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 March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . -------------- --------------- Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer File Number incorporation, address of principal executive offices, and telephone number Identification Number 1-8349 Florida Progress Corporation 59-2147112 A Florida Corporation 410 South Wilmington Street Raleigh, North Carolina 27601 Telephone (919) 546-6111 1-3274 Florida Power Corporation 59-0247770 A Florida Corporation One Progress Plaza St. Petersburg, Florida 33701 Telephone (727) 820-5151
NONE ---- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No . -- This combined Form 10-Q is filed separately by two registrants: Florida Progress Corporation and Florida Power Corporation. Information contained herein relating to either individual registrant is filed by such registrant solely on its own behalf. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of April 30, 2002, each registrant had the following shares of common stock outstanding
Registrant Description Shares ---------- ----------- ------ Florida Progress Corporation Common Stock, without par value 98,616,658 (all of which were held by Progress Energy, Inc.) Florida Power Corporation Common Stock, without par value 100 (all of which were held by Florida Progress Corporation)
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION FORM 10-Q - For the Quarter Ended March 31, 2002 Glossary of Terms Safe Harbor For Forward-Looking Statements PART I. FINANCIAL INFORMATION Item 1. Financial Statements Florida Progress Corporation ---------------------------- Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Florida Power Corporation ------------------------- Statements of Income Balance Sheets Statements of Cash Flows Notes to Financial Statements Florida Progress Corporation and Florida Power Corporation Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures 2 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined Form 10-Q are defined below:
TERM DEFINITION ---- ---------- AST Advanced Separation Technologies Btu British thermal units Company or Florida Progress Florida Progress Corporation CP&L Carolina Power and Light Company CP&L Energy CP&L Energy, Inc. CR3 Florida Power's nuclear generating plant, Crystal River Unit No. 3 DOE United States Department of Energy EPA United States Environmental Protection Agency FASB Financial Accounting Standards Board FDEP Florida Department of Environmental Protection FERC Federal Energy Regulatory Commission Florida Power or the utility Florida Power Corporation Florida Progress or the Company Florida Progress Corporation FPSC Florida Public Service Commission Funding Corp. Florida Progress Funding Corporation IRS Internal Revenue Service MEMCO MEMCO Barge Line, Inc. MGP Manufactured Gas Plant MW megawatts NEIL Nuclear Electric Insurance Limited NRC United States Nuclear Regulatory Commission PLR Private Letter Ruling Preferred Securities 7.10% Cumulative Quarterly Income Preferred Securities, Series A, of FPC Capital I, fully and unconditionally guaranteed by Florida Progress Preferred Stock Florida Power Cumulative Preferred Stock, $100 par value Progress Capital Progress Capital Holdings, Inc. Progress Energy Progress Energy, Inc. Progress Fuels Progress Fuels Corporation, formerly referred to as Electric Fuels Corporation Progress Rail Progress Rail Services Corporation Progress Telecom Progress Telecommunications Corporation Progress Ventures, Inc. Legal entity holding certain non-regulated operations and part of Progress Energy's Progress Ventures business segment PRP potentially responsible party, as defined in CERCLA PUHCA Public Utility Holding Company Act of 1935, as amended RTO Regional Transmission Organization SEC United States Securities and Exchange Commission Section 29 Section 29 of the Internal Revenue Service Code SFAS Statements of Financial Accounting Standards The Trust FPC Capital I
3 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS The matters discussed throughout this combined Form 10-Q that are not historical facts are forward-looking and, accordingly, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. In addition, forward-looking statements are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" including, but not limited to, statements under the sub-heading "Other Matters" concerning synthetic fuel tax credits and regulatory developments. Any forward-looking statement speaks only as of the date on which such statement is made, and Florida Progress and Florida Power undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made. Examples of factors that you should consider with respect to any forward-looking statements made throughout this document include, but are not limited to, the following: governmental policies and regulatory actions (including those of the Federal Energy Regulatory Commission, the Environmental Protection Agency, the Nuclear Regulatory Commission, the Department of Energy, the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935, as amended and the Florida Public Service Commission), particularly legislative and regulatory initiatives regarding the restructuring of the electricity industry or potential national deregulation legislation; the outcome of legal and administrative proceedings, including proceedings before our principal regulators, and the impact of the settlement of Florida Power's rate case; risks associated with operating nuclear power facilities, availability of nuclear waste storage facilities, and nuclear decommissioning costs; terrorist threats and activities, economic uncertainty caused by such activities on the United States, and potential adverse reactions to United States anti-terrorism activities; changes in the economy of areas served by Florida Progress; the extent to which we are able to obtain adequate and timely rate recovery of costs, including potential stranded costs arising from the restructuring of the electricity industry; weather conditions and catastrophic weather-related damage; general industry trends, increased competition from energy and gas suppliers, and market demand for energy; inflation and capital market conditions; realization of cost savings related to synergies resulting from acquisition by Progress Energy and the success of our direct and indirect subsidiaries; the extent to which we are able to continue to use tax credits associated with the operations of the synthetic fuel facilities; and unanticipated changes in operating expenses and capital expenditures. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of Florida Progress or Florida Power. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the effect of each such factor on Florida Progress or Florida Power. 4 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ---------------------------- Florida Progress Corporation CONSOLIDATED INTERIM FINANCIAL STATEMENTS March 31, 2002 CONSOLIDATED STATEMENTS of INCOME (Unaudited) Three Months Ended March 31, (In thousands) 2002 2001 ----------------------------------------------------------------------------- Operating Revenues Electric $686,441 $ 810,474 Diversified businesses 307,237 334,438 ----------------------------------------------------------------------------- Total Operating Revenues 993,678 1,144,912 ----------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 192,946 216,386 Purchased power 115,309 125,619 Other operation and maintenance 131,334 110,866 Depreciation and amortization 69,294 152,069 Taxes other than on income 57,141 60,109 Diversified businesses 324,971 350,598 ----------------------------------------------------------------------------- Total Operating Expenses 890,995 1,015,647 ----------------------------------------------------------------------------- Operating Income 102,683 129,265 ----------------------------------------------------------------------------- Other Income (Expense) Interest income 708 38 Other, net (4,246) (5,040) ----------------------------------------------------------------------------- Total Other Income (Expense) (3,538) (5,002) ----------------------------------------------------------------------------- Net Interest Charges 46,445 50,428 ----------------------------------------------------------------------------- Income from Continuing Operations before Income Taxes 52,700 73,835 Income Taxes (Benefit) (23,073) (1,790) ----------------------------------------------------------------------------- Income from Continuing Operations 75,773 75,625 Discontinued Operations, net of tax (Note 4): Income from discontinued operations -- 363 ----------------------------------------------------------------------------- Net Income $ 75,773 $ 75,988 ============================================================================= See Notes to Interim Financial Statements. 5 Florida Progress Corporation CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
