10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________ to__________ . Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer File Number incorporation, address of principal executive offices, and telephone number Identification Number 1-8349 Florida Progress Corporation 59-2147112 A Florida Corporation 410 South Wilmington Street Raleigh, North Carolina 27601 Telephone (919) 546-6111 1-3274 Florida Power Corporation 59-0247770 A Florida Corporation One Progress Plaza St. Petersburg, Florida 33701 Telephone (727) 820-5151
NONE ---- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . --- No. __. This combined Form 10-Q is filed separately by two registrants: Florida Progress Corporation and Florida Power Corporation. Information contained herein relating to either individual registrant is filed by such registrant solely on its own behalf. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of October 31, 2001, each registrant had the following shares of common stock outstanding
Registrant Description Shares ---------- ----------- ------ Florida Progress Corporation Common Stock, without par value 98,616,658 (all of which were held by Progress Energy, Inc.) Florida Power Corporation Common Stock, without par value 100 (all of which were held by Florida Progress Corporation)
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION FORM 10-Q - For the Quarter Ended September 30, 2001 Glossary of Terms Safe Harbor For Forward-Looking Statements PART I. FINANCIAL INFORMATION Item 1. Financial Statements Florida Progress Corporation ---------------------------- Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Florida Power Corporation ------------------------- Statements of Income Balance Sheets Statements of Cash Flows Notes to Financial Statements Florida Progress Corporation and Florida Power Corporation Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures 2 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined Form 10-Q are defined below:
TERM DEFINITION ---- ---------- ADEA ................................... Age Discrimination in Employment Act AEP .................................... American Electric Power AST .................................... Advanced Separation Technologies Btu .................................... British thermal units CVO .................................... Contingent Value Obligation Company or Florida Progress ............ Florida Progress Corporation CP&L ................................... Carolina Power and Light Company CP&L Energy ............................ CP&L Energy, Inc. CR3 .................................... Florida Power's nuclear generating plant, Crystal River Unit No. 3 DOE .................................... United States Department of Energy Electric Fuels ......................... Electric Fuels Corporation EPA .................................... United States Environmental Protection Agency Energy Ventures ........................ Progress Energy Ventures, Inc. FASB ................................... Financial Accounting Standards Board FDEP ................................... Florida Department of Environmental Protection FERC ................................... Federal Energy Regulatory Commission Florida Power or the utility ........... Florida Power Corporation Florida Progress or the Company ........ Florida Progress Corporation FPSC ................................... Florida Public Service Commission Funding Corp. .......................... Florida Progress Funding Corporation IRS .................................... Internal Revenue Service MEMCO .................................. MEMCO Barge Line, Inc. MGP .................................... Manufactured Gas Plant MW ..................................... megawatts NEIL ................................... Nuclear Electric Insurance Limited NRC .................................... United States Nuclear Regulatory Commission PLR .................................... Private Letter Ruling Preferred Securities ................... 7.10% Cumulative Quarterly Income Preferred Securities, Series A, of FPC Capital I, fully and unconditionally guaranteed by Florida Progress Preferred Stock ........................ Florida Power Cumulative Preferred Stock, $100 par value Progress Capital ....................... Progress Capital Holdings, Inc. Progress Energy ........................ Progress Energy, Inc. Progress Rail .......................... Progress Rail Services Corporation Progress Telecom ....................... Progress Telecommunications Corporation PRP .................................... potentially responsible party, as defined in CERCLA PUHCA .................................. Public Utility Holding Company Act of 1935, as amended QFs .................................... Qualifying facilities RTO .................................... Regional Transmission Organization SEC .................................... United States Securities and Exchange Commission Section 29 ............................. Section 29 of the Internal Revenue Service Code SFAS ................................... Statements of Financial Accounting Standards the Trust .............................. FPC Capital I
3 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS ------------------------------------------ Statements made throughout this Form 10-Q that are not statements of historical facts are forward-looking statements and, accordingly, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. For example, forward-looking statements are made in "Management's Discussion and Analysis of Financial Condition and Results of Operations" including, but not limited to, statements under the sub-heading "Other Matters" concerning synthetic fuel tax credits and regulatory developments. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made. Examples of factors that you should consider with respect to any forward-looking statements made throughout this document include, but are not limited to, the following: governmental policies and regulatory actions (including those of the Federal Energy Regulatory Commission, the Environmental Protection Agency, the Nuclear Regulatory Commission, the Department of Energy, the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935, as amended and the Florida Public Service Commission), particularly legislative and regulatory initiatives that may impact the speed and degree of the restructuring of the electricity industry and the results of negotiations related to the expiration of Florida Power's rate stipulation; the outcome of legal and administrative proceedings, including proceedings before our principal regulators; risks associated with operating nuclear power facilities, availability of nuclear waste storage facilities, and nuclear decommissioning costs; terrorist threats and activities, particularly with respect to our nuclear facilities, economic uncertainty caused by recent terror attacks on the United States, and potential adverse reactions to United States anti-terrorism activities; changes in the economy of areas served by Florida Progress; the extent to which we are able to obtain adequate and timely rate recovery of costs, including potential stranded costs arising from the restructuring of the electricity industry; weather conditions and catastrophic weather-related damage; general industry trends, realization of cost savings related to synergies resulting from acquisition by Progress Energy, increased competition from energy and gas suppliers, and market demand for energy; inflation and capital market conditions; the success of our direct and indirect subsidiaries; the extent to which we are able to use tax credits associated with the operations of the synthetic fuel facilities; and unanticipated changes in operating expenses and capital expenditures. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of the Company. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the effect of each such factor on the Company. 4 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ---------------------------- INTERIM FINANCIAL STATEMENTS (Unaudited) ----------------------------------------
CONSOLIDATED STATEMENTS of INCOME --------------------------------- Florida Progress Corporation Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2001 2000 2001 2000 -------------------------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 906,131 $ 907,965 $ 2,500,265 $ 2,226,611 Diversified businesses 354,473 359,753 1,038,899 1,003,028 -------------------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 1,260,604 1,267,718 3,539,164 3,229,639 -------------------------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 259,763 207,347 696,766 492,532 Purchased power 154,958 166,261 407,180 389,653 Operations and maintenance 119,931 118,015 350,612 355,912 Depreciation and amortization 95,087 135,507 341,801 313,331 Taxes other than on income 63,234 59,377 180,420 165,280 Diversified businesses 389,366 384,918 1,124,735 1,032,955 -------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 1,082,339 1,071,425 3,101,514 2,749,663 -------------------------------------------------------------------------------------------------------------------------------- Operating Income 178,265 196,293 437,650 479,976 -------------------------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 736 1,262 1,512 1,592 Other, net (4,462) 1,320 (15,442) (890) -------------------------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (3,726) 2,582 (13,930) 702 -------------------------------------------------------------------------------------------------------------------------------- Income before Interest Charges and Income Taxes 174,539 198,875 423,720 480,678 -------------------------------------------------------------------------------------------------------------------------------- Interest Charges Long-term debt 35,613 40,761 113,169 121,222 Other interest charges 8,414 12,118 27,618 35,434 Allowance for borrowed funds used during construction (270) (521) (474) (1,391) -------------------------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 43,757 52,358 140,313 155,265 -------------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations before Income Taxes 130,782 146,517 283,407 325,413 Income Taxes (Benefit) (50,670) (688) (75,570) (3,448) -------------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 181,452 147,205 358,977 328,861 Discontinued Operations (Note 3) : Income from discontinued operations (net of applicable income tax expense of $0 and $1,976 for the three months ended and $1,848 and $5,006 for the nine months ended September 30, 2001 and 2000, respectively) - 3,098 2,682 7,884 -------------------------------------------------------------------------------------------------------------------------------- Estimated loss on disposal of discontinued operations, including provision of $5,468 for pre-tax operating income during phase-out period, (net of applicable estimated income tax benefit of $9,028 and $7,797 for the three and nine months ended September 30, 2001) (14,120) - (28,528) - -------------------------------------------------------------------------------------------------------------------------------- Net Income $ 167,332 $ 150,303 $ 333,131 $ 336,745 ================================================================================================================================
See Notes to Interim Financial Statements. 5 CONSOLIDATED BALANCE SHEETS ---------------------------
