not made provision for any additional losses that might result. Other Legal Matters - Florida Progress is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect upon Florida Progress' consolidated financial position, results of operations or liquidity. 73
QUARTERLY FINANCIAL DATA FLORIDA PROGRESS CORPORATION (Unaudited) Three Months Ended (In millions, except per share amounts) March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------------------------------------------------- 1998 OPERATING RESULTS Revenues $787.5 $903.1 $1,031.5 $898.2 Income (loss) from operations 118.2 167.7 228.1 86.3 Net income (loss) 50.5 77.8 117.3 36.1 DATA PER SHARE Earnings (loss) per common share 0.52 0.80 1.21 0.37 Dividends per common share .535 .535 .535 .535 Common stock price per share: High 42 1/4 42 7/8 43 15/16 47 1/8 Low 37 11/16 39 38 1/16 41 - ------------------------------------------------------------------------------------------------------------------- 1997 OPERATING RESULTS Revenues $747.5 $797.3 $ 922.5 $849.1 Income(loss) from operations 95.0 37.9 166.0 (25.2) Net income (loss) 42.0 6.3 81.6 (75.6) DATA PER SHARE Earnings(loss)per common share .43 .07 .84 (.78) Dividends per common share .525 .525 .525 .525 Common stock price per share: High 32 7/8 31 5/8 33 5/8 39 1/4 Low 29 1/2 27 3/4 30 9/16 31 1/8 - -------------------------------------------------------------------------------------------------------------------
FLORIDA POWER CORPORATION (Unaudited) - ---------------------------------------------------------------------------------------------------- Three Months Ended (In millions) March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------------------------------- 1998 Operating revenues $565.2 $663.8 $795.6 $623.6 Net income (loss) $46.2 $68.1 $109.1 $26.7 Earnings (loss) on common stock $45.8 $67.7 $108.8 $26.3 1997 Operating revenues $553.8 $597.2 $706.9 $590.5 Net income $41.6 $1.3 $76.3 $16.7 Earnings on common stock $41.2 $.9 $76.0 $16.3
The business of Florida Power is seasonal in nature and comparisons of earnings for the quarters do not give a true indication of overall trends and changes in Florida Power's operations. In June 1998, Florida Power restated its financial results for the second, third and fourth quarters of 1997 to reflect recognition of the extended nuclear outage as incurred. The change affected the financial results for the interim reporting periods but did not have any effect on results for the fiscal year ended 1997. Effective December 31, 1997, Florida Progress deconsolidated the financial statements of Mid-Continent and established a provision for loss for the full amount of its investment. The deconsolidation has not been reflected in the consolidated financial statements of prior periods. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 74 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS FLORIDA PROGRESS Information concerning the Directors of Florida Progress is included under the headings "Information as to Nominees" and "Information as to Continuing Directors" in Florida Progress' Proxy Statement and is incorporated herein by reference. Information concerning the executive officers of Florida Progress is set forth in Part I, Item 1 hereof under the heading "Executive Officers". Information concerning compliance by Florida Progress' directors and officers, and persons who own more than 10% of Florida Progress' common stock, with the reporting requirements of Section 16(a) of the Securities Act of 1934, is included under the heading "Compliance with Section 16(a) of the Exchange Act" in Florida Progress' Proxy statement and is incorporated have in by reference. In addition, it has come to Florida Progress' attention that a Form 5 report of the gift of 4,318 shares by Joseph Richardson to his wife was filed 24 days late in March 1999. FLORIDA POWER DIRECTORS W. D. ("Bill") Frederick, Jr., Age 64, Director since 1997. Chairman - Compliance Committee Mr. Frederick's principal occupation for the past five years has been as an investor and citrus grower in Orlando, Florida. He served as Mayor of the City of Orlando from 1980 to 1992. In 1966 he founded the Orlando law firm of Frederick, Wooten & Honeywell P.A., and subsequently became a partner in the Orlando law office of Holland & Knight, from which he retired in 1995. He is a member of the Board of Directors of Florida Progress, Blue Cross/Blue Shield of Florida, and SunTrust Bank, Central Florida, N.A. Michael P. Graney, Esquire, Age 55, Director since 1997. Member - Executive Committee Mr. Graney has practiced law with the New York based law firm of Simpson Thacher & Bartlett since 1980 and is now resident partner in its Ohio office. His specialties are utilities, anti-trust and litigation. He is a member of the American, District of Columbia, Ohio and Columbus Bar Associations and the Federal Energy Bar Association. He is a director of Florida Progress. Richard Korpan, Age 57, Director since 1989. Chairman - Executive Committee Information concerning Mr. Korpan is set forth in Part I, Item 1 hereof under the heading "Executive Officers". Clarence V. McKee, Esquire, Age 56, Director since 1988. Mr. McKee's principal occupation is Chairman and Chief Executive Officer of McKee Communications, Inc., Tampa, Florida, a firm involved in the acquisition and management of television and radio stations. He served as Counsel to Pepper & Corazinni, a Washington, D.C. communications law firm, from 1980 until 1987 when he became a co-owner of WTVT Holdings, Inc., where he held the position of Chairman and Chief Executive Officer until 1992. He is a director of Florida Progress, American Heritage Life Insurance Company, and Checkers Drive-In Restaurants, Inc. 75 Vincent J. Naimoli, Age 61, Director since 1997. Mr. Naimoli's principal occupation for more than five years has been as Chairman, President and Chief Executive Officer of Anchor Industries International, Inc., Tampa, Florida, an operating and holding company. He is also Managing General Partner and Chief Executive Officer of the Tampa Bay Devil Rays, Ltd. Major League Baseball Club, St. Petersburg, Florida. Mr. Naimoli is a director of Florida Progress, and in conjunction with the business activities of Anchor Industries, serves as a director of Russell Stanley Corp., and Players International, Inc. Richard A. Nunis, Age 66, Director since 1997. Member - Executive Committee Mr. Nunis' principal occupation for more than five years has been Chairman of Walt Disney Attractions, Orlando, Florida, from which he retired in December 1998. He has held various positions with the Disney organization since 1955, including Vice President, Operations in 1968, Executive Vice President of DISNEYLAND and Walt Disney World in 1972, President of Walt Disney Attractions in 1980, and Chairman in 1991. He is a director of Florida Progress, SunTrust Bank, Central Florida N.A., and Director Emeritus of the Walt Disney Company. Joseph H. Richardson, Age 49, Director since 1996. Member - Executive Committee Information concerning Mr. Richardson is set forth in Part I, Item 1 hereof under the heading "Executive Officers". Joan D. Ruffier, Age 59, Director since 1991. Member - Compliance Committee Ms. Ruffier's principal occupation is Chairman of Human Service Technologies, Inc., a computer software products company. She also serves as Chairman of the University of Florida Foundation and Chair of the Finance Committee of Shands Healthcare,Inc. For more than five years and until November 1998, she was a general partner of Sunshine Cafes, Ltd., Orlando, Florida, a food and beverage concession business at major Florida airports. Previously, she practiced public accounting with the firm of Colley, Trumbower & Howell from 1982 until 1986. She also serves on the boards of directors of Florida Progress, Cyprus Equity Fund and INVEST, Inc. Robert T. Stuart, Jr., Age 66, Director since 1997 Mr. Stuart's principal occupation for more than five years has been as a rancher and investor. Since 1949, he has held numerous executive positions with Mid-Continent, including Vice President, President, Chairman of the Board and Chief Executive Officer until 1986 when Mid-Continent was acquired by Florida Progress. He is a director of Florida Progress. Jean Giles Wittner, Age 64, Director since 1977. Member - Compliance Committee Mrs. Wittner's principal occupation is President of Wittner & Co. and Wittner & Associates, Inc., St. Petersburg, Florida, firms involved in real estate management, insurance brokerage and consulting, positions she has held for more than five years. She previously served as President and Chief Executive Officer of a savings association until it was sold in 1986. She serves on the boards of Florida Progress and Raymond James Bank, F.S.B. 76 Each director holds office until the next Annual Meeting of Shareholders and until the election and qualification of a successor. EXECUTIVE OFFICERS Information concerning the executive officers of Florida Power is set forth in Part I, Item 1 hereof under the heading "Executive Officers" and is incorporated herein by reference. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Based solely on a review of the copies of Section 16(a) forms furnished to Florida Power during 1998, or written representations that no forms were required, Florida Power believes that all persons who at any time during 1998 were officers, directors or greater than 10% beneficial owners of Florida Power's preferred stock, filed their applicable Section 16(a) reports on a timely basis during 1998 and prior fiscal years. ITEM 11. EXECUTIVE COMPENSATION FLORIDA PROGRESS The information under the headings "Compensation of Directors", "Executive Compensation", "Pension Plan Table" and "Employment Contracts, Termination of Employment and Change-in-Control Arrangements" in Florida Progress' Proxy Statement is incorporated herein by reference. FLORIDA POWER COMPENSATION OF DIRECTORS Compensation for all directors of Florida Power (excluding employees of Florida Progress or subsidiaries) was $1,000 for attendance at each meeting of the Florida Power Board of Directors or a committee of the Board of Directors. A $750 fee is paid to each committee chairman for each meeting chaired. EXECUTIVE COMPENSATION The following table contains information with respect to compensation awarded, earned or paid during the years 1996-1998, to (i) the current Chief Executive Officer ("CEO") and (ii) the other four most highly compensated executive officers of Florida Power (the individuals referred to in (i) and (ii) are referred to collectively as the "Named Executive Officers") in 1998, whose total remuneration paid in 1998 exceeded $100,000. 77
SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation Payouts ----------------------------------------- ------------------ Other Name and Principal Annual LTIP All Other Position Year Salary Bonus Compensation(1) Payouts(2) Compensation(3) - -------------------------- ----- ------ ----- ------------- ------------ --------------- RICHARD KORPAN 1998 $650,766 $594,000 $16,891 $792,754 $28,650 Chairman 1997 592,304 41,500 11,850 324,028 26,490 1996 535,610 333,500 1,489 339,107 18,900 JOSEPH H. RICHARDSON 1998 $421,158 $382,500 $2,625 $437,994 $18,900 President and Chief 1997 384,619 -0- 1,685 162,091 13,890 Executive Officer 1996 288,884 214,000 -0- 128,858 16,585(4) ROY A. ANDERSON(5) 1998 $261,926 $290,802 $394 $136,371 $11,025 Senior Vice President, 1997 226,157 -0- 343,035(6) 32,518 5,643 Energy Supply 1996 N/A N/A N/A N/A N/A JEFFREY R. HEINICKA 1998 $278,530 $190,000 $1,772 $208,288 $12,318 Senior Vice President and 1997 264,992 15,500 -0- 110,393 12,315 Chief Financial Officer 1996 258,456 169,000 -0- 113,139 8,585 KENNETH E. ARMSTRONG 1998 $231,933 $127,500 -0- $170,849 $9,882 Vice President and 1997 215,009 10,000 -0- 88,944 9,963 General Counsel 1996 212,785 144,500 -0- 101,748 8,595 (1) Except as otherwise noted, amounts represent the reimbursement of taxes on certain perquisites and other personal benefits. (2) Information for fiscal year 1998, represents the dollar value as of February 17, 1999, the date of award, of shares of Common Stock earned under the 1996-1998 performance cycle of Florida Progress' Long-Term Incentive Plan ("LTIP"), none of which are restricted. The total number of share earned including dividend equivalent shares, is as follows: Richard Korpan 19,544 shares; Joseph H. Richardson 10,798 shares; Roy A. Anderson 3,362 shares; Jeffery R. Heinicka 5,135 shares; and Kenneth E. Armstrong 4,212 shares. (See the discussion of the method of calculating payouts contained in the Long-Term Incentive Compensation portion of the Compensation Committee Report of the Board of Directors from the Florida Progress Proxy Statement, which is incorporated herein by reference. (3) Company contributions to its Savings Plan and Executive Optional Deferred Compensation Plan on behalf of the Named Executive Officers. (4) Represents $8,835 in Company Contributions to the Savings Plan of Florida Progress and the Executive Optional Deferred Compensation Plan and $7,750 of director fees for services as a director of Echelon International Corporation, a former subsidiary of Florida Progress. (5) No compensation information is provided for 1996 because Mr. Anderson was not an executive officer or employee of Florida Power during that year. (6) Includes $282,686 paid to Mr. Anderson under the terms of his employment agreement to place Mr. Anderson in substantially the same economic position as he would have been had he remained with his previous employer. Also includes reimbursement for Mr. Anderson's moving expenses and tax reimbursement payments for moving expenses and imputed flight income.
78 The following table contains information with respect to Performance Shares granted in 1998 to each of the Named Executive Officers of Florida Power under the LTIP:
LONG-TERM INCENTIVE PLAN(1) AWARDS IN 1998 Number of Performance Estimated Payout in Shares at End of Period(3) Performance Period --------------------------------------------- Name Shares(2) Covered Threshold Target Maximum - ------------------- ----------- ---------- ---------- -------- --------- Richard Korpan 17,171 1998-2000 4,293 17,171 34,342 Joseph H. Richardson 8,293 1998-2000 2,073 8,293 16,586 Roy A. Anderson 2,758 1998-2000 690 2,758 5,516 Jeffrey R. Heinicka 2,924 1998-2000 731 2,924 5,848 Kenneth E. Armstrong 2,446 1998-2000 612 2,446 4,892 (1) The LTIP is a Common Stock and cash-based incentive plan to reward participants for long-term performance of Florida Progress. It was approved by the Florida Progress shareholders in 1990. (2) The number of performance shares granted are based on a percentage of base salary in effect at the time of each award and is subject to automatic increase or decrease on a prorated basis in accordance with changes to a participant's base salary or LTIP percentages throughout the performance cycle. In the event of a change in control of Florida Progress, 150% of all performance shares granted to the Named Executive Officers under the LTIP and then outstanding would automatically be considered earned and would be paid in shares of unrestricted Common Stock together with shares of unrestricted Common Stock payable for dividend equivalents accrued through the date of the change in control. (3) Payouts for the 1998-2000 performance cycle are based on achievement of total shareholder return goals established by the Florida Progress Corporation Compensation Committee.
Pension Plan Table The table below illustrates the estimated annual benefits (computed as a straight life annuity beginning at retirement at age 65) payable under the Florida Progress Corporation Retirement Plan for Exempt and Nonexempt Employees("Retirement Plan"), Nondiscrimination Plan and Supplemental Executive Retirement Plan ("SERP") for specified final average compensation and years of service levels.
