UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
I.R.S.
Exact name of each Registrant as specified in Employer
Commission its charter, state of incorporation, address of Identification
File No. principal executive offices and telephone number 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
d/b/a Progress Energy Florida, Inc.
A Florida Corporation
100 Central Avenue
St. Petersburg, Florida 33701
Telephone (727) 820-5151
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Florida Progress Corporation:
7.10% Cumulative Quarterly Income Preferred New York Stock Exchange
Securities, Series A, of FPC Capital I (and the
Guarantee of Florida Progress with respect thereto)
Florida Power Corporation: None
1
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Florida Progress Corporation: None
Florida Power Corporation: None
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Act).
YES [ ] NO [X]
As of June 30, 2002, the aggregate market value of the voting and non-voting
common equity of each of the registrants held by non-affiliates was $0. All of
the common stock of Florida Progress Corporation is owned by Progress Energy,
Inc., its corporate parent. All of the common stock of Florida Power Corporation
is owned by Florida Progress Corporation.
As of February 28, 2003, each registrant had the following shares of common
stock outstanding:
Registrant Description Shares
---------- ----------- ------
Florida Progress Corporation Common Stock (without par value) 98,616,658
Florida Power Corporation Common Stock (without par value) 100
Florida Progress Corporation and Florida Power Corporation meet the conditions
set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore
filing this Form 10-K with the reduced disclosure format permitted by General
Instruction I(2) to such Form 10-K.
This combined Form 10-K 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. Each registrant makes no representation as to information relating
exclusively to the other registrant.
2
TABLE OF CONTENTS
GLOSSARY
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. CONTROLS AND PROCEDURES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
RISK FACTORS
3
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined FORM
10-K are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
AST Advanced Separation Technologies, Incorporated
Btu British thermal units
CERCLA or Superfund Comprehensive Environmental Response
Compensation & Liability Act
Code Internal Revenue Service Code
CVO Contingent Value Obligation
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company Florida Progress Corporation
CP&L Carolina Power & Light Company
CP&L Energy CP&L Energy, Inc.
CR3 Florida Power's nuclear generating plant,
Crystal River Unit No. 3
DOE United States Department of Energy
EITF Emerging Issues Task Force
EITF Issue 02-03 EITF Issue 02-03, "Accounting for Contracts
Involved in Energy Trading and Risk Management
Activities"
EPA United States Environmental Protection Agency
ERISA Employee Retirement Income Security Act of 1974
FASB Financial Accounting Standards Board
FDEP Florida Department of Environmental Protection
FERC Federal Energy Regulatory Commission
FIN No. 45 FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others - an Interpretation of
FASB Statements No. 5, 57 and 107 and Rescission
of FASB Interpretation No. 34"
FIN No. 46 FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation
of ARB No. 51"
Financial Statements Florida Progress' Financial Statements and
Florida Power's Financial Statements, for the
year ended December 31, 2002 contained under
ITEM 8 herein
Florida Power or the Utility Florida Power Corporation
Florida Progress or FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Funding Corp. Florida Progress Funding Corporation
Georgia Power Georgia Power Company
IRS Internal Revenue Service
ISO Independent System Operator
kV Kilovolt
kVA Kilovolt-ampere
LTIP Long-Term Incentive Plan
MGP Manufactured Gas Plant
MW Megawatts
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
NRC United States Nuclear Regulatory Commission
PLR Private Letter Ruling
Preferred Securities FPC-obligated mandatorily redeemable preferred
securities of FPC Capital I
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 Electric
Fuels Corporation
4
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
PVI Progress Ventures, Inc., formerly referred to as
Energy Ventures, a business segment of Progress
Energy
PUHCA Public Utility Holding Company Act of 1935, as
amended
PURPA Public Utility Regulatory Policies Act of 1978
PWR Pressurized Water Reactors
QFs Qualifying facilities
RTO Regional Transmission Organization
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
SFAS No. 4 Statement of Financial Accounting Standards
No. 4, "Reporting Gains and Losses from
Extinguishment of Debt (an amendment of
Accounting Principles Board (APB) Opinion
No. 30)"
SFAS No. 5 Statement of Financial Accounting Standards
No. 5, "Accounting for Contingencies"
SFAS No. 13 Statement of Financial Accounting Standards
No. 13, "Accounting for Leases"
SFAS No. 71 Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain
Types of Regulation"
SFAS No. 87 Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions"
SFAS No. 106 Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions"
SFAS No. 121 Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets
to be Disposed Of"
SFAS No. 123 Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based
Compensation"
SFAS No. 133 Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative and Hedging
Activities"
SFAS No. 138 Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133"
SFAS No. 142 Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets"
SFAS No. 143 Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement
Obligations"
SFAS No. 144 Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"
SFAS No. 145 Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13
and Technical Corrections"
SFAS No. 148 Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure -
An Amendment of FASB Statement No. 123"
the Trust FPC Capital I
5
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 report 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, examples of forward-looking statements discussed in this report
include, but are not limited to, statements under the following headings: 1)
"Liquidity and Capital Resources" about operating cash flows, estimated capital
requirements through the year 2005 and future financing plans, and 2) "Risk
Factors."
Any forward-looking statement speaks only as of the date on which such statement
is made, and neither Florida Progress nor Florida Power undertakes any
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: the impact of fluid and complex government laws and regulations,
including those relating to the environment; the impact of recent events in the
energy markets that have increased the level of public and regulatory scrutiny
in the energy industry and in the capital markets; the impact of Florida Power's
rate case settlement; 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 and purchased power; successful maintenance and operation of Florida
Power's energy commodities and purchased power; economic fluctuations and the
corresponding impact on the Florida Power's commercial and industrial customers;
the inherent risks associated with the operation of nuclear facilities,
including environmental, health, regulatory and financial risks; the impact of
any terrorist acts generally and on our generating facilities and other
properties; the ability to successfully access capital markets on favorable
terms; the impact that increases in leverage may have on the Company and 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; 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 Telecommunications Corporation (Progress Telecom); the Company's
ability to successfully integrate newly acquired assets or properties into its
operations as quickly or as profitably as expected; and unanticipated changes in
operating expenses and capital expenditures. Many of these risks similarly
impact the Company's subsidiaries.
These and other risk factors are detailed from time to time in Florida Progress'
and Florida Power's SEC reports. All such factors are difficult to predict,
contain uncertainties that may materially affect actual results and may be
beyond the control of Florida Progress and Florida Power. Many, but not all of
the factors that may impact actual results are discussed under the heading "Risk
Factors". You should carefully read the "Risk Factors" section of this report.
New factors emerge from time to time, and it is not possible for management to
predict all such factors, nor can it assess the effect of each such factor on
Florida Progress and Florida Power.
6
PART I
ITEM 1. BUSINESS
GENERAL
COMPANY
Florida Progress Corporation (Florida Progress or the Company, which term
includes consolidated subsidiaries unless otherwise indicated) is a wholly owned
subsidiary of Progress Energy, Inc. (Progress Energy), a registered holding
company under the Public Utility Holding Company Act (PUHCA) of 1935. Progress
Energy and its subsidiaries, including Florida Progress, are subject to the
regulatory provisions of PUHCA. Florida Progress is the parent company of
Florida Power Corporation (Florida Power or the Utility) and certain other
subsidiaries. Progress Energy controls Florida Power Corporation and the other
Florida Progress subsidiaries through its ownership of Florida Progress.
On November 30, 2000, the acquisition of Florida Progress by CP&L Energy, Inc.
(CP&L Energy) became effective. On December 4, 2000, CP&L Energy was renamed
Progress Energy. Effective January 1, 2003, Florida Power began doing business
under the name Progress Energy Florida, Inc. The legal name of the entity has
not been changed and there is no restructuring of any kind related to the name
change. The current corporate and business unit structure remains unchanged.