Florida Progress Corporation (In thousands) September 30, December 31, Assets 2001 2000 -------------------------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 7,099,705 $ 6,998,135 Accumulated depreciation (3,926,506) (3,701,975) -------------------------------------------------------------------------------------------------------------------- Utility plant in service, net 3,173,199 3,296,160 Held for future use 8,274 8,274 Construction work in progress 226,757 124,988 Nuclear fuel, net of amortization 66,336 39,879 -------------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 3,474,566 3,469,301 -------------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 38,949 24,200 Accounts receivable 532,666 482,270 Accounts receivable-affiliates 24,909 507 Taxes receivable 30,144 16,363 Deferred income taxes - 39,576 Inventory 468,512 371,919 Deferred fuel cost 57,801 90,434 Prepayments 13,388 23,027 Net assets of discontinued operations 32,642 69,642 Other current assets 29,699 25,251 -------------------------------------------------------------------------------------------------------------------- Total Current Assets 1,228,710 1,143,189 -------------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets 25,098 19,689 Income taxes recoverable through future rates Deferred purchased power contract termination costs 138,601 226,656 Unamortized debt expense 21,347 19,128 Nuclear decommissioning trust funds 401,517 400,719 Diversified business property, net 694,794 666,360 Miscellaneous other property and investments 144,079 181,569 Goodwill, net 128,427 113,152 Other assets and deferred debits 280,345 252,821 -------------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 1,834,208 1,880,094 -------------------------------------------------------------------------------------------------------------------- Total Assets $ 6,537,484 $ 6,492,584 ==================================================================================================================== Capitalization and Liabilities -------------------------------------------------------------------------------------------------------------------- Capitalization -------------------------------------------------------------------------------------------------------------------- Common stock $ 1,358,533 $ 1,318,309 Retained earnings 789,970 670,679 Accumulated other comprehensive loss (1,931) (1,407) Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497 Long-term debt, net 2,349,598 2,276,416 -------------------------------------------------------------------------------------------------------------------- Total Capitalization 4,529,667 4,297,494 -------------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 88,513 190,466 Accounts payable 350,311 352,606 Accounts payable-affiliates 39,880 48 Interest accrued 53,011 64,118 Short-term obligations 313,936 467,292 Advances from parent 170,802 45,180 Other current liabilities 347,326 308,418 -------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 1,363,779 1,428,128 -------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 282,437 302,029 Accumulated deferred investment tax credits 56,330 62,160 Other liabilities and deferred credits 305,271 402,773 -------------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 644,038 766,962 -------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 9) -------------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 6,537,484 $ 6,492,584 ====================================================================================================================
See Notes to Interim Financial Statements. 6 CONSOLIDATED STATEMENTS of CASH FLOWS ------------------------------------- Florida Progress Corporation
Nine Months Ended September 30, (In thousands) 2001 2000 --------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 333,131 $ 336,745 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations (2,682) (7,884) Estimated loss on disposal of discontinued operations 28,528 - Depreciation and amortization 352,262 339,301 Deferred income taxes and investment tax credits, net 501 (20,872) Deferred fuel cost (credit) 32,633 (102,587) Changes in working capital, net of effects from sale or acquisition of business Net increase in accounts receivable (70,601) (141,534) Net increase in inventories (113,200) (23,667) Net (increase) decrease in prepaids and other current assets 5,601 (41,136) Net increase (decrease) in accounts payable 43,134 (2,063) Net increase (decrease) in other current liabilities 140,548 (16,944) Other operating activities (35,481) 36,608 ---------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 714,374 355,967 ---------------------------------------------------------------------------------------------------------------------- Investing Activities: Property additions (212,981) (187,536) Nuclear fuel additions (42,783) - Proceeds from sale of asset 5,532 - Other investing activities (88,930) (129,499) ---------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (339,162) (317,035) ---------------------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds from issuance of long-term debt 299,058 - Net increase in commercial paper reclassified to long-term debt (141,276) 16,455 Net increase (decrease) in short-term indebtedness (153,356) 179,364 Retirement of long-term debt (188,756) (76,727) Equity contribution from parent 39,651 - Dividends paid to parent (213,837) - Dividends paid on common stock - (164,193) Other financing activities (2,224) 533 ---------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (360,740) (44,568) ---------------------------------------------------------------------------------------------------------------------- Cash Provided by Discontinued Operations 277 12 ---------------------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents 14,749 (5,624) ---------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of the Period 24,200 9,587 ---------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 38,949 $ 3,963 ====================================================================================================================== Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period - interest (net of amount capitalized) $ 151,405 $ 154,800 income taxes (net of refunds) $ (76,300) $ 120,000
See Notes to Interim Financial Statements. 7
STATEMENTS of INCOME -------------------- Florida Power Corporation Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2001 2000 2001 2000 -------------------------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 906,131 $ 907,965 $ 2,500,265 $ 2,226,611 Operating Expenses Fuel used in electric generation 259,763 207,347 696,766 492,532 Purchased power 154,958 166,261 407,180 389,653 Operation and maintenance 119,931 118,015 350,612 355,912 Depreciation and amortization 95,087 135,506 341,801 313,330 Taxes other than on income 63,234 59,377 180,420 165,280 -------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 692,973 686,506 1,976,779 1,716,707 -------------------------------------------------------------------------------------------------------------------------------- Operating Income 213,158 221,459 523,486 509,904 -------------------------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 736 1,262 1,513 1,591 Other, net (1,193) 3,146 (6,134) 5,594 -------------------------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (457) 4,408 (4,621) 7,185 -------------------------------------------------------------------------------------------------------------------------------- Income before Interest Charges and Income Taxes 212,701 225,867 518,865 517,089 -------------------------------------------------------------------------------------------------------------------------------- Interest Charges Long-term debt 25,828 25,097 74,307 77,097 Other interest charges 3,090 6,793 11,644 19,459 Allowance for borrowed funds used during construction (271) (521) (475) (1,391) -------------------------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 28,647 31,369 85,476 95,165 -------------------------------------------------------------------------------------------------------------------------------- Income before Income Taxes 184,054 194,498 433,389 421,924 Income Taxes 69,597 72,160 162,259 155,946 -------------------------------------------------------------------------------------------------------------------------------- Net Income 114,457 122,338 271,130 265,978 Dividends on Preferred Stock 378 378 1,134 1,134 -------------------------------------------------------------------------------------------------------------------------------- Earnings for Common Stock $ 114,079 $ 121,960 $ 269,996 $ 264,844 ================================================================================================================================
See Notes to Interim Financial Statements. 8
BALANCE SHEETS -------------- Florida Power Corporation (In thousands) September 30, December 31, Assets 2001 2000 ------------------------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 7,099,705 $ 6,998,135 Accumulated depreciation (3,926,506) (3,701,975) ------------------------------------------------------------------------------------------------------------------- Utility plant in service, net 3,173,199 3,296,160 Held for future use 8,274 8,274 Construction work in progress 226,757 124,988 Nuclear fuel, net of amortization 66,336 39,879 ------------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 3,474,566 3,469,301 ------------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 8,342 3,380 Accounts receivable 338,052 289,237 Accounts receivable-affiliates 18,978 38,729 Advances to parent 127,510 - Deferred income taxes 39,576 Inventory 163,660 139,116 Deferred fuel cost 57,801 90,434 Prepayments and other current assets 3,157 9,097 ------------------------------------------------------------------------------------------------------------------- Total Current Assets 717,500 609,569 ------------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Income taxes recoverable through future rates 25,098 19,689 Deferred purchased power contract termination costs 138,601 226,656 Unamortized debt expense 12,084 9,526 Nuclear decommissioning trust funds 401,517 400,719 Miscellaneous other property and investments 47,060 54,816 Other assets and deferred debits 227,603 187,763 ------------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 851,963 899,169 ------------------------------------------------------------------------------------------------------------------- Total Assets $ 5,044,029 $ 4,978,039 =================================================================================================================== Capitalization and Liabilities ------------------------------------------------------------------------------------------------------------------- Capitalization ------------------------------------------------------------------------------------------------------------------- Common stock $ 1,075,414 $ 1,075,414 Retained earnings 945,773 889,614 Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497 Long-term debt, net 1,569,664 1,397,116 ------------------------------------------------------------------------------------------------------------------- Total Capitalization 3,624,348 3,395,641 ------------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 32,000 82,000 Accounts payable 189,837 170,126 Accounts payable-affiliates 51,302 39,526 Taxes accrued 160,545 4,401 Interest accrued 38,522 47,117 Advances from parent - 20,180 Short-term obligations - 192,530 Other current liabilities 291,883 258,633 ------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 764,089 814,513 ------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 340,992 387,901 Accumulated deferred investment tax credits 55,813 61,626 Other liabilities and deferred credits 258,787 318,358 ------------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 655,592 767,885 ------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 9) ------------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 5,044,029 $ 4,978,039 ===================================================================================================================