Estimated Annual Retirement Benefits Payable Under the Retirement Plan for Exempt and Nonexempt Employees, Nondiscrimination Plan and the Supplemental Executive Retirement Plan --------------------------------------------------------------------- Average Annual Compensation Service Years - ------------------------------------------------------------------------------------------------------ 5 10 15 20 25 30 35 or more 200,000 $37,500 $75,000 $112,000 $120,000 $120,000 $120,000 $126,000 300,000 56,250 112,500 168,750 180,000 180,000 180,000 189,000 400,000 75,000 150,000 225,000 240,000 240,000 240,000 252,000 500,000 93,750 187,500 281,250 300,000 300,000 300,000 315,000 600,000 112,500 225,000 337,500 360,000 360,000 360,000 378,000 700,000 131,250 262,500 393,750 420,000 420,000 420,000 441,000 800,000 150,000 300,000 450,000 480,000 480,000 480,000 504,000 900,000 168,750 337,500 506,250 540,000 540,000 540,000 567,000 1,000,000 187,500 375,000 562,500 600,000 600,000 600,000 630,000 1,100,000 206,250 412,500 618,750 660,000 660,000 660,000 693,000 1,200,000 225,000 450,000 675,000 720,000 720,000 720,000 756,000 1,300,000 243,750 487,500 731,250 780,000 780,000 780,000 819,000 1,400,000 262,500 525,000 787,500 840,000 840,000 840,000 882,000 1,500,000 281,250 562,500 843,000 900,000 900,000 900,000 945,000 1,600,000 300,000 600,000 900,000 960,000 960,000 960,000 1,008,000
The Named Executive Officers are entitled to benefits under the SERP. These benefits are offset by the benefits payable under the Retirement Plan and the 79 Nondiscrimination Plan, as well as 50% of the executive's primary Social Security benefit. The estimated annual SERP benefit for the Named Executive Officers (prior to any offsets) may be determined using the Pension Plan Table set forth above. For these purposes, the current compensation for each executive that would be used in calculating benefits under the SERP is substantially the same as the three-year average of the salary and bonus reported in the summary compensation table, and the number of years of deemed credited service that would be used in calculating benefits under the SERP for each such executive is as follows: Mr. Korpan, 35 years of service; Mr. Richardson, 23 years of service; ; Mr. Anderson 5 years of service; Mr. Heinicka, 21 years of service and Mr. Armstrong, 15 years of service. Under the formula used for calculating benefits under the SERP, the maximum benefit payable to each Named Executive Officer is reached at 16 years of deemed credited service unless the Named Executive Officer achieves 35 years of service. Accrued benefits may also be paid under each of the Retirement Plan, Nondiscrimination Plan and SERP if a participant terminates employment before age 65 and meets the requirements for early retirement, disability, death or other termination-of-employment benefits after becoming vested under the rules of the particular plan. Under the Retirement Plan and the Nondiscrimination Plan, the compensation taken into account in calculating benefits is salary only. The years of credited service that would be used in calculating benefits under the formula applicable to the Retirement Plan and the Nondiscrimination Plan (1.8% of final average earnings for each year of service) for the Named Executive Officers in the summary compensation table are as follows: Mr. Korpan, 10 years of service; Mr. Richardson, 23 years of service; Mr. Anderson, 2 years of service; Mr. Heinicka, 21 years of service; Mr. Armstrong, 12 years of service. The benefits under the Retirement Plan and the Nondiscrimination Plan are subject to offset by an amount equal to 1 1/7% of a participant's primary Social Security benefit for each year of service (with a maximum offset of 40%). In the event of a change in control of Florida Progress, each Named Executive Officer will receive credit under the SERP for five additional years of service, but in no event would such additional years of credited service cause the maximum benefit to be increased. If a participant's employment were terminated following a change in control, the benefit payable from the SERP would be as follows: (1) an annuity beginning at age 55 through 59, subject to early payment reductions in the amount of 3% for each year prior to age 60, or age 60 without reduction; (2) the amount of any federal excise taxes (and income taxes on any reimbursement under this provision) imposed on the executive under Section 4999 of the Internal Revenue Code; and (3) a 50% surviving spouse benefit payable upon death. In April 1998, Florida Power entered into an Amended and Restated Employment Agreement with Roy A. Anderson which provides for his employment through April 30, 2003. His annual base salary will be $245,000, or such greater sum as shall be mutually agreed, with additional award opportunities as a participant in the Management Incentive Compensation Plan ("MICP") and LTIP , with minimum award target levels of 40% of base salary for each plan. He is entitled to participate in the SERP, and shall be credited with up to 22 years of additional service constituting "Deemed Credited Service" thereunder depending on the number of years of actual service. The agreement also provides that if Mr. Anderson's employment with Florida Power continues until or beyond age 60 and his employment terminates 80 thereafter other than as a result of a termination for good cause, Florida Power shall pay to Mr. Anderson certain deferral award payments, based on his age, with a maximum deferral award, if his employment terminates at age 65, of $1,000,000 ($231,000 payable annually over five years). The agreement also provides for certain payments designed to compensate Mr. Anderson for certain benefits he would have enjoyed had he remained with his former employer. If Mr. Anderson's employment terminates other than as a result of termination for good cause, he will receive a $105,960 15-year annuity, to be offset by payments made by his former employer pursuant to comparable arrangements. In the Amended and Restated Agreement, Mr. Anderson also acknowledges that other payments due him under his former employment agreement with Florida Power have been satisfied. The agreement contains a confidentiality agreement and covenant not to compete. In the event of a change in control of Florida Progress, all of the Named Executive Officers are entitled to benefits under individual agreements described in Florida Progress' Proxy Statement under the heading "Employment Contracts, Termination of Employment and Change in Control Arrangements." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT FLORIDA PROGRESS The information included under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in Florida Progress' Proxy Statement is incorporated herein by reference. FLORIDA POWER All of Florida Power's common stock is held beneficially and of record by Florida Progress. None of Florida Power's directors or executive officers owns any shares of Florida Power's common or preferred stock. Information concerning shares of Florida Progress common stock that are held by persons known to Florida Progress to be the beneficial owners of more than 5% of Florida Progress' common stock is set forth in the table under the heading "Security Ownership of Certain Beneficial Owners" in the Florida Progress Proxy Statement and is incorporated herein by reference. The table below sets forth as of December 31, 1998, the number of shares of common stock of Florida Progress owned by Florida Power's directors and Named Executive Officers individually and the directors and all executive officers of Florida Power as a group. 81 Florida Power Number of Shares Percent of Officer or Director Name Beneficially Owned (1) Class (2) - ------------------------ ---------------------- ---------- W. D. ("Bill") Frederick 3,409(3) Michael P. Graney 4,335 Richard Korpan 26,057 Clarence V. McKee 2,537 Vincent J. Naimoli 11,148(4) Richard A. Nunis 25,577 Joseph H. Richardson 14,075(5) Joan D. Ruffier 5,462 Robert T. Stuart, Jr. 1,505,462(6) 1.55% Jean Giles Wittner 11,036 Roy A. Anderson 2,279 Kenneth E. Armstrong 7,430 Jeffrey R. Heinicka 7,325(7) All 16 directors, named executive officers and executive officers as a group, including those named above 1,634,530 1.68% (1) Unless otherwise noted, the directors, and named executive officers, and the directors, and executive officers as a group, have sole voting and investment power with respect to the shares listed. (2) Unless otherwise noted, each director, and named executive officer and all directors, and executive officers as a group, own less than one percent of the outstanding shares of Florida Progress' common stock. (3) Voting and investment power with respect to 1,500 shares is shared. (4) Voting and investment power with respect to 1,600 shares is shared. (5) Voting power with respect to 4,318 shares is shared. (6) Voting and investment power with respect to 150,473 shares is shared. (7) Voting and investment power with respect to 140 shares is shared. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included under the heading "Certain Relationships and Related Transactions" in Florida Progress' Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FOR FLORIDA PROGRESS AND FLORIDA POWER (a) 1. Financial Statements, notes to Financial Statements and report thereon of KPMG LLP are found in Item 8 "Financial Statements and Supplementary Data" herein. 82 2. The following Financial Statement Schedules and reports are included herein: Florida Progress II-Valuation and Qualifying Accounts for the years ended December 31, 1998, 1997 and 1996 Florida Power II-Valuation and Qualifying Accounts for the years ended December 31, 1998, 1997 and 1996 All other schedules are not submitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto. 3. Exhibits filed herewith: Florida Florida Number Exhibit Progress Power ------ ------- -------- ------- 3.(a) Bylaws of Florida Progress, as amended X February 18, 1999. 10.(a) Phantom Stock Plan for the benefit of X X Non-Employee Directors of Florida Progress Corporation. * 10.(b) Agreement between Florida Progress and X William G. Kelly dated as of January 30, 1998, regarding change in control. * 12 Statement of Computation of Ratios. X 21 Subsidiaries of Florida Progress. X 23.(a) Consent of Independent Certified Public X Accountants to the incorporation by reference of their report on the financial statements into the following registration statements of Florida Progress: Form S-3 (No. 33-51573) (relating to the registration of 4.5 million shares of common stock and filed with the SEC on December 17, 1993); Forms S-8 (No.333-19037 and 333-66161)(relating to the Savings Plan for Employees of Florida Progress and filed with the SEC on December 31, 1996); Form S-3 (No.333-07853)(relating to the Progress Plus Plan and filed with the SEC on July 10, 1996); Form S-8 (No.33-47623)(relating to Florida Progress' Long-Term Incentive Plan and filed with the SEC on May 1, 1992); Form S-3 83 (No. 2-93111)(relating to the acquisition of Better Business Forms and filed with the SEC on September 5, 1984. 23.(b) Consent of Independent Certified Public X Accountants to the incorporation by reference of their report on the financial statements into Florida Power's registration statements on Form S-3 (Nos. 33-62210 and 33-55273) (relating to Florida Power's first mortgage bonds) and Form S-3 (No. 333-29897) (relating to Florida Power's medium-term notes). 24 Powers of Attorney are included in the signature pages of this Form 10-K. 27.(a) Florida Progress Financial Data Schedule X 27.(b) Florida Power Financial Data Schedule X 4. Exhibits incorporated herein by reference: Florida Florida Number Exhibit Progress Power ------ -------- -------- ------- 3.(b) Bylaws of Florida Power, as amended to date. X (Filed as Exhibit 3.(b) to the Florida Power Form 10-K for the year ended December 31, 1995, as filed with the SEC on March 20, 1996.) 3.(c) Restated Articles of Incorporation, as X amended, of Florida Progress. (Filed as Exhibit 3(a) to Florida Progress' Form 10-K for the year ended December 31, 1991, as filed with the SEC on March 30, 1992.) 3.(d) Amended Articles of Incorporation, as X X amended, of Florida Power. (Filed as Exhibit 3(a) to the Florida Power Form 10-K for the year ended December 31, 1991, as filed with the SEC (File No. 1-3274) on March 30, 1992.) 4.(a) Amendment to Shareholder Rights X Agreement dated February 20, 1997, between Florida Progress and The First National Bank of Boston. (Filed as Exhibit 4(a) to the Florida Progress Form 10-K for the year ended December 31, 1996, as filed with the SEC on March 27, 1997.) 84 4.(b) Form of Certificate representing shares of X Florida Progress Common Stock. (Filed as Exhibit 4(b) to the Florida Progress Form 10-K for the year ended December 31,1996, as filed with the SEC on March 27, 1997.) 4.(c) Rights Agreement, dated as of November 21, X 1991, between Florida Progress and Manufacturers Hanover Trust Company, including as Exhibit A the form of Rights Certificate. (Filed as Exhibit 4(a) to Florida Progress' Form 8-K dated November 21, 1991, as filed with the SEC on November 27, 1991.) 4.(d) Indenture, dated as of January 1, 1944 (the X X "Indenture"), between Florida Power and Guaranty Trust Company of New York and The Florida National Bank of Jacksonville, as Trustees. (Filed as Exhibit B-18 to Florida Power's Registration Statement on Form A-2 (No. 2-5293) filed with the SEC on January 24, 1944.) 4.(e) Seventh Supplemental Indenture, dated as of X X July 1, 1956, between Florida Power and Guaranty Trust Company of New York and The Florida National Bank of Jacksonville, as Trustees, with reference to the modification and amendment of the Indenture. (Filed as Exhibit 4(b) to Florida Power's Registration Statement on Form S-3 (No. 33-16788) filed with the SEC on September 27, 1991.) 4.(f) Eighth Supplemental Indenture, dated as of X X July 1, 1958, between Florida Power and Guaranty Trust Company of New York and The Florida National Bank of Jacksonville, as Trustees, with reference to the modification and amendment of the Indenture. (Filed as Exhibit 4(c) to Florida Power's Registration Statement on Form S-3 (No. 33-16788) filed with the SEC on September 27, 1991.) 4.(g) Sixteenth Supplemental Indenture, dated as of X X February 1, 1970, between Florida Power and Morgan Guaranty Trust Company of New York and The Florida National Bank of Jacksonville, as Trustees, with reference to the modification and amendment of the Indenture. (Filed as Exhibit 4(d) to Florida Power's Registration Statement on Form S-3 (No. 33-16788) filed with the SEC on September 27, 1991.) 85 4.(h) Twenty-Ninth Supplemental Indenture, dated as X X of September 1, 1982, between Florida Power and Morgan Guaranty Trust Company of New York and Florida National Bank, as Trustees, with reference to the modification and amendment of the Indenture. (Filed as Exhibit 4(c) to Florida Power's Registration Statement on Form S-3 (No. 2-79832) filed with the SEC on September 17, 1982.) 4.(i) Thirty-Eighth Supplemental Indenture dated as X X of July 25, 1994, between Florida Power and First Chicago Trust Company of New York, as successor Trustee, Morgan Guaranty Trust Company of New York, as resigning Trustee, and First Union National Bank of Florida, as resigning Co-Trustee, with reference to confirmation of First Chicago Trust Company of New York as successor Trustee under the Indenture. (Filed as exhibit 4(f) to Florida Power's Registration Statement on Form S-3 (No. 33-55273) as filed with the SEC on August 29, 1994.) 10.(c) Management Incentive Compensation Plan X X of Florida Progress Corporation, as amended to date. (Filed as Exhibit 10(a) to the Florida Progress Form 10-K for the year ended December 31, 1997 as filed with the SEC on March 18, 1998.)* 10.(d) Agreement between Florida Progress and X Kenneth E. Armstrong dated as of January 30, 1998 regarding change in control. (Filed as Exhibit 10(b) to the Florida Progress Form 10-K for the year ended December 31, 1997, as filed with the SEC on March 18, 1998.)* 10.(e) Agreement between Florida Progress and X Stanley I. Garnett, II dated as of January 30, 1998 regarding change in control. (Filed as Exhibit 10(c) to the Florida Progress Form 10-K for the year ended December 31, 1997, as filed with the SEC on March 18, 1998.)* 10.(f) Agreement between Florida Progress and X Jeffrey R. Heinicka dated as of January 30, 1998 regarding change in control. (Filed as Exhibit 10(d) to the Florida Progress Form 10-K for the year ended December 31, 1997, as filed with the SEC on March 18, 1998.)* 86 10.(g) Agreement between Florida Progress and X Richard D. Keller dated as of January 30, 1998 regarding change in control. (Filed as Exhibit 10(e) to the Florida Progress Form 10-K for the year ended December 31, 1997, as filed with the SEC on March 18, 1998.)* 10.(h) Agreement between Florida Progress and X Richard Korpan dated as of January 30, 1998 regarding change in control. (Filed as Exhibit 10(f) to the Florida Progress Form 10-K for the year ended December 31, 1997, as filed with the SEC on March 18, 1998.)* 10.(i) Agreement between Florida Progress and X Joseph H. Richardson dated as of January 30, 1998 regarding change in control. (Filed as Exhibit 10(g) to the Florida Progress Form 10-K for the year ended December 31, 1997, as filed with the SEC on March 18, 1998.)* 10.(j) Employment Agreement between Florida X Progress and Richard Korpan dated as of March 1, 1998. (Filed as Exhibit 10(h) to the Florida Progress Form 10-K for the year ended December 31, 1997, as filed with the SEC on March 18, 1998.)* 10.(k) Executive Optional Deferred Compensation X X Plan*. (Filed as Exhibit 10.(c) to the Florida Progress Form 10-K for the year ended December 31, 1996 as filed with the SEC on March 27, 1997.) 10.(l) Florida Progress Supplemental Executive X X Retirement Plan*. (Filed as Exhibit 10.(b) to the Florida Progress Form 10-K for the year ended December 31, 1996 as filed with the SEC on March 27, 1997.) 10.(m) Second Amended and Restated Guaranty and X Support Agreement dated as of August 7, 1996. (Filed as Exhibit 4 to Florida Progress' Form 10-Q for the quarter ended June 30, 1996). 10.(n) Florida Progress Corporation Long-Term X X Incentive Plan, approved by Florida Progress' Shareholders on April 19, 1990. (Filed as Exhibit 10(d) to Florida Progress' Form 10-Q for the quarter ended March 31, 1990, as filed with the SEC on May 14, 1990). * 87 10.(o) Stock Plan for Non-Employee Directors of X X Florida Progress Corporation and Subsidiaries. (Filed as Exhibit 4.(k) to the Florida Progress Registration Statement on Form S-8 (No. 333- 02619) as filed with the SEC on April 18, 1996.)