Florida Progress' revenues for the year ended December 31, 2002, were $4.4
billion, and assets at year-end were $6.6 billion. Its principal executive
offices are located at 410 South Wilmington Street, Raleigh, North Carolina
27601-1748, telephone number (919) 546-6111. Information about Florida Progress
and its subsidiaries can be found at Progress Energy's home page on the Internet
at http://www.progress-energy.com, the contents of which are not and shall not
be deemed to be a part of this document or any other SEC filing. The Company
makes available free of charge on its website its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments
to these reports as soon as reasonably practicable after such material is
electronically filed or furnished to the Securities and Exchange Commission
(SEC). Florida Progress was incorporated in Florida on January 21, 1982.
Florida Progress' principal business segment is Florida Power, which encompasses
all regulated public utility operations (See ITEM 1 "Business - Utility
Operations - Florida Power") and accounts for approximately 70% and 84% of
Florida Progress' revenues and assets, respectively, at year end in 2002.
Florida Progress' other business segments, including Energy and Related
Services, Rail Services, and Other, represent its diversified operations (See
ITEM 1 "Business - Diversified Operations").
Progress Capital Holdings, Inc. (Progress Capital) is the downstream holding
company for Florida Progress' diversified subsidiaries and provides a portion of
the financing for the non-utility operations. Diversified operations includes
Progress Fuels Corporation (Progress Fuels), formerly Electric Fuels Corporation
(Electric Fuels), and Progress Telecom. On January 2, 2002, Electric Fuels
changed its name to Progress Fuels. Progress Fuels is a diversified non-utility
energy company, whose principal business segments are Energy and Related
Services and Rail Services. Florida Progress' Other category consists primarily
of Progress Telecom, the Company's Investment in FPC Capital Trust, and the
holding company, Florida Progress. Progress Telecom is a provider of wholesale
telecommunications services.
After the acquisition of Florida Progress, Progress Energy hired a financial
adviser to assist Florida Progress in evaluating its strategic alternatives with
respect to Progress Fuels' Inland Marine Transportation and Rail Services
segments. On November 1, 2001, the Inland Marine Transportation segment was sold
to AEP Resources, Inc. During 2001, Progress Energy decided to retain the Rail
Services segment in the near term. In December 2002, the Progress Energy Board
of Directors adopted a resolution approving the sale of Railcar Ltd., a
subsidiary included in the Rail Services segment. On March 12, 2003, Progress
Energy announced that Railcar Ltd. signed a letter of intent to sell
predominately all of its railroad leasing assets to The Andersons, Inc. The
proceeds of the sale will be used to pay off Railcar Ltd. lease obligations. The
transaction is still subject to various closing conditions including financing,
due diligence and the completion of a definitive purchase agreement.
7
ACQUISITIONS
On November 30, 2000, CP&L Energy, which subsequently changed its name to
Progress Energy, acquired all of the outstanding shares of Florida Progress'
common stock in accordance with the Amended and Restated Plan of Exchange,
including the related Plan of Share Exchange, dated as of August 22, 1999, as
amended and restated as of March 3, 2000, among CP&L Energy, Florida Progress
and Carolina Power & Light Company (CP&L). Florida Progress Shareholders
received $54.00 in cash or shares of Progress Energy common stock, subject to
proration, and one contingent value obligation (CVO) in exchange for each of
their shares of Florida Progress common stock. The exchange ratio for the shares
of Progress Energy common stock issued to Florida Progress shareholders was
1.3473. Each CVO represents the right to receive contingent payments based upon
the net after-tax cash flow to Progress Energy generated by four synthetic fuel
facilities purchased by subsidiaries of Florida Progress in 1999.
Westchester Gas Company Acquisition
On April 26, 2002, Progress Fuels, a wholly owned subsidiary of Progress Energy,
completed the acquisition of Westchester Gas Company, which included
approximately 215 natural gas producing 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
$2 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 of gas reserves to Progress Fuels'
growing energy portfolio.
Acquisition of Natural Gas Wells
During the first quarter of 2003, Progress Fuels entered into three independent
transactions to acquire approximately 162 natural gas producing wells with
proven reserves of 195 billion cubic feet (Bcf) from Republic Energy, Inc. and
two other privately-owned companies, all headquartered in Texas. The gross total
purchase price for the transactions was approximately $133 million.
DIVESTITURES
Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a resolution to
sell the assets of Railcar Ltd., a leasing subsidiary included in the Rail
Services segment. An estimated impairment on assets held for sale of $58.8
million has been recognized for the write-down of the assets to be sold to fair
value less the costs to sell.
On March 12, 2003, the Company signed a letter of intent to sell Railcar Ltd. to
The Andersons, Inc. The proceeds of the sale will be used by the Company to pay
off Railcar Ltd. lease obligations. The transaction is still subject to various
closing conditions including financing, due diligence and the completion of a
definitive purchase agreement.
Sale of MEMCO Barge Line, Inc.
On July 23, 2001, Progress Energy announced the disposition of the Inland Marine
Transportation segment of FPC, which was operated by MEMCO Barge Line, Inc.
Inland Marine provided transportation of coal, agricultural and other dry-bulk
commodities as well as fleet management services. On November 1, 2001, Progress
Energy completed the sale of the Inland Marine Transportation segment to AEP
Resources, Inc., a wholly owned subsidiary of American Electric Power.
ENVIRONMENTAL
General
In the areas of air quality, water quality, control of toxic substances and
hazardous and solid wastes and other environmental matters, the Company is
subject to regulation by various federal, state and local authorities. The
Company considers itself to be in substantial compliance with those
environmental regulations currently applicable to its business and operations
and believes it has all necessary permits to conduct such operations.
8
Environmental laws and regulations constantly evolve and the ultimate costs of
compliance cannot always be accurately estimated. For further information with
respect to environmental matters, see Note 22E to the Financial Statements.
Clean Air Legislation
The 1990 amendments to the Clean Air Act require substantial reductions in
sulfur dioxide and nitrogen oxide emissions from fossil-fueled electric
generating plants. The Clean Air Act required Florida Power to meet more
stringent provisions effective January 1, 2000. The Company meets the sulfur
dioxide emissions requirements by fuel switching and maintaining sufficient
sulfur dioxide emission allowances. Installation of additional equipment was
necessary to reduce nitrogen oxide emissions. Increased operation and
maintenance costs, including emission allowance expense, installation of
additional equipment and increased fuel costs are not expected to be material to
the financial position or results of operations of the Company.
The U.S. Environmental Protection Agency (EPA) is conducting an enforcement
initiative related to a number of coal-fired utility power plants in an effort
to determine whether modifications at those facilities were subject to New
Source Review requirements or New Source Performance Standards under the Clean
Air Act. Florida Power was asked to provide information to the EPA as part of
this initiative and cooperated in providing the requested information. The EPA
initiated enforcement actions against other unaffiliated utilities as part of
this initiative, some of which have resulted in or may result in settlement
agreements calling for expenditures, ranging from $1.0 billion to $1.4 billion.
A utility that was not subject to a civil enforcement action settled its New
Source review issues with the EPA for $300 million. These settlement agreements
have generally called for expenditures to be made over extended time periods,
and some of the companies may seek recovery of the related costs through rate
adjustments. The Company cannot predict the outcome of this matter.
Superfund
The provisions of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA), authorize the EPA to require the
clean up of hazardous waste sites. This statute imposes retroactive joint and
several liability. Some states have similar types of legislation. There are
presently several sites with respect to which the Company has been notified by
the EPA, the State of Florida or other state agencies with respect to potential
liability, as described below in greater detail.
Various organic materials associated with the production of manufactured gas,
generally referred to as coal tar, are regulated under various 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 manufactured gas plant (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 EPA and the Florida Department of Environmental
Protection (FDEP). Although Florida Power may incur costs at these sites about
which it has been notified, based upon current status of these sites, Florida
Power does not expect those costs to be material to the financial position or
results of operations of Florida Power. The Company has accrued amounts to
address known costs at certain of these sites.
The Company is periodically notified by regulators such as the EPA and various
state agencies of their involvement or potential involvement in sites, other
than MGP sites, that may require investigation and/or remediation. Although the
Company may incur costs at the sites about which they have been notified, based
upon the current status of these sites, the Company does not expect those costs
to be material to the financial position or results of operations of the
Company.