March 31, December 31, Assets 2002 2001 --------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 7,182,176 $ 7,151,729 Accumulated depreciation (4,038,712) (3,984,308) --------------------------------------------------------------------------------------------------- Utility plant in service, net 3,143,464 3,167,421 Held for future use 7,921 8,274 Construction work in progress 325,237 292,883 Nuclear fuel, net of amortization 56,891 62,536 --------------------------------------------------------------------------------------------------- Total Utility Plant, Net 3,533,513 3,531,114 --------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 14,028 5,201 Accounts receivable 430,738 420,118 Accounts receivable-affiliates 182,416 21,851 Taxes receivable 35,235 14,761 Deferred income taxes 24,047 32,325 Inventory 502,186 485,891 Deferred fuel cost -- 15,147 Prepayments 25,312 10,748 Other current assets 33,371 48,184 --------------------------------------------------------------------------------------------------- Total Current Assets 1,247,333 1,054,226 --------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Income taxes recoverable through future rates 29,640 27,610 Deferred purchased power contract termination costs 87,104 95,326 Unamortized debt expense 20,700 21,021 Nuclear decommissioning trust funds 417,284 406,100 Diversified business property, net 690,012 669,078 Miscellaneous other property and investments 113,435 117,535 Prepaid pension costs 205,663 202,167 Other assets and deferred debits 192,655 186,030 --------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 1,756,493 1,724,867 --------------------------------------------------------------------------------------------------- Total Assets $ 6,537,339 $ 6,310,207 =================================================================================================== Capitalization and Liabilities --------------------------------------------------------------------------------------------------- Capitalization Common stock $ 1,446,802 $ 1,409,034 Retained earnings 641,976 666,201 Accumulated other comprehensive loss (3,380) (2,985) --------------------------------------------------------------------------------------------------- Total Common Stock Equity 2,085,398 2,072,250 Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497 Unsecured note with Parent 500,000 500,000 Long-term debt, net 2,120,293 2,143,934 --------------------------------------------------------------------------------------------------- Total Capitalization 4,739,188 4,749,681 --------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 103,374 88,053 Accounts payable 277,823 285,524 Payables to affiliated companies 411,106 263,389 Interest accrued 54,838 68,575 Short-term obligations 31,950 -- Customer deposits 124,422 118,285 Accrued taxes other than on income 51,406 16,361 Other current liabilities 141,821 122,879 --------------------------------------------------------------------------------------------------- Total Current Liabilities 1,196,740 963,066 --------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 173,052 165,816 Accumulated deferred investment tax credits 52,444 54,387 Other liabilities and deferred credits 375,915 377,257 --------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 601,411 597,460 --------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 10) --------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 6,537,339 $ 6,310,207 ===================================================================================================
See Notes to Interim Financial Statements. 6 Florida Progress Corporation
CONSOLIDATED STATEMENTS of CASH FLOWS Three Months Ended (Unaudited) March 31, (In thousands) 2002 2001 ---------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 75,773 $ 75,988 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations -- (363) Depreciation and amortization 75,925 150,466 Deferred income taxes and investment tax credits, net 19,359 21,948 Deferred fuel cost (credit) 45,651 24,113 Changes in working capital, net of effects from sale or acquisition of business Net (increase) decrease in accounts receivable (171,185) 41,477 Net increase in inventories (17,540) (58,525) Net (increase) decrease in prepaids and other current assets (408) 7,618 Net increase (decrease) in accounts payable 139,622 (41,271) Net increase (decrease) in other current liabilities (4,604) 74,114 Other 12,903 (28,900) ---------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 175,496 266,665 ---------------------------------------------------------------------------------------------------------- Investing Activities: Property additions (86,462) (43,956) Diversified business property additions (35,648) (13,491) Nuclear fuel additions (122) (36,019) Other investing activities (4,620) (16,030) ---------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (126,852) (109,496) ---------------------------------------------------------------------------------------------------------- Financing Activities: Net increase in commercial paper reclassified to long-term debt 45,750 -- Net increase (decrease) in short-term obligations 31,950 (78,235) Retirement of long-term debt (54,835) (31,703) Equity contribution from parent 37,799 -- Dividends paid on common stock (100,000) (54,612) Other financing activities (481) (1,102) ---------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (39,817) (165,652) ---------------------------------------------------------------------------------------------------------- Cash Used in Discontinued Operations -- (16) ---------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 8,827 (8,499) ---------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of the Period 5,201 24,200 ---------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 14,028 $ 15,701 ========================================================================================================== Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period - interest (net of amount capitalized) $ 43,678 $ 67,980 Income taxes (net of refunds) $ 3,937 $ (22,544)
See Notes to Interim Financial Statements. 7 Florida Power Corporation INTERIM FINANCIAL STATEMENTS March 31, 2002 STATEMENTS of INCOME Three Months Ended (Unaudited) March 31, (In thousands) 2002 2001 ------------------------------------------------------------------------ Operating Revenues Electric $686,441 $810,474 Operating Expenses Fuel used in electric generation 192,946 216,386 Purchased power 115,309 125,619 Operation and maintenance 131,334 110,866 Depreciation and amortization 69,294 152,069 Taxes other than on income 57,141 60,109 ------------------------------------------------------------------------ Total Operating Expenses 566,024 665,049 ------------------------------------------------------------------------ Operating Income 120,417 145,425 ------------------------------------------------------------------------ Other Income (Expense) Interest income 708 38 Other, net (1,336) (1,755) ------------------------------------------------------------------------ Total Other Income (Expense) (628) (1,717) ------------------------------------------------------------------------ Net Interest Charges 28,280 28,995 ------------------------------------------------------------------------ Income before Income Taxes 91,509 114,713 Income Taxes 33,388 42,729 ------------------------------------------------------------------------ Net Income 58,121 71,984 Dividends on Preferred Stock 378 378 ------------------------------------------------------------------------ Earnings for Common Stock $ 57,743 $ 71,606 ======================================================================== See Notes to Interim Financial Statements. 8 Florida Power Corporation BALANCE SHEETS (Unaudited)