* X = Exhibit is filed for that respective company. * = Exhibit constitutes an executive compensation plan or arrangement. In reliance upon Item 601(b)(4)(iii) of Regulation S-K, certain instruments defining the rights of holders of long-term debt of Florida Progress and its consolidated subsidiaries are not being filed herewith, because the total amount authorized thereunder does not exceed 10% of the total assets of Florida Progress and its subsidiaries on a consolidated basis. Florida Progress hereby agrees to furnish a copy of any such instruments to the SEC upon request. Florida Progress will furnish to its security holders who so request a copy of any exhibit included or incorporated by reference in this Annual Report on Form 10-K upon payment of a fee of $.25 per page to cover expenses in furnishing such exhibit. (b) Reports on Form 8-K: During the fourth quarter of the year ended December 31, 1998, Florida Progress and Florida Power filed the following reports on Form 8-K: Form 8-K dated October 16, 1998, reporting under Item 5 "Other Events" a press release and related Investor Information Report reporting Florida Progress' and Florida Power's third quarter 1998 earnings. Form 8-K dated November 18, 1998, reporting under Item 5 "Other Events" an Investor News Report providing an update on Florida Power regulatory matters, and another Investor News Report regarding the formation of a fiber-optic telecommunications business. In addition, Florida Progress and Florida Power filed the following reports on Form 8-K subsequent to the fourth quarter of 1998: Form 8-K dated January 25, 1999, reporting under Item 5 "Other Events" a press release and related Investor News report which stated Florida Progress' and Florida Power's 1998 year-end earnings. Form 8-K dated February 18, 1999 reporting under Item 5 "Other Events" an increase in Florida Progress' annual dividend and the construction by Florida Power of peaking units. 88 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FLORIDA PROGRESS CORPORATION March 19, 1999 By: /s/ Richard Korpan --------------------------- Richard Korpan, Chairman of the Board, President and Chief Executive Officer KNOWN BY ALL MEN BY THESE PRESENTS that each of the undersigned officers and directors of Florida Progress Corporation, a Florida corporation, for himself or herself and not for one another, does hereby constitute and appoint KENNETH E. ARMSTRONG, PAMELA A. SAARI and DOUGLAS E. WENTZ, and each of them, a true and lawful attorney in his or her name, place and stead, in any and all capacities, to sign his or her name to any and all amendments to this report, and to cause the same to be filed with the Securities and Exchange Commission, granting unto said attorneys and each of them full power and authority to do and perform any act and thing necessary and proper to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present, and each of the undersigned for himself or herself hereby ratifies and confirms all that said attorneys or any one of them shall lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date ---------- ----- ----- /s/ Richard Korpan Chairman of the Board, March 19,1999 - --------------------------- President,Chief Executive Richard Korpan Officer and Director Principal Executive Officer /s/ Edward W. Moneypenny Senior Vice President and March 19, 1999 - ---------------------------- Chief Financial Officer Edward W. Moneypenny Principal Financial Officer /s/ John Scardino, Jr. Vice President and March 19, 1999 - ---------------------------- Controller John Scardino, Jr. Principal Accounting Officer s/ W. D. Frederick, Jr. Director March 19, 1999 - ---------------------------- W. D. Frederick, Jr. (Continued) 89 Signature Title Date ----------- ----- ----- /s/ Michael P. Graney Director March 19, 1999 - ---------------------------- Michael P. Graney /s/ Clarence V. McKee Director March 19, 1999 - -------------------------- Clarence V. McKee /s/ Vincent J. Naimoli Director March 19, 1999 - -------------------------- Vincent J. Naimoli /s/ Richard A. Nunis Director March 19, 1999 - -------------------------- Richard A. Nunis /s/ Joan D. Ruffier Director March 19, 1999 - -------------------------- Joan D. Ruffier /s/ Robert T. Stuart, Jr. Director March 19, 1999 - -------------------------- Robert T. Stuart, Jr. /s/ Jean Giles Wittner Director March 19, 1999 - -------------------------- Jean Giles Wittner 90 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company. FLORIDA POWER CORPORATION March 19, 1999 By: /s/ Joseph H. Richardson -------------------------------- Joseph H. Richardson, President and Chief Executive Officer KNOWN BY ALL MEN BY THESE PRESENTS that each of the undersigned officers and directors of Florida Power Corporation, a Florida corporation, for himself or herself and not for one another, does hereby constitute and appoint KENNETH E. ARMSTRONG, PAMELA A. SAARI and DOUGLAS E. WENTZ, and each of them, a true and lawful attorney in his or her name, place and stead, in any and all capacities, to sign his or her name to any and all amendments to this report, and to cause the same to be filed with the Securities and Exchange Commission, granting unto said attorneys and each of them full power and authority to do and perform any act and thing necessary and proper to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present, and each of the undersigned for himself or herself hereby ratifies and confirms all that said attorneys or any one of them shall lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- /s/ Joseph H. Richardson President, Chief March 19, 1999 - -------------------------- Executive Officer Joseph H. Richardson and Director /s/ Jeffrey R. Heinicka Senior Vice President March 19, 1999 - -------------------------- and Jeffrey R. Heinicka Chief Financial Officer Principal Financial Officer /s/ John Scardino, Jr. Vice President March 19, 1999 - -------------------------- and Controller John Scardino, Jr. Principal Accounting Officer /s/ Richard Korpan Chairman of the Board, March 19, 1999 - -------------------------- and Director Richard Korpan /s/ W. D. Frederick, Jr. Director March 19, 1999 - -------------------------- W. D. Frederick, Jr. (Continued) 91 Signature Title Date - ----------- ----- ----- /s/ Michael P. Graney Director March 19, 1999 - -------------------------- Michael P. Graney /s/ Clarence V. McKee Director March 19, 1999 - -------------------------- Clarence V. McKee /s/ Vincent J. Naimoli Director March 19, 1999 - -------------------------- Vincent J. Naimoli /s/ Richard A. Nunis Director March 19, 1999 - -------------------------- Richard A. Nunis /s/ Joan D. Ruffier Director March 19, 1999 - -------------------------- Joan D. Ruffier /s/ Robert T. Stuart, Jr. Director March 19, 1999 - -------------------------- Robert T. Stuart, Jr. /s/ Jean Giles Wittner Director March 19, 1999 - -------------------------- Jean Giles Wittner 92
Schedule II FLORIDA PROGRESS CORPORATION Valuation and Qualifying Accounts For the Years Ended December 31, 1998, 1997, and 1996 (In millions) Balance at Additions Balance at Beginning Charged to Other End of Description of Period Expense Deductions Add (Ded) Period - ------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1998 Nuclear Refueling Outage Reserve $22.2 $ - $2.3 $ - $19.9 ======= ======= ======= ======= ======= Provision for loss on coal properties $12.8 $ - $ - $(6.2) $ 6.6 ======= ======= ======= ======= ======= FOR THE YEAR ENDED DECEMBER 31, 1997 Nuclear Refueling Outage Reserve $8.7 $14.0 $ 0.5 $ - $22.2 ======= ======= ======= ======= ======= Insurance policy benefit reserves $325.3 $52.7 $ - $(378.0) $ - ======= ======= ======= ======= ======= Provision for loss on coal properties $40.9 $ - $ - $ (28.1) $12.8 ======= ======= ======= ======= ======= FOR THE YEAR ENDED DECEMBER 31, 1996 Nuclear Refueling Outage Reserve $14.7 $17.4 $23.4 $ - $8.7 ======= ======= ======= ======= ======= Insurance policy benefit reserves $265.0 $60.3 $ - $ - $325.3 ======= ======= ======= ======= ======= Provision for loss on coal properties $ - $40.9 $ - $ - $40.9 ======= ======= ======= ======= =======
(A) Effective December 31, 1997, Florida Progress deconsolidated the financial statements of Mid-Continent Life in its consolidated financial statements. Florida Progress' investment from Mid-Continent is accounted for under the cost method. 93
Schedule II FLORIDA POWER CORPORATION Valuation and Qualifying Accounts For the Years Ended December 31, 1998, 1997, and 1996 (In millions) Balance at Additions Balance at Beginning Charged to Deductions End of Description of Period Expense (See Note) Period - ----------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1998 1998 Nuclear Refueling Outage Reserve (#11) $22.2 $0.0 $2.3 $19.9 ------ ------ ------ ------ $22.2 $0.0 $2.3 $19.9 ======= ======= ======= ======= FOR THE YEAR ENDED DECEMBER 31, 1997 1996 Nuclear Refueling Outage Reserve (#10) $0.5 $0.0 $0.5 $0.0 1998 Nuclear Refueling Outage Revenue (#11) $8.2 $14.0 $0.0 $22.2 ------- ------- ------- ------- $8.7 $14.0 $0.5 $22.2 ======= ======= ======= ======= FOR THE YEAR ENDED DECEMBER 31, 1996 1996 Nuclear Refueling Outage Reserve (#10) $14.7 9.2 $23.4 $0.5 1996 Nuclear Refueling Outage Reserve (#11) 0.0 8.2 0.0 8.2 ------- ------- ------- ------- $14.7 $17.4 $23.4 $8.7 ======= ======= ======= =======
Note: Deductions are payments of actual expenditures related to the outage. EX-3.(A) 2 EX-3.(A) TO PROGRESS/POWER 12/31/98 FORM 10-K EXHIBIT 3.(a) Adopted January 21, 1982 Amended August 16, 1984 Amended November 19, 1987 Amended January 21, 1988 Amended November 17, 1988 Amended April 19, 1990 Amended August 16, 1990 Amended February 7, 1991, effective April 18, 1991 Amended and Restated April 18, 1991 Amended February 6, 1992 Amended November 19, 1992 Amended February 8, 1996, effective April 1, 1996 Amended May 15, 1997 Amended February 19, 1998 Amended February 19, 1998, effective April 17, 1998 Amended April 17, 1998, effective July 1, 1998 Amended February 18, 1999 FLORIDA PROGRESS CORPORATION BYLAWS -1- BYLAWS FLORIDA PROGRESS CORPORATION ARTICLE I Offices Section 1. The registered office and headquarters of the Corporation are in the City of St. Petersburg, County of Pinellas, State of Florida. Section 2. The Corporation may also have an office at such other places as the business of the Corporation may require. ARTICLE II Seal The Corporate seal shall be circular in form and have inscribed thereon the following: Florida Progress Corporation Corporate Seal Florida 1982 ARTICLE III Meetings of Shareholders Section 1. Annual Meeting. There shall be an annual meeting of shareholders in the month of April of each year on such date and at such time and place as shall be designated by the Board of Directors for the election of Directors and for the transaction of such other business as may properly be brought before the meeting. Section 2. Special Meetings. Special meetings of the shareholders of the Corporation, or of the holders of any class or series of stock, required or authorized by law, shall be held for the purpose or purposes stated in the call of said meeting, on the call of the Chairman of the Board, or the President, or the Board of Directors, or when the holders of not less than ten percent (10%) of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting sign, date, and deliver to the Corporation's Secretary one or more written demands for the meeting describing the purpose or purposes for which it is to be held. -1- Section 3. Place; Record Date. Meetings of shareholders may be held within or without the State of Florida. The Board of Directors shall fix a record date in order to determine the shareholders entitled to notice of a shareholders' meeting, to demand a special meeting, to vote or to take any other action. Section 4. Notice. Written notice stating the date, time and place of each meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the meeting, either personally or by first class mail, by or at the direction of the President, the Secretary or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If the notice is mailed at least thirty (30) days before the date of the meeting, it may be done by a class of United States mail other than first class. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder as the address appears on the stock transfer books of the Corporation, with postage thereon prepaid. Section 5. Notice of Adjourned Meetings. When a meeting is adjourned to another date, time or place, it shall not be necessary to give any notice of the adjourned meeting if the date, time or place to which the meeting is adjourned is announced at the meeting before the adjournment is taken, and at the adjourned meeting any business may be transacted that might have been transacted on the original date of the meeting. If, however, after the adjournment, the Board of Directors fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given as provided in Section 4 to each shareholder of record as of the new record date who is entitled to notice of such meeting. Section 6. Quorum and Voting. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. When a specified item of business is required to be voted on by a class or series of stock, the holders of a majority of the shares of such class or series shall constitute a quorum for the transaction of such item of business by that class or series. If a quorum exists, action on a matter, other than the election of Directors, is approved if the votes cast by the holders of the shares represented at the meeting and entitled to vote on the subject matter favoring the action exceed the votes cast opposing the action, unless a greater number of affirmative votes or voting by classes is required by law or the Articles of Incorporation. The Directors shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. -2- If a quorum does not exist, the holders of a majority of the shares represented in person or by proxy and who would be entitled to vote if a quorum had been present shall have the power to adjourn the meeting from time to time, until the requisite amount of stock shall be represented. At such adjourned meeting at which the requisite amount of stock shall be represented any business may be transacted which might have been transacted at the original meeting if a quorum had been present. Section 7. Manner of Voting. A shareholder, other person entitled to vote on behalf of a shareholder pursuant to law, or attorney-in-fact may vote the shareholder's shares either in person or by proxy executed in writing by the shareholder or his duly authorized attorney-in-fact in accordance with law. Section 8. Action by Shareholders Without a Meeting. Any ---------------------------------------- action required by law, these Bylaws or the Articles of Incorporation of the Corporation to be taken at any annual or special meeting of shareholders of the Corporation, or any action which may be taken at any annual or special meeting of such shareholders, may be taken without a meeting, without prior notice and without a vote, if one or more written consents, setting forth the action so taken, shall be dated and signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, and shall be delivered to the Corporation within sixty (60) days of the date of the earliest dated consent. If any class of shares is entitled to vote thereon as a class, such written consent shall be required of the holders of a majority of the shares of each class of shares entitled to vote as a class thereon and of the total shares entitled to vote thereon. Any written consent may be revoked prior to the date that the Corporation receives the required number of consents to authorize the proposed action. No revocation is effective unless in writing and until received by the Corporation. Within ten (10) days after obtaining such authorization by written consent, notice shall be given to those shareholders who have not consented in writing or who are not entitled to vote on the action. The notice shall fairly summarize the material features of the authorized action and, if the action be a merger, consolidation, sale or exchange of assets or other action for which dissenters' rights are provided by law, the notice shall contain a clear statement of the right of shareholders dissenting therefrom to be paid the fair value of their shares upon compliance with further provisions of law regarding the rights of dissenting shareholders. -3- A written consent shall have the same effect as a vote cast at a meeting and may be described as such in any document. Whenever any action is taken by written consent, the written consents of the shareholders consenting to such action or the written reports of inspectors appointed to tabulate such consents shall be filed with the minutes of proceedings of shareholders. Section 9. Advance Notice Provisions for Election of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of shareholders, or at any special meeting of shareholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any shareholder of the Corporation (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 9 and on the record date for the determination of shareholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 9. In addition to any other applicable requirements, for a nomination to be made by a shareholder such shareholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation (a) in the case of an annual meeting, not less than 90 days nor more than 120 days prior to the date of the annual meeting; provided, however, that in the event that less than 100 days' notice or prior public disclosure of the date of the annual meeting is given or made to shareholders, notice by the shareholder in order to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever occurs first; and (b) in the case of a special meeting of shareholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which the notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever occurs first. To be in proper written form, a shareholder's notice to the Secretary must set forth (a) as to each person whom the shareholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the number of shares of common stock of the Corporation which are owned beneficially or of record by the person and (iv) any other -4- information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the shareholder giving the notice (i) the name and record address of such shareholder, (ii) the number of shares of common stock of the Corporation which are owned beneficially or of record by such shareholder, (iii) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder, (iv) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to be named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 9. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. Section 10. Advance Notice Provisions for Business to be Transacted at Annual Meeting. No business may be transacted at an annual meeting of shareholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any shareholder of the Corporation (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 10 and on the record date for the determination of shareholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 10. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. -5- To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days nor more than 120 days prior to the date of the annual meeting; provided, however, that in the event that less than 100 days' notice or prior public disclosure of the date of the annual meeting is given or made to shareholders, notice by the shareholder in order to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever occurs first. To be in proper written form, a shareholder's notice to the Secretary must set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such shareholder, (iii) the number of shares of common stock of the Corporation which are owned beneficially or of record by such shareholder, (iv) a description of all arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and any material interest of such shareholder in such business and (v) a representation that such shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of shareholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 10, provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 10 shall be deemed to preclude discussion by any shareholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. ARTICLE IV Directors Section 1. Number and Term of Office. The Board of Directors of the Corporation shall consist of nine (9) members, divided into three (3) classes serving staggered three-year terms in accordance with the Articles of Incorporation. The three classes shall be designated Class I, Class II and Class III with each Class consisting of three directors. -6- Section 2. Function. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors. Section 3. Qualification. Directors need not be residents of this state or shareholders of the Corporation. Section 4. Authority to Fix Compensation. The Board of Directors shall have authority to fix the compensation of the Directors of the Corporation. Section 5. Duties of Directors. A Director shall discharge his duties as a Director, including his duties as a member of any committee of the Board upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the Corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. In discharging his duties, a Director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by: (a) one or more officers or employees of the Corporation whom the Director reasonably believes to be reliable and competent in the matters presented; (b) legal counsel, public accountants or other persons as to matters which the Director reasonably believes to be within the persons' professional or expert competence; or (c) a committee of the Board of Directors upon which he does not serve, duly designated in accordance with a provision of the Articles of Incorporation or the Bylaws, as to matters within its designated authority, which committee the Director reasonably believes to merit confidence. In discharging his duties, a Director may consider such factors as the Director deems relevant, including the long-term prospects and interests of the Corporation and its shareholders, and the social, economic, legal, or other effects of any action on the employees, suppliers, customers of the Corporation or its subsidiaries, the communities and society in which the Corporation or its subsidiaries operate, and the economy of the state and the nation. A Director shall not be considered to be acting in good faith if he has knowledge concerning the matter in question which would cause such reliance described above to be unwarranted. -7- A Director is not liable for any action taken as a Director, or any failure to take any action, if he performed the duties of his office in compliance with this Section 5. Section 6. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any Director may be removed, only for cause, if the number of votes cast to remove him exceeds the number of votes cast not to remove him. If a Director is elected by a voting group or class of shares under the Articles of Incorporation, only the shareholders of that voting group or class may participate in the vote to remove him. Section 7. Vacancies. Until the next election of Directors upon the expiration of their terms, any vacancy occurring in the Board of Directors, including any vacancy created by reason of an increase in the number of Directors, may be filled only by the affirmative vote of a majority of the remaining Directors, though less than a quorum of the Board of Directors. A Director elected to fill a vacancy shall hold office only until the next election of Directors by the shareholders and until his successor shall have been elected and shall qualify. ARTICLE V Chairman of the Board The Corporation may have a Chairman of the Board who shall be a Director and who shall preside at all meetings of the shareholders and of the Board of Directors. He shall advise and counsel with the President. In addition to the responsibility for maintaining effective external relationships on behalf of the Corporation with industry groups, governmental agencies, scientific, educational and other similar groups, he shall exercise such other responsibilities and duties as shall be assigned to him by the Board of Directors. The Board of Directors shall have the power at any time to leave the office of Chairman of the Board vacant and, in such eventuality, the President shall assume and exercise all of the powers and responsibilities of this office. ARTICLE VI Meetings of the Board Section 1. Time, Place, and Call of Meetings. Meetings of the Board of Directors may be held within or without the State of Florida at the time fixed by these Bylaws or upon call of the Chairman of the Board or the President or the Secretary or any two Directors. Section 2. Annual Meeting. The annual meeting of the Board of Directors shall be held promptly following the annual meeting of shareholders. -8- Section 3. Notice of Meetings. Written notice of the date, time and place of special meetings of the Board of Directors shall be given to each Director by either personal delivery, mail, telegram or cablegram at least two (2) days before the meeting. Notice need not be given of regular meetings held each quarter on dates promulgated before the end of the preceding year. Notice of a meeting of the Board of Directors need not be given to any Director who signs a waiver of notice, either before or after the meeting. Attendance of a Director at a meeting shall constitute a waiver of notice of such meeting and waiver of any and all objection to the place of the meeting, the time of the meeting, or the manner in which it has been called or convened, except when a Director states, at the beginning of the meeting or promptly upon arrival at the meeting, any objection to the transaction of business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. A majority of the Directors present, whether or not a quorum exists, may adjourn any meeting of the Board of Directors to another time and place. Notice of any such adjourned meeting shall be given to the Directors who were not present at the time of the adjournment and, unless the time and place of the adjourned meeting are announced at the time of the adjournment, to the other Directors. Members of the Board of Directors or any committee of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment by means of which all Directors participating in the meeting may simultaneously hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting. The vote on any matter before the Board or any committee of the Board, when members are present by means of a conference telephone or similar communication equipment, shall be by roll call. Section 4. Action Without a Meeting. Any action required to be taken at a meeting of the Board of Directors or a committee thereof may be taken without a meeting if one or more written consents, setting forth the action so to be taken, signed by all of the Directors, or all of the members of the committee, as the case may be, is filed in the minutes of the proceeding. Action taken under this section is effective when the last Director signs the consent, unless the consent specifies a different effective date. A consent under this section has the effect of a meeting vote and may be described as such in any document. -9- Section 5. Quorum and Voting. A majority of the number of Directors fixed by these Bylaws shall constitute a quorum for the transaction of business. The act of the majority of the Directors present at a meeting at which a quorum is present when a vote is taken shall be the act of the Board of Directors. Section 6. Presumption of Assent. A Director of the Corporation who is present at a meeting of the Board of Directors or a committee thereof when corporate action is taken shall be deemed to have assented to the action taken unless he objects at the beginning of the meeting (or promptly upon his arrival) to holding it or transacting specified business at the meeting, or he votes against or abstains from the action taken. Section 7. Director Conflicts of Interest. No contract or other transaction between the Corporation and one or more of its Directors or any other corporation, firm, association or entity in which one or more of the Directors are directors or officers or are financially interested shall be either void or voidable because of such relationship or interest or because such Director or Directors are present at the meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies such contract or transaction or because his or their votes are counted for such purpose, if: (a) The fact of such relationship or interest is disclosed or known to the Board of Directors or committee which authorizes, approves or ratifies the contract or transaction by a vote or consent sufficient for the purpose without counting the votes or consents of such interested Directors; or (b) The fact of such relationship or interest is disclosed or known to the shareholders entitled to vote and they authorize, approve or ratify such contract or transaction by vote or written consent; or (c) The contract or transaction is fair and reasonable as to the Corporation at the time it is authorized by the Board, a committee, or the shareholders. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies such contract or transaction. Shares owned by or voted under the control of a Director who has a relationship or interest in the subject transaction may not be counted in the shareholders' vote to determine whether to authorize, approve, or ratify a conflict of interest transaction under subparagraph (b) above. -10- ARTICLE VII Committees Section 1. Committees. The Board of Directors, by resolution adopted by a majority of the full Board, may designate from among its members an Executive Committee, Audit Committee, Finance and Budget Committee, Compensation Committee, Nominating Committee and one or more other committees and may designate one or more Directors as alternate members of any such committee who may act in the place and stead of any absent member or members at any meeting of such committee. The members of committees, who shall be at least two in number, shall act only as a committee and the individual members shall have no power as such. Unless the Board of Directors elects a committee chairman, each committee shall elect its own chairman and secretary, and have full power and authority to make rules for the conduct of its business. The Board shall have the power at any time to change the membership of committees, fill vacancies, and to abolish committees. Neither the designation of any such committee, the delegation thereto of authority, nor action by such committee pursuant to such authority shall alone constitute compliance by any member of the Board of Directors not a member of the committee in question with his responsibility to act in good faith, in a manner he reasonably believes to be in the best interests of the Corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. Section 2. Executive Committee. The Executive Committee shall have and may exercise all of the powers of the Board of Directors during the intervals between the meetings of the Board in the management of the business and affairs of the Corporation. A majority of the Executive Committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at a meeting, at which a quorum is present, shall be the act of the Executive Committee. The Executive Committee shall keep a record of its acts and proceedings and make a report thereof from time to time to the Board of Directors. The Executive Committee shall not have the authority to: (a) approve or recommend to shareholders actions or proposals required by the Florida Business Corporation Act to be approved by shareholders; (b) fill vacancies on the Board of Directors or any committee thereof; (c) adopt, amend or repeal the Bylaws; -11- (d) authorize or approve the reacquisition of shares unless pursuant to a general formula or method specified by the Board of Directors; or (e) authorize or approve the issuance or sale or contract for the sale of shares, or determine the designation and relative rights, preferences, and limitations of a voting group except that the Board of Directors may authorize a committee (or a senior executive officer of the Corporation) to do so within limits specifically prescribed by the Board of Directors. Section 3. Audit Committee: The Audit Committee shall be composed of at least three outside Directors. The Committee will nominate the public accounting firm to conduct the annual audit of the Corporation and submit the nomination to the Board of Directors for approval. The Audit Committee shall keep a record of its acts and proceedings and make a report thereof from time to time to the Board of Directors. ARTICLE VIII Officers Section 1. Executive Officers. The officers of the Corporation may consist of a Chairman of the Board of Directors, and shall consist of a President, a Secretary, a Treasurer, and such other officers as may be determined and appointed by the Board of Directors. Officers shall be appointed by the Board of Directors at least annually, at the first meeting of Directors immediately following the annual meeting of shareholders of the Corporation, and shall serve until their successors are appointed and shall qualify. Any two or more offices may be held by the same person. Section 2. Duties. The officers of the Corporation shall have the following duties: (a) President. The President shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect, subject, however, to the right of the Board to delegate to others, so far as it lawfully may, any specific powers; and shall, in the absence of the Chairman of the Board, preside at all meetings of the shareholders and of the Board of Directors. The President may appoint such agents as he may deem necessary, who shall hold office during his pleasure, and who shall have such authority and shall perform such duties as from time to time he may prescribe. (b) Secretary. The Secretary shall have custody of, and maintain, all of the corporate records except the financial records, shall record the minutes of all meetings of the shareholders and of the Board of Directors, send all notices of meetings, authenticate records of the Corporation and perform such other duties as may be prescribed by the Board of Directors or the President. -12- (c) Treasurer. The Treasurer shall have custody of all corporate funds and shall perform such other duties as may be prescribed by the Board of Directors or the President. Section 3. Removal of Officers. Any officer or agent appointed by the Board of Directors may be removed by the Board with or without cause, whenever in its judgment the best interests of the Corporation will be served thereby. Any vacancy, however occurring, in any office may be filled by the Board of Directors. An officer's removal does not affect the officer's contract rights, if any, with the Corporation. An officer's resignation does not affect the Corporation's contract rights, if any, with the officer. The appointment of an officer does not of itself create contract rights. ARTICLE IX Capital Stock Section 1. Certificates of Stock. The Board of Directors shall provide for the issue and transfer of the capital stock of the Corporation and prescribe the form of the certificates for such stock. Section 2. Form. Certificates representing shares in the Corporation shall be signed (either manually or in facsimile) by the President or Vice President and the Treasurer or an Assistant Treasurer and may be sealed with the seal of the Corporation or a facsimile thereof. In case any officer who signed such certificate, or whose facsimile signature has been placed upon such certificate, shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issuance. If and to the extent the Corporation is authorized to issue different classes of shares or different series within a class, each certificate representing shares shall state or fairly summarize upon the front or back of the certificate, or shall state conspicuously on its front or back that the Corporation will furnish to any shareholder upon request and without charge a full statement of: (a) The designations, preferences, limitations, and relative rights applicable to each class. (b) The variations in the relative rights, preferences and limitations determined for each series, and the authority of the Board of Directors to determine the variations for future series. -13- Every certificate representing shares which are restricted as to the sale, disposition or other transfer of such shares shall state that such shares are restricted as to transfer and shall set forth or fairly summarize upon the certificate such restrictions, or shall state that the Corporation will furnish to any shareholder upon request and without charge a full statement of such restrictions. Each certificate representing shares shall state upon the face thereof: the name of the Corporation; that the Corporation is organized under the laws of the State of Florida; the name of the person or persons to whom issued; the number and class of shares; and the designation of the series, if any, which such certificate represents. Section 3. Transfer of Stock. The stock of the Corporation shall be transferable or assignable on the books of the Corporation by the holders in person or by attorney on the surrender of the certificates therefor. ARTICLE X Fiscal Year The fiscal year of the Corporation shall be the calendar year. ARTICLE XI Indemnification of Directors, Officers and Employees The Corporation shall indemnify any Director, officer, or employee or any former Director, officer, or employee to the full extent permitted by law. ARTICLE XII Dividends The Board of Directors of the Corporation may, from time to time, declare, and the Corporation may pay, dividends on its shares in cash, property or its own shares, except as prohibited by law, or when contrary to any restrictions contained in corporate indentures, bonds, or other financing agreements. ARTICLE XIII Amendment Except as provided in Article VIII of the Articles of Incorporation, these Bylaws may be altered, amended or repealed and new Bylaws may be adopted by an affirmative vote of at least two-thirds of the number of Directors constituting the Board of Directors or by an affirmative vote of the holders of at least two-thirds of -14- the outstanding Voting Stock (as defined in Article VIII of the Articles of Incorporation) of the Corporation. ARTICLE XIV Gender All references herein to the masculine pronoun shall be deemed to include the feminine pronoun. PROGRESS.FL4 As amended 2-18-99 -15- EX-10.