-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HfkjxzGRNU3SS2z0kU3IEKspNQ+bwTjX8i7jKgtakAvG0Kr53nWZFYspl7V+ReZz 4AkiEVf75fBer6WwjuRr5g== 0001094093-02-000033.txt : 20021118 0001094093-02-000033.hdr.sgml : 20021118 20021115091552 ACCESSION NUMBER: 0001094093-02-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLORIDA POWER CORP / CENTRAL INDEX KEY: 0000037637 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 590247770 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03274 FILM NUMBER: 02828415 BUSINESS ADDRESS: STREET 1: 3201 34TH ST SOUTH STREET 2: ONE PROGRESS PLAZA CITY: ST PETERSBURG STATE: FL ZIP: 33701 BUSINESS PHONE: 7278205151 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLORIDA PROGRESS CORP CENTRAL INDEX KEY: 0000357261 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 592147112 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08349 FILM NUMBER: 02828416 BUSINESS ADDRESS: STREET 1: ONE PROGRESS PLAZA STREET 2: STE 2600 CITY: ST PETERSBURG STATE: FL ZIP: 33701 BUSINESS PHONE: 7278246400 MAIL ADDRESS: STREET 1: ONE PROGRESS PLZ STREET 2: SUITE 2600 CITY: ST PETERSBURG STATE: FL ZIP: 33701 10-Q 1 pei_10qfp-.txt FLORIDA PROGRESS/FLORIDA POWER 3RD QTR 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, 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 100 Central Avenue 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, 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)
1 FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION FORM 10-Q - For the Quarter Ended September 30, 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 Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures Certifications 2 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined Form 10-Q are defined below: TERM DEFINITION 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 Megawatt 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 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 SFAS No. 133 Statements of Financial Accounting Standards No. 133, Accounting for Derivative and Hedging Activities SFAS No. 142 Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets SFAS No. 143 Statements of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations SFAS No. 144 Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets SFAS No. 145 Statements of Financial Accounting Standards No. 145, Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections SFAS No. 146 Statements of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities The Trust FPC Capital I
3 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS This combined report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The matters discussed throughout this combined Form 10-Q that are not historical facts are forward-looking and, accordingly, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. In addition, forward-looking statements are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" including, but not limited to, statements under the sub-heading "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 (the Company) 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: the impact of fluid and complex government laws and regulations, including those relating to the environment; the impact of recent events in the energy markets that have increased the level of public and regulatory scrutiny in the energy industry and in the capital markets; deregulation or restructuring in the electric industry that may result in increased competition and unrecovered (stranded) costs; the uncertainty regarding the timing, creation and structure of regional transmission organizations; weather conditions that directly influence the demand for electricity and natural gas; recurring seasonal fluctuations in demand for electricity and natural gas; fluctuations in the price of energy commodities; economic fluctuations and the corresponding impact on commercial and industrial customers of the Company and Florida Power; the ability of the Company's subsidiaries to pay upstream dividends or distributions to it; the impact on the facilities and businesses of the Company and Florida Power from a terrorist attack; the inherent risks associated with the operation of nuclear facilities, including environmental, health, regulatory and financial risks; the ability of the Company and Florida Power to successfully access capital markets on favorable terms; the impact that increases in leverage may have on the Company and Florida Power; the ability of the Company and Florida Power to maintain their current credit ratings; the impact of derivative contracts used in the normal course of business by the Company and Florida Power; the Company's continued ability to use Section 29 tax credits related to its coal and synthetic fuels businesses; the continued depressed state of the telecommunications industry and the Company's ability to realize future returns from Progress Telecom; the Company's ability to successfully integrate newly acquired businesses, including Westchester Gas Company, into its operations as quickly or as profitably as expected; realization of cost savings related to synergies resulting from acquisition by Progress Energy; the success of our direct and indirect subsidiaries; and unanticipated changes in operating expenses and capital expenditures. Many of these risks similarly impact the Company's subsidiaries. These and other risks are detailed from time to time in the SEC reports of the Company and Florida Power. You should closely read these SEC reports. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of the Company and 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 the Company and Florida Power. 4 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Florida Progress Corporation CONSOLIDATED INTERIM FINANCIAL STATEMENTS September 30, 2002 CONSOLIDATED STATEMENTS of INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 863,637 $ 906,131 $2,316,001 $ 2,500,265 Diversified businesses 338,382 354,473 1,004,817 1,038,899 - ---------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 1,202,019 1,260,604 3,320,818 3,539,164 - ---------------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 237,021 259,763 636,436 696,766 Purchased power 145,743 154,958 387,473 407,180 Other operation and maintenance 139,160 119,931 420,477 350,612 Depreciation and amortization 73,427 95,087 218,004 341,801 Taxes other than on income 61,186 63,234 175,119 180,420 Diversified businesses 588,731 389,366 1,295,072 1,124,735 - ---------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 1,245,268 1,082,339 3,132,581 3,101,514 - ---------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) (43,249) 178,265 188,237 437,650 - ---------------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 1,744 2,348 5,619 6,275 Other, net (3,171) (3,345) (12,645) (14,329) - ---------------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (1,427) (997) (7,026) (8,054) - ---------------------------------------------------------------------------------------------------------------------- Income (Loss) before Interest Charges and Income Taxes (44,676) 177,268 181,211 429,596 - ---------------------------------------------------------------------------------------------------------------------- Interest Charges Net interest charges 45,773 46,757 141,083 146,663 Allowance for borrowed funds used during construction (899) (271) (1,932) (474) - ---------------------------------------------------------------------------------------------------------------------- Net Interest Charges 44,874 46,486 139,151 146,189 - ---------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations before Income (89,550) 130,782 42,060 283,407 Taxes Income Taxes (Benefit) (32,529) (50,670) (67,049) (75,570) - ---------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations (57,021) 181,452 109,109 358,977 Discontinued Operations, net of tax (Note 12): Income (Loss) from discontinued operations 5,120 (14,120) 5,120 (25,846) - ---------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ (51,901) $ 167,332 $ 114,229 $ 333,131 - ----------------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements. 5 Florida Progress Corporation CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) September 30, December 31, Assets 2002 2001 - ------------------------------------------------------------------------------------------------------ Utility Plant Electric utility plant in service $7,374,282 $ 7,151,729 Accumulated depreciation (4,075,834) (3,984,308) - ------------------------------------------------------------------------------------------------------ Utility plant in service, net 3,298,448 3,167,421 Held for future use 7,921 8,274 Construction work in progress 316,274 292,883 Nuclear fuel, net of amortization 45,688 62,536 - ------------------------------------------------------------------------------------------------------ Total Utility Plant, Net 3,668,331 3,531,114 - ------------------------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents 39,559 5,201 Accounts receivable 404,066 357,038 Unbilled accounts receivable 83,315 63,080 Receivable from affiliates 73,310 26,976 Taxes receivable - 14,761 Deferred income taxes 23,517 32,334 Inventory 516,410 485,891 Deferred fuel cost 29,840 15,147 Prepayments 27,892 10,748 Other current assets 42,504 48,175 - ------------------------------------------------------------------------------------------------------ Total Current Assets 1,240,413 1,059,351 - ------------------------------------------------------------------------------------------------------ Deferred Debits and Other Assets Regulatory assets 130,025 157,725 Unamortized debt expense 23,501 21,021 Nuclear decommissioning trust funds 377,238 406,100 Diversified business property, net 661,521 669,078 Miscellaneous other property and investments 103,138 117,535 Prepaid pension costs 221,215 202,167 Other assets and deferred debits 157,649 147,713 - ------------------------------------------------------------------------------------------------------ Total Deferred Debits and Other Assets 1,674,287 1,721,339 - ------------------------------------------------------------------------------------------------------ Total Assets $6,583,031 $ 6,311,804 - ------------------------------------------------------------------------------------------------------ Capitalization and Liabilities - ------------------------------------------------------------------------------------------------------ Capitalization Common stock $1,615,723 $ 1,409,034 Retained earnings 527,248 666,201 Accumulated other comprehensive loss (4,071) (2,985) - ------------------------------------------------------------------------------------------------------ Total Common Stock Equity 2,138,900 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 1,715,181 1,989,684 - ------------------------------------------------------------------------------------------------------ Total Capitalization 4,387,578 4,595,431 - ------------------------------------------------------------------------------------------------------ Current Liabilities Current portion of long-term debt 275,202 88,053 Accounts payable 318,338 285,524 Payable to affiliates 102,454 116,520 Notes payable to affiliates 325,398 147,583 Taxes accrued 100,318 - Interest accrued 45,191 67,861 Short-term Obligations 244,600 154,250 Customer deposits 122,317 118,285 Accrued taxes other than on income 93,412 16,361 Other current liabilities 89,433 128,004 - ------------------------------------------------------------------------------------------------------ Total Current Liabilities 1,716,663 1,122,441 - ------------------------------------------------------------------------------------------------------ Deferred Credits and Other Liabilities Accumulated deferred income taxes 48,153 165,816 Accumulated deferred investment tax credits 48,882 54,387 Regulatory liabilities 53,965 45,643 Other liabilities and deferred credits 327,790 328,086 - ------------------------------------------------------------------------------------------------------ Total Deferred Credits and Other Liabilities 478,790 593,932 - ------------------------------------------------------------------------------------------------------ Commitments and Contingencies (Note 12) - ------------------------------------------------------------------------------------------------------ Total Capitalization and Liabilities $6,583,031 $ 6,311,804 - ------------------------------------------------------------------------------------------------------ See Notes to Interim Financial Statements.
6 Florida Progress Corporation CONSOLIDATED STATEMENTS of CASH FLOWS Nine Months Ended (Unaudited) September 30, (In thousands) 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 114,229 $ 333,131 Adjustments to reconcile net income to net cash provided by operating activities: Impairment of long-lived assets 214,617 - Income from discontinued operations (5,120) (2,682) Estimated loss on disposal of discontinued operations - 28,528 Depreciation and amortization 284,781 405,552 Deferred income taxes and investment tax credits, net (172,073) 501 Deferred fuel cost (credit) (14,694) 32,633 Changes in working capital, net of effects from sale or acquisition of business Net increase in accounts receivable (106,951) (70,919) Net increase in inventories (34,381) (113,200) Net (increase) decrease in prepaids and other current assets (11,655) 5,601 Net increase in accounts payable 15,077 37,510 Net increase in other current liabilities 127,070 20,868 Other 40,523 (81,545) - ---------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 451,423 595,978 - ---------------------------------------------------------------------------------------------------------------------- Investing Activities: Utility property additions (317,278) (222,951) Diversified business property additions (96,462) (66,986) Nuclear fuel additions (120) (42,783) Net contributions to nuclear decommissioning fund 12,348 (14,976) Proceeds from sale of discontinued operations 8,000 - Proceeds from sale of asset 670 5,532 Acquisition, net of cash acquired (17,355) - Other investing activities (16) (4,224) - ---------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (410,213) (346,388) - ---------------------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds from issuance of long-term debt 236,242 299,058 Net increase in intercompany notes 177,816 125,622 Net increase (decrease) in short-term indebtedness 90,350 (294,632) Retirement of long-term debt (335,495) (188,756) Equity contribution from parent 77,904 39,651 Dividends paid to parent (253,182) (213,837) Other financing activities (487) (2,224) - ---------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (6,852) (235,118) - ---------------------------------------------------------------------------------------------------------------------- Cash Provided by Discontinued Operations - 277 - ---------------------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 34,358 14,749 - ---------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of the Period 5,201 24,200 - ---------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 39,559 $ 38,949 - ---------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period - interest (net of amount capitalized) $ 132,219 $ 151,405 income taxes $ 42,614 $ (76,300) See Note 2 for non-cash investing and financing activities. See Notes to Interim Financial Statements.
7 Florida Power Corporation INTERIM FINANCIAL STATEMENTS September 30, 2002 STATEMENTS of INCOME Three Months Ended Nine Months Ended (Unaudited) September 30, September 30, (In thousands) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 863,637 $ 906,131 $2,316,001 $2,500,265 Operating Expenses Fuel used in electric generation 237,021 259,763 636,436 696,766 Purchased power 145,743 154,958 387,473 407,180 Operation and maintenance 139,160 119,931 420,477 350,612 Depreciation and amortization 73,427 95,087 218,004 341,801 Taxes other than on income 61,186 63,234 175,119 180,420 - ------------------------------------------------------------------------------------------------------------- Total Operating Expenses 656,537 692,973 1,837,509 1,976,779 - ------------------------------------------------------------------------------------------------------------- Operating Income 207,100 213,158 478,492 523,486 - ------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 297 736 1,574 1,513 Other, net (1,453) (1,193) (3,529) (6,134) - ------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (1,156) (457) (1,955) (4,621) - ------------------------------------------------------------------------------------------------------------- Income before Interest Charges and Income Taxes 205,944 212,701 476,537 518,865 - ------------------------------------------------------------------------------------------------------------- Interest Charges Gross interest charges 26,663 28,918 84,026 85,951 Allowance for borrowed funds used during (899) (271) (1,932) (475) construction - ------------------------------------------------------------------------------------------------------------- Net Interest Charges 25,764 28,647 82,094 85,476 - ------------------------------------------------------------------------------------------------------------- Income before Income Taxes 180,180 184,054 394,443 433,389 Income Taxes 56,028 69,597 135,038 162,259 - ------------------------------------------------------------------------------------------------------------- Net Income 124,152 114,457 259,405 271,130 Dividends on Preferred Stock 378 378 1,134 1,134 - ------------------------------------------------------------------------------------------------------------- Earnings for Common Stock $ 123,774 $ 114,079 $ 258,271 $ 269,996 - ------------------------------------------------------------------------------------------------------------- See Notes to Interim Financial Statements. 8 Florida Power Corporation BALANCE SHEETS (Unaudited) (In thousands) September 30, December 31, Assets 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $7,374,282 $ 7,151,729 Accumulated depreciation (4,075,834) (3,984,308) - ---------------------------------------------------------------------------------------------------------------------- Utility plant in service, net 3,298,448 3,167,421 Held for future use 7,921 8,274 Construction work in progress 316,274 292,883 Nuclear fuel, net of amortization 45,688 62,536 - ---------------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 3,668,331 3,531,114 - ---------------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 28,725 - Accounts receivable 207,362 185,562 Unbilled accounts receivable 83,315 63,080 Receivable from affiliates 36,605 16,424 Notes receivable from affiliates - 119,799 Deferred income taxes 23,517 32,334 Inventory 204,601 188,630 Deferred fuel cost 29,840 15,147 Prepayments and other current assets 8,963 4,336 - ---------------------------------------------------------------------------------------------------------------------- Total Current Assets 622,928 625,312 - ---------------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 130,025 157,725 Unamortized debt expense 14,562 11,844 Nuclear decommissioning trust funds 377,238 406,100 Miscellaneous other property and investments 40,852 46,442 Prepaid pension costs 216,893 198,351 Other assets and deferred debits 8,889 21,274 - ---------------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 788,459 841,736 - ---------------------------------------------------------------------------------------------------------------------- Total Assets $5,079,718 $ 4,998,162 - ---------------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ---------------------------------------------------------------------------------------------------------------------- Capitalization Common stock $1,081,257 $ 1,081,257 Retained earnings 955,472 950,387 - ---------------------------------------------------------------------------------------------------------------------- Total Common Stock Equity 2,036,729 2,031,644 Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497 Long-term debt, net 1,249,325 1,465,030 - ---------------------------------------------------------------------------------------------------------------------- Total Capitalization 3,319,551 3,530,171 - ---------------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 216,877 32,000 Accounts payable 158,857 143,828 Payable to affiliates 67,526 189,817 Notes payable to affiliates 72,381 - Taxes accrued 28,128 1,768 Interest accrued 36,805 54,440 Short-term obligations 244,600 154,250 Customer deposits 122,317 118,285 Accrued taxes other than on income 82,277 9,202 Other current liabilities 30,623 57,778 - ---------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 1,060,391 761,368 - ---------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 382,030 394,828 Accumulated deferred investment tax credits 48,386 53,875 Regulatory liabilities 53,965 45,643 Other liabilities and deferred credits 215,395 212,277 - ---------------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 699,776 706,623 - ---------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 12) - ---------------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $5,079,718 $ 4,998,162 - ---------------------------------------------------------------------------------------------------------------------- See Notes to Interim Financial Statements. 9 Florida Power Corporation STATEMENTS of CASH FLOWS Nine Months Ended (Unaudited) September 30, (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 259,405 $ 271,130 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 237,440 350,771 Deferred income taxes and investment tax credits, net (13,555) (22,180) Deferred fuel cost (credit) (14,693) 32,633 Changes in working capital: Net increase in accounts receivable (62,216) (59,693) Net increase in inventories (15,971) (24,544) Net (increase) decrease in prepaids and other current assets (4,627) 5,940 Net increase (decrease) in accounts payable (107,262) 31,487 Net increase in other current liabilities 58,677 184,425 Other 3,058 (87,697) - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 340,256 682,272 - ------------------------------------------------------------------------------------------------------------------- Investing Activities: Property additions (317,278) (222,951) Nuclear fuel additions (120) (42,783) Net contributions to nuclear decommissioning fund 12,348 (14,976) Other investing activities 5,526 7,617 - ------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (299,524) (273,093) - ------------------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds from issuance of long-term debt 236,242 297,621 Net increase (decrease) in intercompany notes 192,180 (117,062) Net increase (decrease) in short-term indebtedness 90,350 (288,806) Retirement of long-term debt (276,459) (81,000) Dividends paid to parent (253,186) (213,836) Dividends paid on preferred stock (1,134) (1,134) - ------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (12,007) (404,217) - ------------------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 28,725 4,962 - ------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of the Period - 3,380 - ------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 28,725 $ 8,342 - ------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest (net of amount capitalized) $ 99,729 $ 94,071 income taxes (net of refunds) $ 88,004 $ 17,071 See Notes to Interim Financial Statements.