(In thousands) March 31, December 31, Assets 2002 2001 ---------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 7,182,176 $ 7,151,729 Accumulated depreciation (4,038,713) (3,984,308) --------------------------------------------------------------------------------------------------- Utility plant in service, net 3,143,463 3,167,421 Held for future use 7,921 8,274 Construction work in progress 325,237 292,883 Nuclear fuel, net of amortization 56,892 62,536 --------------------------------------------------------------------------------------------------- Total Utility Plant, Net 3,533,513 3,531,114 --------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 5,898 -- Accounts receivable 269,541 248,642 Accounts and notes receivable-affiliates 153,201 136,223 Deferred income taxes 24,047 32,325 Inventory 184,267 188,630 Deferred fuel cost -- 15,147 Prepayments 4,489 4,345 Other current assets 4,421 -- --------------------------------------------------------------------------------------------------- Total Current Assets 645,864 625,312 --------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Income taxes recoverable through future rates 29,640 27,610 Deferred purchased power contract termination costs 87,104 95,326 Unamortized debt expense 11,604 11,844 Nuclear decommissioning trust funds 417,284 406,100 Miscellaneous other property and investments 44,910 46,442 Prepaid pension costs 204,001 198,351 Other assets and deferred debits 65,174 56,063 --------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 859,717 841,736 --------------------------------------------------------------------------------------------------- Total Assets $ 5,039,094 $ 4,998,162 =================================================================================================== Capitalization and Liabilities --------------------------------------------------------------------------------------------------- Capitalization Common stock $ 1,081,257 $ 1,081,257 Retained earnings 908,130 950,387 --------------------------------------------------------------------------------------------------- Total Common Stock Equity 1,989,387 2,031,644 Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497 Long-term debt, net 1,595,122 1,619,280 --------------------------------------------------------------------------------------------------- Total Capitalization 3,618,006 3,684,421 --------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 102,000 32,000 Accounts payable 129,287 143,828 Accounts payable-affiliates 132,560 189,817 Taxes accrued 14,030 1,768 Interest accrued 42,444 54,440 Short-term obligations 31,950 -- Customer deposits 124,422 118,285 Accrued taxes other than on income 43,289 9,202 Other current liabilities 84,992 57,778 --------------------------------------------------------------------------------------------------- Total Current Liabilities 704,974 607,118 --------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 405,790 394,828 Accumulated deferred investment tax credits 51,937 53,875 Other liabilities and deferred credits 258,387 257,920 --------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 716,114 706,623 --------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 10) --------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 5,039,094 $ 4,998,162 ===================================================================================================
See Notes to Interim Financial Statements. 9 Florida Power Corporation STATEMENTS of CASH FLOWS (Unaudited)
Three Months Ended March 31, (In thousands) 2002 2001 -------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 58,121 $ 71,984 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 75,865 150,406 Deferred income taxes and investment tax credits, net 15,281 7,903 Deferred fuel cost 45,651 24,113 Changes in working capital: Net (increase) decrease in accounts receivable (37,877) 41,325 Net (increase) decrease in inventories 4,363 (17,811) Net (increase) decrease in prepaids and other current assets (4,565) 6,681 Net decrease in accounts payable (71,798) (51,492) Net increase (decrease) in other current liabilities 37,191 (19,930) Other (5,213) (67,306) -------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 117,019 145,873 -------------------------------------------------------------------------------------------------------- Investing Activities: Property additions (86,462) (43,956) Nuclear fuel additions (122) (36,019) Other investing activities (1,859) (4,427) -------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (88,443) (84,402) -------------------------------------------------------------------------------------------------------- Financing Activities: Net increase in commercial paper reclassified to long-term debt 45,750 -- Net increase (decrease) in short-term obligations 31,950 (9,862) Dividends paid on common stock (100,000) (54,611) Dividends paid on preferred stock (378) (378) -------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (22,678) (64,851) -------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 5,898 (3,380) -------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of the Period -- 3,380 -------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 5,898 $ -- -------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest (net of amount capitalized) $ 40,276 $ 39,032 income taxes (net of refunds) $ 3,980 $ 7,362
See Notes to Interim Financial Statements. 10 Florida Progress Corporation and Florida Power Corporation NOTES TO INTERIM FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Organization. Florida Progress Corporation (the Company or Florida ------------ Progress) is a holding company under the Public Utility Holding Company Act of 1935 (PUHCA). The Company became subject to the regulations of PUHCA when it was acquired by CP&L Energy, Inc. on November 30, 2000 (See Note 2). CP&L Energy, Inc. subsequently changed its name to Progress Energy, Inc. (Progress Energy or the Parent). Florida Progress' two primary subsidiaries are Florida Power Corporation (Florida Power) and Progress Fuels Corporation (Progress Fuels). Florida Power is a regulated public utility engaged in the generation, transmission, distribution and sale of electricity in portions of Florida. Florida Power is regulated by the Florida Public Service Commission (FPSC) and the Federal Energy Regulatory Commission (FERC). Progress Fuels is a diversified non-utility energy company, whose principal business segments are Energy & Related Services and Rail Services. Due to the geographical locations of Progress Fuels' Rail Services and the non-Florida portion of its Energy & Related Services operations, it is necessary to report their results one-month in arrears. B. Basis of Presentation. These financial statements have been prepared in --------------------- accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Because the accompanying consolidated interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles, they should be read in conjunction with the audited financial statements for the period ended December 31, 2001 and notes thereto included in Florida Progress' and Florida Power's Form 10-K for the year ended December 31, 2001. The amounts included in the consolidated interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present Florida Progress' and Florida Power's financial position and results of operations for the interim periods. Due to seasonal weather variations and the timing of outages of electric generating units, the results of operations for interim periods are not necessarily indicative of amounts expected for the entire year. Certain reclassifications have been made to prior-year amounts to conform to the current year's presentation. The financial statements include the financial results of the Company and its majority-owned operations. All significant intercompany balances and transactions have been eliminated. Investments in 20% to 50%-owned joint ventures are accounted for using the equity method. In preparing financial statements that conform with generally accepted accounting principles, management must make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses reflected during the reporting period. Actual results could differ from those estimates. NOTE 2. ACQUISITION BY PROGRESS ENERGY, INC. On November 30, 2000, Progress Energy acquired all of the outstanding shares of Florida Progress' common stock in accordance with the Amended and Restated Plan of Exchange, including the related Plan of Share Exchange, dated as of August 22, 1999, as amended and restated as of March 3, 2000, among CP&L Energy, Florida Progress and Carolina Power & Light Company (CP&L). Florida Progress shareholders received $54.00 in cash or shares of Progress Energy common stock having a value of $54.00, subject to proration, and one contingent value obligation (CVO) in exchange for each share of Florida Progress common stock. The exchange ratio for the shares of Progress Energy common stock issued to Florida Progress shareholders was 1.3473. Each CVO represents the right to receive contingent payments based upon the net after-tax cash flow to Progress Energy generated by four synthetic fuel facilities purchased by subsidiaries of Florida Progress in 1999. In connection with the acquisition of the Company by Progress Energy, the Company began the implementation of a plan to combine operations with Progress Energy. In the fourth quarter 2000, the Company recorded executive involuntary termination costs of $24.5 million and non-executive involuntary termination costs of $41.8 million. Substantially all of the executive termination expense was attributable to lump-sum severance costs paid in December 2000. 