(A) 3 EX-10.(A) TO PROGRESS/POWER 12/31/98 FORM 10-K EXHIBIT 10.(a) PHANTOM STOCK PLAN FOR THE BENEFIT OF NON-EMPLOYEE DIRECTORS OF FLORIDA PROGRESS CORPORATION Effective as of January 1, 1999 PHANTOM STOCK PLAN FOR THE BENEFIT OF NON-EMPLOYEE DIRECTORS OF FLORIDA PROGRESS CORPORATION Table of Contents Page ARTICLE I Definitions............................................1 ----------- ARTICLE II Administration.........................................3 -------------- ARTICLE III Participation..........................................4 ------------- ARTICLE IV Phantom Stock Unit Awards and Accounts.................5 -------------------------------------- ARTICLE V Financing..............................................8 --------- ARTICLE VI Payment for Phantom Stock Units........................8 ------------------------------- ARTICLE VII Confidentiality and Restrictions on Competition........9 ----------------------------------------------- ARTICLE VIII Amendment and Termination.............................10 ------------------------- ARTICLE IX Miscellaneous.........................................11 ------------- PHANTOM STOCK PLAN FOR THE BENEFIT OF NON-EMPLOYEE DIRECTORS OF FLORIDA PROGRESS CORPORATION PURPOSE Florida Progress Corporation (the "Company") hereby establishes the Phantom Stock Plan for the Benefit of Non-Employee Directors of Florida Progress Corporation (the "Plan"), effective as of January 1, 1999, as part of the Company's compensation program in order to attract, retain and motivate qualified members of its Board of Directors. The Plan is intended to provide non-employee members of the Board of Directors who contribute their services to the Company with the opportunity to share in the continued success of the Company. ARTICLE I Definitions (a) "Account" shall mean a Participant's Phantom Stock Unit Account as described in Article IV. (b) "Board" or "Board of Directors" shall mean the board of directors of the Company. (c) "Change in Control" shall mean and be deemed to have occurred if: (1) Any person is or becomes the "Beneficial Owner" (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company) representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or (2) During any period of twenty-four (24) consecutive months, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (1), (3) or (4) of this definition or any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; or (3) The closing of a reorganization, merger or consolidation, other than a reorganization, merger or consolidation with respect to which all or substantially all of the individuals and entities who were Beneficial Owners, immediately prior to such reorganization, merger or consolidation, of the combined voting power of the Company's then outstanding securities beneficially own, directly or indirectly, immediately after such reorganization, merger or consolidation, more than seventy-five percent (75%) of the combined voting power of the securities of the Company resulting from such reorganization, merger or consolidation in substantially the same proportions as their respective ownership, immediately prior to such reorganization, merger or consolidation, of the combined voting power of the Company's securities; or (4) (A) The closing of the sale or disposition by the Company (other than to a subsidiary of the Company) of all or substantially all of the assets of the Company (or any such sale or disposition is effected through condemnation proceedings), or (B) the adoption by the Company of a plan of liquidation or dissolution of the Company. Notwithstanding the foregoing, a Change in Control shall not include any event, circumstance or transaction which results from the action (excluding the Participant's service as a member of the Board of Directors) of any person or group of persons which includes, is directly affiliated with or is wholly or partly controlled by one (1) or more executive officers of the Company or its subsidiaries and in which the Plan Participant actively participates. (d) "Company" shall mean Florida Progress Corporation and its successors. (e) "Effective Date" of the Plan shall mean January 1, 1999. (f) "Non-Employee Director" shall mean any member of the Board of Directors who is not an employee of the Company. (g) "Participant" shall mean any Non-Employee Director who is covered by this Plan as provided in Article III. When required by the context of the Plan, the term Participant shall include any former Participant in the Plan. (h) "Phantom Stock Unit" shall mean a right to receive, without payment to the Company, an amount equal to the fair market value of a share of common stock of the Company determined as of the close of the last business day coincident with or immediately preceding the date of the Participant's termination of service as a member of the Board of Directors. (i) "Plan" shall mean the Phantom Stock Plan for the Benefit of Non-Employee Directors of Florida Progress Corporation hereby created and as it may be amended from time to time. (j) "Plan Administrator" shall mean the Company. (k) "Plan Year" shall mean 12-month period ending on each March 31. (l) "Year of Service" shall mean each Plan Year in which a Non-Employee Director serves as a member of the Board of Directors of the Company on the last day of the Plan Year. The term "Year of Service" shall include Plan Years beginning before the Effective Date of the Plan. ARTICLE II Administration (a) Plan Administrator. (1) The Plan Administrator shall have complete control and discretion to manage the operation and administration of the Plan, with all powers necessary to enable it to carry out its duties in that respect. Not in limitation, but in amplification of the foregoing, the Plan Administrator shall have the following powers: (A) To determine all questions relating to the eligibility of Non-Employee Directors to continue to participate; (B) To maintain all records and books of account necessary for the administration of the Plan; (C) To interpret the provisions of the Plan and to make and to publish such interpretive or procedural rules as are not inconsistent with the Plan and applicable law; (D) To compute, certify and arrange for the payment of benefits to which any Participant or beneficiary is entitled; (E) To process claims for benefits under the Plan by Participants or beneficiaries; (F) To engage consultants and professionals to assist the Plan Administrator in carrying out its duties under this Plan; and (G) To develop and maintain such instruments as may be deemed necessary from time to time by the Plan Administrator to facilitate payment of benefits under the Plan. (2) The Plan Administrator may designate employees of the Company to assist the Plan Administrator in the administration of the Plan and perform the duties required of the Plan Administrator hereunder. (b) Plan Administrator's Authority. The Plan Administrator may consult with Company officers, legal and financial advisers to the Company and others, but nevertheless the Plan Administrator shall have the full authority and discretion to act, and the Plan Administrator's actions shall be final and conclusive on all parties. (c) Liability; Indemnification. Notwithstanding any other provision of this Plan, no member of the Board, nor any staff member of the Company acting on behalf of the Company, shall be liable to any Participant, beneficiary, or other person for any action taken or omitted in connection with the interpretation and administration of this Plan. The Plan Administrator and its employees shall be entitled to rely conclusively on all tables, valuations, certificates, opinions and reports that shall be furnished by any actuary, accountant, insurance company, consultant, counsel or other expert who shall be employed or engaged by the Plan Administrator in good faith. The Company shall indemnify the members of the Board, and any such staff member, against any and all claims, losses, damages and expenses, including counsel fees, reasonably incurred by them, and any liability, including any amounts paid in settlement with their approval, arising from their action or failure to act in connection with the interpretation and administration of this Plan. The provisions of this paragraph are not intended to be exclusive, and nothing contained in this paragraph shall in any way limit indemnification provided members of the Board, and any such staff member, under the by-laws of the Company, by contract, by statute or otherwise. ARTICLE III Participation Each Non-Employee Director of the Company on the Effective Date of this Plan shall become a Participant as of such date. Thereafter, any individual who subsequently becomes a Non-Employee Director of the Company shall become a Participant in the Plan as of the date he or she is elected to the Board of Directors (or, if later, as of the first day of the first Plan Year in which he or she serves as a Non-Employee Director). ARTICLE IV Phantom Stock Unit Awards and Accounts (a) In General. Except as provided in paragraph (b) of this Article IV, awards of Phantom Stock Units under this Plan shall be automatic and non-discretionary, and subject to the terms and conditions provided in Articles IV, V, VI and VII. (b) Initial Awards. Each Participant who is a member of the Board of Directors on the Effective Date shall be awarded 2,000 Phantom Stock Units as of such date. Each Non-Employee Director who first participates in the Plan after the Effective Date shall be awarded Phantom Stock Units in an amount to be determined by the Board upon his or her initial commencement of participation in the Plan. (c) Recurring Awards. Each Participant who is reelected to the Board of Directors at any time after the Effective Date shall be awarded 600 Phantom Stock Units upon his or her reelection to a new term as a member of the Board of Directors. In addition, each Participant who is a Participant in the Plan as of the Effective Date and whose term is scheduled to expire in April, 2000 shall be awarded 200 Phantom Stock Units as of April 1, 1999. Each Participant who is a Participant in the Plan as of the Effective Date and whose term is scheduled to expire in April, 2001 shall be awarded 400 Phantom Stock Units as of April 1, 1999. (d) Dividend Equivalent Awards. The Company shall award additional Phantom Stock Units to Participants as of the last day of each Plan Year based upon the following formula: Whenever cash dividends are paid to stockholders with respect to the common stock of the Company, each Participant shall be awarded additional Phantom Stock Units pursuant to this paragraph (d). Each such award shall be equal to the number of shares of common stock of the Company that would be purchased with cash dividends for the Participant (1) if the Participant was participating in the Florida Progress Corporation Progress Plus Stock Plan and (2) if, prior to the cash dividend payment, the Participant was credited with a number of shares of common stock of the Company under the Florida Progress Corporation Progress Plus Stock Plan that was equal to the number of Phantom Stock Units actually credited to the Participant under the terms of this Plan. (e) Changes in Common Stock. In the event that the Plan Administrator determines that any recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, stock dividend, warrants, or rights offering to purchase common stock at a price below Fair Market Value, or other similar transaction affects the Company's common stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under the Plan, then the Plan Administrator shall equitably adjust any or all of the number of Phantom Stock Units credited to Participants' Accounts. (f) Participants' Accounts. (1) Each Phantom Stock Unit award made pursuant to this Plan shall be recorded by the Plan Administrator in a Phantom Stock Unit Account maintained in the name of the Participant. (2) Phantom Stock Units awarded to the Participant shall be credited to his or her Account as of the Effective Date of the award and such Account shall be charged from time to time with all amounts that are paid to, or forfeited with respect to, the Participant. (3) All amounts that are credited to a Participant's Account shall be credited solely for purposes of accounting and computation. A Participant shall not have any interest in or right to such Account at any time. (g) Vested Interests. The vested Phantom Stock Units credited to a Participant's Account shall be payable to the Participant at the time, and in the form and manner, provided in Article VI. (1) Phantom Stock Units awarded to a Participant pursuant to paragraph (b) of this Article IV shall vest according to the following schedule, based upon Years of Service credited to a Non-Employee Director from his or her initial date of service as a member of the Board of Directors: Years of Service Vested Percentage 1 Year of Service 16.66% 2 Years of Service 33.33% 3 Years of Service 50.00% 4 Years of Service 66.67% 5 Years of Service 83.33% 6 Years of Service 100% (2) Phantom Stock Units awarded to a Participant pursuant to paragraph (c) of this Article IV shall vest according to the following schedule, based upon Years of Service credited to a Participant after the reelection with respect to which the Phantom Stock Units are awarded: Years of Service Vested Percentage 1 Year of Service 33.33% 2 Years of Service 66.67% 3 Years of Service 100% Each recurring award credited to a participant pursuant to paragraph (c) of Article IV shall be subject to a separate three year vesting schedule. Notwithstanding the foregoing provisions of this subparagraph (2), (A) each 200 Phantom Stock Unit award made as of April 1, 1999, to a Participant who is a Participant in the Plan as of the Effective Date and whose term is scheduled to expire in April, 2000 shall be non-vested prior to March 31, 2000 and shall become 100% vested as of March 31, 2000 if the Participant is credited with an additional Year of Service as of such date; and (B) each 400 Phantom Stock Unit award made as of April 1, 1999, to a Participant who is a Participant in the Plan as of the Effective Date and whose term is scheduled to expire in April, 2001 shall be non-vested prior to March 31, 2000 and shall become 50% vested as of March 31, 2000 if the Participant is credited with an additional Year of Service as of such date, and shall be 100% vested as of March 31, 2001 if the Participant is credited with an additional Year of Service as of such date. (3) Phantom Stock Units awarded to a Participant pursuant to paragraph (d) of this Article IV shall be treated as vested to the extent such units are attributable to vested Phantom Stock Units credited to the Participant's Account. (4) Notwithstanding the provisions of subparagraphs (1), (2), and (3) above, all Phantom Stock Units awarded to a Participant shall become fully vested in the event of a Change in Control. (5) If a Participant is less than 100% vested in all of the Phantom Stock Units credited to his or her Account at the time he or she first receives a benefit payment pursuant to Article VI, his or her non-vested Phantom Stock Units will be forfeited. (h) Valuation; Annual Statement. The value of a Participant's Account shall be determined by the Plan Administrator and the Plan Administrator may establish such accounting procedures as are necessary to account for the Participant's interest in the Plan. Each Participant's Account shall be valued as of the last day of each Plan Year or more frequently as determined by the Plan Administrator. The Plan Administrator shall furnish each Participant with an annual statement of his or her Account. ARTICLE V Financing (a) Financing. The benefits under this Plan shall be paid out of the general assets of the Company which shall remain subject to the claims of the Company's creditors until such amounts are paid to the Participants. (b) No Trust Created. Nothing contained in this Plan, and no action taken pursuant to the provisions of this Plan, shall create or be construed to create a funded plan, a trust of any kind or a fiduciary relationship between the Company and the Participant, his or her Beneficiary or any other person. (c) Unsecured Interest. The Participant shall not have any interest whatsoever in any specific asset of the Company. To the extent that any person acquires a right to receive payments under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. ARTICLE VI Payment for Phantom Stock Units (a) Timing of Payment. Subject to the restrictions of Article VII, the payment of a Participant's vested interest in the amount credited to his or her Account shall commence as soon as practicable following (1) his or her termination of service with the Board of Directors, (2) his or her death, or (3) a Change in Control. (b) Form and Manner of Benefit Payment. (1) In the case of a Participant who terminates his or her service with the Board of Directors by reason of his or her death, or in the case of a Change in Control, the Participant's benefit shall be paid in a lump sum cash payment. (2) In the case of a Participant who terminates his or her service with the Board of Directors for any other reason, the Participant's benefit shall be paid as a series of annual cash installments (not in excess of 10) or as a lump sum cash payment, as selected by the