See Notes to Interim Financial Statements. 9 STATEMENTS of CASH FLOWS ------------------------ Florida Power Corporation
Nine Months Ended September 30, (In thousands) 2001 2000 ---------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 271,130 $ 265,978 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 350,771 338,934 Deferred income taxes and investment tax credits, net (22,180) (28,210) Deferred fuel cost (credit) 32,633 (102,587) Changes in working capital: Net increase in accounts receivable (29,064) (94,141) Net increase in inventories (24,544) (7,083) Net (increase) decrease in prepaids and other current assets 5,940 (35,874) Net increase (decrease) in accounts payable 31,487 (13,252) Net increase in other current liabilities 36,734 82,122 Other operating activities (90,690) (18,850) ---------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 562,217 387,037 ---------------------------------------------------------------------------------------------------------------------- Investing Activities: Property additions (212,981) (187,536) Nuclear fuel additions (42,783) - Other investing activities (14,336) (13,946) ---------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (270,100) (201,482) ---------------------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds from issuance of long-term debt 297,621 - Net decrease in commercial paper reclassified to long-term debt (96,276) - Net increase (decrease) in short-term indebtedness (192,530) 47,364 Retirement of long-term debt (81,000) (75,900) Dividends paid to parent (213,836) (153,693) Dividends paid on preferred stock (1,134) (1,134) ---------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (287,155) (183,363) ---------------------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents 4,962 2,192 ---------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of the Period 3,380 - ---------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 8,342 $ 2,192 ====================================================================================================================== Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest (net of amount capitalized) $ 94,071 $ 104,800 income taxes (net of refunds) $ 17,071 $ 117,800
See Notes to Interim Financial Statements. 10 FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION NOTES TO INTERIM FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General. Florida Progress Corporation (the Company or Florida Progress) is a ------- holding company under the Public Utility Holding Company Act of 1935 (PUHCA). The Company became subject to the regulations of PUHCA when it was acquired by CP&L Energy, Inc. on November 30, 2000 (See Note 2). CP&L Energy, Inc. subsequently changed its name to Progress Energy, Inc. (Progress Energy or the Parent). Florida Progress' two primary subsidiaries are Florida Power Corporation (Florida Power) and Electric Fuels Corporation (Electric Fuels). Florida Power is a regulated public utility engaged in the generation, transmission, distribution and sale of electricity in portions of Florida. Florida Power is regulated by the Florida Public Service Commission (FPSC) and the Federal Energy Regulatory Commission (FERC). Electric Fuels is a diversified non-utility energy company, whose principal business segments are Energy & Related Services and Rail Services. On July 23, 2001, Progress Energy announced the disposition of the Inland Marine Transportation segment of the Company. The transaction closed on November 1, 2001 (see Note 3). Due to the geographical locations of Electric Fuels' Rail Services, Inland Marine Transportation and the non-Florida portion of its Energy & Related Services operations, it is necessary to report their results one-month in arrears. Basis of Presentation. These financial statements have been prepared in --------------------- accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Because the accompanying consolidated interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles, they should be read in conjunction with the audited financial statements for the period ended December 31, 2000 and notes thereto included in Florida Progress' and Florida Power's Form 10-K for the year ended December 31, 2000. The amounts included in the consolidated interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present Florida Progress' and Florida Power's financial position and results of operations for the interim periods. Due to seasonal weather variations and the timing of outages of electric generating units, the results of operations for interim periods are not necessarily indicative of amounts expected for the entire year. As the Company's common stock is no longer publicly traded, earnings per share data is not presented. Certain reclassifications have been made to prior-year amounts to conform to the current year's presentation. The financial statements include the financial results of the Company and its majority-owned operations. All significant intercompany balances and transactions have been eliminated. Investments in 20% to 50%-owned joint ventures are accounted for using the equity method. In preparing financial statements that conform with generally accepted accounting principles, management must make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses reflected during the reporting period. Actual results could differ from those estimates. NOTE 2. ACQUISITION BY PROGRESS ENERGY, INC. On November 30, 2000, Progress Energy acquired all of the outstanding shares of Florida Progress' common stock in accordance with the Amended and Restated Plan of Exchange, including the related Plan of Share Exchange, dated as of August 22, 1999, as amended and restated as of March 3, 2000, among CP&L Energy, Florida Progress and Carolina Power & Light Company (CP&L). Florida Progress shareholders received $54.00 in cash or shares of Progress Energy common stock having a value of $54.00, subject to proration, and one contingent value obligation (CVO) in exchange for each share of Florida Progress common stock. The exchange ratio for the shares of Progress Energy common stock issued to Florida Progress shareholders was 1.3473. Each CVO represents the right to receive contingent payments based upon the net after-tax cash flow to Progress Energy generated by four synthetic fuel facilities purchased by subsidiaries of Florida Progress in 1999. 11 The acquisition was accounted for by Progress Energy using the purchase method of accounting; however, due to the significance of the public debt and preferred securities of the Company and Florida Power, the acquisition cost was not pushed down to the Company's separate financial statements or Florida Power's. In connection with the acquisition of the Company by Progress Energy, the Company began the implementation of a plan to combine operations with Progress Energy. In the fourth quarter 2000, the Company recorded non-executive involuntary termination costs of $41.8 million. The third quarter 2001 activity for the non-executive termination costs is detailed in the table below: Non-Executive In millions Termination Costs ----------------- Balance at June 30, 2001 $ 28.0 Payments (9.5) ------------------- Balance at September 30, 2001 $ 18.5 =================== The Company completed the implementation phase of the non-executive plan in June 2001 and expects to finalize the plan by the end of 2001. The majority of the related severance payments are expected to occur in 2001 with the remaining payments occurring through 2003. The termination did not result in a plan curtailment related to postretirement benefits other than pension. An immaterial curtailment gain is being recorded for the pension plan. NOTE 3. DISCONTINUED OPERATIONS On July 23, 2001, Progress Energy announced the disposition of the Inland Marine Transportation segment of the Company, which is operated by MEMCO Barge Line, Inc. Inland Marine provides transportation of coal, agricultural and other dry-bulk commodities as well as fleet management services. Progress Energy entered into a contract to sell MEMCO Barge Line, Inc., to AEP Resources, Inc., a wholly-owned subsidiary of American Electric Power. On November 1, 2001, the Company completed the sale of the Inland Marine Transportation segment. As a result of the completion of the sale, the Company has updated the estimated loss on disposal. An estimated loss on disposal of approximately $28.5 million, including an additional loss of $14.1 million for the three months ended September 30, 2001, has been recorded. The additional loss is related to the interest rate effects on the early termination of certain off balance sheet arrangements and an accrual related to an environmental indemnification provision. Proceeds from disposal were $270 million, of which approximately $225 million will be used for the early termination of certain off balance sheet arrangements for assets currently leased by MEMCO. Remaining proceeds were used to retire commercial paper. Since Inland Marine results of operations are recorded one month in arrears, the loss on disposal will be finalized in the fourth quarter. The results of operations for all periods presented have been restated for the discontinued operations of the Inland Marine Transportation segment. The net income of these operations is reported in the consolidated statements of income under Discontinued Operations, for all periods presented, except for the three-month period ending September 30, 2001. Net income of $2.6 million for the three months ended September 30, 2001, has been reflected in estimated phase out period income, included in the estimated loss on disposal of $28.5 million. Revenues from such operations were $43.6 million and $47.0 million for the three months ended September 30, 2001 and 2000, respectively, and $127.8 million and $138.1 million for the nine months ended September 30, 2001 and 2000, respectively. In connection with the sale, the Company entered into environmental indemnification provisions covering both unknown and known sites. As of September 30, 2001, the Company has recorded an accrual to cover estimated probable future environmental expenditures. Management believes that it is reasonably possible that additional costs, which cannot be currently estimated, may be incurred related to the environmental indemnification provision beyond the amounts accrued, as a result of new information. Management cannot predict the outcome of this matter. 12 The net assets relating to the disposition have been segregated on the consolidated balance sheets. A detail of these net assets as of each balance sheet date is detailed in the table below:
In millions September 30, 2001 December 31, 2000 -------------------------------------------------- Current assets $ 26.1 $ 28.6 Non-current assets 78.4 75.0 Current liabilities (25.3) (17.3) Non-current liabilities (15.5) (16.7) Provision for estimated loss on disposal: Estimated Loss on Disposal (31.9) - Accrued net income during phase out period (estimated net income of $3.4 million offset by actual net income of $2.6 million for the three months ended September 30, 2001) 0.8 - -------------------------------------------------- $ 32.6 $ 69.6 ==================================================