10 Florida Progress Corporation and Florida Power Corporation NOTES TO INTERIM FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization. Florida Progress Corporation (the Company or Florida Progress) is a holding company under the Public Utility Holding Company Act of 1935 (PUHCA). The Company became subject to the regulations of PUHCA when it was acquired by Progress Energy, Inc. (Progress Energy or the Parent). Florida Progress' two primary subsidiaries are Florida Power Corporation (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. Progress Fuels' Rail Services and the non-Florida portion of its Energy & Related Services operations report their results one-month in arrears, due to their wide-ranging geographical locations. 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. Effective with the quarter ended September 30, 2002, the Company will no longer reclassify commercial paper as long-term debt. Certain reclassifications have been made to prior-year amounts to conform to the current year's presentation. 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. 2. FUEL ACQUISITION On April 26, 2002, Progress Fuels Corporation acquired 100% of Westchester Gas Company. The acquisition included approximately 215 producing natural gas wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems located within a 25-miles radius of Jonesville, Texas, on the Texas-Louisiana border. The aggregate purchase price of approximately $153 million consisted of cash consideration of approximately $22 million and the issuance of 2.5 million shares of Progress Energy common stock valued at approximately $129 million. The purchase price included approximately $1.7 million of direct transaction costs. The purchase price was primarily allocated to fixed assets based on the preliminary fair values of the assets acquired. The excess of the purchase price over the preliminary fair value of the net identifiable assets and liabilities acquired has been recorded as goodwill. Based on this preliminary allocation, goodwill of approximately $33 million has been recorded. The preliminary purchase price allocation is subject to adjustment for changes in the preliminary assumptions and analyses used, pending additional information including final asset valuations and allocations to gas properties. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of operations for Westchester have been included in the Company's consolidated financial statements since the 11 date of acquisition. The pro forma results of operations would not be materially different than the reported results of operations for the three and nine months ended September 30, 2002, or for the comparable periods of the prior year. 3. IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER ONE-TIME CHARGES Due to the decline of the telecommunications industry and continued operating losses, the Company initiated a valuation study to assess the recoverability of Progress Telecom's long-lived assets. Based on this assessment, the company recorded asset impairments and other one-time charges totaling $233.0 million on a pre-tax basis in the third quarter of 2002 ($144.0 million after-tax). The asset write-downs and other one-time charges are included in diversified business expenses on the Consolidated Statements of Income. The results of Progress Telecom are included in the Other segment (See Note 5). This write-down constitutes a significant reduction in the book value of these long-lived assets. The long-lived asset write-downs of $214.6 million on a pre-tax basis include an impairment of property, plant and equipment and construction work in process. The impairment charge represents the difference between the fair value and carrying amount of these long-lived assets. The fair value of these assets was determined using a valuation study heavily weighted on the discounted cash flow methodology and using market approaches as supporting information. The other one-time charges of $18.4 million on a pre-tax basis primarily relate to inventory adjustments. 4. 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. Any amounts above the retail base revenue caps will be refunded 100 percent to customers. The Agreement also provides that beginning with the in-service date of Florida Power's Hines Unit 2 and continuing through December 31, 2005, Florida Power will be allowed to recover through the fuel cost recovery clause a return on average investment and depreciation expense for Hines Unit 2, to the extent such costs do not exceed the Unit's cumulative fuel savings over the recovery period. Hines Unit 2 is a 516 MW combined-cycle unit under construction and currently scheduled for completion in late 2003. Additionally, the Agreement provides that Florida Power will effect a mid-course correction of its fuel cost recovery clause to reduce the fuel factor by $50 million for the remainder of 2002. The fuel cost recovery clause will operate as it normally does, including, but not limited to any additional mid-course adjustments that may become necessary, and the calculation of true-ups to actual fuel clause expenses. Florida Power will suspend accruals on its reserves for nuclear decommissioning and fossil dismantlement through December 31, 2005. Additionally, for each calendar year during the term of the Agreement, Florida Power will record a $62.5 million depreciation expense reduction, and may, at its option, record up to an equal annual amount as an offsetting accelerated depreciation expense. In addition, Florida Power is authorized, at its discretion, to accelerate the amortization of certain regulatory assets over the term of the Agreement. There was no accelerated depreciation or amortization expense recorded for the three and nine months ended September 30, 2002. 12 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 and will be returned to retail customers over an eight-month period ending December 31, 2002. Any additional refunds under the Agreement will be recorded as they become probable. No additional refunds have been accrued at September 30, 2002. 5. 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 12). 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, rail and track material sales, and scrap metal recycling. These activities include maintenance and reconditioning of salvageable scrap components of railcars, locomotive repair, right-of-way maintenance and operating manufacturing facilities for new rail cars. 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, 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 Rail (In thousands) Utility Related Services Services (a) Other Consolidated - ------------------------------------------------------------------------------------------------------------------------------ Three months ended September 30, 2002: Revenues $ 863,637 $ 93,950 $194,611 $49,821 $1,202,019 Intersegment revenues -- 135,029 1,282 (136,311) -- Income (loss) from continuing operations 123,774 35,380 (579) (215,596) (57,021) Total assets 5,079,718 832,588 579,947 90,778 6,583,031 ============================================================================================================================== Energy and Rail Services Utility Related 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 ============================================================================================================================== 13 Energy and Rail Utility Related Services Services (a) Other Consolidated - ------------------------------------------------------------------------------------------------------------------------------ Nine months ended September 30, 2002: Revenues $ 2,316,001 $248,253 $ 574,514 $ 182,050 $ 3,320,818 Intersegment revenues -- 394,848 2,632 (397,480) -- Income (loss) from continuing operations 258,271 103,846 1,667 (254,675) 109,109 Total assets 5,079,718 832,588 579,947 90,778 6,583,031 ============================================================================================================================== Energy and Rail Services Utility Related 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 ============================================================================================================================== (a)Rail Services' total segment assets at September 30, 2002, decreased from the prior year due to asset sales and impairments recorded in the fourth quarter of 2001.
6. IMPACT OF NEW ACCOUNTING STANDARDS 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 significant 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 generally would be no income statement effect of the mark-to-market because such contracts are generally reflected in fuel adjustment clauses so that the contract's mark-to-market gain or loss would be recorded as a regulatory asset or liability. Any mark-to-market gains or losses in its non-regulated businesses would 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. See Note 7 for more information on SFAS No. 142, "Goodwill and Other Intangible Assets. The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in July 2001. This statement provides accounting and disclosure requirements for retirement obligations associated with long-lived assets and is effective January 1, 2003. This statement requires that the present value of retirement costs for which the Company has a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period. The liability is then accreted over time by applying an interest method of allocation to the beginning liability. The Company is in the process of identifying retirement obligations. Areas that are being reviewed include electric transmission and distribution, gas production and distribution, nuclear decommissioning, all generating facilities, coal mines, synthetic fuel facilities, terminals and telecommunication assets. The Company is also in the process of quantifying the obligations that have been identified under the measurement rules described in the standard. Florida Power does not expect there to be any impact on earnings from this statement. For unregulated companies, the Company currently cannot predict the earnings impact. Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides guidance for the accounting and reporting of impairment or disposal of long-lived assets. The statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." It also supersedes 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 14 and Infrequently Occurring Events and Transactions" related to the disposal of a segment of a business. Adoption of this statement did not have a material effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" This standard will require gains and losses from extinguishment of debt to be classified as extraordinary items only if they meet the criteria of unusual and infrequent in Opinion 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." Any gain or loss on extinguishment will be recorded in the most appropriate line item to which it relates within net income before extraordinary items. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002; however, certain sections are effective for transactions occurring after May 15, 2002. The Company does not have any transactions that are affected by this statement as of September 30, 2002. For Florida Power, any expenses or call premiums associated with the reacquisition of debt obligations are amortized over the remaining life of the original debt using the straight-line method consistent with ratemaking treatment. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." This statement supercedes Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability is recognized at the date an entity commits to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS No. 146 will be effective for any exit and disposal activities covered under the scope of the standard and initiated after December 31, 2002. 7. 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 has completed the first step of the initial transitional goodwill impairment test, which indicated that the Company's goodwill was not impaired as of January 1, 2002. The changes in the carrying amount of goodwill for the nine months ended September 30, 2002, are as follows: (in thousands) Balance as of January 1, 2002 $11,101 Acquisitions 32,506 ------------- Balance as of September 30, 2002 $43,607 The acquired goodwill relates to the acquisition of Westchester Gas Company in April 2002 (see Note 2). As of September 30, 2002, all goodwill has been assigned to the Energy and Related Services segment. As required by SFAS No. 142, the results for the prior year's periods have not been restated. A reconciliation of net income as if SFAS No. 142 had been adopted is presented below for the three and nine months ended September 30, 2001, and the years ended December 31, 2001, 2000 and 1999. (in thousands) Three Months Ended Nine Months Ended Year Ended Year Ended Year Ended September 30, 2001 September 30, 2001 2001 2000 1999 ------------------------------------------------------------------------------------------- Reported net income $ 167,332 $ 333,131 $ 244,331 $ 144,241 $ 314,897 Add back: Goodwill amortization 529 1,702 2,394 3,001 5,509 --------- ---------- --------- --------- --------- Adjusted net income $ 167,861 $ 334,833 $ 246,725 $ 147,242 $ 320,406
The Company has no other significant intangible assets as of September 30, 2002, and December 31, 2001. Florida Power has no goodwill and no significant intangible assets as of September 30, 2002, and December 31, 2001. 15 8. COMPREHENSIVE INCOME Florida Progress comprehensive loss for the three months ended September 30, 2002 was $58.4 million and comprehensive income for the nine months ended September 30, 2002 was $108.0 million. Comprehensive income for Florida Progress for the three and nine months ended September 30, 2001, was $181.2 million and $346.7 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. 9. FINANCING ACTIVITIES In February 2002, $50 million of Progress Capital Holdings, Inc. (PCH) medium-term notes, 5.78% Series, matured. Progress Energy funded this maturity through the issuance of commercial paper. On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54% Series, matured. Florida Power funded this maturity through the issuance of commercial paper. On July 11, 2002, Florida Power announced the redemption of $108.55 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 A Due January 1, 2027, $90 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 B Due February 1, 2022, and $10.115 million principal amount of Pasco County Pollution Control Refunding Revenue Bonds, Series 1992A Due February 1, 2022, at 102% of the principal amount of such bonds and $32.2 million principal amount of Pinellas County Pollution Control Refunding Revenue Bonds, Series 1991 Due December 1, 2014 at 101% of the principal amount of such bonds. These redemptions were finalized on August 12, 2002. On July 16, 2002, Florida Power issued $108.55 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due January 1, 2027, $100.115 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022 and $32.2 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002C Due January 1, 2018. Proceeds from this issuance were used to redeem Florida Power's pollution control revenue refunding bonds above. 10. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS Progress Fuels periodically enters into derivative instruments to hedge its exposure to price fluctuations on natural gas sales. During 2002, Progress Fuels has executed cash flow hedges on approximately 17.3 Bcf of natural gas sales for the fourth quarter of 2002 and entire year 2003. These instruments did not have a material impact on the Company's consolidated financial position or results of operations. 11. 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 16 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. 12. COMMITMENTS AND CONTINGENCIES Contingencies 1) IRS Audit One of Progress Fuels' synthetic fuel entities, Colona Synfuel Limited Partnership, L.L.L.P., is being audited by the Internal Revenue Service (IRS). The audit of Colona was not unexpected. The Company is audited regularly in the normal course of business as are most similarly situated companies. The Company has been allocated approximately $217 million in tax credits to date for this synthetic fuel entity. In September 2002, all of the Company's majority-owned synthetic fuel entities were accepted into the IRS's Pre-Filing Agreement (PFA) program. The PFA program allows taxpayers to voluntarily accelerate the IRS exam process in order to seek resolution of specific issues. Either the Company or the IRS can withdraw from the program at any time, and issues not resolved through the program may proceed to the next level of the IRS exam process. While the ultimate outcome is uncertain, the Company believes that participation in the PFA program will likely shorten the tax exam process. In management's opinion, the Company is complying with all the necessary requirements to be allowed such credits and believes it is likely, although it cannot provide certainty, that it will prevail if challenged by the IRS on any credits taken. The timing for the ultimate disposition of this audit is uncertain. 2) 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. In addition, the Company is periodically notified by regulators such as the EPA and various state agencies of their involvement or potential involvement in site, other than MGP sites, that may require investigation and/or remediation. There are two former MGP sites and 10 other active waste sites or categories of sites associated with Florida Power that have required or are anticipated to require investigation and/or remediation costs. As of September 30, 2002, Florida Power has accrued approximately $11.1 million for probable and reasonably estimable costs at these sites. Florida Power believes that the maximum liability it can currently estimate on these sites is $17.0 million. Florida Power has filed for recovery of approximately $4.0 million of these costs. As more activity occurs at these sites, Florida Power will assess the need to adjust the accruals. These accruals have been recorded on an undiscounted basis. Florida Power measures its liability for these sites based on available evidence including its experience in investigation and/or remediation of contaminated sites, which includes assessing and developing cost-sharing arrangements with other potentially responsible parties. A rollforward of the balance in this accrual is not provided due to the immateriality of this activity in the periods presented. 17 As part of the sale of the Inland Marine Transportation segment to AEP Resources in 2001, Florida Progress established an accrual to address liabilities which may result from known and unknown environmental liabilities but primarily to address contamination in soil and potentially groundwater at one site. The balance in this accrual is $9.9 million at September 30, 2002. Florida Progress estimates that its maximum contractual liability to AEP Resources associated with Inland Marine Transportation segment is $60 million. These accruals have been determined on an undiscounted basis. Florida Progress measures its liability for this site based on estimable and probable remediation scenarios. A rollforward of the balance in this accrual is not provided due to the immateriality of this activity for the periods presented. 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. The Company is also currently in the process of assessing potential costs and exposures at other sites it has been notified of. As the assessments are developed and analyzed, the Company will accrue costs for the sites to the extent the costs are probable and can be reasonably estimated. There has been and may be further proposed federal legislation requiring reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon 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 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. Designation of areas that do not attain the standard is proceeding and further litigation and rulemaking on this and other aspects of the standard are anticipated. 