11 The first quarter 2002 activity for the non-executive termination costs is detailed in the table below: (In millions) Balance at December 31, 2001 $7.7 Payments (4.0) Adjustments -- ---- Balance at March 31, 2002 $3.7 ==== NOTE 3. FINANCIAL INFORMATION BY BUSINESS SEGMENT The Company's principal business segment is Florida Power, an electric utility engaged in the generation, purchase, transmission, distribution and sale of electricity primarily in Florida. The other reportable business segments are Progress Fuels' Energy & Related Services and Rail Services. The Inland Marine Transportation business, formerly a business segment, was sold in November 2001 (See Note 4). The Energy & Related Services includes coal and synthetic fuel operations, natural gas production and sales, river terminal services and off-shore marine transportation. Rail Services' operations include railcar repair, rail parts reconditioning and sales, railcar leasing and sales, providing rail and track material, and scrap metal recycling. The other category consists primarily of Progress Telecommunications, the Company's telecommunications subsidiary, the Company's investment in FPC Capital Trust, which holds the Preferred Securities, and the holding company, Florida Progress Corporation. Progress Telecommunications markets wholesale fiber-optic based capacity service in the Eastern United States and also markets wireless structure attachments to wireless communication companies and governmental entities. Florida Progress allocates a portion of its operating expenses to business segments. Financial data for business segments for the periods covered in this Form 10-Q are presented in the table below:
Energy and Related Rail (In thousands) Utility Services Services Other Consolidated ------------------------------------------------------------------------------------------------------------ Three months ended March 31, 2002: Revenues $ 686,441 $ 70,015 $169,369 $ 67,853 $ 993,678 Intersegment revenues -- 131,930 495 (132,425) -- Income (loss) from continuing operations 57,743 30,747 (701) (12,016) 75,773 Total assets 5,039,094 580,002 596,765 321,478 6,537,339 ============================================================================================================
Energy and Related Rail Utility Services Services Other Consolidated ------------------------------------------------------------------------------------------------------------ Three months ended March 31, 2001: Revenues $ 810,474 $ 84,688 $224,165 $ 25,585 $1,144,912 Intersegment revenues -- 80,516 37 (80,553) -- Income (loss) from continuing operations 71,606 29,181 (2,098) (23,064) 75,625 Total assets 4,829,168 393,713 822,859 302,996 6,348,736 ============================================================================================================
NOTE 4. DISCONTINUED OPERATIONS On July 23, 2001, Progress Energy announced the disposition of the Inland Marine Transportation segment of the Company, which is operated by MEMCO Barge Line, Inc. Inland Marine provides transportation of coal, agricultural and other dry-bulk commodities as well as fleet management services. Progress Energy entered into a contract to sell MEMCO Barge Line, Inc., to AEP Resources, Inc., a wholly-owned subsidiary of American Electric Power. On November 1, 2001, the Company completed the sale of the Inland Marine Transportation segment. The results of operations for the three months ended March 31, 2001, has been restated for the discontinued operations of the Inland Marine Transportation segment. The net income of these operations is reported in the Consolidated Statements of Income under discontinued operations. 12 Results for discontinued operations for the three months ended March 31, 2001, were as follows: (in thousands) 2001 ------- Revenues $34,268 ------- Earnings before income taxes $ 730 Income taxes 367 ------- Net earnings $ 363 ======= NOTE 5. IMPACT OF NEW ACCOUNTING STANDARD During the second quarter of 2001, the Financial Accounting Standards Board (FASB) issued interpretations of Statements of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities," (SFAS No. 133) indicating that options in general cannot qualify for the normal purchases and sales exception, but provided an exception that allows certain electricity contracts, including certain capacity-energy contracts, to be excluded from the mark-to-market requirements of SFAS No. 133. The interpretations were effective July 1, 2001. Those interpretations did not require the Company to mark-to-market any of its electricity capacity-energy contracts currently outstanding. In December 2001, the FASB revised the criteria related to the exception for certain electricity contracts, with the revision to be effective April 1, 2002. The revised interpretation did not result in any changes to the Company's assessment of mark-to-market requirements for its current contracts. If an electricity or fuel supply contract in its regulated businesses is subject to mark-to-market accounting, there would be no income statement effect of the mark-to-market because the contract's mark-to-market gain or loss will be recorded as a regulatory asset or liability. Any mark-to-market gains or losses in its non-regulated businesses will affect income unless those contracts qualify for hedge accounting treatment. The application of the new rules is still evolving and further guidance from the FASB is expected, which could additionally impact the Company's financial statements. Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This statement clarifies the criteria for recording of other intangible assets separately from goodwill. See Note 6 for more information. The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in July 2001. This statement provides accounting requirements for retirement obligations associated with tangible long-lived assets and is effective January 1, 2003. This statement requires that the present value of retirement costs for which the Company has a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period. The Company is currently assessing the effects this statement may ultimately have on the Company's accounting for decommissioning, dismantlement and other retirement costs. NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This statement clarifies the criteria for recording of other intangible assets separately from goodwill. Effective January 1, 2002, goodwill is no longer subject to amortization over its estimated useful life. Instead, goodwill is subject to at least an annual assessment for impairment by applying a two-step fair-value based test. This assessment could result in periodic impairment charges. The Company is in the process of performing the first step of the initial transitional goodwill impairment test. This test will be as of January 1, 2002, and will be completed by June 30, 2002. The Company has not yet determined the impact, if any, to the Company's consolidated financial position or results of operations. There were no changes in the carrying amount of goodwill for the three months ended March 31, 2002. The Company's $11.1 million of goodwill is assigned to the Energy and Related Services segment. As required by SFAS No. 142, the results for the prior year's quarter have not been restated. A reconciliation of net income as if SFAS No. 142 had been adopted is presented below for the three months ended March 31, 2001. (in thousands) Three Months Ended March 31, 2001 ------------------ Reported net income $75,988 Add back: Goodwill amortization (net of tax) 1,253 ------- Adjusted net income $77,241 13 The Company has no intangible assets as of March 31, 2002 and December 31, 2001. NOTE 7. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES (QUIPS) OF A SUBSIDIARY TRUST HOLDING SOLELY FLORIDA PROGRESS GUARANTEED SUBORDINATED DEFERRABLE INTEREST NOTES In April 1999, FPC Capital I (the Trust), an indirect wholly owned subsidiary of the Company, issued 12 million shares of $25 par cumulative Company-obligated mandatorily redeemable preferred securities (Preferred Securities) due 2039, with an aggregate liquidation value of $300 million and an annual distribution rate of 7.10%, payable quarterly. Currently, all 12 million shares of the Preferred Securities that were issued are outstanding. Concurrent with the issuance of the Preferred Securities, the Trust issued to Florida Progress Funding Corporation (Funding Corp.) all of the common securities of the Trust (371,135 shares), for $9.3 million. Funding Corp. is a direct wholly owned subsidiary of the Company. The existence of the Trust is for the sole purpose of issuing the Preferred Securities and the common securities and using the proceeds thereof to purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable Interest Notes (subordinated notes) due 2039, for a principal amount of $309.3 million. The subordinated notes and the Notes Guarantee (as discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds from the sale of the subordinated notes were advanced to Progress Capital Holdings, Inc. (PCH), and used for general corporate purposes including the repayment of a portion of certain outstanding short-term bank loans and commercial paper. The Company has fully and unconditionally guaranteed the obligations of Funding Corp. under the subordinated notes (the Notes Guarantee). In addition, the Company has guaranteed the payment of all distributions required to be made by the Trust, but only to the extent that the Trust has funds available for such distributions (Preferred Securities Guarantee). The Preferred Securities Guarantee, considered together with the Notes Guarantee, constitutes a full and unconditional guarantee by the Company of the Trust's obligations under the Preferred Securities. The subordinated notes may be redeemed at the option of Funding Corp. beginning in 2004 at par value plus accrued interest through the redemption date. The proceeds of any redemption of the subordinated notes will be used by the Trust to redeem proportional amounts of the Preferred Securities and common securities in accordance with their terms. Upon liquidation or dissolution of Funding Corp., holders of the Preferred Securities would be entitled to the liquidation preference of $25 per share plus all accrued and unpaid dividends thereon to the date of payment. These Preferred Securities are classified as long-term debt on Florida Progress' consolidated balance sheets. NOTE 8. FLORIDA POWER RATE CASE SETTLEMENT On March 27, 2002, the parties in Florida Power's rate case entered into a Stipulation and Settlement Agreement (the Agreement) related to retail rate matters. The Agreement was approved by the Florida Public Service Commission (FPSC) on April 23, 2002. The Agreement is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if Florida Power's base rate earnings fall below a 10% return on equity, Florida Power may petition the FPSC to amend its base rates. The Agreement provides that Florida Power will reduce its retail revenues from the sale of electricity by an annual amount of $125 million. The Agreement also provides that Florida Power will operate under a Revenue Sharing Incentive Plan (the Plan) through 2005, and thereafter until terminated by the FPSC, that establishes annual revenue caps and sharing thresholds. The Plan provides that retail base rate revenues between the sharing thresholds and the retail base rate revenue caps will be divided into two shares - a 1/3 share to be received by Florida Power's shareholders, and a 2/3 share to be refunded to Florida Power's retail customers; provided, however, that for the year 2002 only, the refund to customers will be limited to 67.1% of the 2/3 customer share. The retail base rate revenue sharing threshold amounts for 2002 will be $1,296 million and will increase $37 million each year thereafter. The Plan also provides that all retail base rate revenues above the retail base rate revenue caps established for each year will be refunded to retail customers on an annual basis. For 2002, the refund to customers will be limited to 67.1% of the retail base rate revenues that exceed the 2002 cap. The retail base revenue caps for 2002 will be $1,356 million and will increase $37 million each year thereafter. The Agreement also provides that beginning with the in-service date of Florida Power's Hines Unit 2, currently expected to be late 2003, and continuing through December 31, 2005, Florida Power will be allowed to recover through the fuel cost recovery clause a return on average investment and depreciation expense for Hines Unit 2, to the extent such costs do not exceed the Unit's cumulative fuel savings over the recovery period. 14 Additionally, the Agreement provides that Florida Power will effect a mid-course correction of its fuel cost recovery clause to reduce the fuel factor by $50 million for the remainder of 2002. The fuel cost recovery clause will operate as it normally does, including, but not limited to any additional mid-course adjustments that may become necessary, and the calculation of true-ups to actual fuel clause expenses. Florida Power will suspend accruals on its reserves for nuclear decommissioning and fossil dismantlement through December 31, 2005. Additionally, for each calendar year during the term of the Agreement, Florida Power will record a $62.5 million depreciation expense reduction, and may, at its option, record up to an equal annual amount as an offsetting accelerated depreciation expense. In addition, Florida Power is authorized, at its discretion, to accelerate the amortization of certain regulatory assets over the term of the Agreement. Under the terms of the Agreement, Florida Power agreed to continue the implementation of its four-year Commitment to Excellence Reliability Plan and expects to achieve a 20% improvement in its annual System Average Interruption Duration Index by no later than 2004. If this improvement level is not achieved for calendar years 2004 or 2005, Florida Power will provide a refund of $3 million for each year the level is not achieved to 10% of its total retail customers served by its worst performing distribution feeder lines. The Agreement also provides that Florida Power will refund to customers $35 million of revenues Florida Power collected during the interim period since March 13, 2001. This one-time retroactive revenue refund was recorded in the first quarter of 2002. NOTE 9. COMPREHENSIVE INCOME Comprehensive income for Florida Progress for the three months ended March 31, 2002 and 2001 was $75.4 million and $75.7 million, respectively. Items of other comprehensive income for the three month periods consisted primarily of foreign currency translation adjustments. Florida Power does not have any items of other comprehensive income. NOTE 10. COMMITMENTS AND CONTINGENCIES Claims and Uncertainties -- The Company is subject to federal, state and local regulations addressing air and water quality, hazardous and solid waste management and other environmental matters. Various organic materials associated with the production of manufactured gas, generally referred to as coal tar, are regulated under federal and state laws. The lead or sole regulatory agency that is responsible for a particular former coal tar site depends largely upon the state in which the site is located. There are several MGP sites to which Florida Power has some connection. In this regard, Florida Power, with other potentially responsible parties, is participating in investigating and, if necessary, remediating former coal tar sites with several regulatory agencies, including, but not limited to, the U.S. Environmental Protection Agency (EPA) and the FDEP. Although the Company may incur costs at these sites about which it has been notified, based upon current status of these sites, the Company does not expect those costs to be material to the financial position or results of operations of the Company. The Company has accrued amounts to address known costs at certain of these sites. The Company is periodically notified by regulators such as the EPA and various state agencies of their involvement or potential involvement in sites, other than MGP sites, that may require investigation and/or remediation. Although the Company may incur costs at the sites about which they have been notified, based upon the current status of these sites, the Company does not expect those costs to be material to the financial position or results of operations of the Company. There has been and may be further proposed federal legislation requiring reductions in air emissions for nitrogen oxides, sulfur dioxide and mercury setting forth national caps and emission levels over an extended period of time. This national multi-pollutant approach would have significant costs which could be material to the Company's consolidated financial position or results of operations. Some companies may seek recovery of the related cost through rate adjustments or similar mechanisms. The Company cannot predict the outcome of this matter. The EPA has been conducting an enforcement initiative related to a number of coal-fired utility power plants in an effort to determine whether modifications at those facilities were subject to New Source Review requirements or New Source Performance Standards under the Clean Air Act. Florida Power was asked to provide information to the EPA as part of this initiative and cooperated in providing the requested information. The EPA has initiated enforcement