NOTE 4. FINANCIAL INFORMATION BY BUSINESS SEGMENT The Company's principal business segment is Florida Power, an electric utility engaged in the generation, purchase, transmission, distribution and sale of electricity in portions of Florida. The other reportable business segments are Electric Fuels' Energy & Related Services and Rail Services. Electric Fuels' Inland Marine Transportation unit is no longer a reportable segment due to the disposition of these operations (See Note 3). Energy & Related Services includes coal and synthetic fuel operations, natural gas production and sales, river terminal services and off-shore marine transportation. Rail Services' operations include railcar repair, rail parts reconditioning and sales, railcar leasing and sales, providing rail and track material, and scrap metal recycling. The other category consists primarily of Progress Telecom, the Company's telecommunications subsidiary, the Company's investment in FPC Capital Trust, which holds the Preferred Securities, the holding company, Florida Progress Corporation and elimination entries. Progress Telecom markets wholesale fiber-optic based capacity service in the Southeastern United States and also markets wireless structure attachments to wireless communication companies and governmental entities. Financial data for business segments for the periods covered in this Form 10-Q are presented in the table below:
Energy and Florida Related Rail (In thousands) Power Services Services Other Consolidated -------------------------------------------------------------------------------------------------- Three months ended September 30, 2001: Revenues $ 906,131 $ 99,416 $ 219,554 $ 35,503 $ 1,260,604 Intersegment revenues -- 88,014 477 (88,491) -- Income (loss) from continuing operations 114,079 39,098 (2,165) 30,440 181,452 Total assets 5,044,029 550,141 828,384 114,930 6,537,484 ================================================================================================== Energy and Florida Related Rail Power Services Services Other Consolidated -------------------------------------------------------------------------------------------------- Three months ended September 30, 2000: Revenues $ 907,965 $ 101,045 $ 250,197 $ 8,511 $ 1,267,718 Intersegment revenues -- 57,883 188 (58,071) -- Income (loss) from continuing operations 121,960 25,495 79 (329) 147,205 Total assets 4,920,010 649,555 852,734 305,332 6,727,631 ===================================================================================================
13
Energy and Florida Related Rail Power Services Services Other Consolidated -------------------------------------------------------------------------------------------------- Nine months ended September 30, 2001: Revenues $ 2,500,265 $ 275,904 $ 669,580 93,415 $ 3,539,164 Intersegment revenues -- 280,426 1,055 (281,481) -- Income (loss) from continuing operations 269,996 106,521 (13,953) (3,587) 358,977 Total assets 5,044,029 550,141 828,384 114,930 6,537,484 ================================================================================================== Energy and Florida Related Rail Power Services Services Other Consolidated -------------------------------------------------------------------------------------------------- Nine months ended September 30, 2000: Revenues $ 2,226,611 $ 209,422 $ 775,201 $ 18,405 $ 3,229,639 Intersegment revenues -- 188,863 515 (189,378) -- Income (loss) from continuing operations 264,844 60,002 2,926 1,089 328,861 Total assets 4,920,010 649,555 852,734 305,332 6,727,631 ==================================================================================================
NOTE 5. IMPACT OF NEW ACCOUNTING STANDARDS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. The adoption of SFAS No. 133 did not have any effect on the Company's financial statements. During the second quarter of 2001, the FASB issued an interpretation of SFAS No. 133 indicating that options, in general, cannot qualify for the normal purchases and sales exception, but provided an exception that allows certain electricity contracts, including certain capacity-energy contracts, to be excluded from the mark-to-market requirements of SFAS No. 133. These interpretations were effective July 1, 2001. Those interpretations would not result in mark-to-market effects on the Company's financial statements based on contracts currently outstanding. In October 2001, the FASB revised criteria related to the exception for certain electricity contracts, with the revision to be effective January 1, 2002. It is unclear whether or not that revision will be sustained and, if so, what effects the revision would have on the Company's financial statements. If an electricity or fuel supply contract in its regulated business is subject to mark-to-market accounting, there would be no income statement effect of the mark-to-market because the contract's mark-to-market gain or loss will be recorded as a regulatory asset or liability. Any mark-to-market gains or losses on contracts outside its regulated business will affect income unless those contracts qualify for hedge accounting treatment. The application of the new rules is still evolving and further guidance from the Financial Accounting Standards Board (FASB) is expected, which could additionally impact the Company's financial statements. On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and clarifies the criteria for recording of other intangible assets separately from goodwill. SFAS No. 142 requires that, effective January 1, 2002, the amortization of goodwill will cease. It also requires that goodwill be evaluated for impairment at least annually, which could result in periodic impairment charges. Goodwill amortization on an after-tax basis was $0.4 million and $1.7 million for the three and nine months ended September 30, 2001, and is expected to be approximately $2.5 million for the year. The Company is currently assessing the impact adopting these statements will have on the financial statements. 14 On August 15, 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" that provides accounting guidance for the costs of retiring long-lived assets and is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact adoption of this statement will have on the financial statements. On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supercedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". It also supercedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" related to the disposal of a segment of a business. The Statement is effective for fiscal years beginning after December 15, 2001, with early adoption encouraged. The Company is currently assessing the impact adopting this statement will have on the financial statements. NOTE 6. FINANCING ACTIVITIES During the first quarter of 2001, Progress Capital Holdings retired $31 million in Medium-Term Notes. The $6 million of medium-term notes that were retired in January had a 9.95% coupon rate and the $25 million of medium-term notes that were retired in February had a 6.13% coupon rate. Progress Energy issued commercial paper to fund the maturing medium-term notes. On July 1, 2001, $80 million of Florida Power's Medium-Term Notes, 6.47% Series matured. Florida Power issued commercial paper to fund the maturing medium-term notes. On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds, 6.650% Series due July 15, 2011. Proceeds from the issuance were primarily used to retire commercial paper and for general corporate purposes. During the third quarter of 2001, Progress Capital Holdings retired $70 million of Medium-Term Notes. The $10 million of medium-term notes that were retired in July had a 9.55% coupon rate, and the $60 million of medium-term notes that were retired in August had a 6.88% coupon rate. Progress Energy issued commercial paper to fund the maturing medium-term notes. On October 30, 2001, Progress Energy issued $400 million of senior notes, 5.85% Series due 2008 and $400 million of senior notes, 7.00% Series due 2031. Approximately $600 million of the proceeds from the issuance were used to retire Progress Capital Holding's commercial paper. NOTE 7. FLORIDA PROGRESS OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES (QUIPS) OF A SUBSIDIARY TRUST HOLDING SOLELY FLORIDA PROGRESS GUARANTEED SUBORDINATED DEFERRABLE INTEREST NOTES In April 1999, FPC Capital I (the Trust), an indirect wholly owned subsidiary of the Company, issued 12 million shares of $25 par cumulative Company-obligated mandatorily redeemable preferred securities due 2039 (Preferred Securities), with an aggregate liquidation value of $300 million and a quarterly distribution rate of 7.10%, payable quarterly. Currently, all 12 million shares of the Preferred Securities that were issued are outstanding. Concurrent with the issuance of the Preferred Securities, the Trust issued to Florida Progress Funding Corporation (Funding Corp.) all of the common securities of the Trust (371,135 shares), for $9.3 million. Funding Corp. is a direct wholly owned subsidiary of the Company. The existence of the Trust is for the sole purpose of issuing the Preferred Securities and the common securities and using the proceeds thereof to purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable Interest Notes due 2039 (subordinated notes), for a principal amount of $309.3 million. The subordinated notes and the Notes Guarantee (as discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds from the sale of the subordinated notes were advanced to Progress Capital Holdings, Inc. (PCH), and used for general corporate purposes including the repayment of a portion of certain outstanding short-term bank loans and commercial paper. The Company has fully and unconditionally guaranteed the obligations of Funding Corp. under the subordinated notes (the Notes Guarantee). In addition, the Company has guaranteed the payment of all distributions required to be made by the Trust, but only to the extent that the Trust has funds available for such distributions (Preferred Securities Guarantee). The Preferred Securities Guarantee, considered together with the Notes Guarantee, constitutes a full and unconditional guarantee by the Company of the Trust's obligations under the Preferred Securities. 15 The subordinated notes may be redeemed at the option of Funding Corp. beginning in 2004 at par value plus accrued interest through the redemption date. The proceeds of any redemption of the subordinated notes will be used by the Trust to redeem proportional amounts of the Preferred Securities and common securities in accordance with their terms. Upon liquidation or dissolution of Funding Corp., holders of the Preferred Securities would be entitled to the liquidation preference of $25 per share plus all accrued and unpaid dividends thereon to the date of payment. These preferred securities are classified as long-term debt on Florida Progress' balance sheets. NOTE 8. COMPREHENSIVE INCOME Comprehensive income for Florida Progress for the three months and the nine months ended September 30, 2001, was $181.2 million and $346.7 million, respectively. For the three months and the nine months ended September 30, 2000, comprehensive income was $150.1 million and $336.4 million, respectively. Items of other comprehensive income for the three and nine month periods consisted primarily of foreign currency translation adjustments. Florida Power does not have any items of other comprehensive income. NOTE 9. COMMITMENTS AND CONTINGENCIES Insurance -- Florida Progress and its subsidiaries utilize various risk management techniques to protect certain assets from risk of loss, including the purchase of insurance. Risk avoidance, risk transfer and self-insurance techniques are utilized depending on the Company's ability to assume risk, the relative cost and availability of methods for transferring risk to third parties, and the requirements of applicable regulatory bodies. Florida Power self-insures its transmission and distribution lines against loss due to storm damage and other natural disasters. Pursuant to a regulatory order, Florida Power is accruing $6 million annually to a storm damage reserve and may defer any losses in excess of the reserve. The reserve balance is approximately $34.0 million as of September 30, 2001. 