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 1) 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 18 Appeals agreed to review the judge's order decertifying the class. In anticipation of a potential ruling decertifying the case as a class action, plaintiffs filed a virtually identical lawsuit, which identified all opt-in plaintiffs as named plaintiffs. On July 5, 2001, the Eleventh Circuit Court of Appeals ruled that as a matter of law, disparate claims cannot be brought under the Americans with Disabilities Act (ADEA). This ruling has the effect of decertifying the case as a class action. On October 3, 2001, the plaintiffs filed a petition in the United States Supreme Court, requesting a hearing of the case, on the issue of whether disparate claims can be brought under the ADEA. On December 3, 2001, the United States Supreme Court agreed to hear the case. Oral arguments on the issue were held on March 20, 2002. On April 1, 2002, the U.S. Supreme Court issued a per curiam affirmed order in the case stating they had improvidently granted the oral argument and they would uphold the ruling of the Eleventh Circuit Court of Appeals. Therefore, the case will remain decertified. As a result of the decertification, the trial court has grouped the plaintiffs cases to be tried. The trial for the first set of twelve plaintiffs began on July 22, 2002. The jury entered a verdict in favor of Florida Power in that trial on August 9, 2002. The next group of plaintiffs' to be tried was named, but no trial date was set. The parties attended a second mediation on October 31 and November 1, 2002. The Company was able to reach a settlement of this matter with all but three plaintiffs, the details of which are subject to a confidentiality agreement. 2) Franchise Litigation Six cities, with a total of approximately 49,000 customers, have sued Florida Power in various circuit courts in Florida. The lawsuits principally seek 1) a declaratory judgment that the cities have the right to purchase Florida Power's electric distribution system located within the municipal boundaries of the cities, 2) a declaratory judgment that the value of the distribution system must be determined through arbitration, and 3) injunctive relief requiring Florida Power to continue to collect from Florida Power's customers and remit to the cities, franchise fees during the pending litigation, and as long as Florida Power continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of the franchise ordinances under which Florida Power had agreed to collect such fees. Three circuit courts have entered orders requiring arbitration to establish the purchase price of Florida Power's electric distribution facilities within three cities. Two appellate courts have upheld those circuit court decisions and authorized cities to determine the value of Florida Power's facilities within the cities through arbitration. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system. An arbitration in one of the cases was held in August 2002 and an award was issued in October 2002 setting the value of Florida Power's distribution system within one city at approximately $22 million. At this time, whether and when there will be further proceedings following this award cannot be determined. Additional arbitration's have been scheduled to occur in the fourth quarter of 2002 and second quarter of 2003. The Company cannot predict the outcome of these matters. 3) 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. 13. DISCONTINUED OPERATIONS On July 23, 2001, Progress Energy announced the disposition of the Inland Marine Transportation segment of the Company, which was operated by MEMCO Barge Line, Inc. Inland Marine 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 and nine months ended September 30, 2001, 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. 19 Results for discontinued operations for the three and nine months ended September 30, 2001, were as follows: (in thousands) Three Months ended Nine Months ended September 30, 2001 September 30, 2001 ------------------- ------------------- Revenues $ 39,313 $ 114,620 =================== =================== Earnings before income taxes $ - $ 4,530 Income taxes - 1,848 ------------------- ------------------- Net earnings - 2,682 Estimated loss on disposal of discontinued operations, Including provision of $5,468 for pre-tax operating income During phase-out period, (net of applicable income tax Benefit of $9,028 and $7,797 for the three and nine months ended September 30,2001, respectively) (14,120) (28,528) ------------------- ------------------- Loss from discontinued operations $ (14,120) $ (25,846) =================== ===================
The discontinued operations in the Consolidated Statements of Income for the three and nine months ended September 30, 2002, represents the after-tax gain from the resolution of approximately $8.0 million of contingencies in the purchase agreement of the Inland Marine Transportation segment. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS Florida Progress' consolidated earnings from continuing operations for the three and nine months ended September 30, 2002, were a loss of $57.0 million and income of $109.1 million respectively, compared to income of $181.5 million and $359.0 million for the comparable periods ended September 30, 2001. The year over year comparisons were most significantly impacted by the recognition of asset impairments and other one time charges of $144.0 million, net of tax, recognized in the Progress Telecom business in the third quarter of 2002. In addition, the current year results were negatively affected by intra-period tax adjustments. These factors and other key business drivers are discussed in more detail in the following business segment reviews. FLORIDA POWER CORPORATION Florida Power reported earnings for common stock for the three and nine months ended September 30, 2002 of $123.8 million and $258.3 million, respectively, compared to earnings of $114.1 million and $270.0 million, respectively, for the same periods in the prior year. Additionally, Florida Power results for the three and nine months ended September 30, 2002 were favorably impacted by a $13.4 million tax benefit reallocation from the holding company to Florida Power. See Other Businesses section below for additional information on the tax benefit reallocation. Florida Power's earnings for the three and nine months ended September 30, 2002, were negatively affected by the outcome of the Florida Power rate case settlement, which included a one-time retroactive revenue refund of $35.0 million, $21.0 million after tax, recorded in the first quarter of 2002 and a decrease in retail rates, which was partially offset by reductions in depreciation in accordance with the settlement. See Note 4 to the Interim Financial Statements for additional information on the settlement. In addition, Florida Power results for the three months and nine months ended were negatively affected by increases in operations and maintenance expense as described more fully below. Florida Power's electric revenues for the three and nine months ended September 30, 2002 and 2001 and the percentage change by customer class are as follows (in millions): - ------------------------------------------------------------------------------------------------------------------- Three Months Ended September 30, Nine Months Ended September 30, --------------------------------------------------------------------------- Customer Class 2002 % Change 2001 2002 % Change 2001 - ------------------------------------------------------------------------------------------------------------------- Residential $469.8 (5.7)% $498.2 $1,244.7 (3.0)% $1,283.2 Commercial 199.5 (8.0) 216.9 549.7 (3.3) 568.2 Industrial 52.6 (4.0) 54.8 157.7 (5.8) 167.5 Governmental 45.1 (7.2) 48.6 128.5 (1.6) 130.6 Retroactive Retail Revenue Refund - - - (35.0) - - - --------------------------------------------------- ----------------------- -------------- Total Retail Revenues 767.0 (6.3) 818.5 2,045.6 (4.8) 2,149.5 Wholesale 57.8 (19.9) 72.2 166.1 (28.4) 232.0 Unbilled 8.4 - (7.3) 20.2 - (12.1) Miscellaneous 30.4 33.9 22.7 84.1 (35.8) 130.9 - --------------------------------------------------- ----------------------- -------------- Total Electric Revenues $863.6 (4.7)% $906.1 $2,316.0 (7.4)% $2,500.3 - ------------------------------------------------------------------------------------------------------------------- 21 Florida Power's electric energy sales for the three and nine months ended September 30, 2002 and 2001, and the percentage change by customer class are as follows (in thousands of mWh): - ------------------------------------------------------------------------------------------------------------------- Three Months Ended September 30, Nine Months Ended September 30, --------------------------------------------------------------------------- 2002 % Change 2001 2002 % Change 2001 - ------------------------------------------------------------------------------------------------------------------- Residential 5,503 2.5% 5,370 14,078 1.7% 13,841 Commercial 3,207 1.4 3,164 8,519 1.8 8,367 Industrial 983 5.3 934 2,859 (2.2) 2,923 Governmental 759 1.2 750 2,095 2.6 2,042 - --------------------------------------------------- --------------------- -------------- Total Retail Energy Sales 10,452 2.3 10,218 27,551 1.4 27,173 Wholesale 1,020 (22.7) 1,320 2,975 (18.8) 3,666 Unbilled 214 - (181) 689 - (122) - --------------------------------------------------- --------------------- -------------- Total mWh sales 11,686 2.9% 11,357 31,215 1.6% 30,717 - -------------------------------------------------------------------------------------------------------------------
As a result of the settlement of the Florida Power rate case, effective May 1, 2002, Florida Power reduced its rates by 9.25%. The effect of this reduction was to reduce revenue by $30.9 million for the third quarter of 2002 and $51.4 million for the nine months ended September 30, 2002, when compared to the same periods in the prior year. Partially offsetting the decrease in rates and the one-time refund from the settlement detailed above were the impacts of favorable weather and customer growth. In addition, revenues for the first nine months of 2002 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. In 2001, the deferred revenues were offset by accelerated amortization of the Tiger Bay regulatory asset, discussed below, and therefore, had no net earnings impact. Wholesale electric revenues and sales decreased from the prior year due to the completion of specific contracts. Fuel used in generation and purchased power decreased $32.0 million and $80.0 million for the three and nine months ended September 30, 2002, respectively, when compared to $414.7 million and $1,103.9 million, respectively, for the same periods in the prior year, primarily due to lower oil and gas prices and purchased power costs, partially offset by an increase in coal prices and volume from higher system requirements. In addition, the decrease for the three months ended September 30, 2002, was due to the lowered recovery of fuel expense as a result of the mid-course correction of Florida Power's fuel cost recovery clause as part of the settlement. 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 by $19.2 million and $69.9 million for the three and nine months ended September 30, 2002, respectively, when compared to operations and maintenance expense of $119.9 million and $350.6 million, respectively, for the same periods in the prior year. These amounts have increased due to a decreased pension credit in the current year ($6.5 million and $22.8 million lower for the three and nine months ended September 30, 2002); increased other employee benefit costs, primarily driven by medical costs (approximately $6.1 million and $15.6 million for the three and nine months ended September 30, 2002); increased spending related to Florida Power's Commitment to Excellence program which is aimed at improving system reliability and customer satisfaction ($2.9 million and $8.5 million for the three and nine months ended September 30, 2002); and increased support charges from the Service Company as a result of higher vacancy rates in the prior year. Depreciation and amortization expense decreased by $21.7 million and $123.8 million for the three and nine months ended September 30, 2002, respectively, when compared to expense of $95.1 million and $341.8 million, respectively, for the same periods in the prior year. The Florida Power rate case settlement provides for ongoing reductions in depreciation, nuclear decommissioning and fossil dismantlement costs that reduced the amount of depreciation recorded by $19.5 million and $58.7 million for the three and nine months ended September 30, 2002, respectively. In addition, the first half of 2001 depreciation and amortization 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 decreased $3.7 million for the three months ended September 30, 2002, and decreased $2.7 million for the nine months ended September 30, 2002, when compared to the same periods in the prior year. The Energy and Related Services segment sold 1.7 million and 5.3 million tons of synthetic fuel for the three and nine months ended September 30, 2002, respectively, compared to 2.4 million 22 and 6.2 million tons, respectively, for the same periods in the prior year. The sales resulted in tax credits of $44.8 million and $144.5 million being recorded for the three and nine months ended September 30, 2002, respectively, compared to tax credits of $63.1 million and $166.3 million, respectively, for the same periods in the prior year. The synthetic fuel production and related tax credits are lower in 2002 than 2001 because the production schedule in 2002 has been evenly distributed based on anticipated full-year production whereas in 2001 excess production in the first nine months of the year mandated lower fourth quarter production. The production and sale of the synthetic fuel from these facilities qualifies for tax credits under Section 29 of the Code. See "Synthetic Fuels" under OTHER MATTERS below for additional discussion of these tax credits. The Energy and Related Services operations include the operations of Mesa Hydrocarbons, Inc. (Mesa), which owns natural gas reserves and operates wells in Colorado and sells natural gas. These operations also include the activities of the recently acquired Westchester Gas Company. See Note 2 to the Interim Financial Statements for additional information on this acquisition. Progress Fuels periodically enters into derivative instruments to hedge its exposure to price fluctuations on natural gas sales. During 2002, Progress Fuels has entered into cash flow hedges for approximately 81 percent and 56 percent, respectively, of Mesa and Westchester's total projected natural gas sales for the fourth quarter of 2002 and the entire year 2003. See Note 10 to the Interim Financial Statements for more information on these instruments. Rail Services - Rail Services' operations represent the activities of Progress Rail Services Corporation (Progress Rail) and include railcar repair, rail parts reconditioning and sales, scrap metal recycling and other rail related services. Rail Services generated a loss of $0.6 million for the three months ended and income of $1.7 million for the nine months ended September 30, 2002, compared to losses of $2.2 million and $14.0 million for the comparable periods in 2001. Rail Service's year to year results were impacted by a weak business environment, which resulted in $24.1 million decreased revenues for the quarter and a decrease of $93.5 million for the nine months ended September 30, 2002 when compared to 2001 (actual third quarter 2001 revenues of $220.0, actual September 2001 year to date revenues of $670.6 million). In addition, Rail Services' transition from acting as a scrap reseller in 2001 to acting as a scrap resale agent in 2002 and asset sales in 2001 decreased revenues. Corresponding decreases in operating costs and the impact of targeted cost cutting measures offset the revenue reductions. OTHER The other group includes telecommunications, holding company and financing expenses. The increased loss over the three months (2002 loss of $215.6 million compared to 2001 income of $30.4 million) and nine months (2002 loss of $254.7 million compared to 2001 loss of $3.6 million) of 2001 is due primarily to the recognition of asset impairments and other one-time charges in the telecommunications business unit and by intra-period income tax allocation adjustments. Generally accepted accounting principles require companies to apply a levelized effective tax rate to interim periods that is consistent with the estimated annual effective tax rate. Income tax expense was increased by $60.2 million and $79.2 million for the three and nine months ended September 30, 2002, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was increased by $38.2 million and $17.8 million for the three and nine months ended September 30, 2001, respectively. The tax credits associated with the Company's synthetic fuel operations lower the overall effective tax rate. These credits, along with seasonal earnings variations and the impact of the Progress Telecom asset impairment, 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. Progress Telecom had net losses of $147.0 million and $156.6 million for the three and nine months ended September 30, 2002, respectively. This compares to net losses of $2.8 million and $6.9 million for the same periods in 2001. The decrease in earnings in 2002, when compared to 2001, is primarily due to long-lived asset impairments and other one-time after tax charges of $144.0 million. See Note 3 to the Interim Financial Statements for further discussion of these charges. This write-down constitutes a significant reduction in the book value of these assets and the ongoing operations are expected to have a negligible impact on the Company's net income. Excluding the one-time charges, Progress Telecom's third quarter 2002 loss of $3.0 million compares to the prior year's comparable period loss of $2.8 million. A loss for the nine months ended September 30, 2002 (excluding the one-time charges) of $12.6 million compares to a loss of $6.9 million for the comparable period in 2001. The earnings declines resulted primarily from additional depreciation on fiber assets being capitalized and depreciated in the first half of 2002, partially offset by declines in depreciation in the third quarter resulting from the asset impairments. Progress Energy and its subsidiaries are subject to regulation under the Public Utility Holding Company Act (PUHCA) of 1935, as amended, of the SEC. According to a recent SEC order, Progress Energy's tax benefit not related to acquisition interest expense is to be allocated to profitable subsidiaries. Therefore, the 23 tax benefit that was previously held in the Parent's holding company, has been allocated to the profitable subsidiaries effective with the third quarter of 2002. This allocation increased Florida Progress holding company tax expense by $3.3 million for the three months ended September 30, 2002. LIQUIDITY AND CAPITAL RESOURCES Statements of Cash Flows and Financing Activities Cash provided by operating activities decreased $144.6 million for the nine months ended September 30, 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 to changes in the balances of certain current assets and liabilities due to operational fluctuations. Net cash used in investing activities increased $71.8 million for the nine months ended September 30, 2002, when compared to the corresponding period in the prior year. This is primarily due to increased expenditures on Florida Power's construction program and the acquisition of Westchester Gas Company (See Note 2 to the Interim Financial Statements). During the first nine months of 2002, $317.3 million was spent on the Florida Power construction program and $96.5 million was spent in diversified operations. The acquisition of Westchester Gas Company resulted in a net cash outflow of $17.4 million. Net cash used in financing activities decreased $228.3 million for the nine months ended September 30, 2002, when compared to the corresponding period in the prior year. The decrease is primarily due to the Company paying off $294.6 million of short-term indebtedness in the prior year. This decrease was offset with increases in the net equity transactions with the parent and intercompany borrowings in the current year. 