Other Environmental Matters
On November 1, 2001, the Company completed the sale of the Inland Marine
Transportation segment to AEP Resources, Inc. In connection with the sale, the
Company entered into environmental indemnification provisions covering both
unknown and known sites. The Company has recorded an accrual to cover estimated
probable future environmental expenditures. The Company believes that it is
reasonably possible that additional costs, which cannot be currently estimated,
may be incurred related to the environmental indemnification provision beyond
the amounts accrued. The Company cannot predict the outcome of this matter.
9
Florida Power has filed claims with the Company's general liability insurance
carriers to recover costs arising out of actual or potential environmental
liabilities. Some claims have settled and others are still pending. While
management cannot predict the outcome of these matters, the outcome is not
expected to have a material effect on the financial position or results of
operations.
EMPLOYEES
As of February 28, 2003, Florida Progress and its subsidiaries had approximately
7,800 regular full-time employees. As of February 28, 2003, Florida Power had
approximately 4,000 regular full-time employees. The International Brotherhood
of Electrical Workers (IBEW) represents approximately 2,100 of these full-time
employees. Florida Power and the IBEW reached agreement in early December on a
new, three-year labor contract. The previous contract expired December 1, 2002.
UTILITY OPERATIONS - FLORIDA POWER
GENERAL
Florida Power was incorporated in Florida in 1899, and is an operating public
utility engaged in the generation, purchase, transmission, distribution and sale
of electricity. At December 31, 2002, Florida Power had a total summer
generating capacity (including jointly-owned capacity) of approximately 8,024
megawatts (MW).
Florida Power provided electric service during 2002 to an average of 1.5 million
customers in west central Florida. Its service area covers approximately 20,000
square miles and includes the densely populated areas around Orlando, as well as
the cities of St. Petersburg and Clearwater. Florida Power is interconnected
with 20 municipal and 9 rural electric cooperative systems. Major wholesale
power sales customers include Seminole Electric Cooperative, Inc., Florida
Municipal Power Agency, Florida Power & Light, and Tampa Electric Company.
Florida Power is subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC) and the Florida Public Service Commission (FPSC).
BILLED ELECTRIC REVENUES
Florida Power's electric revenues billed by customer class, for the last three
years, are shown as a percentage of total electric revenues in the table below:
BILLED ELECTRIC REVENUES
Revenue Class 2002 2001 2000
------------- ---- ---- ----
Residential 55% 54% 53%
Commercial 24% 24% 24%
Industrial 7% 7% 8%
Others 6% 6% 5%
Wholesale (a) 8% 9% 10%
(a) These revenues are managed by Progress Ventures on behalf of Florida
Power.
Important industries in the territory include phosphate rock mining and
processing, electronics design and manufacturing, and citrus and other food
processing. Other important commercial activities are tourism, health care,
construction and agriculture.
10
FUEL AND PURCHASED POWER
General
Florida Power's consumption of various types of fuel depends on several factors,
the most important of which are the demand for electricity by Florida Power's
customers, the availability of various generating units, the availability and
cost of fuel and the requirements of federal and state regulatory agencies.
Florida Power's energy mix for the last three years is presented in the
following table:
ENERGY MIX PERCENTAGES
Fuel Type 2002 2001 2000
--------- ---- ---- ----
Coal (a) 33% 33% 34%
Oil 16% 16% 15%
Nuclear 15% 15% 15%
Gas 15% 14% 14%
Purchased Power 21% 22% 22%
(a) Includes synthetic fuel from unrelated third parties and petroleum
coke.
Florida Power is generally permitted to pass the cost of recoverable fuel and
purchased power to its customers through fuel adjustment clauses. The future
prices for and availability of various fuels discussed in this report cannot be
predicted with complete certainty. However, Florida Power believes that its fuel
supply contracts, as described below, will be adequate to meet its fuel supply
needs.
Florida Power's average fuel costs per million British thermal units (Btu) for
the last three years were as follows:
AVERAGE FUEL COST
(per million Btu)
2002 2001 2000
---- ---- ----
Coal (a) $2.43 $2.16 $1.89
Oil 3.77 3.81 4.15
Nuclear .46 .47 .47
Gas 4.06 4.52 4.32
Weighted Average 2.60 2.59 2.46
(a) Includes synthetic fuel from unrelated third parties and petroleum
coke.
Changes in the unit price for coal, oil and gas are due to market conditions.
Since these costs are primarily recovered through recovery clauses established
by regulators, the fluctuation does not materially affect net income.
Coal
Florida Power anticipates a combined requirement of approximately 5.7 million to
6.1 million tons of coal and synthetic fuel in 2003. Most of the coal is
expected to be supplied from the Appalachian coal fields of the United States.
Approximately two-thirds of the fuel is expected to be delivered by rail and the
remainder by barge. All of this fuel is supplied by Progress Fuels pursuant to
contracts between Florida Power and Progress Fuels.
For 2003, Progress Fuels has medium-term and long-term contracts with various
sources for approximately 100% of the fuel requirements of Florida Power's coal
units. These contracts have price adjustment provisions. All the coal to be
purchased for FPC is considered to be low sulfur coal by industry standards.
Oil and Gas
Oil is purchased under contracts and in the spot market from several suppliers.
The majority of the cost of Florida Power's oil and gas is determined by market
prices as reported in certain industry publications. Management believes that
11
Florida Power has access to an adequate supply of oil for the reasonably
foreseeable future. Florida Power believes that the threat of or a war against
Iraq could negatively impact the price of oil. Florida Power's natural gas
supply is purchased under firm supply and transportation contracts and in the
spot market from numerous suppliers. Florida Power also uses interruptible
transportation contracts on certain occasions when available. Florida Power
believes that existing contracts for oil are sufficient to cover its
requirements if natural gas is unavailable during certain time periods.
Nuclear
Nuclear fuel is processed through four distinct stages. Stages I and II involve
the mining and milling of the natural uranium ore to produce a concentrate and
the conversion of this uranium concentrate into uranium hexafluoride. Stages III
and IV entail the enrichment of the uranium hexafluoride and the fabrication of
the enriched uranium hexafluoride into usable fuel assemblies.
Florida Power has sufficient uranium, conversion, enrichment and fabrication
contracts to meet its near term nuclear fuel requirement needs. Florida Power
expects to contract for all of its future long-term uranium, conversion and
enrichment service needs with contract durations ranging from five to ten years.
Although Florida Power cannot predict the future availability of uranium and
nuclear fuel services, Florida Power does not currently expect to have
difficulty obtaining uranium oxide concentrate or the services necessary for its
conversion, enrichment and fabrication into nuclear fuel.
Purchased Power
Florida Power, along with other Florida utilities, buys and sells power in the
wholesale market on a short- and long-term basis. As of December 31, 2002,
Florida Power had a variety of purchase power agreements for the purchase of
approximately 1,304 MW of firm power. These agreements include (1) long-term
contracts for the purchase of about 473 MW of purchased power with other
investor-owned utilities, including a contract with The Southern Company for
approximately 413 MW, and (2) approximately 831 MW of capacity under contract
with certain qualifying facilities (QFs). The capacity currently available from
QFs represents about 10% of Florida Power's total installed system capacity.
COMPETITION
Electric Industry Restructuring
Florida Power continues to monitor progress toward a more competitive
environment and has actively participated in regulatory reform deliberations in
Florida. Movement toward deregulation in this state has been affected by recent
developments related to deregulation of the electric industry in California and
other states.
On December 11, 2001, the Florida 2020 Study Commission issued its final report
to the Florida Legislature regarding possible changes to the regulation of
electric utilities in Florida. The Florida legislature did not take any action
on the final report during the 2001 or 2002 session.
In response to a legislative directive, the FPSC and the FDEP submitted in
February 2003 a joint report on renewable electric generating technologies for
Florida. The report assessed the feasibility and potential magnitude of
renewable electric capacity for Florida, and summarized the mechanisms other
states have adopted to encourage renewable energy. The report did not contain
any policy recommendations. The Company cannot anticipate when, or if,
restructuring legislation will be enacted, or if the Company would be able to
support it in its final form.