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 (currently available through commercial insurance), Florida Power could be assessed up to $88.1 million per incident, with a maximum assessment of $10 million per year. Florida Power also maintains nuclear property damage insurance and decontamination and decommissioning liability insurance totaling $1.6 billion. This insurance coverage is purchased from Nuclear Electric Insurance Ltd. (NEIL). Florida Power is self-insured for any losses that are in excess of this coverage. Under the terms of the NEIL policy, Florida Power could be assessed up to a maximum of $9.13 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. Claims and Uncertainties -- The Company is subject to federal, state and local regulations addressing air and water quality, hazardous and solid waste management and other environmental matters. Various organic materials associated with the production of manufactured gas, generally referred to as coal tar, are regulated under federal and state laws. The lead or sole regulatory agency that is responsible for a particular former coal tar site depends largely upon the state in which the site is located. There are several MGP sites to which Florida Power has some connection. In this regard, Florida Power, with other potentially responsible parties, is participating in investigating and, if necessary, remediating former coal tar sites with several regulatory agencies, including, but not limited to, the U.S. Environmental Protection Agency (EPA) and the Florida Department of Environmental Protection (FDEP). Although the Company may incur costs at these sites about which it has been notified, based upon current status of these sites, the Company does not expect those costs to be material to the financial position or results of operations of the Company. The Company has accrued amounts to address known costs at certain of these sites. The Company is periodically notified by regulators such as the EPA and various state agencies of its involvement or potential involvement in sites, other than MGP sites, that may require investigation and/or remediation. Although the Company may incur costs at the sites about which it has been notified, based upon the current status of these sites, the Company does not expect those costs to be material to the financial position or results of operations of the Company. 16 The EPA has been conducting an enforcement initiative related to a number of coal-fired utility power plants in an effort to determine whether modifications at those facilities were subject to New Source Review requirements or New Source Performance Standards under the Clean Air Act. Florida Power has been asked to provide information to the EPA as part of this initiative and has cooperated in providing the requested information. The EPA has initiated enforcement actions against other unaffiliated utilities as part of this initiative, some of which have resulted in or may result in settlement agreements, ranging from $1.0 billion to $1.4 billion. These settlement agreements have generally called for expenditures to be made over extended time periods, and some of the companies may seek recovery of the related costs through rate adjustments or similar mechanism. The Company cannot predict the outcome of this matter. In July 1997, the EPA issued final regulations establishing a new eight-hour ozone standard. In October 1999, the District of Columbia Circuit Court of Appeals ruled against the EPA with regard to the federal eight-hour ozone standard. The U.S. Supreme Court has upheld, in part, the District of Columbia Circuit Court of Appeals decision. Further litigation and rulemaking are anticipated. The Company cannot predict the outcome of this matter. On November 1, 2001, the Company completed the sale of the Inland Marine Transportation segment, which was operated by MEMCO Barge Line, Inc. to AEP Resources, Inc. In connection with the sale, the Company entered into environmental indemnification provisions covering both unknown and known sites. As of September 30, 2001, the Company has recorded an accrual to cover estimated probable future environmental expenditures. Management believes that it is reasonably possible that additional costs, which cannot be currently estimated, may be incurred related to the environmental indemnification provision beyond the amounts accrued as a result of new information. Management cannot predict the outcome of this matter. Florida Power has filed claims with the Company's general liability insurance carriers to recover costs arising out of actual or potential environmental liabilities. Some claims have settled and others are still pending. While management cannot predict the outcome of these matters, the outcome is not expected to have a material effect on the financial position or results of operations Florida Power currently is storing spent nuclear fuel onsite in spent fuel pools. If Florida Power does not seek renewal of the Crystal River Unit No. 3 (CR3) operating license, CR3 will have sufficient storage capacity in place for fuel consumed through the end of the expiration of the license in 2016. If Florida Power extends the CR3 operating license, dry storage may be necessary. Regulatory developments - Florida Power previously operated under an agreement committing several parties not to seek any reduction in its base rates or authorized return on equity. That agreement expired on June 30, 2001. On May 3, 2001, the staff of the Florida Public Service Commission, or FPSC, recommended that the FPSC require Florida Power to submit, by September 14, 2001, minimum filing requirements, based on a 2002 projected calendar year, to initiate a rate proceeding regarding its future base rates. The FPSC staff also recommended to the FPSC that, pending completion of Florida Power's rate case, annual revenues of $114 million should be held subject to refund to its customers. On June 20, 2001, the FPSC issued an order that Florida Power be required to hold $114 million of revenue subject to refund and to file, by September 14, 2001, minimum filing requirements based on a projected 2002 test year. On July 2, 2001, Florida Power filed a request for rehearing of the portion of the FPSC's order requiring that it hold $114 million of revenues subject to refund on the grounds that the order contradicted FPSC precedent, was inconsistent with the applicable statutory requirements and violated Florida Power's due process rights. On October 16, 2001, the Commission approved Florida Power's motion for reconsideration and reduced the revenue subject to refund by $16 million to $98 million. The Commission also allowed the Company to reduce the amount subject to refund if it is successful in recovering certain expenses incurred during 2001, thus potentially reducing the amount subject to refund. On September 14, 2001, Florida Power submitted its required rate filing, including its revenue requirements and supporting testimony. Under the filing, Florida Power customers would receive a $5 million annual credit rate for 15 years, or $75 million in total, from net synergies of its merger with Progress Energy. Additionally, the filing provides that the regulatory asset related to the purchase of Tiger Bay cogeneration facility in 1997 would be fully amortized by the end of 2003, which would provide customers with a further rate reduction of $37 million annually beginning in 2004. Also included in the filing is an incentive regulatory plan, which would provide for additional rate reductions through efficiencies derived as a result of Florida Power's ability to lower the future costs of its utility operations. The Company expects to satisfy an additional filing requirement due November 15, 2001. Hearings are scheduled to begin March 20, 2002, with a final decision expected in July 2002. The FPSC has encouraged its staff, Florida Power, and other parties to negotiate a settlement, if possible, before the hearings begin. The Company cannot predict the outcome or impact of these matters. 17 LEGAL MATTERS Age Discrimination Suit -- Florida Power and Florida Progress have been named defendants in an age discrimination lawsuit. The number of plaintiffs remains at 116, but four of those plaintiffs have had their federal claims dismissed and 74 others have had their state age claims dismissed. While no dollar amount was requested, each plaintiff seeks back pay, reinstatement or front pay through their projected dates of normal retirement, costs and attorneys' fees. In October 1996, the Federal Court approved an agreement between the parties to provisionally certify this case as a class action suit under the Age Discrimination in Employment Act. Florida Power filed a motion to decertify the class and in August 1999, the Court granted Florida Power's motion. In October 1999, the judge certified the question of whether the case should be tried as a class action to the Eleventh Circuit Court of Appeals for immediate appellate review. In December 1999, the Eleventh Circuit Court of Appeals agreed to review the judge's order decertifying the class and oral arguments were held in January 2001. In anticipation of a potential ruling decertifying the case as a class action, plaintiffs filed a virtually identical lawsuit, which identified all opt-in plaintiffs as named plaintiffs. This case had been held in abeyance until reactivated in July 2000 upon motion of the plaintiffs. On July 5, 2001, the Eleventh Circuit Court of Appeals ruled that as a matter of law, disparate claims cannot be brought under the Age Discrimination in Employment Act (ADEA). This ruling has the effect of decertifying this case as a class action. On October 3, 2001, the plaintiffs filed a petition in the United States Supreme Court, requesting a hearing of the case, on the issue of whether disparate claims can be brought under the ADEA. The Company cannot predict the outcome of this matter. In December 1998, during mediation in this age discrimination suit, plaintiffs alleged damages of $100 million. Company management, while not believing plaintiffs' claim to have merit, offered $5 million in an attempt to settle all claims. Plaintiffs rejected that offer. Florida Power and the plaintiffs engaged in informal settlement discussions, which terminated on December 22, 1998. As a result of the plaintiffs' claims, management has identified a probable range of $5 million to $100 million with no amount within that range a better estimate of probable loss than any other amount; accordingly, Florida Power has accrued $5 million. In December 1999, Florida Power also recorded an accrual of $4.8 million for legal fees associated with defending its position in these proceedings. There can be no assurance that this litigation will be settled, or if settled, that the settlement will not exceed $5 million. Additionally, the ultimate outcome, if litigated, cannot presently be determined. Advanced Separation Technologies (AST) -- In 1996, Florida Progress sold its 80% interest in AST to Calgon Carbon Corporation (Calgon) for net proceeds of $56 million in cash. In January 1998, Calgon filed a lawsuit against Florida Progress and the other selling shareholder and amended it in April 1998, alleging misstatement of AST's 1996 revenues, assets and liabilities, seeking damages and granting Calgon the right to rescind the sale. The lawsuit also accused the sellers of failing to disclose flaws in AST's manufacturing process and a lack of quality control. Florida Progress believes that the aggregate total of all legitimate warranty claims by customers of AST for which it is probable that Florida Progress will be responsible for under the Stock Purchase Agreement with Calgon is approximately $3.2 million, and accordingly, accrued $3.2 million in