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. On September 4, 2002, S&P reaffirmed Progress Energy's and Florida Power's credit ratings and maintained the negative outlook for Progress Energy. On April 10, 2002, Moody's Investors Service revised its outlook to negative from stable on Progress Energy's senior unsecured debt rating of Baa1. Moody's maintained a stable outlook for both Florida Power and CP&L. Moody's stated that its change in outlook to negative was in response to the increased level of debt incurred by Progress Energy, primarily to finance the expansion of its Progress Ventures unregulated generation portfolio. On October 18, 2002, Moody's announced that it had placed Progress Energy's senior unsecured debt rating (Baa1) on review for possible downgrade. As its basis for review, Moody's cited primarily Progress Energy's recent writedown of the value of its long-lived telecommunications assets and the related delay in its deleveraging plan. Moody's further indicated that it did not expect its review to result in more than a one notch downgrade of Progress Energy's senior unsecured debt rating. Moody's confirmed its ratings of Progress Energy's commercial paper (P-2) and the ratings of its two operating utilities, CP&L (senior secured--A-3, commercial paper--P-2, stable outlook) and Florida Power (senior secured--A-1, commercial paper--P-1, stable outlook). The change in outlook by the rating agency has not materially affected the Company's access to liquidity nor the cost of its short-term borrowings. On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54% Series, matured. Florida Power funded this maturity through the issuance of commercial paper. On July 11, 2002, Florida Power announced the redemption of $108.55 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 A Due January 1, 2027, $90 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 B Due February 1, 2022, and $10.115 million principal amount of Pasco County Pollution Control Refunding Revenue Bonds, Series 1992A Due February 1, 2022, at 102% of the principal amount of such bonds and $32.2 million principal amount of Pinellas County Pollution Control Refunding Revenue Bonds, Series 1991 Due December 1, 2014 at 101% of the principal amount of such bonds. These redemptions were finalized on August 12, 2002. 24 On July 16, 2002, Florida Power issued $108.55 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due January 1, 2027, $100.115 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022 and $32.2 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002C Due January 1, 2018. Proceeds from this issuance were used to redeem Florida Power's pollution control revenue refunding bonds above. Future Commitments As of September 30, 2002, both Florida Progress' and Florida Power's contractual cash obligations and other commercial commitments have 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 4 to the Interim Financial Statements for additional information on the Agreement. Fuel Acquisition On April 26, 2002, Progress Fuels 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. The aggregate purchase price of approximately $153 million consisted of cash consideration of approximately $22 million and the issuance of 2.5 million shares of Progress Energy common stock valued at approximately $129 million. The purchase price included approximately $1.7 million of direct transaction costs. The properties are located within a 25-mile radius of Jonesville, Texas, on the Texas-Louisiana border. This transaction added 140 billion cubic feet (Bcf) of gas reserves to Progress Fuels' fuel business. See Note 2 to the Interim Financial Statements for additional information on this acquisition. Synthetic Fuels Tax Credits The Company, through Progress Fuels and its subsidiaries, produces synthetic fuel from coal. The production and sale of the synthetic fuel qualifies for tax credits under Section 29 of the Internal Revenue Code (Section 29) if certain requirements are satisfied, including a requirement that the synthetic fuel differs significantly in chemical composition from the coal used to produce such synthetic fuel. All of the Company's synthetic fuel facilities have received favorable private letter rulings from the Internal Revenue Service (IRS) with respect to their operations. These tax credits are subject to review by the IRS, and if the Company failed to prevail through the administrative or legal process, there could be a significant tax liability owed for previously taken Section 29 credits, with a significant impact on earnings and cash flows. Tax credits for the nine months ended September 30, 2002 and 2001, were $144.5 million and $166.3 million, respectively, offset by operating losses, net of tax, of $59.9 million and $84.0 million, respectively, for the same periods. One synthetic fuel entity, Colona Synfuel Limited Partnership, L.L.L.P., from which the Company has been allocated approximately $217 million in tax credits to date, is being audited by the IRS. The audit of Colona was not unexpected. The Company is audited regularly in the normal course of business as are most similarly situated companies. Total Section 29 credits generated to date are approximately $547 million. In September 2002, all of the Company's majority-owned synthetic fuel entities were accepted into the IRS's Pre-Filing Agreement (PFA) program. The PFA program allows taxpayers to voluntarily accelerate the IRS exam process in order to seek resolution of specific issues. Either the Company or the IRS can withdraw from the program at any time, and issues not resolved through the program may proceed to the next level of the IRS exam process. While the ultimate outcome is uncertain, the Company believes that participation in the PFA program will likely shorten the tax exam process. In management's opinion, the Company is complying with the private letter rulings and all the necessary requirements to be allowed such credits under Section 29 and believes it is likely, although it cannot provide certainty, that it will prevail if challenged by the IRS on any credits taken. The current Section 29 tax credit program expires in 2007. 25 Standard Market Design On July 31, 2002, the Federal Energy Regulatory Commission (FERC) issued its Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design (SMD NOPR). The proposed rules set forth in the SMD NOPR would require, among other things, that 1) all transmission owning utilities transfer control of their transmission facilities to an independent third party; 2) transmission service to bundled retail customers be provided under the FERC-regulated transmission tariff, rather than state-mandated terms and conditions; 3) new terms and conditions for transmission service be adopted nationwide, including new provisions for pricing transmission in the event of transmission congestion; 4) new energy markets be established for the buying and selling of electric energy; and 5) load serving entities be required to meet minimum criteria for generating reserves. If adopted as proposed, the rules set forth in the SMD NOPR would materially alter the manner in which transmission and generation services are provided and paid for. Progress Energy is reviewing the SMD NOPR and expects to file comments thereto, portions of which are due on November 15, 2002 and January 10, 2003. FERC also has indicated that it expects to issue final rules during the third quarter of 2003. The Company cannot predict the outcome of this rulemaking or the possible outcome of any further proceedings, including appeals, related to this matter. Regional Transmission Organizations The GridFlorida applicants filed a revised RTO proposal with the FPSC on March 20, 2002 incorporating certain changes required by the FPSC's December 2001 order. The FPSC then conducted a series of workshops and meetings to allow parties an opportunity to comment on the applicants' March 20 compliance filing. As a result of these comments, the GridFlorida applicants filed modifications to certain aspects of the compliance filing on June 21, 2002. On September 3, 2002, the FPSC issued an order addressing the compliance of the applicants' modified filing with the FPSC's December 2001 order through final agency action, requiring additional revisions to the applicants' modified filing through proposed agency action, and scheduling an expedited hearing for late October 2002 to consider the applicants' revised market design proposal and other proposed agency action revisions protested by the parties. On October 3, 2002, the Office of Public Counsel filed a Notice of Appeal to the Florida Supreme Court regarding the FPSC's September 3rd order. At a public meeting on October 15, 2002, the FPSC voted to hold further proceedings in the GridFlorida docket in abeyance pending the outcome of the Office of Public Counsel's appeal. The actual structure of GridFlorida or any alternative combined transmission structure, as well as the date it may become operational, depends upon the resolution of all regulatory approvals and technical issues. Given the regulatory uncertainty of the ultimate timing, structure and operations of GridFlorida or an alternate combined transmission structure, the Company cannot predict whether their creation will have any material adverse effect on its future consolidated results of operations, cash flows or financial condition. Franchise Litigation Six cities, with a total of approximately 49,000 customers, have sued Florida Power in various circuit courts in Florida. The lawsuits principally seek 1) a declaratory judgment that the cities have the right to purchase Florida Power's electric distribution system located within the municipal boundaries of the cities, 2) a declaratory judgment that the value of the distribution system must be determined through arbitration, and 3) injunctive relief requiring Florida Power to continue to collect from Florida Power's customers and remit to the cities, franchise fees during the pending litigation, and as long as Florida Power continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of the franchise ordinances under which Florida Power had agreed to collect such fees. Three circuit courts have entered orders requiring arbitration to establish the purchase price of Florida Power's electric distribution facilities within three cities. Two appellate courts have upheld those circuit court decisions and authorized cities to determine the value of Florida Power's facilities within the cities through arbitration. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system. An arbitration in one of the cases was held in August 2002 and an award was issued in October 2002 setting the value of Florida Power's distribution system within one city at approximately $22 million. At this time, whether and when there will be further proceedings following this award cannot be determined. Additional arbitration's have been scheduled to occur in the fourth quarter of 2002 and second quarter of 2003. The Company cannot predict the outcome of these matters. Nuclear Matters Pressurized Water Reactors On March 18, 2002 the Nuclear Regulatory Commission (NRC) sent a bulletin to companies that hold licenses for pressurized water reactors (PWRs) requiring information on the structural integrity of the reactor vessel head and a basis 26 for concluding that the vessel head will continue to perform its function as a coolant pressure boundary. The Company filed responses as required. Inspections of the vessel heads at the Company's PWR plants have been performed during previous outages. In October 2001 at the Crystal River plant (CR3), one nozzle was found to have a crack and was repaired; however, no degradation of the reactor vessel head was identified. Current plans are to replace the vessel head at CR3 during its next regularly scheduled refueling outage in 2003. On August 9, 2002, the NRC issued an additional Bulletin dealing with head leakage due to cracks near the control rod nozzles. The NRC has asked licensees to commit to high inspection standards to ensure the more susceptible plants have no cracks. For CR3, the Company has responded to the NRC that previous inspections are sufficient until the reactor head is replaced in the fall of 2003. Security On February 25, 2002, the NRC issued orders formalizing many of the security enhancements made at the Company's nuclear plants 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. These interim security measures were required to be completed at each nuclear site by August 31, 2002. The Company completed the requirements by the deadline and expects the NRC to perform an inspection for compliance in the near future. 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. Union Contract Approximately 2,100 employees at Florida Power are represented by the International Brotherhood of Electrical Workers (IBEW). The current union contract was ratified in December 1999 and expires on December 1, 2002. Florida Power is currently in negotiations with the IBEW, but cannot predict the outcome or impact of this matter. 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, FPC mandatorily redeemable securities of trust and unsecured note with parent at September 30, 2002, was not materially different than at December 31, 2001. Progress Fuels periodically enters into derivative instruments to hedge its exposure to price fluctuations on natural gas sales. During 2002, Progress Fuels has executed cash flow hedges on approximately 17.3 Bcf of natural gas sales for the fourth quarter of 2002 and entire year 2003. These instruments did not have a material impact on the Company's consolidated financial position or results of operations. Effective with the quarter ended September 30, 2002, the Company will no longer reclassify commercial paper as long-term debt. At December 31, 2001, the Company had reclassified $154 million of commercial paper to long-term debt. At September 30, 2002, the exposure to changes in interest rates from the Company's commercial paper facilities 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 27 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 at September 30, 2002, was not materially different than at December 31, 2001. Effective with the quarter ended September 30, 2002, Florida Power will no longer reclassify commercial paper as long-term debt. At December 31, 2001, Florida Power had reclassified $154 million of commercial paper to long-term debt. At September 30, 2002, the exposure to changes in interest rates from Florida Power's commercial paper facilities was not materially different than at December 31, 2001. ITEM 4. CONTROLS AND PROCEDURES Florida Progress Corporation Within the 90 days prior to the filing date of this report, Florida Progress carried out an evaluation, under the supervision and with the participation of its management, including Florida Progress' chief executive officer and chief financial officer, of the effectiveness of the design and operation of Florida Progress' disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, Florida Progress' chief executive officer and chief financial officer concluded that its disclosure controls and procedures are effective in timely alerting them to material information relating to Florida Progress (including its consolidated subsidiaries) required to be included in its periodic SEC filings. Since the date of the evaluation, there have been no significant changes in Florida Progress' internal controls or in other factors that could significantly affect these controls. Florida Power Corporation Within the 90 days prior to the filing date of this report, Florida Power carried out an evaluation, under the supervision and with the participation of its management, including Florida Power's chief executive officer and chief financial officer, of the effectiveness of the design and operation of Florida Power's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, Florida Power's chief executive officer and chief financial officer concluded that its disclosure controls and procedures are effective in timely alerting them to material information relating to Florida Power (including its consolidated subsidiaries) required to be included in its periodic SEC filings. Since the date of the evaluation, there have been no significant changes in Florida Power's internal controls or in other factors that could significantly affect these controls. 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 trial for the first set of twelve plaintiffs began on July 22, 2002. The jury entered a verdict in favor of Florida Power in that trial on August 9, 2002. The next group of plaintiffs' to be tried was named, but no trial date was set. The parties attended a second mediation on October 31 and November 1, 2002. The Company was able to reach a settlement of this matter with all but three plaintiffs, the details of which are subject to a confidentiality agreement. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Florida Exhibit Progress Florida Power Number Description Corporation Corporation ------- ----------- ----------- ------------- 10(i) Progress Energy, Inc. 2002 Equity Incentive Plan X X (Amended and Restated Effective July 10, 2002) 10(ii) 2002 Performance Share Sub-Plan (effective July X X 9, 2002), Exhibit A to the Progress Energy, Inc. 2002 Equity Incentive Plan (b) Reports on Form 8-K filed during or with respect to the quarter: Florida Progress Corporation Financial Item Statements Reported Included Date of Event Date Filed 9 No August 13, 2002 August 13, 2002 Florida Power Corporation Financial Item Statements Reported Included Date of Event Date Filed 9 No August 13, 2002 August 13, 2002