Regional Transmission Organizations
As a result of Order 2000, Florida Power, along with Florida Power & Light
Company and Tampa Electric Company (the Applicants) filed with the FERC in
October 2000 an application for approval of a GridFlorida RTO. The GridFlorida
proposal is pending before both the FERC and the FPSC. The FERC provisionally
approved the structure and governance of GridFlorida. In December 2001, the FPSC
found the Applicants were prudent in proactively forming GridFlorida but ordered
the Applicants to modify the proposal in several material respects, including a
change in structure to a not-for-profit Independent Systems Operator (ISO). The
Commission's most recent order in September 2002 ordered further state
proceedings. The issues to be addressed as modifications include but are not
limited to 1) pricing/rate structure; 2) elimination of the pancaking of
revenues; 3) cost recovery of incremental costs; 4) demarcation dates for new
12
facilities and long-term transmission contracts; and 6) market design. The
Florida Office of Public Counsel appealed the September 2002 order to the
Florida Supreme Court and on October 28, 2002, the FPSC abated its proceedings
pending the outcome of the appeal. It is unknown what the outcome of this appeal
will be at this time. It is unknown when the FERC or the FPSC will take final
action with regard to the status of GridFlorida or what the impact of further
proceedings will have on the Company's earnings, revenues or pricing.
Standard Market Design
On July 31, 2002, the 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. Florida Power filed comments on November 15, 2002 and supplemental comments
on January 10, 2003. On January 15, 2003, the FERC announced the issuance of a
White Paper on SMD NOPR to be released in April 2003. Florida Power plans to
file comments on the White Paper. The FERC has also indicated that it expects to
issue final rules during the summer of 2003.
Merchant Plants
There has been no change in the statutory framework for siting new generation
since the Florida Supreme Court's decision in Tampa Electric Company v. Garcia,
767 So.2d 428 (Fla. 2000) in April 2000. The Court reversed a decision of the
Florida Public Service Commission and held that under Florida's Power Plant
Siting Act, an applicant for any new generation over 75 MW that includes a steam
generating facility must be a load-serving utility or the output of the proposed
plant must be under firm contract to a load-serving utility. Thus, site
certification for merchant generation for large, non-peaking capacity cannot be
independently undertaken. At the present time there are no pending legislative
proposals for change.
Franchise Agreements
Florida Power holds franchises with varying expiration dates in 104 of the
municipalities in which it distributes electric energy. Florida Power also
serves within a number of municipalities and in all its unincorporated areas
without existing franchise agreements. The general effect of these franchises is
to provide for the manner in which Florida Power occupies rights-of-way in
incorporated areas of municipalities for the purpose of constructing, operating
and maintaining an energy transmission and distribution system.
Approximately 36% of Florida Power's total utility revenues for 2002 were from
the incorporated areas of the 104 municipalities that had franchise ordinances
during the year. Since 2000, Florida Power has renewed 27 expiring franchises
and reached agreement on a franchise with a city that did not previously have a
franchise. Franchises with eight municipalities have expired without renewal.
All but 26 of the existing franchises cover a 30-year period from the date
enacted. The exceptions are 22 franchises each with a term of 10 years and
expiring between 2005 and 2012; two franchises each with a term of 15 years and
expiring in 2017; one 30-year franchise that was extended in 2000 for five years
expiring in 2005; and one franchise with a term of 20 years expiring in 2020. Of
the 104 franchises, 39 expire between January 1, 2003 and December 31, 2012 and
65 expire between January 1, 2013 and December 31, 2031.
Ongoing negotiations are taking place with the municipalities to reach agreement
on franchise terms and to enact new franchise ordinances. For further
information with respect to franchise litigation, see Note 22 to the Financial
Statements.
13
Stranded Costs
An important issue encompassed by industry restructuring is the recovery of
"stranded costs." Stranded costs primarily include the generation assets of
utilities whose value in a competitive marketplace would be less than their
current book value, as well as above-market purchased power commitments to QFs.
Thus far, all states that have passed restructuring legislation have provided
for the opportunity to recover a substantial portion of stranded costs.
Assessing the amount of stranded costs for a utility requires various
assumptions about future market conditions, including the future price of
electricity. For Florida Power, the single largest stranded cost exposure is its
commitment to QFs. Florida Power has taken a proactive approach to this industry
issue. Since 1996, Florida Power has been seeking ways to address the impact of
escalating payments from contracts it was obligated to sign under provisions of
Public Utility Regulatory Policies Act of 1978 (PURPA).
REGULATORY MATTERS
General
Florida Power is subject to the jurisdiction of the FPSC with respect to, among
other things, retail rates and issuance of securities. In addition, Florida
Power is subject to regulation by the FERC with respect to transmission and
sales of wholesale power, accounting and certain other matters. The underlying
concept of utility ratemaking is to set rates at a level that allows the utility
to collect revenues equal to its cost of providing service including a
reasonable rate of return on its equity. Increased competition as a result of
industry restructuring may affect the ratemaking process.
Electric Retail Rates
The FPSC authorizes retail "base rates" that are designed to provide a utility
with the opportunity to earn a specific rate of return on its "rate base," or
average investment in utility plant. These rates are intended to cover all
reasonable and prudent expenses of utility operations and to provide investors
with a fair rate of return.
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. The Agreement
eliminates the authorized Return on Equity (ROE) range normally used by the FPSC
for the purpose of addressing earning levels; 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 rates by 9.25%;
resulting in a reduction of 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 caps will be divided into two shares - a 1/3
share to be retained 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 amount for 2002
was $1.296 billion 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 100% 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 cap for 2002 was $1.356 billion and will increase $37 million each year
thereafter. As of December 31, 2002, $4.7 million was accrued and will be
refunded to customers in March 2003. On February 24, 2003, the parties to the
Agreement filed a motion seeking an order from the FPSC to enforce the
Agreement. In this motion, the parties dispute Florida Power's calculation of
retail revenue subject to refund and contend that the refund should be
approximately $23 million. Florida Power cannot predict the outcome of this
matter.
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
14
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 year
ended December 31, 2002.
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.
Per the Agreement, Florida Power was required to refund to customers $35 million
of revenues collected during the interim period of March 13, 2001 through April
30, 2002. This one-time retroactive revenue refund was recorded in the first
quarter of 2002 and was returned to retail customer over an eight-month period
ended December 31, 2002.
Fuel and Other Cost Recovery
Florida Power's operating costs not covered by the utility's base rates include
fuel, purchased power and energy conservation expenses and specific
environmental costs. The state commission allows electric utilities to recover
certain of these costs through various cost recovery clauses, to the extent the
respective commission determines in an annual hearing that such costs are
prudent. In addition, in December 2002, the FPSC approved an Environmental Cost
Recovery Clause which will permit the Company to recover the costs of specified
environmental projects to the extent these expenses are found to be prudent in
an annual hearing and not otherwise included in base rates. Costs will be
recovered through this recovery clause in the same manner as the other existing
clause mechanisms.
The state commission's determination results in the addition of a rider to a
utility's base rates to reflect the approval of these costs and to reflect any
past over- or under-recovery. Due to the regulatory treatment of these costs and
the method allowed for recovery, changes from year to year have no material
impact on operating results.
NUCLEAR MATTERS
Florida Power has one nuclear generating plant, Crystal River Unit No. 3 (CR3),
which is subject to regulation by the NRC. The NRC's jurisdiction encompasses
broad supervisory and regulatory powers over the construction and operation of
nuclear reactors, including matters of health and safety, antitrust
considerations and environmental impact. Florida Power has a license to operate
the nuclear plant through December 3, 2016. Florida Power currently has a 91.8%
ownership interest in CR3. On February 20, 2003, Florida Power notified the NRC
of its intent to submit an application to extend the plant license in the first
quarter of 2009.
In late 2002, CR3 received a license amendment authorizing a small power level
increase. The power level increase of approximately 8 MW was implemented in
February 2003.
On March 18, 2002, the 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 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 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.
15
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.