actions against other utilities as part of this initiative, some of which have resulted in or may result in settlement agreements, ranging from $1.0 billion to $1.4 billion. A utility that was not subject to a civil enforcement action settled its New Source Review issues with the EPA for $300 million. These settlement agreements have generally called for expenditures to be made over 15 extended time periods, and some of the companies may seek recovery of the related costs through rate adjustments. The Company cannot predict the outcome of this matter. In July 1997, the EPA issued final regulations establishing a new eight-hour ozone standard. In October 1999, the District of Columbia Circuit Court of Appeals ruled against the EPA with regard to the federal eight-hour ozone standard. The U.S. Supreme Court has upheld, in part, the District of Columbia Circuit Court of Appeals decision. Further litigation and rulemaking are anticipated. The Company cannot predict the outcome of this matter. On November 1, 2001, the Company completed the sale of the Inland Marine Transportation segment to AEP Resources, Inc. In connection with the sale, the Company entered into environmental indemnification provisions covering both unknown and known sites. The Company has recorded an accrual to cover estimated probable future environmental expenditures. The Company believes that it is reasonably possible that additional costs, which cannot be currently estimated, may be incurred related to the environmental indemnification provision beyond the amounts accrued. The Company cannot predict the outcome of this matter. Florida Power has filed claims with the Company's general liability insurance carriers to recover costs arising out of actual or potential liabilities. Some claims have settled and others are still pending. While management cannot predict the outcome of these matters, the outcome is not expected to have a material effect on the financial position or results of operations. LEGAL MATTERS Age Discrimination Suit -- Florida Power and Florida Progress have been named defendants in an age discrimination lawsuit. The number of plaintiffs remains at 116, but four of those plaintiffs have had their federal claims dismissed and 74 others have had their state age claims dismissed. While no dollar amount was requested, each plaintiff seeks back pay, reinstatement or front pay through their projected dates of normal retirement, costs and attorneys' fees. In October 1996, the Federal Court approved an agreement between the parties to provisionally certify this case as a class action suit under the Age Discrimination in Employment Act. Florida Power filed a motion to decertify the class and in August 1999, the Court granted Florida Power's motion. In October 1999, the judge certified the question of whether the case should be tried as a class action to the Eleventh Circuit Court of Appeals for immediate appellate review. In December 1999, the Court of Appeals agreed to review the judge's order decertifying the class. In anticipation of a potential ruling decertifying the case as a class action, plaintiffs filed a virtually identical lawsuit, which identified all opt-in plaintiffs as named plaintiffs. On July 5, 2001, the Eleventh Circuit Court of Appeals ruled that as a matter of law, disparate claims cannot be brought under the Americans with Disabilities Act (ADEA). This ruling has the effect of decertifying the case as a class action. On October 3, 2001, the plaintiffs filed a petition in the United States Supreme Court, requesting a hearing of the case, on the issue of whether disparate claims can be brought under the ADEA. On December 3, 2001, the United States Supreme Court agreed to hear the case. Oral arguments on the issue were held on March 20, 2002. On April 1, 2002, the U.S. Supreme Court issued a per curiam affirmed order in the case stating they had improvidently granted the oral argument and they would uphold the ruling of the Eleventh Circuit Court of Appeals. Therefore, the case will remain decertified. As a result of the decertification, the trial court has grouped the plaintiffs cases to be tried. The first set of plaintiffs, 12 former information technology plaintiffs, is set for trial in July, 2002. The Company cannot predict the outcome of this matter. In December 1998, during mediation in this age discrimination suit, plaintiffs alleged damages of $100 million. Company management, while not believing plaintiffs' claim to have merit, offered $5 million in an attempt to settle all claims. Plaintiffs rejected that offer. Florida Power and the plaintiffs engaged in informal settlement discussions, which terminated on December 22, 1998. As a result of the plaintiffs' claims, management has identified a probable range of $5 million to $100 million with no amount within that range a better estimate of probable loss than any other amount; accordingly, Florida Power has accrued $5 million. In December 1999, Florida Power also recorded an accrual of $4.8 million for legal fees associated with defending its position in these proceedings. There can be no assurance that this litigation will be settled, or if settled, that the settlement will not exceed $5 million. Additionally, the ultimate outcome, if litigated, cannot presently be determined. Franchise Litigation -- Seven cities, with a total of approximately 59,000 customers, have sued Florida Power in various circuit courts in Florida. The lawsuits principally seek 1) a declaratory judgment that the cities have the right to purchase Florida Power's electric distribution system located within the municipal boundaries of the cities, 2) a declaratory judgment that the value of the distribution system must be determined through arbitration, and 3) injunctive relief requiring Florida Power to continue to collect from Florida Power's customers and remit to the cities, franchise fees during the pending litigation, and as long as Florida Power continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of the franchise ordinances under which Florida Power had agreed to collect such fees. Three circuit courts have entered orders requiring arbitration to establish the purchase price of Florida Power's 16 electric distribution facilities within three cities. One appellate court has held that one city has the right to determine the value of Florida Power's facilities within the city through arbitration. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system, nor has there been any proceeding to determine the value at which such a purchase could be made. Arbitration in one of the cases is scheduled to occur in the third quarter of 2002. The Company cannot predict the outcome of these matters. Other Legal Matters -- Florida Progress and Florida Power are involved in various other claims and legal actions arising in the ordinary course of business, some of which involve substantial amounts. Where appropriate, accruals have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect upon either company's consolidated financial position, results of operations or liquidity. NOTE 11. SUBSEQUENT EVENT On April 26, 2002, Progress Energy finalized the acquisition of Westchester Gas Company, which includes approximately 215 producing natural gas wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems. Total consideration of $148 million included $128 million in Progress Energy common stock and $20 million in cash. The properties are located within a 25-mile radius of Jonesville, Texas, on the Texas-Louisiana border and will be owned by subsidiaries of Progress Fuels. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS Florida Progress' consolidated income from continuing operations for the three months ended March 31, 2002, was $75.8 million compared to earnings of $75.6 million for the same period in 2001. Business segment results and the factors affecting them are discussed below. FLORIDA POWER CORPORATION Florida Power, the largest subsidiary of Florida Progress, reported earnings for common stock of $57.7 million for the first quarter of 2002, compared to $71.6 million for the comparable period in 2001. Quarterly earnings were negatively affected by the outcome of the Florida Power rate case settlement, which included a one-time retroactive revenue refund of $35 million ($21 million after-tax), as well as the impact of mild weather. See Note 8 to the Interim Financial Statements for additional information on the settlement. Earnings for the three months ended March 31, 2002, were positively impacted by lower ongoing depreciation expense in accordance with the rate case settlement and increased revenues from customer growth and usage. The tables below detail Florida Power's sales by customer class. Florida Power's electric revenues for the three months ended March 31, 2002 and 2001 and the percentage change by customer class are as follows (in millions): --------------------------------------------------------------------------- Customer Class 2002 % Change 2001 --------------------------------------------------------------------------- Residential $379.2 (4.9)% $398.9 Commercial 166.8 5.0 158.9 Industrial 50.0 (6.5) 53.5 Governmental 39.9 5.6 37.8 Retroactive Retail Revenue Refund (35.0) -- -- --------------------------------------------------- ------ Total Retail Revenues 600.9 (7.4) 649.1 Wholesale 52.4 (46.4) 97.7 Unbilled 6.5 129.2 (22.3) Miscellaneous 26.6 (69.1) 86.0 --------------------------------------------------- ------ Total Electric Revenues $686.4 (15.3)% $810.5 --------------------------------------------------------------------------- Florida Power's electric energy sales for the three months ended March 31, 2002 and 2001, and the percentage change by customer class are as follows (in thousands of mWh): -------------------------------------------------------------------------- Customer Class 2002 % Change 2001 -------------------------------------------------------------------------- Residential 4,060 (7.9)% 4,409 Commercial 2,456 1.4 2,422 Industrial 882 (9.9) 979 Governmental 621 0.8 616 -------------------------------------------------- ----- Total Retail Energy Sales 8,019 (4.8) 8,426 Wholesale 979 (23.9) 1,286 Unbilled 32 106.5 (495) -------------------------------------------------- ----- Total mWh sales 9,030 (2.0)% 9,217 -------------------------------------------------------------------------- As a result of the settlement of the Florida Power rate case, Florida Power Electric recognized a one-time retroactive revenue refund of $35 million to its retail customers in the first quarter of 2002. In addition, the first quarter 2002 revenues decreased when compared to the same period in the prior year due to the recognition of $63 million of deferred revenue in the first quarter of 2001, which is included in miscellaneous revenues in the table above. Milder weather conditions in the first quarter of 2002, when compared to the same period in the prior year, negatively affected energy sales, which was partially offset by an increase in Florida Power's customer base. A weaker economy negatively impacted the industrial customer class. Fuel used in generation and purchased power decreased $33.7 million for the three months ended March 31, 2002, when compared to $342.0 million in the prior year, primarily due to lower oil and gas prices and a decrease in system requirements. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, have no material impact on operating results. Other operation and maintenance expense increased $20.5 million for the three months ended 18 March 31, 2002, when compared to $110.9 million in the prior year, primarily due to a decrease in pension credits and increases in other benefit costs and Service Company costs due to an increase in employee headcount in the current quarter when compared to the prior quarter. Depreciation and amortization expense decreased $82.8 million for the three months ended March 31, 2002, when compared to $152.1 million in the prior year. The Florida Power rate case settlement provides for ongoing reductions in depreciation which reduced the amount of depreciation recorded in the first quarter of 2002 by $15.6 million. In addition, the first quarter of 2001 includes $63 million of accelerated amortization on the Tiger Bay regulatory asset associated with deferred revenue from 2000. PROGRESS FUELS CORPORATION Progress Fuels makes up the majority of Florida Progress' diversified operations. The results of operations for Progress Fuels' Energy and Related Services and Rail Services units are discussed below. Energy and Related Services - Earnings at the Energy and Related Services Group --------------------------- increased $1.6 million from the same period in the prior year. The increase was due primarily to improved operating results of the terminal services operations. The Energy and Related Services segment sold 1.4 million and 1.6 million tons of synthetic fuel for the three months ended March 31, 2002 and 2001, respectively, that resulted in tax credits of $43.9 million and $44.4 million being recorded for the first quarter of 2002 and 2001, respectively. See OTHER MATTERS below for information on associated tax credits. Rail Services - Results in the Rail Services group improved $1.4 million when ------------- compared to a net loss of $2.1 million in 2001. Current year results were positively impacted by the implementation of certain costs control programs at Progress Rail. Rail Services' first quarter 2002 revenues of $169.9 million are $54.3 million less than the comparable 2001 revenues of $224.2 million. This decrease (with comparable decreases in operating expenses) results from selling the Louisville Scrap and Metal operation in November 2001 and the transition from acting as a scrap reseller in 2001 to acting as a scrap resale agent in 2002. Rail Services results for the three months ended March 31, 2002, have been favorably impacted by the implementation of cost control programs. OTHER The other group includes telecommunications, holding company and financing expenses. The decreased loss over the first quarter of 2001 is due primarily to the recording of an intra-period income tax allocation adjustment. Generally accepted accounting principles require companies to apply a levelized effective tax rate to interim periods that is consistent with the estimated annual rate. Income tax expense was increased by $2.8 million and $14.8 million for the first quarter of 2002 and 2001, respectively, to maintain an effective tax rate consistent with the estimated annual rate. The tax credits associated with the Company's synthetic fuel operations lower the overall effective tax rate. These credits, along with seasonal earnings variations, can also cause large swings in the effective tax rate for interim periods. Therefore, this adjustment will vary each quarter, but have no effect on net income for the year. The telecommunications group also had slightly higher losses than the first quarter of 2001 due to continued expansion of the business. MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES Statements of Cash Flows and Financing Activities Cash provided by operating activities decreased $91.2 million for the three months ended March 31, 2002, when compared to the corresponding period in the prior year. The decrease in cash from operating activities for the 2002 period is due to a decrease in operating income from the impact of the Florida Power rate case settlement and the impact of unfavorable weather in the current quarter. In addition, changes in the balances of certain current assets and liabilities due to operational fluctuations decreased cash provided by operating activities. Net cash used in investing activities increased $17.4 million for the three months ended March 31, 2002, when compared to the corresponding period in the prior year, primarily due to increased expenditures on Florida Power's construction program. During the first three months of 2002, $86.5 million was spent on the Florida Power construction program and $35.6 million was spent in diversified operations. Net cash used in financing activities decreased $125.8 million for the three months ended March 31, 2002, when compared to the corresponding period in the prior year. The decrease in cash used in financing activities is primarily due to an increase in short-term obligations during the current quarter. 