29 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 14, 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 30 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, William Cavanaugh III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Florida Progress Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ William Cavanaugh III ------------------------- William Cavanaugh III Chairman and Chief Executive Officer 31 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter M. Scott III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Florida Progress Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Peter M. Scott III ---------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, H. William Habermeyer, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Florida Power Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ H. William Habermeyer, Jr. ------------------------------ H. William Habermeyer, Jr. President and Chief Executive Officer 33 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter M. Scott III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Florida Power Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Peter M. Scott III ---------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer 34 EX-10.I 3 pei_10qexhibit10ifp-.txt EXHIBIT 10(1) Progress Energy, Inc. 2002 Equity Incentive Plan (Amended and Restated Effective July 10, 2002) Section 1. Purpose Progress Energy, Inc. (hereinafter referred to as the "Sponsor"), a North Carolina corporation, hereby establishes the 2002 Equity Incentive Plan (the "Plan") to promote the interests of the Sponsor and its shareholders through the (i) attraction and retention of executive officers, directors and other key employees essential to the success of Sponsor and its Affiliates; (ii) motivation of executive officers, directors and other key employees using performance-related and stock-based incentives linked to the interests of the Sponsor's shareholders; and (iii) enabling of such executive officers, directors and other key employees to share in the long-term growth and success of the Sponsor and its Affiliates. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended), Stock Appreciation Rights, Restricted Stock, Performance Shares, Performance Units, and any other Stock Unit Awards or stock-based forms of Awards as the Committee may determine under its sole and complete discretion at the time of grant, subject to the provisions of this Plan document and applicable law. The 1997 Equity Incentive Plan of Progress Energy, Inc. (the "1997 Plan") shall remain effective with regard to all Awards made thereunder, but shall be superseded by this Plan with regard to all Awards after the Effective Date. Section 2. Effective Date and Duration The Plan was approved by the Board of Directors on March 20, 2002, subject to approval by the shareholders of the Sponsor. The Plan will become effective on the date of approval of the Plan by the Sponsor's shareholders (the "Effective Date"). The Plan was further amended and restated effective July 10, 2002. The Plan shall expire on the tenth anniversary of the Effective Date; however, all Awards made prior to, and outstanding on such date, shall remain valid in accordance with their terms and conditions. Section 3. Definitions Except as otherwise defined in the Plan, the following terms shall have the meanings set forth below: 3.1 "Affiliate" means, with respect to Sponsor, any entity that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with Sponsor. 3.2 "Award" means individually or collectively, a grant under the Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Units, Performance Shares, or other Stock Unit Awards. 3.3 "Award Date" or "Grant Date" means the date on which an Award is made by the Committee under this Plan. 3.4 "Award Agreement" or "Agreement" means a written agreement implementing the grant of each Award signed by an authorized officer of the Sponsor and by the Participant. 3.5 "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act. 3.6 "Board" or "Board of Directors" means the Board of Directors of the Sponsor. 3.7 "Cashless Exercise" means the exercise of an Option by the Participant in compliance with the Federal Reserve Board's Regulation T (or any successor provision) or as otherwise permitted by the Committee through the use of a brokerage firm to make payment to the Sponsor of the exercise price either from the proceeds of a loan to the Participant from the brokerage firm or from the proceeds of the sale of Stock issued pursuant to the exercise of the Option, and upon receipt of such payment, the Sponsor delivers the exercised Stock to the brokerage firm. The date of exercise of a Cashless Exercise shall be the date the broker executes the sale of exercised Stock, or if no sale is made, the date the broker receives the exercise loan notice from the Participant to pay the Sponsor for the exercised Stock. 3.8 "Cause" means: (a) embezzlement or theft from the Company, or other acts of dishonesty, disloyalty or otherwise injurious to the Company; (b) disclosing without authorization proprietary or confidential information of the Company; (c) committing any act of negligence or malfeasance causing injury to the Company; (d) conviction of a crime amounting to a felony under the laws of the United States or any of the several states; (e) any violation of the Company's Code of Ethics; or (f) unacceptable job performance which has been substantiated in accordance with the normal practices and procedures of the Company. 3.9 "Change in Control" means, with respect to any Award granted on or after the Effective Date and prior to July 10, 2002, a change in control of the Sponsor of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act; provided, that without limitation, such a Change in Control shall be deemed to have occurred at such time as a "person" (as used in Section 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 25% or more of the combined voting power of the Sponsor's outstanding securities ordinarily having the right to vote in elections of directors; or individuals who constitute the Board of Directors of the Sponsor on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, or of any board of directors of a successor to the Sponsor, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Sponsor's shareholders, was approved by a vote of at least three quarters of the directors comprising the Incumbent Board shall be, for purposes of this subsection (b), considered as though such person were a member of the Incumbent Board, in each case, as determined by the Committee in accordance with Section 4.1. Notwithstanding the foregoing, with respect to any Award granted on or after July 10, 2002, a Change in Control shall mean the earliest of the following dates: (a) the date any person or group of persons (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934), excluding employee benefit plans of the Sponsor, becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Securities Act of 1934) of securities of the Sponsor representing twenty-five percent (25%) or more of the combined voting power of the Sponsor's then outstanding securities (excluding the acquisition of securities of the Sponsor by an entity at least eighty percent (80%) of the outstanding voting securities of which are, directly or indirectly, beneficially owned by the Sponsor); or (b) the date of consummation of a tender offer for the ownership of more than fifty percent (50%) of the Sponsor's then outstanding voting securities; or (c) the date of consummation of a merger, share exchange or consolidation of the Sponsor with any other corporation or entity regardless of which entity is the survivor, other than a merger, share exchange or consolidation which would result in the voting securities of the Sponsor outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving or acquiring entity) more than sixty percent (60%) of the combined voting power of the voting securities of the Sponsor or such surviving or acquiring entity outstanding immediately after such merger or consolidation; or (d) the date, when as a result of a tender offer or exchange offer for the purchase of securities of the Sponsor (other than such an offer by the Sponsor for its own securities), or as a result of a proxy contest, merger, share exchange, consolidation or sale of assets, or as a result of any combination of the foregoing, individuals who are Continuing Directors cease for any reason to constitute at least two-thirds (2/3) of the members of the Board; or (e) the date the shareholders of the Sponsor approve a plan of complete liquidation or winding-up of the Sponsor or an agreement for the sale or disposition by the Sponsor of all or substantially all of the Sponsor's assets; or (f) the date of any event which the Board determines should constitute a Change in Control. A Change in Control shall not be deemed to have occurred after July 10, 2002, on account of an event described in paragraphs (a), (b), (c), (d) or (e) of this Section 3.9 until a majority of the members of the Board receive written certification from the Committee that such event has occurred. Any determination that an event described in this Section 3.9 has occurred shall, if made in good faith on the basis of information available at that time, be conclusive and binding on the Committee, the Sponsor, the Participants and their beneficiaries for all purposes of the Plan. 3.10 "CEO" means the chief executive officer of the Sponsor. 3.11 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 3.12 "Committee" means the Organization and Compensation Committee of the Board, comprised solely of Outside Directors, which will administer the Plan pursuant to Section 4 herein. 3.13 "Company" means Progress Energy, Inc., including all Affiliates, or any successor thereto. 3.14 "Continuing Director" means the members of the Board as of the Effective Date; provided, however, that any person becoming a director subsequent to such date whose election or nomination for election was supported by seventy-five percent (75%) or more of the directors who then comprised Continuing Directors shall be considered to be a Continuing Director. 3.15 "Covered Participant" means a Participant who is a "covered employee" as defined in Section 162(m)(3) of the Code, and the regulations promulgated thereunder. 3.16 "Department" means the Human Resources Department of Progress Energy Service Company, LLC. 3.17 "Designated Beneficiary" means the beneficiary designated by the Participant, pursuant to procedures established by the Department, to receive amounts due to the Participant or to exercise any rights of the Participant to the extent permitted hereunder in the event of the Participant's death. If the Participant does not make an effective designation, then the Designated Beneficiary will be deemed to be the Participant's estate. 3.18 "Disability" means (i) the mental or physical disability, either occupational or non-occupational in origin, of the Participant defined as "total disability" in the Long-term Disability Plan of the Sponsor currently in effect and as amended from time to time; or (ii) a determination by the Committee of "Total Disability" based on medical evidence that precludes the Participant from engaging in any occupation or employment for wage or profit for at least twelve months and appears to be permanent. In the case of Awards of Incentive Stock Options, "Disability" shall have the meaning set forth in Section 22(e)(3) of the Code. 3.19 "Divestiture" means the sale (including the spin-off) of, or closing by, the Company of the business operations in which the Participant is employed. 3.20 "Early Retirement" means retirement of a Participant from employment with the Company after age 55, but prior to age 65 under the provisions of the Sponsor's Pension Plan or the Sponsor's Supplemental Senior Executive Retirement Plan. In the event of a change in the Sponsor's Pension Plan such that there is no longer a definition of "Early Retirement" or the Participant is not a participant in the Sponsor's Pension Plan for purposes of this plan, "Early Retirement" shall mean retirement before age 65 after reaching the 55th birthday together with completion of 15 years of Vesting Service, or after completion of 35 years of Vesting Service with no age limitation. 3.21 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 3.22 "Executive Officer" means an individual designated as an "officer" for purposes of Section 16 of the Securities Exchange Act of 1934 and as an "executive officer" for Item 401(b) of Regulation S-K by the Board pursuant to resolutions adopted by the Board from time to time. 3.23 "Fair Market Value" means, on any given date, the closing price of Stock as reported on the New York Stock Exchange composite tape on such day or, if no shares of Stock were traded on the New York Stock Exchange on such day, then on the next preceding day that Stock was traded on such exchange, all as reported by such source as the Committee may select. In the case of a Cashless Exercise, Fair Market Value means the price of the Stock at the date and time the broker executes the sale of exercised Stock. 3.24 "Full-time Employee" means an employee of the Company designated by the Department as being a "regular, full-time employee" who is eligible for all plans and programs of the Company set forth for such employees. This designation excludes all part-time, temporary, leased or contract employees and consultants to the Company. 3.25 "Incentive Stock Option" means an option to purchase Stock, granted under Section 7 herein, which is designated as an incentive stock option by the Committee and is intended to meet the requirements of Section 422 of the Code. 3.26 "Key Employee" means an officer or other employee of the Company, who is selected for participation in the Plan in accordance with Section 4.2. 3.27 "Nonqualified Stock Option" means an Option to purchase Stock, granted under Section 7 herein, which is not intended to be an Incentive Stock Option. 3.28 "Normal Retirement" means the retirement of any Participant under the Sponsor's Pension Plan at age 65. In the event of a change in the Sponsor's Pension Plan such that there is no longer a definition of "Normal Retirement" or the Participant is not a participant in the Sponsor's Pension Plan, for purposes of the Plan "Normal Retirement" shall mean retirement upon attaining the age of 65 years and completing five years of Vesting Service. 3.29 "Option" means an Incentive Stock Option or a Nonqualified Stock Option. 3.30 "Other Stock Unit Award" means Awards of Stock or other Awards that are valued in whole or in part by reference to, or are otherwise based on, shares of Stock or other securities of the Sponsor. 3.31 "Outside Director" means a member of the Board of Directors of the Sponsor who is not an employee of the Company. 3.32 "Participant" means a Key Employee or Outside Director who has been granted an Award under the Plan. 3.33 "Performance-Based Exception" means the performance-based exception from the tax deductibility limitations of Code Section 162(m). 3.34 "Performance Measures" mean, unless and until the Committee proposes for shareholder approval and the Sponsor's shareholders approve a change in the general performance measures set forth in this article, the attainment of which may determine the degree of payout and/or vesting with respect to Awards which are designed to qualify for the Performance-Based Exception, measure(s) chosen from among the following alternatives: (a) Total shareholder return (absolute or peer-group comparative) (b) Stock price increase (absolute or peer-group comparative) (c) Dividend payout as a percentage of net income (absolute or peer-group comparative) (d) Return on equity (absolute or peer-group comparative) (e) Return on capital employed (absolute or peer-group comparative) (f) Cash flow, including operating cash flow, free cash flow, discounted cash flow return on investment, and cash flow in excess of cost of capital (g) Economic value added (income in excess of capital costs) (h) Cost per KWH (absolute or peer-group comparative) (i) Revenue per KWH (absolute or peer-group comparative) (j) Market share (k) Customer satisfaction as measured by survey instruments (absolute or peer-group comparative) (l) Earnings before interest, and taxes (absolute or peer-group comparative) (m) Earnings before interest, taxes, depreciation, and amortization (absolute or peer-group comparative) The Committee shall have the discretion to adjust the determinations of the degree of attainment of the pre-established Performance Measures; provided, however, that Awards which are designed to qualify for the Performance-Based Exception may not be adjusted upward (the Committee shall retain the discretion to adjust such Awards downward), except to the extent permitted under Code Section 162(m) and the regulations thereunder to reflect corporate reorganizations or other events. 3.35 "Performance Award" means a performance-based Award, which may be in the form of either Performance Shares or Performance Units. 3.36 "Performance Period" means the time period designated by the Committee during which performance goals must be met. 3.37 "Performance Share" means an Award, designated as a Performance Share, granted to a Participant pursuant to Section 10 herein, the value of which is determined, in whole or in part, by the value of Stock in a manner deemed appropriate by the Committee and described in the Agreement or Sub-Plan. 3.38 "Performance Unit" means an Award, designated as a Performance Unit, granted to a Participant pursuant to Section 10 herein, the value of which is determined, in whole or in part, by the attainment of pre-established goals relating to Sponsor's or Company's financial or operating performance as deemed appropriate by the Committee and described in the Agreement or Sub-Plan. 3.39 "Period of Restriction" means the period during which the transfer of shares of Restricted Stock is restricted, pursuant to Section 9 of the Plan. 3.40 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). 3.41 "Plan" means the Progress Energy, Inc. 2002 Equity Incentive Plan as herein described and as hereafter from time to time amended. 3.42 "Restricted Stock" means an Award of Stock granted to a Participant pursuant to Section 9 of the Plan. 3.43 "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the Exchange Act as adopted in Exchange Act Release No. 34-37260 (May 31, 1996, effective August 15, 1996), or any successor rule as amended from time to time. 3.44 "Section 162(m)" means Section 162(m) of the Code, or any successor section under the Code, as amended from time to time and as interpreted by final or proposed regulations promulgated thereunder from time to time. 3.45 "Securities Act" means the Securities Act of 1933 and the rules and regulations promulgated thereunder, or any successor law, as amended from time to time. 3.46 "Secretary" means the corporate secretary of the Sponsor. 3.47 "Sponsor" means Progress Energy, Inc., or any successor thereto. 3.48 "Sponsor's Pension Plan" means the Progress Energy Pension Plan, as amended from time to time, and any successor thereto. 3.49 "Stock" means the common stock of the Sponsor. 3.50 "Stock Appreciation Right" means the right to receive an amount equal to the excess of the Fair Market Value of a share of Stock (as determined on the date of exercise) over the Fair Market Value of the Stock on the Award Date of the Stock Appreciation Right. 3.51 "Stock Unit Award" means an Award of Stock or units granted under Section 11 of the Plan. 3.52 "Sub-Plan" means a written document that permits the grant of Awards consistent with the provisions of this Plan. 3.53 "Vesting Service" means each year of employment with the Company in which a Participant works 1,000 hours. Section 4. Administration 4.1 The Committee. The Plan shall be administered and interpreted by the Committee which shall have full authority and all powers necessary or desirable for such administration. The express grant in this Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. In its sole and complete discretion the Committee may adopt, alter, suspend and repeal any such administrative rules, regulations, guidelines, and practices governing the operation of the Plan as it shall from time to time deem advisable. In addition to any other powers and, subject to the provisions of the Plan, the Committee shall have the following specific powers: (i) to determine the terms and conditions upon which the Awards may be made and exercised; (ii) to determine all terms and provisions of each Agreement and/or Sub-Plan, which need not be identical for types of Awards nor for the same type of Award to different Participants; (iii) to construe and interpret the Agreements, Sub-Plans and the Plan; (iv) to establish, amend, or waive rules or regulations for the Plan's administration; (v) to accelerate the exercisability of any Award, the length of a Performance Period or the termination of any Period of Restriction except for Awards to Covered Participants that are intended to qualify for the Performance-Based Exception, other than as may be otherwise provided under the terns of such an Award in the event of a Change in Control or as hereinafter specified; and (vi) to make all other determinations and take all other actions necessary or advisable for the administration of the Plan, including a determination of a Change in Control under Section 3.9. The Committee may take action by a meeting in person, by unanimous written consent, or by meeting with the assistance of communications equipment which allows all Committee members participating in the meeting to communicate in either oral or written form. The Committee may seek the assistance or advice of any persons it deems necessary to the proper administration of the Plan. 4.2 Selection of Participants Other Than Outside Directors. Subject to Section 5 of the Plan, the Committee shall have sole and complete discretion in determining Key Employees who shall participate in the Plan; provided, however, the Committee may delegate to the CEO the authority to designate Key Employees and/or Awards to be made to Key Employees who are not Executive Officers, subject to any limitations imposed by the Committee on the designation of Key Employees including a fixed maximum Award amount for any group of Key Employees and/or a maximum Award amount for any one Key Employee, as determined by the Committee. Awards made to the Executive Officers shall be determined by the Committee. 