In February 2003, the NRC issued Order EA-03-009, requiring specific inspections
of the reactor pressure vessel head and associated penetration nozzles at PWRs.
The Company has responded to the Order, stating that the Company intends to
comply with the provisions of the Order. No adverse impact is anticipated.
Security
On February 25, 2002, the NRC issued an order requiring interim compensatory
measures with regard to security at nuclear plants. This order formalized many
of the security enhancements made at the Company's nuclear plants since
September 2001. This order includes additional restrictions on access, increased
security presence and closer coordination with the Company's partners in
intelligence, military, law enforcement and emergency response at the federal,
state and local levels. The Company completed the requirements by the
established deadlines. NRC inspections for compliance are underway.
In addition, in January 2003, the NRC issued a final order with regard to access
control. This order requires the Company to enhance its current access control
program by January 7, 2004. The Company expects that it will be in full
compliance with the order by the established deadline.
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.
Enrichment Facilities Decontamination
Florida Power filed an action against the United States in the U.S. Court of
Claims on November 1, 1996 challenging certain retroactive assessments imposed
by the federal government on domestic nuclear power companies to fund the
decommissioning and decontamination of the government's uranium enrichment
facilities. The government is collecting this assessment on an annual basis,
which is levied upon all domestic utilities that had enrichment services
contracts with the government. Collection of the special assessments began in
1992 and is scheduled to continue for a 15-year period. A number of other
utilities have filed similar actions against the government.
The Claims Court issued a decision granting the government's summary judgment
motion. That decision was appealed to the U.S. Court of Appeals for the Federal
Circuit, which stayed its consideration of the case pending a decision by the
U.S. Supreme Court on a petition for writ of certiorari that was filed by
Commonwealth Edison et al. in their case against the government. This Supreme
Court refused to accept that case for review, effectively resolving the case in
favor of the government. Based on a joint motion, Florida Power's appeal has
been dismissed with prejudice.
ENVIRONMENTAL MATTERS
There are two former MGP sites and 11 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 December 31, 2002 and
2001, Florida Power has accrued approximately $10.9 million and $8.5 million,
respectively, for probable and reasonably estimable costs at these sites.
Florida Power does not believe that it can provide an estimate of the reasonably
possible total remediation costs beyond what it has currently accrued. In 2002,
Florida Power filed a petition for recovery of approximately $4.0 million in
environmental costs through the Environmental Cost Recovery Clause with the
FPSC. Florida Power was successful with this filing and will recover costs
through rates for investigation and remediation associated with transmission and
distribution substations and transformers. 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 investigating and remediating environmentally impaired sites. This process
often includes assessing and developing cost-sharing arrangements with other
potentially responsible parties.
16
DIVERSIFIED OPERATIONS
GENERAL
Florida Progress' diversified operations are owned directly or indirectly
through Progress Capital, a Florida corporation and wholly owned subsidiary of
Florida Progress. Progress Capital holds the capital stock of, and provides the
financing for, Florida Progress' non-utility subsidiaries. Its primary
subsidiary is Progress Fuels, formerly Electric Fuels. On January 2, 2002,
Electric Fuels changed its name to Progress Fuels.
Formed in 1976, Progress Fuels is an energy and transportation company. When the
Inland Marine Transportation unit was sold in November 2001, Progress Fuels was
reorganized into two business units, Energy and Related Services and Rail
Services. Progress Fuels' energy and related services business unit supplies
coal to Florida Power's Crystal River Energy Complex and other utility and
industrial customers. This business unit also produces and sells natural gas and
synthetic fuel along with operating terminal services and offshore marine
transportation. Progress Fuels also manages all of Progress Energy's synthetic
fuel facilities (See Note 16 to the Financial Statements).
The rail services business unit, led by Progress Rail Services Corporation
(Progress Rail), is one of the largest integrated and diversified suppliers of
railroad and transit system products and services in North America and is
headquartered in Albertville, Alabama. Rail Services' principal business
functions include the Mechanical Group, Rail and Trackwork Group, and Recycling
Group.
The Company intends to sell the assets of Railcar Ltd., a leasing subsidiary,
during 2003 and has therefore reported these assets as assets held for sale. On
March 12, 2003, the Company signed a letter of intent to sell Railcar Ltd. to
The Andersons, Inc. The proceeds of the sale will be used by the Company to pay
off Railcar Ltd. lease obligations. The transaction is still subject to various
closing conditions including financing, due diligence and the completion of a
definitive purchase agreement. With operations in 26 states, Canada and Mexico,
Progress Rail offers a full range of railcar parts, maintenance-of-way
equipment, rail and other track material, railcar repair facilities, railcar
scrapping and metal recycling as well as railcar sales and leasing.
The Mechanical Group is primarily focused on railroad rolling stock that
includes freight cars, transit cars and locomotives, the repair and maintenance
of these units, and the manufacturing or reconditioning of major components for
these units. The Rail and Trackwork Group focuses on rail and other track
components, the infrastructure which supports the operation of rolling stock, as
well as the equipment used in maintaining the railroad infrastructure and
right-of-way. The Recycling Group supports the Mechanical and Rail and Trackwork
Groups through its reclamation of reconditionable material. In addition, the
Recycling Group is a major supplier of recyclable scrap metal to North American
steel mills and foundries through its processing locations as well as its scrap
brokerage operations.
Rail Services' key railroad industry customers are Class 1 railroads, regional
and shortline railroads, major North American transit systems, major railcar and
locomotive builders, and major railcar lessors. The U.S. operations are located
in 26 states and include further geographic coverage through mobile crews on a
selected basis. This coverage allows for Rail Services' customer base to be
dispersed throughout the U.S., Canada and Mexico.
After the acquisition of Florida Progress, Progress Energy hired a financial
adviser to assist Florida Progress in evaluating its strategic alternatives with
respect to Progress Fuels' Inland Marine Transportation and Rail Services
segments. 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 provided 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 (See Note
4 to the Financial Statements). During 2001, Progress Energy decided to retain
the Rail Services segment in the near term. An SEC order approving the merger of
Florida Progress with Progress Energy requires Progress Energy to divest of Rail
Services and certain immaterial, non-regulated investments of Florida Progress
by November 30, 2003. Progress Energy is pursuing alternatives, but does not
expect to find the right divestiture opportunity by that date. Therefore,
Progress Energy plans to seek an extension from the SEC.
17
In October 1998, Florida Progress formed a new subsidiary, Progress Telecom.
Progress Telecom has data fiber network transport capabilities that stretch from
New York to Miami, Florida, with gateways to Latin America and conducts
primarily a carrier's carrier business. Progress Telecom markets wholesale
fiber-optic-based capacity service in the Eastern United States to long-distance
carriers, internet service providers and other telecommunications companies.
Progress Telecom also markets wireless structure attachments to wireless
communication companies and governmental entities. As a result of the
acquisition by Progress Energy, Progress Telecom now manages the fiber-optic
network of Caronet, Inc. (Caronet), a subsidiary of Progress Energy, stretching
from Atlanta to Washington, D. C. Progress Telecom combined its fiber network
with Caronet's fiber network in 2001. As of December 31, 2002, Progress Telecom
and Caronet owned and managed approximately 8,400 route miles and more than
130,000 fiber miles of fiber-optic cable. For additional information regarding
asset and investment impairments, see Note 7 to the Financial Statements.
Progress Telecom competes with other providers of fiber-optic telecommunications
services, including local exchange carriers and competitive access providers, in
the Eastern United States.
Lease revenue for dedicated transport and data services is generally billed in
advance on a fixed rate basis and recognized over the period the services are
provided. Revenues relating to design and construction of wireless
infrastructure are recognized upon completion of services (i.e., as the revenue
is earned) for each completed phase of design and construction.
COMPETITION
Florida Progress' non-utility subsidiaries compete in their respective
marketplaces in terms of price, quality of service, location and other factors.