Participant. A Participant shall elect the manner of payment for his or her benefit upon commencing participation in the Plan. Prior to the commencement of benefit payments under the Plan, the Participant may, subject to the approval of the Plan Administrator, revise the manner of payment. Any request by a Participant to revise the manner of payment must be received by the Plan Administrator not later than December 31 of the calendar year preceding the year in which benefit payments commence. (3) If a Participant dies before he or she has received all of his or her vested benefits under the Plan, all unpaid amounts shall be paid in a lump sum as soon as administratively practicable after the death of the Participant to the beneficiary or beneficiaries designated by the Participant to receive such benefits. A designation of beneficiaries may be made in the Participant's will or on a separate form prescribed by and filed with the Plan Administrator, which form shall comply with the laws of the state of the Participant's residence. Any separate form filed with the Plan Administrator may be changed at any time by filing a new form with the Plan Administrator. If the Participant has designated no beneficiary, or if no beneficiary that he or she has designated survives him or her, then such unpaid amounts shall be paid to his or her estate. In the event of any dispute as to the entitlement of any beneficiary, the Plan Administrator may withhold any payment until such dispute has been resolved. (c) Tax Withholding. The Company may withhold, or require the withholding from any benefit payment which it is required to make, any federal, state or local taxes required by law to be withheld with respect to a benefit payment and such sum as the Company may reasonably estimate as necessary to cover any taxes for which the Company may be liable and which may be assessed with regard to such payment. Upon discharge or settlement of such tax liability, the Company shall pay the balance of such sum, if any, to the Participant, or if the Participant is then deceased, to the beneficiary of the Participant. Prior to making any payment hereunder, the Company may require such documents from any taxing authority, or may require such indemnities or surety bond, as the Company shall reasonably deem necessary for its protection. ARTICLE VII Confidentiality and Restrictions on Competition (a) Confidentiality. As a condition of receiving benefits under this Plan, a Participant shall not, after the termination of his or her service as a member of the Board of Directors, voluntarily appear against the Company or any affiliate of the Company before any judicial or administrative tribunal or legislative body, on any matter about which the Participant possesses any expertise or special knowledge relative to the Company's or such affiliate's business. Any breach of this condition will result in a complete forfeiture of any further benefits under the Plan for both the Participant and any surviving beneficiary of the Participant. The Company may require the Participant to execute a separate confidentiality agreement prior to the Participant's receipt of benefits, which agreement may provide for liquidated damages, in the event of a breach by the Participant, in an amount equal to the benefits paid under this Plan. (b) Restrictions on Competition. As a condition of receiving benefits under this Plan, a Participant shall not directly or indirectly engage in competition with the Company or any affiliate of the Company at any time prior to or during the one year period following his or her initial entitlement to benefits payable under this Plan. Any breach of this condition will result in a complete forfeiture of any further benefits under the Plan for both the Participant and any surviving beneficiary of the Participant. The Company may require the Participant to execute a separate agreement establishing restrictions on competition prior to the Participant's receipt of benefits, which agreement may provide for liquidated damages, in the event of a breach by the Participant, in an amount equal to the benefits paid under this Plan. For purposes of this paragraph (b), a Participant shall be deemed to "engage in competition" with the Company (or an affiliate of the Company) if he or she (1) discloses proprietary information with respect to the Company (or any affiliate of the Company) to any person, corporation, or other entity for any purpose whatsoever; (2) owns, manages, operates, controls, is employed by, acts as an agent for, consults with, advises, participates in or is connected in any manner with the ownership, management, operation or control of any business (in any state of the United States in which the Company or any affiliate of the Company is doing business) which is engaged in businesses that are or may be competitive to the businesses of the Company or any affiliate of the Company; or (3) solicits any of the employees or agents of the Company (or any affiliate of the Company) to terminate their employment or relationship with the Company (or any affiliate of the Company). (c) Essential Elements. The provisions of this Article VII are essential elements of this Plan, and, but for the confidentiality requirements in paragraph (a) and the restrictions on competition in paragraph (b) applicable to the Participants, the Company would not agree to sponsor this Plan for the benefit of the Participants. ARTICLE VIII Amendment and Termination (a) Amendment and Termination. The Plan may be amended or terminated at any time by the Board of Directors. Notice of any such amendment or termination shall be given in writing to each Participant having an interest in the Plan. (b) Effect of Amendment or Termination. (1) No amendment or termination of the Plan shall adversely affect the rights of any Participant with respect to any vested benefit credited to the Account of the Participant prior to such amendment or termination. (2) Upon termination of the Plan, each Participant (or his or her beneficiaries) shall be paid the balance of his or her Account in a lump sum cash payment. ARTICLE IX Miscellaneous (a) Payments to Minors and Incompetents. If the Plan Administrator receives satisfactory evidence that a person who is entitled to receive any benefit under the Plan, at the time such benefit becomes available, is a minor or is physically unable or mentally incompetent to receive such benefit and to give a valid release therefor, and that another person or an institution is then maintaining or has custody of such person, and that no guardian or other representative of the estate of such person shall have been duly appointed, the Plan Administrator may authorize payment of such benefit otherwise payable to such person to such other person or institution; and the release of such other person or institution shall be a valid and complete discharge for the payment of such benefit. (b) No Interest in Assets. Nothing contained in the Plan shall be deemed to give any Participant any equity or other interest in the assets, business or affairs of the Company. No Participant in the Plan shall have a security interest in assets of the Company used to pay benefits. (c) Recordkeeping. Appropriate records shall be maintained for the purpose of the Plan by the officers and employees of the Company at the Company's expense and subject to the supervision and control of the Plan Administrator. (d) Non-Alienation of Benefits. No benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. No benefit under the Plan shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person. If any person entitled to benefits under the Plan shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefit under the Plan, or if any attempt shall be made to subject any such benefit to the debts, contracts, liabilities, engagements or torts of the person entitled to any such benefit, except as specifically provided in the Plan, then such benefits shall cease and terminate at the discretion of the Plan Administrator. The Plan Administrator may then hold or apply the same or any part thereof to or for the benefit of such person or any dependent or beneficiary of such person in such manner and proportions as it shall deem proper. (e) State Law. This Plan shall be construed in accordance with the laws of Florida. (f) Number. Except when otherwise indicated by the context, the definition of any term herein in the singular shall include the plural. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officers on this 18th day of February, 1999. ATTEST: FLORIDA PROGRESS CORPORATION (CORPORATE SEAL) /s/ Kathleen M. Haley /s/ Richard Korpan _____________________________ By: _________________________ Secretary Its: President, Chief Executive Officer 95550 EX-10.(B) 4 EX-10.(B) TO PROGRESS/POWER 12/31/98 FORM 10-K EXHIBIT 10.(b) AGREEMENT THIS AGREEMENT, dated as of January 30, 1998 (this "Agreement"), is made by and between Florida Progress Corporation, having its principal offices at One Progress Plaza, St. Petersburg, Florida 33701 (the "Corporation"), and William G. Kelley, residing at 4515 Shark Drive, Bradenton, Florida 34208 (the "Executive"). WHEREAS, the Corporation considers it essential to the best interests of its shareholders to foster the continued employment of key executive and management personnel; and WHEREAS, the Board of Directors of the Corporation (the "Board") recognizes that the possibility of a Change in Control (as defined in Section 1.3 below) of the Corporation exists from time to time and that such possibility, and the uncertainty, instability and questions that it may raise for and among key executive and management personnel, may result in the premature departure or significant distraction of such individuals to the material detriment of the Corporation and its shareholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce, focus and encourage the continued attention and dedication of key executive and management personnel of the Corporation and its subsidiaries, such as the Executive, to their assigned duties without distraction in the face of potentially disturbing or unsettling circumstances arising from the possibility of a Change in Control of the Corporation; NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Corporation and the Executive hereby agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below: 1.1 "Annual Base Salary" shall mean the Executive's rate of regular base annual compensation (prior to any reduction under (i) a salary reduction agreement pursuant to section 401(k) or section 125 of the Internal Revenue Code of 1986, as amended from time to time (the "Code") or (ii) any plan or arrangement deferring any base salary or bonus payments), and shall not include (without limitation) allowances, fees, retainers, reimbursements, bonuses, incentive awards, prizes or similar payments. 1.2 "Cause" shall mean: (i) the Executive engaging in fraud, misappropriation or willful misconduct that is demonstrably and materially injurious to the property or business of the Corporation and/or its subsidiaries, monetarily or otherwise; or (ii) the Executive's conviction of, or plea of no contest to, a felony. For purposes of clause (i) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive in bad faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Corporation or its subsidiaries. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Board (or a committee thereof), the Corporation's chief executive officer or other duly authorized senior officer of the Corporation (as appropriate) or based upon the advice of counsel for the Corporation shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Corporation or its subsidiaries. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice of any such meeting is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, (a) the Executive has acted in a manner described in clause (i) above, and specifying the particulars thereof in detail, or (b) one of the events set forth in (ii) has occurred. 1.3 "Change in Control" shall mean and be deemed to have occurred if: (i) any Person is or becomes, after the date of this Agreement, the Beneficial Owner (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation) representing twenty-five percent (25%) or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of twenty-four (24) consecutive months (not including any period prior to January 1, 1998), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Corporation to effect a transaction described in clause (i), (iii) or (iv) of this definition or any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; or (iii) the shareholders of the Corporation approve a reorganization, merger or consolidation, other than a reorganization, merger or consolidation with respect to which all or substantially all of the individuals and entities who were Beneficial Owners, immediately prior to such reorganization, merger or consolidation, of the combined voting power of the Corporation's then outstanding securities beneficially own, directly or indirectly, immediately after such reorganization, merger or consolidation, more than seventy-five percent (75%) of the combined voting power of the securities of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their respective ownership, immediately prior to such reorganization, merger or consolidation, of the combined voting power of the Corporation's securities; or (iv) the shareholders of the Corporation approve (a) the sale or disposition by the Corporation (other than to a subsidiary of the Corporation) of all or substantially all of the assets of the Corporation (or any such sale or disposition is effected through condemnation proceedings), or (b) a complete liquidation or dissolution of the Corporation. Notwithstanding the foregoing, a Change in Control shall not include any event, circumstance or transaction which results from the action (excluding the Executive's employment activities with the Corporation, Florida Power Corporation or any of their respective subsidiaries) of any Person or group of Persons which includes, is directly affiliated with or is wholly or partly controlled by one or more executive officers of the Corporation or its subsidiaries and in which the Executive actively participates. 1.4 "Corporation" shall include Florida Progress Corporation and any successor to its business and/or assets which assumes (either expressly, by operation of law or otherwise) and/or agrees to perform this Agreement by operation of law or otherwise (except in determining, under Section 1.3 hereof, whether or not any Change in Control of the Corporation has occurred in connection with such succession). 1.5 "Disability" shall mean and be deemed the reason for the termination by the Corporation of the Executive's employment, if, as a result of the Executive's incapacity due to physical and/or mental illness, (i) the Executive shall have been absent from the full-time performance of the Executive's duties with the Corporation or any affiliate of the Corporation for a period of six (6) consecutive months, (ii) the Corporation and/or such affiliate gives the Executive a Notice of Termination for Disability, and (iii) within thirty (30) days after such Notice of Termination is given, the Executive does not return to the full-time performance of the Executive's duties. 1.6 "Employment Period" shall mean the period commencing on the date of any Change in Control until the earliest to occur of (i) the date which is thirty-six (36) months from the date of any such Change in Control, (ii) the date of termination by the Executive of the Executive's employment for Good Reason, or (iii) the termination by the Corporation of the Executive's employment for any reason. 1.7 "Good Reason" shall mean the occurrence (without the Executive's express written consent) of any one of the following acts, or failures to act, unless, in the case of any act or failure to act described in clauses (i), (iv), (v) or (vi) below, such act or failure to act is corrected by the Corporation prior to the Date of Termination specified in the Notice of Termination given by the Executive in respect thereof not later than six (6) months after the occurrence of the event that serves as the basis for the Notice of Termination: (i) the assignment to the Executive of any duties or responsibilities inconsistent with those described in Section 3.2 below or with the Executive's position(s) or status (including, without limitation, offices, titles, and reporting relationships) as an executive officer of the Corporation and/or its primary subsidiaries or a substantial adverse alteration in the nature of the Executive's authorities, duties, responsibilities, position(s) or status from those described in Section 3.2 below or otherwise; (ii) a reduction in the Executive's Annual Base Salary or annual bonus opportunity as in effect on the date of this Agreement or as the same may be increased at any time thereafter and from time to time; (iii) the relocation of the Corporation's principal executive offices to a location more than thirty (30) miles from its location on the date of this Agreement (or, if different, more than thirty (30) miles from where such offices are located immediately prior to any Potential Change in Control) or the Corporation's requiring the Executive to be based anywhere other than the Corporation's principal Florida executive offices, except for required travel on the Corporation's business to an extent substantially consistent with the Executive's business travel obligations as of the date of this Agreement; (iv) the failure by the Corporation or a subsidiary to continue in effect any pension benefit or deferred compensation plan in which the Executive participates immediately prior to any Potential Change in Control which is material to the Executive's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan or arrangement) has been made with respect to such plan, or the failure by the Corporation or a subsidiary to continue the Executive's participation therein (or in such substitute or alternative plan or arrangement) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Potential Change in Control; (v) the failure by the Corporation or a subsidiary to continue to provide the Executive with health and welfare benefits substantially similar to those enjoyed by the Executive under any retirement, life insurance, medical, health and accident, or disability or similar plan of the Corporation or a subsidiary in which the Executive was participating at the time of any Potential Change in Control, the taking of any action by the Corporation or a subsidiary which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Potential Change in Control, or the failure by the Corporation or a subsidiary to provide the Executive with the greater number of paid vacation days to which the Executive is entitled pursuant to the terms of the Executive's employment agreement or in accordance with the Corporation's or a subsidiary's normal vacation policy, in either case, as in effect at the time of the Potential Change in Control; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1; (vii) the failure of the Corporation to obtain a written agreement reasonably satisfactory to the Executive from any successor to the Corporation (as described in Section 9.1) to perform this Agreement; and/or (viii) any termination of employment by the Executive which occurs during the one-month period commencing on the first anniversary of the consummation of the transaction that produced the Change in Control. 