4.3 Awards to Outside Directors. Awards to Outside Directors shall be made in the sole discretion of the full Board of Directors; provided, however, that Awards of Options to Outside Directors shall be limited to Nonqualified Stock Options. 4.4 Award Agreements and Sub-Plans. Each Award granted under the Plan shall be granted either under the terms of an Award Agreement and/or a Sub-Plan. Award Agreements and Sub-Plans shall specify the terms, conditions and any rules applicable to the Award, including but not limited to the effect of transferability, a Change in Control, or death, Disability, Divestiture, Early Retirement, Normal Retirement or other termination of employment of the Participant on the Award. If the Award is granted under the terms of an Award Agreement, the Award Agreement shall be signed by an authorized representative of the Sponsor and the Participant, and a copy of the signed Award Agreement shall be provided to the Participant. If the Award is granted under the terms and conditions of a Sub-Plan, the Sub-Plan shall be approved by the Committee as an Exhibit to the Plan, and a copy of the Sub-Plan or a summary description thereof shall be provided to each Participant. 4.5 Committee Decisions. All determinations and decisions made by the Committee pursuant to the provisions of the Plan shall be final, conclusive, and binding upon all persons, including the Company, its employees, Participants, and Designated Beneficiaries, and the Sponsor's shareholders, except when the terms of any sale or award of shares of Stock or any grant of rights or Options under the Plan are required by law or by the Articles of Incorporation or Bylaws of the Sponsor to be approved by the Sponsor's Board of Directors or shareholders prior to any such sale, award or grant. 4.6 Rule 16b-3 and Section 162(m) Requirements. Notwithstanding any other provision of the Plan, the Committee may impose such conditions on any Award, and the Board may amend the Plan in any such respects, as may be required to satisfy the requirements of Rule 16b-3 or Section 162(m). 4.7 Indemnification of Committee. In addition to such other rights of indemnification as they may have as Outside Directors or as members of the Committee, the members of the Committee shall be indemnified by the Sponsor against reasonable expenses incurred from their administration of the Plan. Such reasonable expenses include, but are not limited to, attorneys' fees, actually and reasonably incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted or made hereunder, and against all amounts reasonably paid by them in settlement thereof or paid by them in satisfaction of a judgment in any such action, suit or proceeding, if such members acted in good faith and in a manner which they believed to be in, and not opposed to, the best interests of the Company. Section 5. Eligibility Selection of Participants by the Committee or the CEO under Section 4.2 shall be subject to the following limitations: (i) no person owning, directly or indirectly, more than 5% of the total combined voting power of all classes of Stock shall be eligible to participate under the Plan; and (ii) only Full-time Employees shall be eligible to participate under the Plan, except that Outside Directors may be granted Nonqualified Stock Options or Restricted Stock Awards in accordance with Section 4.3. Section 6. Shares of Stock Subject to the Plan 6.1 Number of Shares. Subject to adjustment as provided below and except as otherwise provided in Section 6.4 and Section 6.5 herein, the maximum aggregate number of shares of Stock that may be issued pursuant to Awards made under the Plan shall not exceed 15,000,000 shares of Stock, which may be in any combination of Options, Restricted Stock, Performance Shares or any other right or Option which is payable in the form of Stock. Additionally, shares of Stock available for issuance on the Effective Date under the 1997 Plan shall be transferred to the Plan and added to the shares available for the grant of Awards under this Plan. The maximum aggregate number of shares that may be granted in the form of Incentive Stock Options shall be 10,000,000. The maximum aggregate number of shares of Stock that may be granted in the form of Restricted Stock shall be 3,000,000 and the maximum aggregate number of shares of Stock (or derivatives of shares of Stock) that may be granted in the form of Performance Shares, Performance Units or other Stock Unit Awards shall be 4,000,000. Shares of Stock may be available from the authorized but unissued shares of Stock. Except as provided in Sections 6.2 and 6.3 herein, the issuance of shares of Stock in connection with the exercise of, or as other payment for, Awards under the Plan shall reduce the number of shares of Stock available for future Awards under the Plan. 6.2 Lapsed Awards of Forfeited Shares of Stock. In the event that (i) any Option or other Award granted under the Plan or the 1997 Plan terminates, expires, or lapses for any reason other than exercise of the Award, or (ii) if shares of Stock issued pursuant to the Awards are canceled or forfeited for any reason, the number of shares of Stock available for Awards under the Plan shall be increased by the number of shares of Stock that were subject to such Award; provided, however, that this provision shall not be construed to allow for the issuance of treasury stock. 6.3 Delivery of Shares of Stock as Payment. In the event a Participant pays for any Option or other Award granted under the Plan through the delivery of previously acquired shares of Stock, the number of shares of Stock available for Awards under the Plan shall be increased by the number of shares of Stock surrendered by the Participant, subject to Rule 16b-3 as interpreted by the Securities and Exchange Commission or its staff; provided, however, that this provision shall not be construed to allow for the issuance of treasury stock. 6.4 Capital Adjustments. The number and class of shares of Stock subject to each outstanding Award, the maximum number of shares of Stock that may be subject to an Award under Sections 7.7, 8.5, 9.6, 10.6 and 11.1, the Option Price (as hereinafter defined) and the aggregate number, type and class of shares of Stock for which Awards thereafter may be made shall be subject to adjustment, if any, as the Committee deems appropriate, based on the occurrence of a number of specified and non-specified events; provided, however, that with respect to Incentive Stock Options such adjustment shall be made in a manner consistent with Section 424(a) of the Code and, with respect to any Awards to Executive Officers, shall be consistent with the requirements of Section 162(m) of the Code and the regulations promulgated thereunder. Such events include but are not limited to the following: (a) If the outstanding shares of Stock of the Sponsor are increased, decreased or exchanged through merger, consolidation, sale of all or substantially all of the property of the Sponsor, reorganization, recapitalization, reclassification, stock dividend, stock split or other distribution in respect to such shares of Stock, for a different number or type of shares of Stock, or if additional shares of Stock or new or different shares of Stock are distributed with respect to such shares of Stock, an appropriate and proportionate adjustment shall be made in: (i) the maximum number of shares of Stock available for the Plan as provided in Section 6.1 herein, (ii) the type of shares of Stock or other securities available for the Plan, (iii) the number of shares of Stock subject to any then outstanding Awards under the Plan, and (iv) the price (including exercise price) for each share of Stock (or other kind of shares or securities) subject to then outstanding Awards, but without change in the aggregate purchase price as to which such Options remain exercisable or Restricted Stock releasable. (b) If other events not specified above in this Section 6.4, such as any extraordinary cash dividend, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Stock, or other similar corporate event affect the Stock such that an adjustment is necessary to maintain the benefits or potential benefits intended to be provided under this Plan, then the Committee in its discretion may make adjustments to any or all of (i) the number and type of shares of Stock which thereafter may be optioned and sold or awarded or made subject to Stock Appreciation Rights under the Plan, (ii) the grant, exercise or conversion price of any Award made under the Plan thereafter, and (iii) the number and price (including Exercise Price) of each share of Stock (or other kind of shares or securities) subject to then outstanding Awards, but without change in the aggregate purchase price as to which such Options remain exercisable or Restricted Stock releasable. Any adjustment as provided above for Awards that are intended to qualify for the Performance-Based Exception shall be subject to any applicable restrictions set forth in Section 12 or in Section 162(m). (c) Any adjustment made by the Committee pursuant to the provisions of this Section 6.4 shall be final, binding and conclusive. A notice of such adjustment, including identification of the event causing such an adjustment, the calculation method of such adjustment, and the change in price and the number of shares of Stock, or securities, cash or property purchasable subject to each Award shall be sent to each affected Participant. No fractional interests shall be issued under the Plan based on such adjustments, and shall be forfeited. 6.5 Acquisitions. In connection with the acquisition of any business by the Company or any of its Affiliates, any outstanding grants, awards or sales of options or other similar rights pertaining to such business may be assumed or replaced by grants or awards under the Plan upon such terms and conditions as the Committee determines. The date of any such grant or award shall relate back to the date of the initial grant or award being assumed or replaced, and service with the acquired business shall constitute service with the Company for purposes of such grant or award. Any shares of Stock underlying any grant or award or sale pursuant to any such acquisition shall be disregarded for purposes of applying the limitations, and shall not reduce the number of shares of Stock available, under Section 6.1 above. Notwithstanding any provision in this Plan to the contrary, the exercise price of any such Award may be below Fair Market Value in order to replace the value of another award in the sole discretion of the Committee. Section 7. Stock Options 7.1 Grant of Stock Options. Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may grant Options to Key Employees, and with respect to Outside Directors pursuant to approval by the Board, as it shall determine. Except with respect to Outside Directors, the Committee shall have sole and complete discretion in determining the type of Option granted, the Option Price (as hereinafter defined), the duration of the Option, the number of shares of Stock to which an Option pertains, any conditions imposed upon the exercisability of the Options, the conditions under which the Option may be terminated and any such other provisions as may be warranted to comply with the law or rules of any securities trading system or stock exchange. Notwithstanding the preceding, the Committee may delegate to the CEO authority to grant options in accordance with Section 4.2. Each Option grant shall have such specified terms and conditions detailed in an Award Agreement. The Agreement shall specify whether the Option is intended to be an Incentive Stock Option within the meaning of Section 422 of the Code, or a Nonqualified Stock Option. 7.2 Option Price. The exercise price per share of Stock covered by an Option ("Option Price") shall be determined at the time of grant by the Committee, subject to Section 6.5 hereof and the limitation that the Option Price shall not be less than 100% of the Fair Market Value of the Stock on the Grant Date. 7.3 Exercisability. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee or the CEO, as the case may be, shall determine, which will be specified in the Award Agreement and need not be the same for each Participant. However, no Option may be exercisable within the first year following the Grant Date, except in the event of a Change in Control, or after the expiration of ten (10) years from the Grant Date. 7.4 Limitations on Incentive Stock Options. Incentive Stock Options may be granted only to Participants who are employees of the Sponsor or of a "Parent Corporation" or "Subsidiary Corporation" (as defined in Sections 424(e) and (f) of the Code, respectively) at the Grant Date. The aggregate Fair Market Value (determined as of the time the Stock Option is granted) of the Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under all option plans of the Company and of any Parent Corporation or Subsidiary Corporation) shall not exceed one hundred thousand dollars ($100,000). For purposes of the preceding sentence, Incentive Stock Options will be taken into account in the order in which they are granted. The per-share exercise price of an Incentive Stock Option shall not be less than one hundred percent (100%) of the Fair Market Value of the Stock on the Grant Date, and no Incentive Stock Option may be exercised later than ten (10) years after the date it is granted. In addition, no Incentive Stock Option may be issued to a Participant in tandem with a Nonqualified Stock Option. Further, Incentive Stock Options may not be granted to any Participant who, at the time of grant, owns stock possessing (after the application of the attribution rules of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary Corporation, unless the exercise price of the option is fixed at not less than one hundred ten percent (110%) of the Fair Market Value of the Stock on the Grant Date and the exercise of such Option is prohibited by its terns after the expiration of five (5) years from the Grant Date of such Option. 7.5 Method of Exercise. Options shall be exercised by the delivery of a notice from the Participant to the Secretary (or his or her designee) in the form prescribed by the Committee setting forth the number of shares of Stock with respect to which the Option is to be exercised, accompanied by full payment for the shares of Stock. The Option Price shall be payable to the Sponsor in full in cash, or its equivalent, or by delivery of shares of Stock (not subject to any security interest or pledge) valued at Fair Market Value at the time of exercise or by a combination of the foregoing. In addition, the Committee may permit the Cashless Exercise of the Option. As soon as practicable, after receipt of notice and payment, the Sponsor shall deliver to the Participant, Stock certificates in an appropriate amount based upon the number of shares of Stock with respect to which the option is exercised, issued in the Participant's name. 7.6 Notice. Each Participant shall give prompt notice to the Sponsor of any disposition of shares of Stock acquired upon exercise of an Incentive Stock Option if such disposition occurs within either two (2) years after the Grant Date or one (1) year after the date of transfer of such shares of Stock to the Participant upon the exercise of such Incentive Stock Option. 7.7 Maximum Award. The maximum number of shares of Stock that may be granted in the form of Options pursuant to any Award granted in a single calendar year to any one Participant shall be 2,000,000. 7.8 Limitation on Transferability. Solely to the extent permitted by the Committee in an Award Agreement and subject to the terms and conditions as the Committee shall specify, a Nonqualified Stock Option (but not an Incentive Stock Option) may be transferred to members of the Participant's immediate family (as determined by the Committee) or to trusts, partnerships or corporations whose beneficiaries, members or owners are members of the Participant's immediate family, and/or to such other persons or entities as may be approved by the Committee in advance and set forth in an Award Agreement, in each case subject to the condition that the Committee be satisfied that such transfer is being made for estate or tax planning purposes or for gratuitous or donative purposes, without consideration (other than nominal consideration) being received therefor. Except to the extent permitted by the Committee in accordance with the foregoing, an Option shall be nontransferable otherwise than by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the Participant only by such Participant. Section 8. Stock Appreciation Rights 8.1 Grant of Stock Appreciation Rights. Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may grant freestanding Stock Appreciation Rights, Stock Appreciation Rights in tandem with an Option, or Stock Appreciation Rights in addition to an Option. Stock Appreciation Rights granted in tandem with an Option or in addition to an Option may be granted at the time of the Option or at a later time. 8.2 Price. The exercise price of each Stock Appreciation Right shall be determined at the time of grant by the Committee, subject to the limitation that the grant price shall not be less than 100% of Fair Market Value of the Stock on the Grant Date. 8.3 Exercise. The Participant shall be entitled to receive payment upon exercise of a Stock Appreciation Right in accordance with Section 8.4. 8.4 Payment. Upon exercise of the Stock Appreciation Right, the Participant shall be entitled to receive payment from the Company in an amount determined by multiplying (a) the difference between the Fair Market Value of a share of Stock on the date of Exercise of the Stock Appreciation Right over the grant price specified in the Award Agreement by (b) the number of shares of Stock with respect to which the Stock Appreciation Right is exercised. 8.5 Maximum Award. The maximum number of shares of Stock that may be subject to Stock Appreciation Rights granted to any Participant during a single calendar year shall be 2,000,000. Section 9. Restricted Stock 9.1 Grant of Restricted Stock. Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may grant shares of Restricted Stock under the Plan to such Participants, and in such amounts and for such duration and/or consideration as it shall determine. Participants receiving Restricted Stock Awards are not required to pay the Sponsor or the Company therefor (except for applicable tax withholding) other than the rendering of services and/or other consideration as determined by the Committee at its sole discretion. 