Progress Fuels competes in several distinct markets. Its coal and synthetic fuel
operations compete in the eastern United States utility and industrial coal
markets, and its rail operations compete in the railcar repair, parts and
associated services markets primarily in the eastern United States, but also in
the midwest and west. Factors contributing to Progress Fuels' success in these
markets include a competitive cost structure and strategic locations. There are
numerous competitors in each of these markets, although no one competitor is
dominant in any industry. The business of Progress Fuels and its subsidiaries,
taken as a whole, is not subject to significant seasonal fluctuation.
18
ITEM 2. PROPERTIES
GENERAL
Florida Progress believes that its physical properties and those of its
subsidiaries are adequate to carry their businesses as currently conducted.
Florida Progress and its subsidiaries maintain property insurance against loss
or damage by fire or other perils to the extent that such property is usually
insured.
UTILITY OPERATIONS
As of December 31, 2002, Florida Power's 14 generating plants represent a
flexible mix of fossil, nuclear, combustion turbine and combined cycle resources
with a total summer generating capacity (including jointly-owned capacity) of
8,024 MW. At December 31, 2002, Florida Power has the following generating
facilities:
- -----------------------------------------------------------------------------------------------------------------------
Facility Location No. of In-Service Fuel Florida Summer Net
Units Date Ownership Capability (a)
(in %) (in MW)
- -----------------------------------------------------------------------------------------------------------------------
STEAM TURBINES
Anclote Holiday, FL 2 1974-1978 Gas/Oil 100 993
Bartow St. Petersburg, FL 3 1958-1963 Gas/Oil 100 444
Crystal River Crystal River, FL 4 1966-1984 Coal 100 2,302
Suwannee River Live Oak, FL 3 1953-1956 Gas/Oil 100 143
--------- --------------------------------
Total 12 3,882
COMBINED CYCLE
Hines Bartow, FL 1 1999 Gas/Oil 100 482
Tiger Bay Fort Meade, FL 1 1997 Gas 100 207
--------- --------------------------------
Total 2 689
COMBUSTION TURBINES
Avon Park Avon Park, FL 2 1968 Gas/Oil 100 52
Bartow St. Petersburg, FL 4 1958-1972 Gas/Oil 100 187
Bayboro St. Petersburg, FL 4 1973 Oil 100 184
DeBary DeBary, FL 10 1975-1992 Gas/Oil 100 667
Higgins Oldsmar, FL 4 1969-1970 Gas 100 122
Intercession City Intercession City, FL 14 1974-2000 Gas/Oil 100 (c) 1,041 (b)
Rio Pinar Rio Pinar, FL 1 1970 Oil 100 13
Suwannee River Live Oak, FL 3 1980 Gas/Oil 100 164
Turner Enterprise, FL 4 1970-1974 Oil 100 154
University of Florida
Cogeneration Gainesville, FL 1 1994 Gas 100 35
--------- --------------------------------
Total 47 2,619
NUCLEAR
Crystal River Crystal River, FL 1 1977 Uranium 91.78 834 (b)
--------- --------------------------------
Total 1 834
TOTAL 62 8,024
- -----------------------------------------------------------------------------------------------------------------------
(a) Amounts represent Florida Power's net summer peak rating, gross of
co-ownership interest in plant capacity.
(b) Facilities are jointly owned. The capacities shown include joint owners'
share.
(c) Florida Power and Georgia Power Company ("Georgia Power") are co-owners of
a 143 MW advanced combustion turbine located at Florida Power's
Intercession City site (Unit P11). Georgia Power has the exclusive right to
the output of this unit during the months of June through September.
Florida Power has that right for the remainder of the year.
19
As of December 31, 2002, including both the total generating capacity of 8,024
MW and the total firm contracts for purchased power of 1,304 MW, Florida Power
had total capacity resources of approximately 9,328 MW. Hines Unit 2 is a 516 MW
combined-cycle unit currently under construction and scheduled for completion in
late 2003.
Several entities have acquired undivided ownership interests in CR3 in the
aggregate amount of 8.22%. The joint ownership participants are: City of Alachua
- - 0.08%, City of Bushnell - 0.04%, City of Gainesville - 1.41%, Kissimmee
Utility Authority - 0.68%, City of Leesburg - 0.82%, Utilities Commission of the
City of New Smyrna Beach - 0.56%, City of Ocala - 1.33%, Orlando Utilities
Commission - 1.60% and Seminole Electric Cooperative, Inc. - 1.70%. Florida
Power and Georgia Power are co-owners of a 143 MW advance combustion turbine
located at Florida Power's Intercession City site (P11). Georgia Power has the
exclusive right to the output of this unit during the months of June through
September. Florida Power has that right for the remainder of the year.
Otherwise, Florida Power has good and marketable title to its principal plants
and important units, subject to the lien of its mortgage and deed of trust, with
minor exceptions, restrictions and reservations in conveyances, as well as minor
defects of the nature ordinarily found in properties of similar character and
magnitude. Florida Power also owns certain easements over private property on
which transmission and distribution lines are located.
As of December 31, 2002, Florida Power distributed electricity through 370
substations with an installed transformer capacity of approximately 45,000,000
kVA. Of this capacity, about 31,000,000 kVA is located in transmission
substations and 14,000,000 kVA in distribution substations. Florida Power has
the second largest transmission network in Florida. Florida Power has
approximately 5,000 circuit miles of transmission lines, of which 2,600 circuit
miles are operated at 500, 230, or 115 kV and the balance at 69 kV. Florida
Power has approximately 28,000 circuit miles of distribution lines, which
operate at various voltages ranging from 2.4 to 25 kV.
DIVERSIFIED OPERATIONS
Progress Fuels owns and/or operates approximately 5,300 railcars and 100
locomotives that are used for the transportation and shipping of coal, steel,
and other bulk products. Through a joint venture, Progress Fuels has four
oceangoing tug/barge units.
Progress Fuels controls, either directly or through subsidiaries, coal reserves
located in eastern Kentucky and southeastern Virginia of approximately 12
million tons and controls, through mineral leases, additional estimated coal
reserves of approximately 18 million tons. The reserves controlled include
substantial quantities of high quality, low sulfur coal that is appropriate for
use at Florida Power's existing generating units. Progress Fuels' total
production of coal during 2002 was approximately 2.6 million tons.
In connection with its coal operations, Progress Fuel's business units own and
operate an underground mining complex located in southeastern Kentucky and
southwestern Virginia. Other subsidiaries own and operate surface and
underground mines, coal processing and loadout facilities and a river terminal
facility in eastern Kentucky, a railcar-to-barge loading facility in West
Virginia, and two bulk commodity terminals on the Kanawha River near Charleston,
West Virginia. Progress Fuels and its subsidiaries employ both company and
contract miners in their mining activities.
Progress Fuels has oil and gas leases on about 20,000 acres in Garfield and Mesa
counties in Colorado, containing proven natural gas net reserves of 98 billion
cubic feet. This subsidiary currently operates 96 gas wells on the properties.
Progress Fuels also has oil and gas leases on about 35,000 acres concentrated
within a 25-mile radius along the Texas and Louisiana border, containing proven
natural gas reserves of 125 billion cubic feet. This subsidiary currently
operates 234 gas wells on the properties. Progress Fuels' natural gas production
in 2002 was 11.8 billion cubic feet. The Company is exploring opportunities to
divest of its Mesa properties in 2003.
Progress Fuels owns and operates a manufacturing facility at the Florida Power
Energy Complex in Crystal River, Florida. The manufacturing process utilizes the
fly ash generated by the burning of coal as the major raw material in the
production of lightweight aggregate used in construction building blocks.
Progress Rail, a Progress Fuels subsidiary, is one of the largest integrated
processors of railroad materials in the United States, and is a leading supplier
of new and reconditioned freight car parts, rail, rail welding and track work
components, railcar repair facilities, railcar and locomotive leasing,
maintenance-of-way equipment and scrap metal recycling. It has facilities and
offices in 26 states, Mexico and Canada.
20
As a result of the acquisition by Progress Energy, Progress Telecom now manages
the fiber-optic network of Caronet, Inc. (Caronet), a subsidiary of Progress
Energy, stretching from Atlanta to Washington, D.C. Progress Telecom combined
its fiber network with Caronet's fiber network in 2001.