1.8 "Person" shall have the meaning ascribed thereto in Section 3(a)(9) of the Exchange Act, as modified, applied and used in Sections 13(d) and 14(d) thereof; provided, however, that a Person shall not include (i) the Corporation or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its subsidiaries (in its capacity as such), (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same character and proportions as their ownership of stock of the Corporation. 1.9 "Potential Change in Control" shall mean and be deemed to have occurred if: (i) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) the Corporation or any Person publicly announces an intention to take actions which, if consummated, would constitute a Change in Control; and/or (iii) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation representing fifteen (15) percent or more of the combined voting power of the Corporation's then outstanding securities, or any Person increases such Person's beneficial ownership of such securities by ten (10) percentage points or more over the percentage so owned by such Person on December 31, 1997. 1.10 "Retirement" shall mean and be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated upon or after normal retirement age pursuant to the pension plan of the Corporation or any subsidiary of the Corporation in which the Executive participates, not including any early retirement or so-called "window period" retirements, generally applicable to its officers, as in effect immediately prior to any Potential Change in Control. 2. Term of this Agreement. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 2001; provided, however, that the term of this Agreement shall automatically be extended each January 1 after the date hereof for an additional period of one (1) year unless, not later than 6 months prior to such January 1, the Corporation gives written notice to the Executive that it does not wish to continue such automatic extension; and provided, further, however, that if a Change in Control shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of not less than thirty-six (36) months beyond the month in which such Change in Control occurred or, if later, eighteen (18) months after the consummation within such thirty-six (36) month period of the transaction that produced the Change in Control (the "Term"). Notwithstanding the foregoing provisions of this Section 2, the Term shall terminate upon attainment of normal retirement age as defined in the pension plan of the Corporation. 3. Corporation's Covenants. 3.1 Severance Payments. In order to induce the Executive to remain in the employ of the Corporation and/or one or more of its subsidiaries and in consideration of the Executive's covenants set forth in Section 4 below, the Corporation agrees, under the terms and conditions described herein and in addition to the amounts payable to the Executive under Section 5 below, to pay the Executive the "Severance Payments" described in Section 6.1 below and the other payments and benefits described herein in the event the Executive's employment is terminated during the Employment Period or under the other circumstances set forth in Section 6.1 below. 3.2 Position and Duties. During the Employment Period, (i) the Executive's position (including status, offices, titles and reporting relationships), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the one hundred eighty (180) day period immediately preceding any related Potential Change in Control, and (ii) the Executive's services shall be performed at the location where the Executive was employed immediately preceding any such Potential Change in Control, or any office or location less than thirty (30) miles from such location. 3.3 Base Salary. During the Employment Period, the Executive shall receive Annual Base Salary at least equal to twenty-six (26) times the highest bi-weekly base salary paid or payable, including (without limitation) any base salary which has been earned but deferred, to the Executive by the Corporation and its affiliated companies in respect of the twelve (12) month period immediately preceding the month in which any related Potential Change in Control occurs. The Executive's Annual Base Salary shall be reviewed annually for potential increase. In addition, Annual Base Salary shall not be reduced after the occurrence of a Potential Change in Control. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Corporation. 3.4 Incentive Plans. a. MICP. The Executive shall be awarded for each fiscal year ending within the Employment Period an annual bonus (the "Annual Bonus") in cash at least equal to the target annual incentive bonus of the Executive under the Corporation's Management Incentive Compensation Plan (the "MICP"), or any other annual incentive bonus plan maintained by the Corporation from time to time for the fiscal year in which the Change in Control occurs. Each Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus in accordance with rules established by the Corporation for that purpose. b. LTIP. The Executive shall be awarded for each award period that begins within the Employment Period a grant of performance shares at least equal to the annual long-term incentive award received by the Executive (not taking into account any pro-ration) under the Corporation's Long-Term Incentive Plan or any other long-term incentive bonus plan maintained by the Corporation from time to time (the "LTIP") for the fiscal year in which the Change in Control occurs, and such shares shall be subject to performance goals consistent with those established by the Corporation for the fiscal years prior to the fiscal year in which the Change in Control occurs. 3.5 Savings and Retirement Plans. During the Employment Period, the Executive (in addition to the Incentive Plans) shall be entitled to participate in all other incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Corporation and its subsidiaries, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Corporation and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the one hundred eighty (180) day period immediately preceding any related Potential Change in Control or, if more favorable to the Executive, those provided generally at any time thereafter to other peer executives of the Corporation and its affiliated companies. 3.6 Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be entitled to participate in and shall receive all benefits under all of the health and welfare benefit plans, practices, policies and programs provided by the Corporation and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent (and at the same cost, excluding increases in the employee contribution amounts which are consistent with and equivalent to the historical rates of increase imposed by the Corporation in respect thereof) applicable generally to other peer executives of the Corporation and its subsidiaries, but in no event shall such plans, practices, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the one hundred eighty (180) day period immediately preceding any related Potential Change in Control or, if more favorable to the Executive, those provided generally at any time thereafter to other peer executives of the Corporation and its affiliated companies. 3.7 Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Corporation and its affiliated companies in effect for the Executive at any time during the one hundred eighty (180) day period immediately preceding any related Potential Change in Control or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Corporation and its affiliated companies. 3.8 Office Support; Perquisites. During the Employment Period, the Executive shall be entitled to secretarial support and other facilities, perquisites and programs to enable the Executive to be able to discharge the Executive's responsibilities hereunder in accordance with the most favorable plans, practices, programs and policies of the Corporation and its affiliated companies in effect for the Executive at any time during the one hundred eighty (180) day period immediately preceding any related Potential Change in Control or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Corporation and its affiliated companies. 3.9 Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Corporation and its affiliated companies, or pursuant to the terms and provisions of any employment agreement, as in effect for the Executive at any time during the one hundred eighty (180) day period immediately preceding any related Potential Change in Control or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Corporation and its affiliated companies. 4. The Executive's Covenants. 4.1 Employment. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control during the Term the Executive will remain in the employ of the Corporation during any related Employment Period. 4.2 Time and Attention. During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Corporation and to use the Executive's reasonable best efforts to perform faithfully and efficiently the responsibilities and duties assigned to the Executive hereunder. During the Employment Period it shall not be a violation of this Agreement for the Executive to (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures and fulfill speaking engagements and (iii) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Corporation and its subsidiaries in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to any Potential Change in Control, the reinstatement or continued conduct of such activities (or the reinstatement or conduct of activities similar in nature and scope thereto) subsequent to any related Potential Change in Control shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Corporation and its subsidiaries. 4.3. Non-interference; Confidential Information; Non-Competition (a) No Interference. For so long as the Executive is employed by the Corporation, and for a period of one (1) year after termination of the Executive's employment for any reason after a Change in Control, the Executive shall not, whether for his own account or for the account of any other individual, partnership, firm, corporation or other business organization (other than the Corporation or one of its affiliates), directly or indirectly, intentionally solicit, endeavor to entice away from the Corporation (or any of its affiliates), or otherwise interfere with the relationship of the Corporation (or any of its affiliates) with, any person who is employed by or otherwise engaged to perform services for the Corporation (or any of its affiliates) including, but not limited to, any independent representatives or organizations, or any person or entity that is a customer of the Corporation (or any of its affiliates); provided, however, that if a customer of the Corporation (or any of its affiliates) also engages in business in areas outside of Florida that are not served by the business of the Corporation (and/or any of its affiliates) with which the Executive is involved, the Board of Directors may determine, in an appropriate situation, that the solicitation of such customer in such areas does not violate the restrictions of this Section 4.3(a). The Executive understands and agrees that the rights and obligations set forth in this Section 4.3(a) could extend beyond the Term. (b) Confidential Information. The Executive covenants and agrees with the Corporation that he will not at any time, during or after employment with the Corporation, except in performance of the Executive's obligations to the Corporation or with the prior express written consent of the Board of Directors, directly or indirectly, intentionally or unintentionally, disclose any Confidential Information that he may learn or has learned by reason of his employment or association with the Corporation or any of its affiliates, or any predecessors to its business, or use any such information for his own personal benefit or gain. The term "Confidential Information" includes, without limitation, information not previously disclosed to the public or to the trade by the Corporation's management with respect to the products, facilities and methods, trade secrets and other intellectual property, systems, procedures, manuals, confidential reports, fee or rate information, customer lists, financial information (including without limitation the revenues, costs or profits associated with any of the Corporation's (or any of its affiliates') activities or products), business plans, prospects, opportunities or other information of the Corporation or any of its affiliates. Confidential Information shall not include information which (i) is or becomes generally available to the public other than as a result of disclosure by the Executive in violation of this Section 4.3(b) or (ii) the Executive is required to disclose under any applicable laws, regulations or directives of any government agency, tribunal or authority having jurisdiction in the matter or under subpoena or other process of law. The Executive understands and agrees that the rights and obligations set forth in this Section 4.3 (b) shall extend beyond the Term. (c) Exclusive Property. The Executive confirms that all Confidential Information is and shall remain the exclusive property of the Corporation or any of its affiliates. All business records, papers and documents kept or made by the Executive relating to the business of the Corporation (or any of its affiliates) or any Confidential Information shall be and remain the property of the Corporation and/or any such affiliates. Upon termination of employment or upon the request of the Corporation at any time, the Executive shall promptly deliver to the Corporation, and shall not without the prior express written consent of the Corporation retain, any and all copies of (i) any written materials not previously made available to the public, or (ii) records and documents made by the Executive or coming into his possession concerning any Confidential Information or the business or affairs of the Corporation or any predecessors to its business, or any of its affiliates. The Executive understands and agrees that the rights and obligations set forth in this Section 4.3(c) shall extend beyond the Term. (d) Covenant Not to Compete. During the Employment Period and for one (1) year after termination of the Executive's employment for any reason after a Change in Control, the Executive shall not compete, directly or indirectly, with the Corporation or its affiliates within fifty (50) miles of any geographic area in which the Corporation or its affiliates has material business interests with which the Executive is involved at the time of the termination of the Executive's employment. If it is judicially determined that this provision, or any portion thereof, is unenforceable under applicable law(s) (statute, common law or otherwise), then it is hereby agreed by the Executive and the Corporation that the unenforceable portion shall be redrafted to the extent necessary to render it enforceable, while leaving the remaining portions intact. By agreeing to this contractual modification prospectively at this time, the parties intend to make this provision enforceable under the law(s) of all applicable states so that the entire agreement not to compete and/or this Agreement as prospectively modified shall remain in full force and effect and shall not be rendered void or illegal. Such modifications shall not affect the payments made to the Executive under this Agreement. The Executive acknowledges that his skills are such that he can be gainfully employed in noncompetitive employment and that the agreement not to compete will in no way prevent him from earning a living. The Executive understands and agrees that the rights and obligations set forth in this Section 4.3(d) shall extend beyond the Term. (e) Injunctive Relief. Without intending to limit the remedies available to the Corporation, the Executive acknowledges that a breach of any of the covenants contained in this Section 4.3 may result in material irreparable injury to the Corporation or its affiliates for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Corporation shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining the Executive from engaging in activities prohibited by this Section 4.3 or such other relief as may be required to specifically enforce any of the covenants in this Section 4.3. 5. Compensation Other Than Severance Payments. 5.1 Disability. Following a Potential Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Corporation as a result of incapacity due to physical or mental illness, the Executive's full salary shall be paid to the Executive at a rate no less than the rate in effect at the commencement of any such disability period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Corporation or its subsidiaries during such disability period, until the Executive's employment is terminated by the Corporation for Disability. 5.2 Base Salary. If the Executive's employment shall be terminated for any reason following a Potential Change in Control and during the Term, the Executive's full salary shall be paid to the Executive through the Date of Termination (as defined below in Section 7.2) at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to or with respect to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Corporation or its subsidiaries during such period. 5.3 Benefits. If the Executive's employment shall be terminated for any reason following a Potential Change in Control and during the Term, the Executive's normal post-termination compensation and benefits shall be paid to the Executive as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the retirement, health insurance, life insurance and other compensation (including without limitation any bonus and/or incentive compensation) or benefit plans, programs and arrangements maintained by the Corporation or its subsidiaries or affiliates. 