the third quarter of 1999 as an estimate of probable loss. Florida Progress filed a motion for summary judgement, which is pending. Qualifying Facilities Contracts -- Florida Power's purchased power contracts with qualifying facilities employ separate pricing methodologies for capacity payments and energy payments. Florida Power has interpreted the pricing provision in these contracts to allow it to pay an as-available energy price rather than a higher firm energy price when the avoided unit upon which the applicable contract is based would not have been operated. The owners of four qualifying facilities filed suits against Florida Power in state court over the contract payment terms, and one owner also filed suit in federal court. Three of the state court suits have been settled and the federal case was dismissed. In the remaining state court suit, the trial regarding NCP Lake Cogen (Lake) concluded in December 1998. In April 1999, the judge entered an order granting Lake's breach of contract claim and ruled that Lake is entitled to receive "firm" energy payments during on-peak hours, but for all other hours, Lake is entitled to the "as-available" rate. The Court also ruled that for purposes of calculating damages, the breach of contract occurred at the inception of the contract. In August 1999, a Final Judgement was entered awarding damages to Lake of approximately $4.5 million and Lake filed a Notice of Appeal. On January 26, 2001, the District Court of Appeals reversed the trial court's order and held that the contract requires Florida Power to pay Lake the firm energy rate for all hours that the avoided unit operates, less any maintenance shut-down hours. The District Court of Appeals remanded the case to the trial court for a new trial to determine the appropriate amount of damages consistent with the appellate court's ruling. Florida Power sought rehearing of this decision with the District Court of Appeal's, which subsequently confirmed its initial decision. On remand, Florida Power entered a stipulation on issues of fact that resulted in the issuance of a Final Judgement awarding damages to Lake of 18 approximately $20 million, which Florida Power recorded as a charge to purchased power expense. Also in the Lake matter, in April 1998, Florida Power filed a petition with the FPSC for a Declaratory Statement that the contract between the parties limits energy payments thereunder to the avoided costs based upon an analysis of a hypothetical unit having the characteristics specified in the contract. In October 1998, the FPSC denied the petition. Florida Power appealed this decision to the Florida Supreme Court, which subsequently upheld the FPSC. Management does not expect that the results of these legal actions will have a material impact on Florida Power's financial position, results of operations or liquidity. Florida Power anticipates that all fuel and capacity expenses, including any settlement amounts or judicial awards incurred as a result of the matters discussed above, will be recovered from its customers. Easement Litigation -- In December 1998, Florida Power was served with a class action lawsuit seeking damages, declaratory and injunctive relief for the alleged improper use of electric transmission easements. The plaintiffs contend that the licensing of fiber optic telecommunications lines to third parties or telecommunications companies for other than Florida Power's internal use along the electric transmission line right-of-way exceeds the authority granted in the easements. In June 1999, plaintiffs amended their complaint to add Progress Telecommunications Corporation, an indirect wholly owned subsidiary of Florida Progress, as a defendant and to add counts for unjust enrichment and constructive trust. In January 2000, the court conditionally certified the class statewide. In a mediation held in March 2000, the parties reached a tentative settlement of this claim. In January 2001, the Court preliminarily approved the amended settlement agreement, certified the settlement class and approved the class notice. A final settlement hearing was held in June 2001. As of October 31, 2001, the Court has not entered a final order. Management does not expect that the results of these legal actions will have a material impact on Florida Progress' financial position, results of operations or liquidity. Accordingly, no provision for loss has been recorded pertaining to this matter. Franchise Litigation -- Five cities, with a total of approximately 36,000 customers, have sued Florida Power in various circuit courts in Florida. The lawsuits principally seek (1) a declaratory judgment that the cities have the right to purchase Florida Power's electric distribution system located within the municipal boundaries of the cities, (2) a declaratory judgment that the value of the distribution system must be determined through arbitration, and (3) injunctive relief requiring Florida Power to continue to collect from Florida Power's customers and remit to the cities, franchise fees during the pendency of the litigation, and as long as Florida Power continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of the franchise ordinances under which Florida Power had agreed to collect such fees. Two circuit courts have entered orders requiring arbitration to establish the purchase price of Florida Power's electric distribution facilities within two cities. One appellate court has held that one city has the right to determine the value of Florida Power's facilities within the city through arbitration. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system, nor has there been any proceeding to determine the price at which such a purchase could be made. One court has ordered Florida Power to continue to collect franchise fees of the city of Winter Park, Florida, and hold those fees in escrow, pending resolution of the litigation. The Company cannot predict the outcome of these matters. Other Legal Matters -- Florida Progress and Florida Power are involved in various other claims and legal actions arising in the ordinary course of business, some of which involve substantial amounts. Where appropriate, accruals have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect upon either company's consolidated financial position, results of operations or liquidity. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS For the three and nine months ended September 30, 2001, as compared to the corresponding periods in the prior year. Florida Progress' consolidated income from continuing operations for the three and nine month periods ended September 30, 2001, was $181.5 million and $359.0 million, respectively, compared to income from continuing operations of $147.2 million and $328.9 million, for the same periods in 2000. Business segment results and the factors affecting them are discussed below. FLORIDA POWER CORPORATION Florida Power, the largest subsidiary of Florida Progress, reported earnings for common stock of $114.1 million and $270.0 million for the third quarter and first nine months of 2001, compared to $122.0 million and $264.8 million for the comparable periods in 2000. The components of retail and wholesale electric megawatt-hour sales for the three and nine months ended September 30, 2001, and 2000 were as follows: (In millions of mWh)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 % Change 2001 2000 % Change ---- ---- -------- ---- ---- -------- Residential 5,370 5,467 (1.8) % 13,842 13,267 4.3 % Commercial 3,164 3,184 (0.6) 8,367 8,215 1.9 Industrial 934 1,078 (13.4) 2,923 3,244 (9.9) Governmental 751 738 1.8 2,041 1,988 2.7 ------------------- ------------------- Total Retail mWh Sales 10,219 10,467 (2.4) 27,173 26,714 1.7 Wholesale 1,201 1,232 (2.5) 2,886 2,683 7.6 ------------------- ------------------- Total mWh Sales 11,420 11,699 (2.4) % 30,059 29,397 2.3 %
Florida Power's retail megawatt-hour sales decreased slightly during the third quarter of 2001 and increased slightly for the year to date, compared with 2000. Residential and commercial sectors increased year to date due to continued customer growth, partially offset by cooler weather, which is a key factor influencing usage among residential customers. Cooler weather also negatively influenced retail sales for the quarter, but was partially offset by customer growth. Industrial sales declined due to weakness in the manufacturing sector and phosphate industry, which continue to be affected by the economic downturn that is expected to continue. Wholesale sales decreased for the quarter, but have increased year to date compared to 2000, which is attributable to sales to Seminole Electric Cooperative, Florida Power's largest wholesale customer. The year to date increase reflects an increase in the capacity contracts with the City of Homestead and Florida Power & Light, with milder weather negatively impacting the third quarter results. Fuel used in generation and purchased power, combined, increased $41.1 million and $221.8 million, for the third quarter and first nine months of 2001, respectively, when compared to the same periods last year. The increase is due mainly to the increased price of coal in the third quarter, and coal, oil and gas for the year compared to the same periods in 2000, as well as, damages paid to NCP Lake Cogen related to its qualify facilities contract suit (See Footnote 9). Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, have no material impact on operating results. Operations and maintenance expense increased slightly during the quarter, but decreased year to date, as compared with 2000. The decrease for the first nine months of 2001, is due primarily to lower plant maintenance costs, partially offset by a prior year refund of transmission charges from a supplier. 20 Depreciation and amortization decreased $40.4 million for the third quarter and increased $28.5 million year to date. The results were primarily due to accelerated amortization of the Tiger Bay regulatory asset of $63.0 million in March 2001 compared to $44.4 million in September 2000. The additional amortization amounts had no earnings impact as they were offset by the recognition of revenues that were deferred pursuant to a regulatory order in the fourth quarter of 2000. Other Expenses increased $4.9 million and $11.8 million, respectively, for the three and nine months ended September 30, 2001, as compared with the same periods in 2000. This increase was primarily due to a decrease in power marketing net operating income and lower returns on company owned life insurance. Other interest charges decreased $3.7 million and $7.8 million, respectively, for the three and nine months ended September 30, 2001, as compared with 2000. The decrease for the quarter was due to lower average borrowings on commercial paper, combined with lower interest rates. The year to date decrease is due primarily to a reduction in the amortization of a regulatory asset representing interest charges on federal income taxes. ELECTRIC FUELS CORPORATION Electric Fuels makes up the majority of Florida Progress' diversified operations. The results of operations for Electric Fuels' Energy and Related Services and Rail Services units are discussed below. On July 23, 2001, Progress Energy announced that it had entered into a contract to sell the Inland Marine Transportation business segment to AEP Resources, Inc., a wholly owned subsidiary of American Electric Power. On November 1, 2001, the Company completed the sale of the Inland Marine Transportation segment, which was operated by MEMCO Barge Line, Inc. to AEP Resources, Inc. Proceeds from disposal were $270 million, of which approximately $225 million will be used for the early termination of certain off balance sheet arrangements for assets currently leased by MEMCO. Remaining