9.2 Restricted Stock Agreement. Each Restricted Stock grant shall be evidenced by an Agreement that shall specify the Period of Restriction; the conditions which must be satisfied prior to removal of the restriction; the number of shares of Restricted Stock granted; and such other provisions as the Committee shall determine. The Committee may specify, but is not limited to, the following types of restrictions in the Award Agreement: (i) restrictions on acceleration or achievement of terms or vesting based an any business or financial goals of the Company, including, but not limited to the Performance Measures set out in Section 3.33, and (ii) any other further restrictions that may be advisable under the law, including requirements set forth by the Securities Act, any securities trading system or stock exchange upon which such shares under the Plan are listed. 9.3 Removal of Restrictions. Except as otherwise noted in this Section 9, Restricted Stock covered by each Award made under the Plan shall be provided to and become freely transferable by the Participant after the last day of the Period of Restriction and/or upon the satisfaction of other conditions as determined by the Committee. Except as specifically provided in this Section 9, the Committee shall have no authority to reduce or remove the restrictions or to reduce or remove the Period of Restriction without the express consent of the shareholders of the Sponsor. If the grant of Restricted Stock is performance based, the total Restricted Period for any or all shares or units of Restricted Stock so granted shall be no less than one (1) year. Any other shares of Restricted Stock issued pursuant to this Section 9 shall provide that the minimum Period of Restrictions shall be three (3) years, which Period of Restriction may permit the removal of restrictions on no more than one-third (1/3) of the shares of Restricted Stock at the end of the first year following the Grant Date, and the removal of the restrictions on an additional one-third (1/3) of the shares at the end of each subsequent year. Notwithstanding the previous sentence, if a Participant terminates employment from the Company at or following Early Retirement or Normal Retirement, any time-based Period of Restriction may be removed at the discretion of the Committee. In no event shall any restrictions be removed from shares of Restricted Stock during the first year following the Grant Date, except due to retirement as described in the preceding sentence or in the event of a Change in Control. 9.4 Voting Rights. During the Period of Restriction, Participants in whose name Restricted Stock is granted under the Plan may exercise full voting rights with respect to those shares. 9.5 Dividends and Other Distributions. During the Period of Restriction, Participants in whose name Restricted Stock is granted under the Plan shall be entitled to receive all dividends and other distributions paid with respect to those shares. If any such dividends or distributions are paid in shares, the shares shall be subject to the same restrictions on transferability as the Restricted Stock with respect to which they were distributed. 9.6 Maximum Award. The maximum number of shares of Stock that may be granted in the form of Restricted Stock pursuant to an Award granted to a Participant during a single calendar year shall be 250,000. Section 10. Performance Based Awards 10.1 Grant of Performance Awards. Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may issue Performance Awards in the form of either Performance Units or Performance Shares to Participants subject to the Performance Measures and Performance Period as it shall determine. The Committee shall have complete discretion in determining the number and value of Performance Units or Performance Shares granted to each Participant. Participants receiving Performance Awards are not required to pay the Sponsor or a Subsidiary or Affiliate therefor (except for applicable tax withholding) other than the rendering of services. 10.2 Value of Performance Awards. The Committee shall determine the number and value of Performance Units or Performance Shares granted to each Participant as a Performance Award. The Committee shall set Performance Measures in its discretion for each Participant who is granted a Performance Award. The extent to which such Performance Measures are met will determine the value of the Performance Unit to the Participant or the number of Performance Shares earned by the Participant. Such Performance Measures may be particular to a Participant, may relate to the performance of the Affiliate which employs him or her, may be based on the division which employs him or her, may be based on the performance of the Company generally, or a combination of the foregoing. The terms and conditions of each Performance Award will be set forth in an Agreement and/or a Sub-Plan. 10.3 Settlement of Performance Awards. After a Performance Period has ended, the holder of a Performance Unit or Performance Share shall be entitled to receive the value thereof based on the degree to which the Performance Measures established by the Committee and set forth in the Agreement and/or Sub-Plan have been satisfied. 10.4 Form of Payment. Payment of the amount to which a Participant shall be entitled upon the settlement of a Performance Award shall be made in cash, Stock, or a combination thereof as determined by the Committee. Payment may be made in a lump sum or installments as prescribed by the Committee. 10.5 Deferral of Performance Awards. Prior to the year with respect to which a Performance Award may vest, the Committee may permit a Participant to elect, in accordance with rules prescribed by the Committee, not to receive a distribution upon the vesting of such Performance Award and instead have the Company continue to maintain the Performance Award on its books of account. 10.6 Maximum Award. The maximum number of shares of Stock that may be the subject of a Performance Share Award granted to a Participant in a single calendar year shall be 250,000. The maximum amount of compensation payable, without regard to any deferred amounts, to a Participant pursuant to the grant of Performance Unit Awards in any calendar year shall be $10,000,000. Section 11. Other Stock Based Awards 11.1 Grant of Other Stock Based Awards. Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may issue to Participants, either alone or in addition to other Awards made under the Plan, Stock Unit Awards which may be in the form of or based on Stock or other securities. The maximum number of shares of Stock that may be granted in any calendar year to a Participant as part of a Stock Unit Award shall be 250,000. If the value of any Stock Unit Award is not based entirely on the value of the underlying Stock, the maximum amount of compensation payable, without regard to any deferred amounts, to a Participant pursuant to the grant of all such Stock Unit Awards in any calendar year shall be $ 2,500,000. The Committee, in its sole and complete discretion, may determine that an Award, either in the fore of a Stock Unit Award under this Section 11 or as an Award granted pursuant to Sections 7 through 10, may provide to the Participant (i) dividends or dividend equivalents (payable on a current or deferred basis) and (ii) cash payments in lieu of or in addition to an Award. Subject to the provisions of the Plan, the Committee in its sole and complete discretion, shall determine the terms, restrictions, conditions, vesting requirements, and payment rules (all of which are sometimes hereinafter collectively referred to as "rules") of the Award. The Award Agreement and/or Sub-Plan shall specify the rules of each Award as determined by the Committee. However, each Stock Unit Award need not be subject to identical rules. 11.2 Rules. The Committee, in its sole and complete discretion, may grant a Stock Unit Award subject to the following rules: (a) Stock or other securities issued pursuant to Stock Unit Awards may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated by a Participant until the expiration of at least six months from the Award Date, except that such limitation shall not apply in the case of death or Disability of the Participant. All rights with respect to such other Stock Unit Awards granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant or his or her guardian or legal representative. (b) Stock Unit Awards may require the payment of cash consideration by the Participant in receipt of the Award or provide that the Award, and any Stock or other securities issued in conjunction with the Award be delivered without the payment of cash consideration. (c) The Committee, in its sole and complete discretion, may establish certain Performance Measures that may relate in whole or in part to receipt of the Stock Unit Awards. (d) Stock Unit Awards may be subject to a deferred payment schedule and/or vesting over a specified employment period. (e) The Committee, in its sole and complete discretion, as a result of certain circumstances, may waive or otherwise remove, in whole or in part, any restriction or condition imposed on a Stock Unit Award at the time of grant. 11.3 Deferral of Stock Units. Prior to the year with respect to which a Stock Unit may vest, the Committee may permit a Participant to elect, in accordance with rules prescribed by the Committee, not to receive a distribution upon the vesting of such Stock Unit and instead have the Company continue to maintain the Stock Unit on its books of account. Section 12. Special Provisions Applicable to Covered Participants. Unless the Committee in its sole discretion determines that any Award made to a Covered Employee is not intended to qualify for the Performance Based Exception under Section 162(m), Awards subject to Performance Measures that are granted to Covered Participants under this Plan shall be governed by the conditions of this Section 12, in addition to the requirements of Sections 9, 10, and 11 above. Should conditions set forth under this Section 12 (when applicable) conflict with the requirements of Sections 9, 10, and 11, the conditions of this Section 12 shall prevail. (a) Performance Measures for Covered Participants shall be established by the Committee in writing prior to the beginning of the Performance Period, or by such other later date during the Performance Period as may be permitted under Section 162(m). Performance Measures for Covered Participants may include alternative and multiple Performance Measures and may be based on one or more business criteria. (b) All Performance Measures must be objective and must satisfy third party "objectivity" standards under Section 162(m). (c) The Performance Measures shall not allow for any discretion by the Committee as to an increase in any Award, but discretion to lower an Award is permissible. (d) The Award and payment of any Award under this Plan to a Covered Participant with respect to relevant Performance Period shall be contingent upon the attainment of the Performance Measures that are applicable to such Covered Participant. The Committee shall certify in writing prior to payment of any such Award that such applicable Performance Measures relating to the Award are satisfied. Approved minutes of the Committee may be used for this purpose. (e) All Awards to Covered Participants under this Plan shall be further subject to such other conditions, restrictions, and requirements as the Committee may determine to be necessary to carry out the purpose of this Section 12. Section 13. General Provisions 13.1 Withholding. The Company shall have the right to deduct or withhold, or require a Participant to remit to the Company, any taxes, including employment taxes, required by law to be withheld with respect to the Awards made under this Plan. In the event an Award is paid in the form of Stock, the Committee may require the Participant to remit to the Company the amount of any taxes required to be withheld from such payment in Stock, or, in lieu thereof the Company may withhold (or the Participant may be provided the opportunity to elect to tender) the number of shares of Stock equal in Fair Market Value to the amount required to be withheld. 13.2 No Right to Employment. No granting of an Award shall be construed as a right to employment with the Company. 13.3 Rights as Shareholder. Subject to the Award provisions, no Participant or Designated Beneficiary shall be deemed a shareholder of the Sponsor nor have any rights as such with respect to any shares of Stock to be provided under the Plan until he or she has become the holder of such shares. Notwithstanding the aforementioned, with respect to Stock granted under a Restricted Stock Agreement under this Plan, the Participant or Designated Beneficiary of such Award shall be deemed the owner of such shares. As such, unless contrary to the provisions herein or in any such related Award Agreement, such shareholder shall be entitled to full voting, dividend and distribution rights as provided any other Sponsor shareholder. 13.4 Construction of the Plan. The Plan, and its rules, rights, Agreements, Sub-Plans and regulations, shall be governed, construed, interpreted and administered in accordance with applicable Federal laws, or to the extent that Federal laws do not apply, the laws of the State of North Carolina. In the event any provision of the Plan shall be held invalid, illegal or unenforceable, in whole or in part, for any reason, such determination shall not affect the validity, legality or enforceability of any remaining provision, or portion of provision, of the Plan overall, which shall remain in full force and effect. 13.5 Amendment of Plan. The Committee or the Board of Directors may amend, suspend, or terminate the Plan or any portion thereof at any time, provided (a) such amendment is made with shareholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement for the Performance-Based Exception under Section 162(m), and (b) such amendment may not adjust or amend the exercise price of Options previously granted to a Participant without further shareholder approval except as provided in Sections 6.4 and 6.5 hereof. The Committee in its discretion may amend the Plan so as to conform with any applicable regulatory requirements subject to any provisions to the contrary specified herein. 13.6 Amendment of Award. At any time and in its sole and complete discretion, the Committee may amend any Award for the following reasons: (i) additions and/or changes are made to the Code, any federal or state securities law, or other law or regulations subsequent to the Grant Date, and have an impact on the Award; or (ii) for any other reason not described in clause (i), provided (a) such amendment does not adversely affect a Participant or, if it does, provided the Participant gives his or her consent to such amendment, and (b) such amendment may not adjust or amend the exercise price of Options previously granted to a Participant without further shareholder approval except as provided in Sections 6.4 and 6.5 hereof. 13.7 Exemption from Computation of Compensation for Other Purposes. By accepting an Award under this Plan, each Participant agrees that such Award shall be considered special incentive compensation and will be exempt from inclusion as "wages" or "salary" for purposes of calculating benefits under pension, profit sharing, disability, severance, life insurance, and other employee benefit plans of the Company, except as otherwise provided in those benefit plans. 13.8 Legend. In its sole and complete discretion, the Committee may elect to legend certificates representing shares of Stock sold or awarded under the Plan, to make appropriate references to the restrictions imposed on such shares. 13.9 Executive Officers and Covered Participants. All Award Agreements and/or Sub-Plans for Participants subject to Section 16(b) shall be deemed to include any such additional terms, conditions, limitations and provisions as Rule 16b-3 requires, unless the Committee in its discretion determines that any such Award should not be governed by Rule 16b3. All Awards subject to the Performance Based Exception shall be deemed to include any such additional terms, conditions, limitations and provisions as are necessary to comply with the Performance-Based Compensation exemption of Section 162(m), unless the Committee, in its sole discretion, determines that an Award to a Covered Participant is not intended to qualify for the Performance-Based Exception. 13.10 Change in Control. In the event of a Change in Control, the Committee may provide, in its sole and complete discretion, either within the terms of the Award Agreement or subsequently, for the acceleration of the payment and/or vesting of any Award, the extension of the time during which an Award is exercisable to its full term regardless of a Participant's termination of employment with the Company and/or the release of any restrictions on any Award. 13.11 Divestiture. In the event of a Divestiture, the Committee may provide, in its sole and complete discretion, either within the terms of the Award Agreement or subsequently, for the acceleration of the payment and/or vesting of any Award, the extension of the time during which an Award is exercisable to its full term regardless of a Participant's termination of employment with the Company and/or the release of any restrictions on any Award or the assumption of an Award as contemplated in Section 13.14. 13.12 Unfunded Obligation. Nothing in this Plan shall be interpreted or construed to require the Company in any manner to fund any obligation to the Participants or any Designated Beneficiary. Nothing contained in this Plan nor any action taken hereunder shall create, or be construed to create a trust of any kind, or a fiduciary relationship between the Company and/or the Committee, and the Participants and/or any Designated Beneficiary. To the extent that any Participant or Designated Beneficiary acquires a right to receive payments under this Plan, such rights shall be no greater than the rights of any unsecured general creditor of the Sponsor. 13.13 Plan Expenses. All reasonable expenses of the Plan shall be paid by the Company. 13.14 Transfer. The sponsorship of this Plan may be assumed by any Affiliate of the Sponsor in the case of a reorganization of the Sponsor and its Affiliates, or by any successor in interest of the Sponsor. Further, in the event any Award under the Plan is assumed by an Affiliate or another entity in connection with the disposition or sale of any business of the Sponsor and its Affiliates, the Award so assumed shall be cancelled under the Plan. EX-10.II 4 pei_10qexhibit10iifp-.txt EXHIBIT 10(II) EXHIBIT A TO 2002 EQUITY INCENTIVE PLAN PERFORMANCE SHARE SUB-PLAN (Effective July 9, 2002) This Performance Share Sub-Plan ("Sub-Plan") sets forth the rules and regulations adopted by the Committee for issuance of Performance Share Awards under Section 10 of the 2002 Equity Incentive Plan ("Plan"). Capitalized terms used in this Sub-Plan that are not defined herein shall have the meaning given in the Plan. In the event of any conflict between this Sub-Plan and the Plan, the terms and conditions of the Plan shall control. No Award Agreement shall be required for participation in this Sub-Plan. Section 1. Definitions When used in this Sub-Plan, the following terms shall have the meanings as set forth below, and are in addition to the definitions set forth in the Plan. 1.1 "Account" means the account used to record and track the number of ------- Performance Shares granted to each Participant as provided in Section 2.4. 1.2 "Award" as used in this Sub-Plan means each aggregate award of Performance ----- Shares as provided in Section 2.2. 1.3 "EBITDA" means earnings before interest, taxes, depreciation, and ------ amortization as determined from time to time by the Committee. 1.4 "EBITDA Growth" means the percentage increase (if any) in EBITDA for any -------------- Year, as compared to the previous Year as determined from time to time by the Committee. 1.5 "Peer Group" means the utilities included in the Standard & Poor's Utility ---------- (Electric Power Companies) Index. 