Progress Telecom provides wholesale telecommunications services throughout the
Eastern United States. Progress Telecom incorporates more than 130,000 fiber
miles in its network, including over 160 Points-of-Presence, or physical
locations where a presence for network access exists.
ITEM 3. 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.
Florida Power and Florida Progress have successfully resolved and settled
the multi-party lawsuit served on the companies in 1995. In 1995, Florida
Power and Florida Progress were named defendants in an age discrimination
lawsuit. The number of plaintiffs was 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
sought 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 (ADEA).
Florida Power filed a motion to decertify the class and in August 1999, the
Court granted Florida Power's motion. In October 1999, the judge certified
the question of whether the case should be tried as a class action to the
Eleventh Circuit Court of Appeals for immediate appellate review. In
December 1999, the Court of Appeals agreed to review the judge's order
decertifying the class.
In anticipation of a potential ruling decertifying the case as a class
action, plaintiffs filed a virtually identical lawsuit, which identified
all opt-in plaintiffs as named plaintiffs. On July 5, 2001, the Eleventh
Circuit Court of Appeals ruled that as a matter of law, disparate claims
cannot be brought under the Age Discrimination in Employment Act. 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 one plaintiff,
the details of which are subject to a confidentiality agreement. The amount
of the settlements are not expected to have a material adverse impact on
the Company.
The Company believes this proceeding no longer meets the disclosure
standards for this item, and thus will no longer report on it. (For
additional information, see Note 22F to the Financial Statements -
Commitments and Contingencies - Legal Matters - Age Discrimination Suit.)
2. Calgon Carbon Corporation v. Potomac Capital Investment Corporation,
Potomac Electric Power Company, Progress Capital Holdings, Inc., and
Florida Progress Corporation, United States District Court for the Western
District of Pennsylvania, Civil Action No. 98-0072.
Calgon Carbon Corporation (Calgon) filed a complaint on January 12, 1998,
asserting securities fraud, breach of contract and other claims in
connection with the sale to it by two of the defendants in December 1996 of
their interests in Advanced Separation Technologies, Incorporated (AST), a
corporation engaged in the business of designing and assembling proprietary
21
separation equipment. Prior to closing, Progress Capital, a wholly owned
subsidiary of Florida Progress, owned 80% of the outstanding stock of AST
and Potomac Capital Investment Corporation (an entity unaffiliated with
Progress Capital or Florida Progress) owned 20%. Calgon paid Progress
Capital an aggregate of approximately $57.5 million (producing net proceeds
of approximately $56 million after certain fees and expenses) in respect of
Progress Capital's share of AST's stock. Calgon claims that AST's assets
and revenues were overstated and liabilities and expenses were understated
for 1996. Calgon also alleges undisclosed facts relating to accounting
methodology, poor products, manufacturing and quality control problems and
undisclosed warranty claims. Calgon seeks damages, punitive damages and the
right to rescind the purchase. The defendants have filed a motion for
summary judgement, which is pending. As a result of documents recently
produced by the plaintiff which Florida Progress believes undercut several
of Calgon's claims, discovery has been reopened. Defendants will be allowed
to supplement their motion. (See Note 22 to the Financial Statements -
Commitments and Contingencies - Legal Matters - Advanced Separation
Technologies.)
3. Wallace Bentley, et al. v. City of Tallahassee, Interstate Fibernet, Inc.
and Florida Power Corporation, Circuit Court for Leon County, Florida. Case
No. 98-7107.
In December 1998, Florida Power was served with this class action lawsuit
seeking damages, declaratory and injunctive relief for the alleged improper
use of electric transmission easements. The plaintiffs contend that the
licensing of fiber-optic telecommunications lines to third parties or
telecommunications companies for other than Florida Power's internal use
along the electric transmission line right-of-way exceeds the authority
granted in the easements. In June 1999, plaintiffs amended their complaint
to add Progress Telecom as a defendant and adding counts for unjust
enrichment and constructive trust. In January 2000, the trial court
conditionally certified the class statewide. In mediation held in March
2000, the parties reached a tentative settlement of this claim. In January
2001, the trial court preliminarily approved the amended settlement
agreement, certified the settlement class and approved the class notice. On
November 16, 2001, the trial court issued a final order approving the
settlement. Several objectors to the settlement appealed the order to the
1st District Court of Appeal. On February 12, 2003, the appellate court
issued an opinion upholding the trial court's subject matter jurisdiction
over the case, but reversing the trial court's order approving the
mandatory settlement class for purposes of declaratory and injunctive
relief. The appellate court remanded the case to the trial court for
further proceedings. The Company filed a motion requesting discretionary
review before the Florida Supreme Court, which is pending before the 1st
District Court of Appeal. The objectors and the class plaintiffs also have
filed similar requests for discretionary review as well as requests for
rehearing before the 1st District Court of Appeal, all of which are
pending. The Company cannot predict the outcome of any future proceedings
in this case.
(See Note 22 to the Financial Statements - Commitments and Contingencies -
Legal Matters - Easement Litigation.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by ITEM 4 is omitted pursuant to Instruction I (2)(c)
to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
22
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
FLORIDA PROGRESS
All of Florida Progress' common stock is owned by Progress Energy, and as a
result there is no established public trading market for the stock.
Florida Progress receives dividends from Florida Power. Florida Power's Amended
Articles of Incorporation and its Indenture dated as of January 1, 1944, under
which it issues first mortgage bonds, contain provisions restricting dividends
in certain circumstances. At December 31, 2002, Florida Power's ability to pay
dividends was not limited by these restrictions.
Florida Progress and Progress Capital have entered into a Second Amended and
Restated Guaranty and Support Agreement dated as of August 7, 1996, pursuant to
which Florida Progress has unconditionally guaranteed the payment of Progress
Capital's debt (as defined in the agreement).
Florida Progress did not issue any equity securities during 2002 that were not
registered under the Securities Act.
FLORIDA POWER
All of Florida Power's common stock is owned by Florida Progress, and as a
result there is no established public trading market for the stock. For the past
three years, Florida Power has paid quarterly dividends to Florida Progress
totaling the amounts shown in the Statements of Common Equity in the Financial
Statements. Florida Power's amended articles of incorporation, and its Indenture
dated as of January 1, 1944, as supplemented, under which it issues first
mortgage bonds, contain provisions restricting dividends in certain
circumstances. At December 31, 2002, Florida Power's ability to pay dividends
was not limited by these restrictions.
Florida Power did not issue any equity securities during 2002 that were not
registered under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by ITEM 6 is omitted pursuant to Instruction I(2)(a)
to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements that involve estimates, projections, goals, forecasts, assumptions,
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Please review
"Risk Factors" and "SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion
of the factors that may impact any such forward-looking statements made herein.
OVERVIEW
Florida Progress' income from continuing operations for the years ended December
31, 2002 and 2001 were $230.1 million and $265.4 million respectively. The year
over year comparisons were most significantly impacted by:
o $144.0 million of after-tax impairments and related charges in the
telecommunications operations in 2002;
o $44.7 million of after-tax estimated impairment on assets held for sale
related to Railcar Ltd. in 2002;
o $108.1 million of after-tax long-lived asset impairments related to the
Rail Services operations in 2001;
o improved operations of the Rail Services segment, exclusive of the asset
impairment, and
o improved earnings at Florida Power.
These and other key operating results are discussed by segment, below.
FLORIDA POWER CORPORATION
Florida Power's operating results are primarily influenced by customer demand
for electricity, its ability to control costs and its regulatory return on
equity. Annual demand for electricity is based on the number of customers and
their annual usage, with usage largely driven by weather. Since Florida Power
serves a predominately retail customer base, operating results are primarily
influenced by the level of retail sales and the costs associated with those
sales.
The FPSC oversees the retail sales of the state's investor-owned electric
utilities and authorizes retail base rates. Base rates and the resulting base
revenues are intended to cover all reasonable and prudent expenses of utility
operations and provide investors with a fair rate of return.