6. Severance Payments. 6.1 Severance. The Corporation shall pay the Executive the payments and benefits described in Section 6.1(a), (b) and (c) (the "Severance Payments") upon the termination of the Executive's employment following a Change in Control and during the Term, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Corporation for Cause, (ii) by reason of Retirement, (iii) by the Executive without Good Reason, (iv) due to death, or (v) due to Disability. In addition, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Corporation without Cause or by the Executive with Good Reason (a) if the Executive reasonably demonstrates that the Executive's employment was terminated prior to a Change in Control without Cause (1) at the request of a Person who has entered into an agreement with the Corporation the consummation of which will constitute a Change in Control (or who has taken other steps reasonably calculated to effect a Change in Control) or (2) otherwise in connection with, as a result of or in anticipation of a Change in Control, or (b) if the Executive terminates his employment for Good Reason prior to a Change in Control and the Executive reasonably demonstrates that the circumstance(s) or event(s) which constitute such Good Reason occurred (1) at the request of such Person or (2) otherwise in connection with, as a result of or in anticipation of a Change in Control. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. In the event of Disability or death of the Executive after the Date of Termination in respect of any termination without Cause or any termination for Good Reason, payments and benefits shall be made to the Executive, or the Executive's beneficiaries or legal representative, as the case may be. (a) Lump Sum Payment. A lump sum payment equal to two and one-half (2.50) times the highest "total 12-month compensation" of the Executive (whether or not deferred) for any 12-month period during the five (5) completed calendar years prior to the Date of Termination, where "total 12-month compensation" means the sum of the Executive's Annual Base Salary during such 12-month period and the full amount of the Executive's MICP award (target or actual, whichever is greater) that was payable during such 12-month period (or annualized 12-month period if the Executive has not completed 12 months of employment). (b) Welfare Plan Continuation. For a thirty (30) month period after the Date of Termination, or if sooner, until the Executive reaches the age of sixty-five (65) years, the Corporation shall provide the Executive (at no cost to the Executive) with life, disability, accident and health insurance benefits substantially similar to those that the Executive is receiving immediately prior to any related Potential Change in Control or the receipt of the Notice of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control which reduction constitutes Good Reason), whichever is greater; provided, however, that the final 18 months of the continued coverage period hereunder shall be deemed to constitute the full amount of the Executive's entitlement to COBRA benefits as a result of the Executive's termination of employment. Upon the termination of the Executive's continued benefits provided under the prior sentence, the Executive shall be eligible to continue such benefits (at the Executive's cost) to the same extent that such benefits are provided by the Corporation thereafter (the "Continued Access Period") to comparable executives and, after the Executive attains age 65, to retired executives. Benefits otherwise receivable by the Executive pursuant to the first sentence of this Section 6.1(b) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive without cost during such period following the Executive's termination of employment (and any such benefits actually received by the Executive shall be reported to the Corporation by the Executive). Continued coverage during the Continued Access Period shall terminate if comparable benefits are made available to the Executive under any other policy or program (and the availability of any such benefits shall be reported to the Corporation by the Executive). (c) LTIP. Performance shares granted to the Executive under the LTIP for performance cycles commencing after a Change in Control has occurred and remaining uncompleted will be deemed earned as of the Date of Termination to the extent of one hundred fifty percent (150%) of target under each award agreement, and the value of each such award will be paid out to the Executive in a lump-sum cash payment. Performance shares granted to the Executive under the LTIP for performance cycles which commenced after a Change in Control occurred and were completed before the Date of Termination will be paid out to the extent earned, and the value of such award will be paid out to the Executive in a lump-sum cash payment. (d) SERP; Other Deferred Compensation. The Executive shall receive credit under the Corporation's Supplemental Executive Retirement Plan ("SERP") for five (5) additional years of service and shall immediately become 100% vested in the Executive's accrued benefit and/or account balance to date under the SERP and any non-qualified deferred compensation plan, and any amendment, modification or termination of any such plan occurring during the Term of this Agreement after any Change in Control shall not be effective against the Executive to decrease or change any of the Executive's rights thereunder. (e) Relocation and Other Assistance. Should the Executive be required to move his or her primary residence in order to pursue other business opportunities within thirty (30) months of the Date of Termination, the Company will reimburse the Executive for any expenses (not in excess of $10,000) incurred in that relocation that are not reimbursed by another employer, including, without limitation, assistance in selling the Executive's home and all other assistance and benefits that were customarily provided by the Corporation to transferred executives prior to the Change in Control. In addition, if the Executive retains legal counsel with respect to the taxation of payments to be made to the Executive under this Agreement, the Corporation shall reimburse the Executive for such reasonable legal fees and disbursements (but not in excess of $15,000). 6.2 Special Reimbursement. (a) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Corporation or any of its subsidiaries, any Person whose actions result in a Change in Control or any Person affiliated with the Corporation or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") would subject the Executive to the excise tax imposed under Section 4999 of the Code or any successor section thereto (the "Excise Tax"), the Corporation shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Section 6.2(a), shall be equal to the Total Payments. (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Corporation's general counsel and reasonably acceptable to the Executive such Total Payments (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Corporation's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and applicable state and local income taxes at the highest marginal rate of taxation, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (c) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of the Executive's employment, the Executive shall repay to the Corporation, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Corporation shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Corporation shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of any such subsequent liability for Excise Tax with respect to the Total Payments. 6.3 Date of Payment. The payments provided for in Section 6.2 hereof shall be made not later than the fifteenth (15th) day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Corporation shall pay to the Executive on such day an estimate, as determined in good faith by the Corporation, of the minimum amount of such payments to which the Executive is likely to be entitled to and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Corporation to the Executive, payable on the tenth (10th) business day after demand by the Corporation (together with interest at the rate provided in section 7872(f)(2)(A) of the Code). At the time that payments are made under this Section 6.3, the Corporation shall provide the Executive with a detailed written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Corporation has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 Legal Costs. The Corporation shall reimburse the Executive for reasonable legal fees and expenses incurred in good faith by the Executive as a result of any dispute with any party (including, but not limited to, the Corporation or any subsidiary of the Corporation) regarding the payment or receipt of any benefit provided for in this Agreement (including, but not limited, all such fees and expenses incurred in disputing any termination or in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code) plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied by such evidence of fees and expenses incurred as the Corporation reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (which meeting may be a regular meeting of the Board where prior notice of consideration of such termination is given to members of the Board) finding that, in the good faith opinion of the Board, (i) the Executive engaged in conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail, or (ii) one of the events set forth in clause (ii) of such definition has occurred. For purposes of this Agreement, any purported termination not effected in accordance with this Section 7.1 shall not be considered effective. 7.2 Date of Termination. "Date of Termination", with respect to any purported termination of the Executive's employment after a Potential Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Corporation, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, after the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved either by mutual written agreement of the parties or by a final judgement, order, or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall not be extended by a notice of dispute if the basis for such notice, as determined in good faith by the party receiving such notice is not given in good faith or the party giving such notice does not pursue the resolution of such dispute with reasonable diligence. Subject to the rights granted by Section 4.3, any controversy or claim arising out of, or relating to, any provision of this Agreement shall be settled by binding arbitration in accordance with the laws of The State of Florida by three arbitrators, one of whom shall be appointed by the Corporation, one by the Executive, and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association. Such arbitration shall be conducted in Florida in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term, and such termination is disputed in accordance with Section 7.3 above (and pursuant thereto the Date of Termination is extended), the Corporation shall continue to pay the Executive the full Annual Base Salary in effect at the time of any related Potential Change in Control or when the notice giving rise to the dispute was given (whichever is greater). Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement or any other plan, agreement or arrangement. 8. No Mitigation. The Corporation agrees that, if the Executive's employment is terminated during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Corporation pursuant to Section 6 or Section 7.4. Further, the amount of any payment or benefit provided for in Section 6 (other than pursuant to Section 6.1.(b)) or Section 7.4 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, or offset against any amount claimed to be owed by the Executive to the Corporation or any of its subsidiaries, or otherwise. 9. Successors; Binding Agreement. 9.1 Successors. In addition to any obligations imposed by law upon any successor to the Corporation, the Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Corporation in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate employment with the Corporation for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the beneficiary (or beneficiaries) designated by the Executive from time to time in accordance with the procedures for notice set out in Section 10; provided, however, that if there shall be no effective designation of beneficiary by the Executive, such amounts shall be paid to the executors, personal representatives or administrators of the Executive's estate. 10. Notices; Other Communications. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Corporation: Florida Progress Corporation P.O. Box 33042 St. Petersburg, Florida 33733 With a copy to: Mr. William G. Kelley Vice President, Human Resources Florida Progress Corporation 3201 34th Street South St. Petersburg, Florida 33711 To the Executive: Mr. William G. Kelley 4515 Shark Drive Bradenton, Florida 34208 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Florida without regard to the principles of conflict of laws thereof. All references to sections of the Exchange Act or the Code (or the rules and/or regulations under either) shall be deemed also to refer to and include any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The rights and obligations of the Corporation and the Executive under this Agreement shall survive the expiration of the Term and the Employment Period. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, all of which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. No Limitation. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Corporation or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement with the Corporation or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Corporation or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement as in effect from time to time except as explicitly modified by this Agreement. 15. Other Agreements. This Agreement contains the entire agreement between the parties concerning the subject matter hereof and supersedes all prior agreements understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect thereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. FLORIDA PROGRESS CORPORATION /s/ Richard Korpan By:_____________________________________ RICHARD KORPAN PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ William G. Kelley ----------------------------------------- Executive EX-12 5 EX-12 TO PROGRESS/POWER 12/31/98 FORM 10-K Exhibit 12 FLORIDA POWER CORPORATION Statement of Computation of Ratios (Dollars In Millions) Ratio of Earnings to Fixed Charges: 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Net Income $250.1 $135.9 $238.4 $227.0 $200.8 Add: Operating Income Taxes 140.3 69.9 135.8 129.5 114.7 Other Income Taxes .7 -- (.1) (.1) (.8) ------- ------- ------- ------- ------- Income Before Taxes 391.1 205.8 374.1 356.6 314.7 Total Interest Charges 136.5 117.3 98.4 104.5 108.4 ------- ------- ------- ------- ------- Total Earnings (A) $527.6 $323.1 $472.5 $461.1 $423.1 ------- ------- ------- ------- ------- Fixed Charges (B) $136.5 $117.3 $98.4 $104.5 $108.4 ------- ------- ------- ------- ------- Ratio of Earnings to Fixed Charges (A/B) 3.87 2.75 4.80 4.41 3.90 ======= ======= ======= ======= ======= EX-21 6 EX-21 TO PROGRESS/POWER 12/31/98 FORM 10-K EXHIBIT 21 Subsidiaries of Florida Progress Corporation December 31, 1998 Name of Subsidiary * State of Incorporation ---------------------- ------------------------ Utility segment: Florida Power Corporation Florida Diversified segment: Progress Capital Holdings, Inc. Florida Electric Fuels Corporation Florida MEMCO Barge Line, Inc. Delaware Progress Rail Services Corporation Alabama Progress Telecommunications Corporation Florida ---------- * Each subsidiary does business under its own name. EX-23.(A) 7 EX-23.(A) TO PROGRESS/POWER 12/31/98 FORM 10-K Exhibit 23.(a) The Shareholders Florida Progress Corporation: We consent to incorporation by reference in the registration statements No. 33-51573 on Form S-3, No. 33-47623 on Form S-8, No. 2-93111 on Form S-3, No. 333-19037 on Form S-8, 333-66161 on Form S-8, and No. 333-07853 on Form S-3 of Florida Progress Corporation of our report dated January 25, 1999, relating to the consolidated balance sheets of Florida Progress Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and common equity and comprehensive income for each of the years in the three-year period ended December 31, 1998, and all related schedules, which report appears in the December 31, 1998 annual report on Form 10-K of Florida Progress Corporation. /s/KPMG LLP - -------------------------------- KPMG LLP St. Petersburg, Florida March 19, 1999 EX-23.(B) 8 EX-23.(B) TO PROGRESS/POWER 12/31/98 FORM 10-K Exhibit 23.(b) The Shareholders Florida Power Corporation: We consent to incorporation by reference in the registration statements No. 33-62210 on Form S-3, No. 33-55273 on Form S-3, and No. 333-29897 on Form S-3 of Florida Power Corporation of our report dated January 25, 1999, relating to the balance sheets of Florida Power Corporation as of December 31, 1998 and 1997, and the related statements of income, cash flows and common equity and comprehensive income for each of the years in the three-year period ended December 31, 1998, and all related schedules which report appears in the December 31, 1998 annual report on Form 10-K of Florida Power Corporation. /s/KPMG LLP - ------------------------------ KPMG LLP St. Petersburg, Florida March 19, 1999 EX-27.(A) 9 EX-27.(A) TO PROGRESS/POWER 12/31/98 FORM 10-K
UT This schedule contains summary financial information extracted from Florida Progress's consolidated balance sheet as of December 31, 1998, and consolidated statements of income and cash flows for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 0000357261 FLORIDA PROGRESS CORPORATION DEC-31-1998 DEC-31-1998 YEAR PER-BOOK 3,631 1,000 854 0 676 6,161 1,221 0 641 1,862 0 34 2,250 150 0 86 146 0 0 0 1,633 6,161 3,620 148 3,020 3,168 452 2 454 170 284 2 282 208 0 878 2.90 2.90
EX-27 10 EX-27.(B) TO PROGRESS/POWER 12/31/98 FORM 10-K
UT This schedule contains summary financial information extracted from Florida Power's consolidated balance sheet as of December 31, 1998, and consolidated statements of income and cash flows for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 0000037637 FLORIDA POWER CORPORATION DEC-31-1998 DEC-31-1998 YEAR PER-BOOK 3,631 11 463 0 823 4,928 1,004 0 816 1,820 0 34 1,555 0 0 47 92 0 0 0 1,380 4,928 2,648 140 2,137 2,277 371 6 377 127 250 1 249 155 0 779 0.00 0.00
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