1.6 "Performance Period" for purposes of this Sub-Plan means three consecutive ------------------- Years beginning with the Year in which an Award is granted. 1.7 "Performance Schedule" means Attachment 1 to this Sub-Plan, which sets --------------------- forth the Performance Measures applicable to this Sub-Plan. 1.8 "Performance Share" for purposes of this Sub-Plan means each unit of an ------------------ Award granted to a Participant, the value of which is equal to the value of Company Stock as hereinafter provided. 1.9 "Retire" or "Retirement" means termination of employment on or after: ------ ---------- (a) becoming 65 years old with at least 5 years of service; (b) becoming 55 years old with at least 15 years of service; or (c) achieving at least 35 years of service, regardless of age. 1.10 "Salary" means the regular base rate of compensation payable by the Company ------ to a Participant on an annual basis as of the date an Award is granted. Salary does not include bonuses, if any, or incentive compensation, if any. Such compensation shall not be reduced by any deferrals made under any other plans or programs maintained by the Company. 1.11 "Total Shareholder Return" means the total percentage return realized by -------------------------- the owner of a share of stock during a relevant Year or any part thereof. Total Shareholder Return is equal to the appreciation or depreciation in value of the stock (which is equal to the closing value of the stock on the last trading day of the relevant period minus the closing value of the stock on the last trading day of the preceding Year) plus the dividends declared during the relevant period, divided by the closing value of the stock on the last trading day of the preceding Year. Closing values for the stock on the dates given above shall be those published in the Wall Street Journal. 1.12 "Year" means a calendar year. ---- Section 2. Sub-Plan Participation and Awards 2.1 Participant Selection. Participants under this Sub-Plan shall be selected ---------------------- by the Committee in its sole discretion as provided in Section 4.2 of the Plan. 2.2 Awards. Subject to any adjustments to be made under Section 2.5, the ------ Compensation Committee may, in its sole discretion, grant Awards to some or all of the Participants in the form of a specific number of Performance Shares. The total value of any Award shall not exceed the following limitations, based on the Participant's Salary on the date that the Award is granted: -------------------------------------------- ------------------------------ Participant Award Limitation -------------------------------------------- ------------------------------ CEO*/COO* 150% of Salary -------------------------------------------- ------------------------------ Presidents*/Executive VPs* 100% of Salary -------------------------------------------- ------------------------------ Senior VPs* 85% of Salary -------------------------------------------- ------------------------------ Department Heads and Key Managers** Level I 75% of Salary Level II 50% of Salary Level III 40% of Salary -------------------------------------------- ------------------------------ * Senior Management Committee level position **Levels shall be determined in the sole discretion of the Committee 2.3 Award Valuation at Grant. In calculating the limitations set forth in ------------------------- Section 2.2, the value of each Performance Share shall be equal to the closing price of a share of Stock on the last trading day before the Award is granted, as published in the Wall Street Journal. Each Award is deemed to be granted on the day that it is approved by the Committee. 2.4 Accounting and Adjustment of Awards. The number of Performance Shares -------------------------------------- awarded to a Participant shall be recorded in a separate Account for each Participant. The number of Performance Shares recorded in a Participant's Account shall be adjusted to reflect any splits or other adjustments in the Stock. If any cash dividends are paid on the Stock, the number of Performance Shares in each Participant's Account shall be increased by a number equal to (i) the dividend multiplied by the number of Performance Shares in each Participant's Account, divided by (ii) the closing price of a share of Stock on the payment date of the dividend, as published in the Wall Street Journal. 2.5 Performance Schedule and Calculation of Awards. Each Award shall become ------------------------------------------------- vested on January 1 immediately following the end of the applicable Performance Period, subject to adjustment in accordance with the following procedure. (a) One-half of the Award shall be adjusted as follows: (i) The Total Shareholder Return for the Company shall be determined for each Year during the Performance Period, and shall then be averaged (the "Company TSR"). (ii) The average Total Shareholder Return for all Peer Group utilities shall be determined for each Year during the Performance Period, and shall then be averaged ( the "Peer Group TSR"). (iii)The Peer Group TSR for the Performance Period shall be subtracted from the Company TSR for the Performance Period. The remainder shall then be used to determine the number of vested Performance Shares using the Performance Schedule, based on one-half of the number of Performance Shares in the Participant's Account. (b) The other one-half of the Award shall be adjusted as follows: (i) The EBITDA Growth for the Company shall be determined for each Year during the Performance Period, and shall then be averaged (the "Company EBITDA Growth"). (ii) The average EBITDA Growth for all Peer Group utilities shall be determined for each Year during the Performance period, and shall be averaged (the "Peer Group EBITDA Growth"). (iii) The Peer Group EBITDA Growth for the Performance Period shall be subtracted from the Company EBITDA Growth for the Performance Period. The remainder shall then be used to determine the number of vested Performance Shares using the Performance Schedule, based on one-half of the number of Performance Shares in the Participant's Account. (c) The total number of vested Performance Shares payable to the Participant shall be the sum of the amounts determined in accordance with subsections (a) and (b) above. (d) The Performance Measures and the Performance Schedule will not change during any Performance Period with regard to any Awards that have already been granted. The Committee reserves the right to modify or adjust the Performance Measures and/or the Performance Schedule in the Committee's sole discretion with regard to future grants. 2.6 Payment Options. Except as provided in Section 3, Awards shall be paid after expiration of the Performance Period. The Company will pay in cash to each Participant the aggregate value of vested Performance Shares, which shall be determined in accordance with Section 2.7. Payment shall be made as follows: (a) 100% during the month of April of the Year immediately following expiration of the Performance Period, or as soon as practical thereafter; or (b) in accordance with an alternative payment election made by Participant substantially in the form attached hereto as Attachment 2, provided that such election is executed by the Participant and returned to the Vice President, Human Resources Department no later than the end of the first Year of the Performance Period. Once made, this election is irrevocable. 2.7 Valuation of Performance Shares. For the purposes of payment under Section 2.6, the aggregate value of vested Performance Shares shall be equal to the total number of vested Performance Shares in the Participant's Account (after any applicable adjustments under Section 2.5) multiplied by the closing price of the Stock on the March 31 (or if March 31 is not a trading day, the closing price of the Stock on the next preceding trading day) before payment of the Award, as published in the Wall Street Journal. 2.8 Grantor Trust. In the case of a Change in Control, the Company shall, subject to the restrictions in this Section 2.8 and Section 13.12 of the Plan, irrevocably set aside funds in one or more such grantor trusts in an amount that is sufficient to pay each Participant employed by such Company (or Designated Beneficiary), the net present value as of the date on which the Change in Control occurs, of the earned benefits to which Participants (or their Designated Beneficiaries) would be entitled pursuant to the terms of the Plan if the value of their deferral account (if any) established pursuant to section 2.6(b) would be paid in a lump sum upon the Change in Control. Any such trust shall be subject to the claims of the general creditors of the Sponsor or Company in the event of bankruptcy or insolvency of the Sponsor or Company. Section 3. Early Vesting and Forfeiture 3.1 Retirement, Death or Divestiture. If prior to expiration of the Performance Period the Participant Retires or dies, or in the event of a Divestiture during a Performance Period, the Participant's outstanding Award(s) for any unexpired Performance Period shall immediately become vested, and the aggregate value of the Award shall be paid in cash after being adjusted in accordance with Section 3.3. 3.2 Change in Control. In the event of a Change in Control prior to the expiration of the Performance Period, any outstanding Award of the Participant for any unexpired Performance Period shall be treated as follows: (a) If the Award is assumed by the successor to the Sponsor as of the date of the Change in Control, each outstanding Award not previously forfeited shall continue to vest and shall be paid pursuant to the terms of this Sub-Plan; provided, however, that in the event the employment of the Participant is terminated by the Company without Cause following the Change in Control, any outstanding Award shall become vested as of the termination date, and the aggregate value of the Award shall be paid in cash after being adjusted in accordance with Section 3.3. (b) If the Award is not assumed by the successor to the Sponsor as of the date of the Change in Control, any outstanding Award shall become vested as of the date of the Change in Control, and the aggregate value of the Award shall be paid in cash after being adjusted in accordance with Section 3.3. 3.3 Adjustment of Awards. Any Award which is vested pursuant to this Section 3 prior to the end of the Performance Period shall be adjusted pursuant to the following procedure. (a) One-half of the Award shall be adjusted as follows: (i) The Total Shareholder Return for the Company shall be determined for each Year or partial Year, and a weighted average Total Shareholder Return for the Company shall be calculated for the period between the first day of the Performance Period and the date the Participant Retires or dies, or the date of the Divestiture or the date that the Award is vested pursuant to Section 3.2 (the "Prorated Company TSR"). (ii) The average Total Shareholder Return for all Peer Group utilities shall be determined for each Year or partial Year, and a weighted average Total Shareholder Return shall be calculated for the period between the first day of the Performance Period and the date the Participant Retires or dies, or the date of the Divestiture or the date that the Award is vested pursuant to Section 3.2 (the "Prorated Peer Group TSR"). (iii) The Prorated Peer Group TSR for the Performance Period shall be subtracted from the Prorated Company TSR for the Performance Period. The remainder shall then be used to determine the vested Performance Shares using the Performance Schedule, based on one-half of the number of Performance Shares in the Participant's Account. (b) The other one-half of the Award shall be adjusted as follows: (i) The EBITDA Growth for the Company shall be determined for each Year or partial Year, and a weighted average EBITDA Growth for the Company shall be calculated for the period between the first day of the Performance Period and the end of the calendar quarter immediately preceding the date that the Participant Retires or dies, or end of the calendar quarter immediately preceding the date of the Divestiture or the date that the Award is vested pursuant to Section 3.2 (the "Prorated Company EBITDA Growth"). (ii) The average EBITDA Growth for all Peer Group utilities shall be determined for each Year or partial Year, and a weighted average EBITDA Growth shall be calculated for the period between the first day of the Performance Period and the end of the calendar quarter immediately preceding the date the Participant Retires or dies, or the end of the calendar quarter immediately preceding the date of the Divestiture or the date that the Award is vested pursuant to Section 3.2 (the "Prorated Peer Group EBITDA Growth"). (iii) The Prorated Peer Group EBITDA Growth for the Performance Period shall be subtracted from the Prorated Company EBITDA Growth for the Performance Period. The remainder shall then be used to determine the vested Performance Shares using the Performance Schedule, based on one-half of the number of Performance Shares in the Participant's Account. (c) The total number of vested Performance Shares payable to the Participant shall be the sum of the amounts determined in accordance with subsections (a) and (b) above. (d) If the Participant Retires, the Award shall be paid in accordance with the Participant's election as provided in Section 2.6. If the Participant dies, or in the event of a Divestiture, payment shall be made in cash within a reasonable time after the Participant dies, or within a reasonable time after the Divestiture becomes effective, notwithstanding any election under Section 2.6. Payment upon death shall be made to the Participant's Designated Beneficiary. If the Award is vested pursuant to Section 3.2, the Award shall be paid within a reasonable time after the date of vesting, notwithstanding any election under Section 2.6. The aggregate value of the vested Performance Shares shall be determined in accordance with section 3.4. 3.4 Valuation of Performance Shares. For the purposes of payment under Section 3.3(d), the aggregate value of vested Performance Shares shall be equal to the number of vested Performance Shares in the Participant's Account (after any applicable adjustments under Section 3.3) multiplied by the closing price of the Stock on the date that the Participant Retires or dies, or on the date of the Divestiture, or the on date the Award vests pursuant to Section 3.2 (as applicable), as published in the Wall Street Journal. 3.5 Termination of Employment. In the event that a Participant's employment with the Company terminates for any reason other than as provided in this Section 3, any Award made to the Participant which has not vested as provided in Section 2 or Section 3 shall be forfeited. Any vested Awards shall be paid within a reasonable time after termination (for reasons other than Retirement), notwithstanding any election to defer the payment of any Award under Section 2.6. Section 4. Non-Assignability of Awards The Awards and any right to receive payment under the Plan and this Sub-Plan may not be anticipated, alienated, pledged, encumbered, or subject to any charge or legal process, and if any attempt is made to do so, or a Participant becomes bankrupt, then in the sole discretion of the Committee, any Award made to the Participant which has not vested as provided in Sections 2 and 3 shall be forfeited. Section 5. Amendment and Termination This Sub-Plan shall be subject to amendment, suspension, or termination as provided in the Plan. ATTACHMENT 1 PERFORMANCE SCHEDULE PERFORMANCE SHARE CALCULATION(1) -------------------------------- The following table shall be used to adjust one half of the Participant's Award in accordance with Section 2.5(a) or Section 3.3(a) of the Plan: If the Company TSR(2) minus Then the 50% of the vested the Peer Group TSR(2) is: Performance Share Award shall be multiplied by: 5% or better 2.00 4.0 - 4.99 1.75 3.0 - 3.99 1.50 2.0 - 2.99 1.25 1.0 - 1.99 1.00 (0.99) - 0.99 .50 (1.0) - (1.99) .25 (2.0) or less 0.00 The following table shall be used to adjust one half of the Participant's Award in accordance with Section 2.5(b) or Section 3.3(b) of the Plan: If the Company EBITDA Growth(2) minus Then the 50% of the vested the Peer Group EBITDA Growth(2) is: Performance Share Award shall be multiplied by: 5% or better 2.00 4.0 - 4.99 1.75 3.0 - 3.99 1.50 2.0 - 2.99 1.25 1.0 - 1.99 1.00 0.00 - 0.99 .50 Less than 0 0 (1) The number of Performance Shares as calculated above shall be paid in accordance with the provisions of Section 2.5 and 2.6 of the Sub-Plan. (2) For purposes of Section 3, the Prorated Company TSR and EBITDA Growth and Prorated Peer Group TSR and EBITDA Growth shall be used, and the number of Performance Shares as calculated above shall be paid in accordance with the provisions of Section 3.3 of the Sub-Plan. ATTACHMENT 2 Performance Share Sub-Plan 200_ Deferral Election Form As a Participant in the Performance Share Sub-Plan of the 2002 Equity Incentive Plan ("Sub-Plan"), I hereby elect to defer payment of my Award otherwise payable to me by the Company and attributable to services to be performed by me during the Performance Period beginning on January __, 200__. This election shall apply to [CHECK ONE]: [ ] 100% of the Award [ ] 50% of the Award [ ] 75% of the Award [ ] 25% of the Award Upon vesting, I understand that my Award shall continue to be recorded in my Account as Performance Shares as described in the Sub-Plan and adjusted to reflect the payment and reinvesting of the Company's common stock dividends over the deferral period, until paid in full. I hereby elect to defer receipt (or commencement of receipt) of my Award until the date specified below, or as soon as practical thereafter [CHECK ONE]: [ ] a specific date certain at least 5 years from expiration of the Performance Period: 4 / 1 / * ------------------------- (month/day/year) [ ] the April 1 following the date of retirement [ ] the April 1 following the first anniversary of my date of retirement * Notwithstanding my election above, if I elect a date certain distribution and I retire before that date certain, I understand that the Company will commence distribution of my account no later than the April 1 following the first anniversary of the date of retirement, or as soon as practical thereafter, even though said date is earlier than 5 years from expiration of the Performance Period. I hereby elect to be paid as described in the Sub-Plan in the form of [CHECK ONE]: [ ] a single payment [ ] annual payments commencing on the date set forth above and payable on the anniversary date thereof over: [ ] a two year period [ ] a three year period [ ] a four year period [ ] a five year period I understand that I will receive "earnings" on those deferred amounts when they are paid to me. I understand that the election made as indicated herein is irrevocable and that all deferral elections are subject to the provisions of the Sub-Plan, including provisions that may affect timing of distributions. I understand and acknowledge that my interests herein and my rights to receive distribution of the deferred amounts may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, or subjected to any charge or legal process, and if any attempt is made to do so, or I become bankrupt, my interest may be terminated by the Committee, which, in his sole discretion. I further understand that nothing in the Sub-Plan shall be interpreted or construed to require the Company in any manner to fund any obligation to me, or to my beneficiary(ies) in the event of my death. - ------------------------------------------ --------------------------------- (Signature) (Date) - ------------------------------------------ --------------------------------- (Print Name) (Company Location) Received: Agent of Chief Executive Officer - ------------------------------------------ --------------------------------- (Signature) (Date) -----END PRIVACY-ENHANCED MESSAGE-----