19 In February 2002, $50 million of Progress Capital Holding (PCH) medium-term notes, 5.78% Series, matured. Progress Energy funded this maturity through the issuance of commercial paper. On March 28, 2002, Standard & Poor's affirmed Progress Energy's corporate credit rating of BBB+ and Florida Power's rating but revised the outlook for Progress Energy to negative from stable. S&P stated that its change in outlook reflects the increased business risk at Progress Energy's Progress Ventures business unit and lower-than-projected credit protection measures. The change in outlook by the rating agency has not affected the Company's access to liquidity nor the cost of its short-term borrowings. The Company is committed to maintaining its current ratings and is currently assessing the situation with the rating agency to determine an appropriate course of action, if necessary, to address its concerns. Future Commitments As of March 31, 2002, both Florida Progress' and Florida Power's contractual cash obligations and other commercial commitments has not changed materially from what was reported in the 2001 Annual Report on Form 10-K. OTHER MATTERS Florida Power Rate Case Settlement On March 27, 2002, the parties in Florida Power's rate case entered into a Stipulation and Settlement Agreement (the Agreement) related to retail rate matters. The Agreement was approved by the FPSC on April 23, 2002. The Agreement is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if Florida Power's base rate earnings fall below a 10% return on equity, Florida Power may petition the FPSC to amend its base rates. See Note 8 to the Interim Financial Statements for additional information on the Agreement. Fuel Acquisition On April 26, 2002, Progress Energy finalized the acquisition of Westchester Gas Company, which includes approximately 215 producing natural gas wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems. Total consideration of $148 million included $128 million in Progress Energy common stock and $20 million in cash. The properties are located within a 25-mile radius of Jonesville, Texas, on the Texas-Louisiana border and will be owned by subsidiaries of Progress Fuels. This transaction added 140 billion cubic feet (Bcf) of gas reserves to Progress Fuels' fuel business, which more than doubled its gas reserves and potential annual production levels. Synthetic Fuels Tax Credits Progress Fuels, through its subsidiaries, owns a majority interest in three synthetic fuel entities; two located in Kentucky and the other located in West Virginia. Progress Fuels has a minority interest in three other synthetic fuel entities, each of which is located in West Virginia, Virginia and Kentucky. Progress Ventures, Inc., a wholly owned subsidiary of Progress Energy, owns a 90% interest in two of these entities, which are located in Kentucky and West Virginia. All entities have received private letter rulings (PLRs) from the Internal Revenue Service with respect to their synfuel operations. The PLRs do not limit the production on which synthetic fuel tax credits may be claimed. Should the tax credits be denied on future audits and Florida Progress fails to prevail through the audit/legal process, there could be significant tax liability owed for previously taken Section 29 credits, with a significant impact on earnings and cash flows. These tax credits are scheduled to expire in 2007. In Management's opinion, Florida Progress is complying with all the necessary requirements to be allowed such credits under Section 29 and believes it is probable, although it cannot provide certainty, that it will prevail if challenged by the IRS on any credits taken. Franchise Litigation Seven cities, with a total of approximately 59,000 customers, have sued Florida Power in various circuit courts in Florida. The lawsuits principally seek 1) a declaratory judgment that the cities have the right to purchase Florida Power's electric distribution system located within the municipal boundaries of the cities, 2) a declaratory judgment that the value of the distribution system must be determined through arbitration, and 3) injunctive relief requiring Florida Power to continue to collect from Florida Power's customers and remit to the cities, franchise fees during the pending litigation, and as long as Florida Power continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of 20 the franchise ordinances under which Florida Power had agreed to collect such fees. Three circuit courts have entered orders requiring arbitration to establish the purchase price of Florida Power's electric distribution facilities within three cities. One appellate court has held that one city has the right to determine the value of Florida Power's facilities within the city through arbitration. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system, nor has there been any proceeding to determine the value at which such a purchase could be made. Arbitration in one of the cases is scheduled to occur in the third quarter of 2002. The Company cannot predict the outcome of these matters. Nuclear Matters On April 1, 2002, Florida Power filed a response to an industry-wide request from the Nuclear Regulatory Commission (NRC) concerning potential degradation of the reactor vessel heads of pressurized water reactors (PWRs). Inspection of the vessel head at Florida Power's Crystal River plant (CR3) was performed during the 2001 outage. One nozzle was found to have a crack and was repaired; however, no degradation of the reactor vessel head was identified. Current plans are to replace the vessel head at CR3 during its next regularly scheduled refueling outage in 2003. On February 25, 2002, the NRC issued orders formalizing many of the security enhancements made at CR3 since September 2001. These orders include additional restrictions on access, increased security presence and closer coordination with the Company's partners in intelligence, military, law enforcement and emergency response at the federal, state and local levels. The Company is currently reviewing the new requirements to determine the cost to implement these orders. The Company does not expect those costs to be material to the Company's consolidated financial position or results of operations. As the NRC, other governmental entities, and the industry continue to consider security issues, it is possible that more extensive security plans could be required. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Florida Progress Corporation Certain market risks are inherent in Florida Progress' financial instruments, which arise from transactions entered into in the normal course of business. Florida Progress' primary exposures are changes in interest rates with respect to long-term debt, commercial paper reclassified as long-term debt and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. Florida Progress' exposure to return on marketable securities for the decommissioning trust funds has not changed materially since December 31, 2001. In addition, Florida Progress' exposure to changes in interest rates from the Company's fixed rate long-term debt, commercial paper reclassified as long-term debt, FPC mandatorily redeemable securities of trust and unsecured note with parent at March 31, 2002, was not materially different than at December 31, 2001. Florida Power Corporation Certain market risks are inherent in Florida Power's financial instruments, which arise from transactions entered into in the normal course of business. Florida Power's primary exposures are changes in interest rates with respect to long-term debt, commercial paper reclassified as long-term debt and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. Florida Power's exposure to return on marketable securities for the decommissioning trust funds has not changed materially since December 31, 2001. In addition, Florida Power's exposure to changes in interest rates from its fixed rate long-term debt and commercial paper reclassified as long-term debt at March 31, 2002, was not materially different than at December 31, 2001. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 1. Wanda L. Adams, et al. v. Florida Power Corporation and Florida Progress Corporation, U.S. District Court, Middle District of Florida, Ocala Division, Case No. 95-123-C.V.-OC-10. See prior discussion of this matter in the 2001 Form 10-K, Item 3, paragraph 2. On October 3, 2001, the plaintiffs filed a petition in the United States Supreme Court, requesting a hearing of the case, on the issue of whether disparate claims can be brought under the Americans with Disabilities Act (ADEA). On December 3, 2001, the United States Supreme Court agreed to hear the case. Oral arguments on the issue were held on March 20, 2002. On April 1, 2002, the U.S. Supreme Court issued a per curiam affirmed order in the case stating they had improvidently granted the oral argument and they would uphold the ruling of the Eleventh Circuit Court of Appeals. Therefore, the case will remain decertified. As a result of the decertification, the trial court has grouped the plaintiffs cases to be tried. The first set of plaintiffs, 12 former information technology plaintiffs, is set for trial in July, 2002. The Company cannot predict the outcome of this matter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K filed during or with respect to the quarter: Florida Progress Corporation and Florida Power Corporation Financial Item Statements Reported Included Date of Event Date Filed -------- ---------- ------------- ---------- 7 Yes March 15, 2002 March 15, 2002 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLORIDA PROGRESS CORPORATION FLORIDA POWER CORPORATION (Registrants) Date: May 15, 2002 By: /s/ Peter M. Scott III ----------------------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer By: /s/ Robert H. Bazemore, Jr. ----------------------------------- Robert H. Bazemore, Jr. Vice President and Controller Chief Accounting Officer 23