proceeds were used to retire commercial paper. The results of operations of the Inland Marine Transportation segment are reflected as discontinued operations and, therefore, are no longer included in Florida Progress' income from continuing operations. In connection with the sale, the Company entered into environmental indemnification provisions covering both unknown and known sites. As of September 30, 2001, the Company has recorded an accrual to cover estimated probable future environmental expenditures. Management believes that it is reasonably possible that additional costs, which cannot be currently estimated, may be incurred related to the environmental indemnification provision beyond the amounts accrued, as a result of new information. Management cannot predict the outcome of this matter. Energy and Related Services - Earnings at the Energy and Related Services Group --------------------------- increased $13.6 million and $46.5 million from the three and nine month periods in the prior year. The increase was due primarily to higher synthetic fuel sales and related tax credits during the quarter and nine months ended September 30, 2001, compared with last year (See "Other Matters" below). Increases in the market price and volume of coal deliveries over the prior year also contributed to increased earnings in the Energy and Related Services group. Production volumes and the market price of natural gas decreased in the third quarter, as compared to 2000, but remain higher for the year compared to 2000. Rail Services - Earnings in the Rail Services group decreased $2.2 million and ------------- $16.9 million for the quarter and first nine months of 2001, respectively, when compared to 2000. Current year results were negatively affected by the significant downturn in the domestic scrap market and the continuing weak market for railcar parts. OTHER The other group includes telecommunications, holding company and financing expenses. The increased income for the three and nine months ended September 30, 2001 when compared to the corresponding periods of the prior year are due primarily to the recording of an intra-period income tax allocation adjustment. Generally accepted accounting principles require companies to apply a levelized effective tax rate to interim periods that is consistent with the estimated annual rate. Income tax expense was decreased by $38.2 million for the third quarter and $17.8 million for the first nine months of 2001. For the comparable periods in 2000, income tax expense was decreased by $17.2 million for the third quarter and $35.9 million for the first nine months of 2000, to maintain an effective tax rate consistent with the estimated annual rate. The tax credits associated with the Company's synthetic fuel operations lower the overall effective tax rate. Fluctuations in estimated earnings and tax credits, can also cause large swings in the effective tax rate for interim periods. Therefore, this adjustment will vary each quarter, but have no effect on net income for the year. Decreases in operating expenses at the holding company, resulting from decreased operations and staffing levels, also positively impacted results for the other segment for the quarter and the year, when compared to the same periods in 2000. The telecommunications group had higher losses than the third quarter and first nine months of 2000 due to continued expansion of the business. 21 MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 2001, $213.0 million was spent on the Florida Power construction program and $88.9 million was spent in diversified operations. During the first quarter of 2001, Progress Capital Holdings retired $31 million in Medium-Term Notes. The $6 million of medium-term notes that were retired in January had a 9.95% coupon rate and the $25 million of medium-term notes that were retired in February had a 6.13% coupon rate. Progress Energy issued commercial paper to fund the maturing medium-term notes. On July 1, 2001, $80 million of Florida Power's Medium-Term Notes, 6.47% Series matured. Florida Power issued commercial paper to fund the maturing medium-term notes. On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds, 6.650% Series due July 15, 2011. Proceeds from the issuance were primarily used to retire commercial paper and for general corporate purposes. During the third quarter of 2001, Progress Capital Holdings retired $70 million of Medium-Term Notes. The $10 million of medium-term notes that were retired in July had a 9.55% coupon rate, and the $60 million of medium-term notes that were retired in August had a 6.88% coupon rate. Progress Energy issued commercial paper to fund the maturing medium-term notes. On October 30, 2001, Progress Energy issued $400 million of senior notes, 5.85% Series due 2008 and $400 million of senior notes, 7.00% Series due 2031. Approximately $600 million of the proceeds from the issuance were used to retire the Progress Capital Holding's commercial paper. OTHER MATTERS Regulatory Developments ----------------------- Florida Power previously operated under an agreement committing several parties not to seek any reduction in its base rates or authorized return on equity. That agreement expired on June 30, 2001. On May 3, 2001, the staff of the Florida Public Service Commission, or FPSC, recommended that the FPSC require Florida Power to submit, by September 14, 2001, minimum filing requirements, based on a 2002 projected calendar year, to initiate a rate proceeding regarding its future base rates. The FPSC staff also recommended to the FPSC that, pending completion of Florida Power's rate case, annual revenues of $114 million should be held subject to refund to its customers. On June 20, 2001, the FPSC issued an order that Florida Power be required to hold $114 million of revenue subject to refund and to file, by September 14, 2001, minimum filing requirements based on a projected 2002 test year. On July 2, 2001, Florida Power filed a request for rehearing of the portion of the FPSC's order requiring that it hold $114 million of revenues subject to refund on the grounds that the order contradicted FPSC precedent, was inconsistent with the applicable statutory requirements and violated Florida Power's due process rights. On October 16, 2001, the Commission approved Florida Power's motion for reconsideration and reduced the revenue subject to refund by $16 million to $98 million. The Commission also allowed the Company to reduce the amount subject to refund if it is successful in recovering certain expenses incurred during 2001, thus potentially reducing the amount subject to refund. On September 14, 2001, Florida Power submitted its required rate filing, including its revenue requirements and supporting testimony. Under the filing, Florida Power customers would receive a $5 million annual credit rate for 15 years, or $75 million in total, from net synergies of its merger with Progress Energy. Additionally, the filing provides that the regulatory asset related to the purchase of Tiger Bay cogeneration facility in 1997 would be fully amortized by the end of 2003, which would provide customers with a further rate reduction of $37 million annually beginning in 2004. Also included in the filing is an incentive regulatory plan, which would provide for additional rate reductions through efficiencies derived as a result of Florida Power's ability to lower the future costs of its utility operations. The Company expects to satisfy an additional filing requirement due November 15, 2001. Hearings are scheduled to begin March 20, 2002, with a final decision expected in July 2002. The FPSC has encouraged its staff, Florida Power, and other parties to negotiate a settlement, if possible, before the hearings begin. The Company cannot predict the outcome or impact of these matters. In its May 3, 2001, recommendation, the FPSC staff expressed concerns related to Florida Power's plans to participate in the creation of the GridFlorida regional transmission organization, or GridFlorida RTO, along with Florida Power & Light Company and Tampa Electric Company. The FPSC staff raised questions about the prudence of establishing the new system and costs associated with the process. Florida Power is continuing to evaluate the concerns that the FPSC staff has 22 raised about the GridFlorida RTO and the impact those concerns might have on the implementation of the GridFlorida RTO plan this year. On May 16, 2001, the FPSC initiated dockets to review the prudence of the GridFlorida applicants' decision to form and participate in the GridFlorida RTO. The GridFlorida applicants have announced that they will hold GridFlorida development activities in abeyance. On June 27, 2001, the FPSC issued an order establishing a two-phase process for addressing these GridFlorida RTO issues in the context of Florida Power's pending rate case. In the first phase, the FPSC will address the general issues associated with the prudence of the GridFlorida RTO on an expedited basis. A hearing on Phase I was held October 3 through October 5, 2001, with a final FPSC order scheduled for November 26, 2001. The second phase will address ratemaking issues and will be decided as part of the general rate proceeding. The Company cannot predict the outcome or impact of these matters. Regional Transmission Organizations ----------------------------------- In October 2000, Florida Power, along with Florida Power & Light Company and Tampa Electric Company filed with the Federal Energy Regulatory Commission, or FERC, an application for approval of a regional transmission organization, or RTO, for peninsular Florida, currently named GridFlorida. On March 28, 2001, FERC issued an order provisionally granting GridFlorida RTO status and directing the GridFlorida applicants to make certain changes in the RTO documents and to file such changes within 60 days. On May 29, 2001, the GridFlorida applicants made the compliance filing as directed by FERC, but FERC has not yet issued an order on that compliance filing. On July 12, 2001, FERC issued an order requiring certain parties involved in the GridSouth RTO to develop a plan for a single RTO for the southeast. The GridFlorida applicants and the parties to the GridFlorida docket before FERC were encouraged to participate, but were not required to do so. Florida Power and the other GridFlorida applicants participated in the mediation. On September 10, 2001, the presiding administrative law judge of the mediation submitted a mediation report to FERC. The report, which has not yet been acted on by FERC, recommended adoption of a for-profit transmission company RTO model. FERC intends to issue an order regarding the mediation report in November 2001. The Company cannot predict the outcome of this mediation or the effect that it may have on the GridFlorida proceedings currently ongoing before the FERC and the FPSC. Synthetic Fuels Tax Credits --------------------------- On April 20, 2001 and May 4, 2001, the Internal Revenue Service (IRS) released Revenue Procedure 2001-30 and Revenue Procedure 2001-34, respectively, that outline the conditions that must be met to receive a Private Letter Ruling (PLR) for Section 29 tax credits from the IRS. PLRs represent advance rulings from the IRS applying its interpretation of the tax law to an entities' facts for Section 29 credits. The Company continues to pursue PLRs for its two majority-owned facilities and two minority-owned facilities that have not received PLRs. In management's opinion, the Company is complying with all the necessary requirements to be allowed such credits under Section 29, although it cannot provide with certainty that it will receive PLRs or prevail, if challenged by the IRS, on any credits taken. Franchise Litigation -------------------- Five cities, with a total of approximately 36,000 customers, have sued Florida Power in various circuit courts in Florida. The lawsuits principally seek (1) a declaratory judgment that the cities have the right to purchase Florida Power's electric distribution system located within the municipal boundaries of the cities, (2) a declaratory judgment that the value of the distribution system must be determined through arbitration, and (3) injunctive relief requiring Florida Power to continue to collect from Florida Power's customers and remit to the cities, franchise fees during the pendency of the litigation, and as long as Florida Power continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of the franchise ordinances under which Florida Power had agreed to collect such fees. Two circuit courts have entered orders requiring arbitration to establish the purchase price of Florida Power's electric distribution facilities within two cities. One appellate court has held that one city has the right to determine the value of Florida Power's facilities within the city through arbitration. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system, nor has there been any proceeding to determine the price at which such a purchase could be made. One court has ordered Florida Power to continue to collect franchise fees of the city of Winter Park, Florida, and hold those fees in escrow, pending resolution of the litigation. The Company cannot predict the outcome of these matters. NEW ACCOUNTING STANDARDS ------------------------ During the second quarter of 2001, the FASB issued an interpretation of SFAS No. 133 indicating that options, in general, cannot qualify for the normal purchases and sales exception, but provided an exception that allows certain electricity 23 contracts, including certain capacity-energy contracts, to be excluded from the mark-to-market requirements of SFAS No. 133. These interpretations were effective July 1, 2001. Those interpretations would not result in mark-to-market effects on the Company's financial statements based on contracts currently outstanding. In October 2001, the FASB revised criteria related to the exception for certain electricity contracts, with the revision to be effective January 1, 2002. It is unclear whether or not that revision will be sustained and, if so, what effects the revision would have on the Company's financial statements. If an electricity or fuel supply contract in its regulated business is subject to mark-to-market accounting, there would be no income statement effect of the mark-to-market because the contract's mark-to-market gain or loss will be recorded as a regulatory asset or liability. Any mark-to-market gains or losses on contracts outside its regulated business will affect income unless those contracts qualify for hedge accounting treatment. The application of the new rules is still evolving and further guidance from the Financial Accounting Standards Board (FASB) is expected, which could additionally impact the Company's financial statements. On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and clarifies the criteria for recording of other intangible assets separately from goodwill. SFAS No. 142 requires that, effective January 1, 2002, the amortization of goodwill will cease. It also requires the goodwill be evaluated for impairment at least annually, which could result in periodic impairment charges. Goodwill amortization on an after-tax basis was $0.4 million and $1.7 million for the three and nine months ended September 30, 2001, and is expected to be approximately $2.5 million for the year. The Company is currently assessing the impact adopting these statements will have on the financial statements. On August 15, 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" that provides accounting guidance for the costs of retiring long-lived assets and is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact adoption of this statement will have on the financial statements. On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supercedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". It also supercedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" related to the disposal of a segment of a business. The Statement is effective for fiscal years beginning after December 15, 2001, with early adoption encouraged. The Company is currently assessing the impact adopting this statement will have on the financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Certain market risks are inherent in Florida Progress' financial instruments, which arise from transactions entered into in the normal course of business. Florida Progress' primary exposures are changes in interest rates with respect to long-term debt, commercial paper and the FPC obligated mandatorily redeemable securities of trust, and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. Florida Progress' exposure to return on marketable securities for the decommissioning trust funds has not changed materially since December 31, 2000. On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds, 6.650% Series due July 15, 2011. Proceeds from the issuance were primarily used to retire commercial paper. As a result of this issuance, the exposure to changes in interest rates from Florida Progress' fixed rate long-term debt and commercial paper at September 30, 2001 has changed from December 31, 2000. The total fixed rate long-term debt at September 30, 2001, was $1.8 billion, with an average interest rate of 6.71% and fair market value of $1.8 billion. The total commercial paper outstanding at September 30, 2001 was $359 million, with an average interest rate of 3.59% and fair market value of $359 million. 24 Florida Progress also had $300 million outstanding of FPC mandatorily redeemable securities of trust, with a fixed interest rate of 7.10%. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 1. Wanda L. Adams, et al. v. Florida Power Corporation and Florida Progress Corporation, U.S. District Court, Middle District of Florida, Ocala Division, Case No. 95-123-C.V.-OC-10. See prior discussion of this matter in the 2000 Form 10-K, Item 3, paragraph 3. The plaintiffs filed a motion with the District Court to reopen the case of Akin, et al. vs. Florida Power, and to dismiss the Adams ------------------------------ ----- case. The Akin case was originally filed in an effort to preserve the ---- litigation rights of the 61 plaintiffs who opted into the Adams case. The ----- Court had previously stayed the Akin case pending a ruling on Florida ---- Power's motion to decertify the class. Oral arguments were held in January 2001. On July 5, 2001, the Eleventh Circuit Court of Appeals ruled that as a matter of law, disparate claims cannot be brought under the Americans with Disabilities Act (ADEA). This ruling has the effect of decertifying the Akin case as a class action. On October 3, 2001, the plaintiffs filed a ---- petition in the United States Supreme Court, requesting a hearing of the case, on the issue of whether disparate claims can be brought under the ADEA. The Company cannot predict the outcome of this matter. 2. Wallace Bentley, et al. v. City of Tallahassee, Interstate Fibernet, Inc. and Florida Power Corporation, Circuit Court for Leon County, Florida. Case No. 98-7107. In December 1998, Florida Power was served with this class action lawsuit seeking damages, declaratory and injunctive relief for the alleged improper use of electric transmission easements. The plaintiffs contend that the licensing of fiber optic telecommunications lines to third parties or telecommunications companies for other than Florida Power's internal use along the electric transmission line right-of-way exceeds the authority granted in the easements. In June 1999, plaintiffs amended their complaint to add Progress Telecom as a defendant and adding counts for unjust enrichment and constructive trust. In January 2000, the court conditionally certified the class statewide. In mediation held in March 2000, the parties reached a tentative settlement of this claim. In January 2001, the Court preliminarily approved the amended settlement agreement, certified the settlement class and approved the class notice. A final settlement hearing was held in June 2001. To date, the Court has not entered a final order. If given final approval, the settlement would not have a material adverse impact on the financial position, results of operations or liquidity of Florida Power or Progress Telecom. 3. 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. Florida Power's purchased power contracts with qualifying facilities (QFs) employ separate pricing methodologies for capacity payments and energy payments. Florida Power has interpreted the pricing provision in its qualifying facility 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. On October 21, 1994, NCP Lake Cogen, 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. The trial regarding Lake concluded in December 1998. In April 1999, the judge entered an order granting Lake's breach of contract claim and ruled that Lake is entitled to receive "firm" energy payments during on-peak hours, but for all other hours, Lake is entitled to the "as-available" rate. The Court also ruled that for purposes of calculating damages, the breach of contract occurred at the inception of the contract. In August 1999, a Final Judgement was entered awarding damages to Lake of approximately $4.5 million and Lake filed a Notice of Appeal. On January 26, 2001, the District Court of Appeals reversed the trial court's order and held that the contract requires Florida Power to pay Lake the firm energy rate for all hours that the avoided unit operates, less any maintenance shut-down hours. The District Court of Appeals remanded the case to the trial court for a new trial to determine the appropriate amount of damages consistent with the appellate court's ruling. Florida Power sought rehearing of this decision with the District Court of Appeal's, which subsequently confirmed its initial decision. On remand, Florida Power entered a stipulation on issues of fact that resulted in the issuance of a Final 25 Judgement awarding damages to Lake of approximately $20 million, which Florida Power recorded as a charge to purchased power expense. Also in the Lake matter, in April 1998, Florida Power filed a petition with the FPSC for a Declaratory Statement that the contract between the parties limits energy payments thereunder to the avoided costs based upon an analysis of a hypothetical unit having the characteristics specified in the contract. In October 1998, the FPSC denied the petition. Florida Power appealed this decision to the Florida Supreme Court, which subsequently upheld the FPSC. Management does not expect that the results of these legal actions will have a material impact on Florida Power's financial position, results of operations or liquidity. Florida Power anticipates that all fuel and capacity expenses, including any settlement amounts or judicial awards incurred as a result of the matters discussed above, will be recovered from its customers. 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K: During the third quarter of 2001, the following report on Form 8-K was filed. Florida Power Corporation ------------------------- Financial Item Statements Reported Included Date of Event Date Filed -------- -------- ------------- ---------- 5 No July 1, 2001 July 23, 2001 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLORIDA PROGRESS CORPORATION FLORIDA POWER CORPORATION (Registrants) Date: November 7, 2001 By: /s/ Peter M. Scott III ------------------------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer By: /s/ Robert H. Bazemore, Jr. ------------------------------------- Robert H. Bazemore, Jr. Vice President and Controller Chief Accounting Officer 28