Costs not covered by base rates include fuel, purchased power energy
conservation expenses and certain environmental costs. The FPSC allows electric
utilities to recover these costs, referred to as "pass-through" costs, through
various cost recovery clauses to the extent those costs are prudent. Due to the
regulatory treatment of these expenses and the method allows for recovery,
changes from year to year have no material impact on operating results.
Florida Power contributed earnings of $322.6 million and $309.6 million for the
years ended December 31, 2002 and 2001, respectively. Florida Power's earnings
in 2002 were 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), a decrease in retail rates of 9.25% (effective May 1, 2002),
which resulted in an additional $79.5 million decline in revenues, and an
estimated revenue sharing refund of $4.7 million. These revenue declines were
partially offset by $78.2 million of lower depreciation and amortization
pursuant to the rate case and increased service revenue rates. See Note 12 to
the Florida Progress consolidated financial statements for further discussion of
the rate case settlement.
A comparison of the results of operations of Florida Power for 2002 and 2001
follows.
24
Revenues
Florida Power's electric revenues for the years ended December 31, 2002 and 2001
and the percentage change by year and by customer class, as well as the impact
of the rate case settlement on revenue, are as follows:
---------------------------------------------------------------------
(in millions)
---------------------------------------------------------------------
Customer Class 2002 % Change 2001
---------------------------------------------------------------------
Residential $ 1,645 0.1% $ 1,643
Commercial 731 (3.1) 754
Industrial 211 (5.4) 223
Governmental 173 (1.7) 176
Revenue Sharing Refund (5) - -
Retroactive Retail Rate Refund (35) - -
--------- ---------
Total Retail Revenues 2,720 (2.7) 2,796
Wholesale 230 (20.1) 288
Unbilled (3) - (22)
Miscellaneous 115 (23.8) 151
--------- ---------
Total Electric Revenues $ 3,062 (4.7)% $ 3,213
---------------------------------------------------------------------
Florida Power's electric energy sales for the years ended December 31, 2002 and
2001 and the percentage change by year and by customer class are as follows:
-------------------------------------------------------------------------
(in thousands of mWh)
-------------------------------------------------------------------------
Customer Class 2002 % Change 2001
-------------------------------------------------------------------------
Residential 18,754 6.5% 17,604
Commercial 11,420 3.2 11,061
Industrial 3,835 (1.0) 3,872
Governmental 2,850 4.5 2,726
--------- ---------
Total Retail Energy Sales 36,859 4.5 35,263
Wholesale 4,180 (11.4) 4,719
Unbilled 5 - (511)
--------- ---------
Total mWh Sales 41,044 4.0% 39,471
-------------------------------------------------------------------------
Florida Power electric revenues decreased $151.1 million from 2001 to 2002. The
revenue declines were driven by the $119.2 million impact of the rate case,
mentioned previously. Additionally, wholesale revenues declined $58.1 million,
driven primarily by a contract that was not renewed. Year over year comparisons
were also unfavorably impacted by the recognition of $63.0 million of revenue
deferred from 2000 to 2001. Partially offsetting the unfavorable revenue impacts
was growth in the residential (approximately 29,000 additional customers) and
commercial (approximately 4,000 additional customers) customer classes.
Additional offsets included weather conditions, primarily a warmer than normal
summer in 2002, and an increase in other service revenue, resulting primarily
from increased rates allowed under the rate case settlement, along with higher
transmission wheeling revenues.
Residential and commercial sales increased in 2001 and reflect continued growth
in the number of customers served by Florida Power Electric, partially offset by
milder weather and a downturn in the economy. Florida Power Electric added over
35,000 new customers in 2001.
Expenses
Fuel used in generation and purchased power was $1.4 billion for the year ended
December 31, 2002, a decrease of $58.8 million from 2001. The decrease is
primarily due to a lower recovery of fuel expense that resulted from a
mid-course correction of Florida Power's fuel cost recovery clause, as part of
the rate settlement, and lower purchased power costs, partially offset by an
increase in coal prices and volume from high system requirements. Fuel and
purchased power expenses are recovered primarily through cost recovery clauses
and, as such, have no material impact on operating results.
25
Operations and maintenance expense increased $85.1 million in 2002 when compared
to $487.1 million in 2001, due primarily to a reduced pension credit of $30.8
million, increased costs related to the Commitment to Excellence program of
$11.3 million, and an increase in other salary and benefit costs of $21.5
million related partially to increased medical costs. The Commitment to
Excellence program was initiated in 2002 to improve service and reliability.
Depreciation and amortization expense decreased $158.1 million in 2002 when
compared to $453.0 million in 2001. In addition to the depreciation and
amortization reduction of approximately $79.0 million related to the rate case,
depreciation declined an additional $97.0 million related to accelerated
amortization on the Tiger Bay regulatory asset, which was created as a result of
the early termination of certain long-term cogeneration contracts. See Note 12A
to the financial statements for further detail on the rate case. Florida Power
amortizes the regulatory asset according to a plan approved by the FPSC in 1997
and plans to fully amortize the asset by the end of 2003. In 2001, $97.0 million
of accelerated amortization was recorded on the Tiger Bay regulatory asset, of
which $63.0 million was associated with deferred revenue from 2000 and had no
impact on 2001 earnings.
According to an SEC order under PUHCA, Progress Energy's tax benefit not related
to acquisition interest expense is to be allocated to profitable subsidiaries.
Therefore, the tax benefit that was previously held in Progress Energy's holding
company was allocated to its profitable subsidiaries effective with 2002. This
resulted in the allocation of a $19.9 million tax benefit to Florida Power in
2002. Other fluctuations in income taxes are primarily due to changes in pretax
income.
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 - Income from continuing operations for Energy and
Related Services were $117.5 million and $128.5 million for 2002 and 2001,
respectively.
The Energy and Related Services unit sold 6.5 million and 8.1 million tons of
synthetic fuel in 2002 and 2001. The sales resulted in tax credits of $170.3
million and $213.4 million for 2002 and 2001, respectively. The synthetic fuel
is produced at a loss; however, the production and sale of the fuels qualifies
for tax credits under Section 29 of the Code, which more than offsets the loss.
Production in 2002 was curtailed to ensure effective utilization of the credits.
The synthetic fuels operations generated losses before income taxes of $111.1
million and $165.8 million in 2002 and 2001, respectively. Other fluctuations in
income taxes are primarily due to changes in pretax income.
The Energy and Related Services unit also includes operations related to natural
gas exploration and production. In 2001, these operations included the
operations of Mesa Hydrocarbons, Inc. (Mesa), which owns natural gas reserves
and operates wells in Colorado and sells natural gas. In 2002, it also included
similar operations of Westchester Gas Company, which was purchased during 2002.
These gas operations generated income from continuing operations of $9.6 million
and $5.3 million in 2002 and 2001, respectively. Westchester Gas Company
produced 5.8 million cubic feet of gas in 2002, which represented 49% of the
combined production for the year. This increased production drove the earnings
increase from 2001 to 2002. The Company is exploring opportunities to divest of
its Mesa properties in 2003.
Rail Services - Rail Services' operations represent the activities of Progress
Rail and include railcar and locomotive repair, trackwork, rail parts
reconditioning and sales, scrap metal recycling, railcar leasing and other rail
related services. Rail Services' results for the year ended December 31, 2001,
include Rail Services' cumulative revenues and net loss from the date of
acquisition, November 30, 2000, because Rail Services had been held for sale
from the date of acquisition through the second quarter of 2001.
Rail Services contributed net losses from continuing operations of $47.4 million
and $144.4 million for the years ended December 31, 2002 and 2001, respectively.
The net loss in 2002 includes a $44.7 million after-tax estimated impairment on
assets held for sale related to Railcar Ltd., a leasing subsidiary of Progress
Rail. The Company intends to sell the assets of Railcar Ltd. in 2003 and has
reported these assets as assets held for sale. See Note 4A to the Florida
Progress consolidated financial statements for discussion of this planned
divestiture. On March 12, 2003, Progress Energy announced that Railcar Ltd.
signed a letter of intent to sell predominately all of its railroad leasing
assets to The Andersons, Inc. The proceeds of the sale will be used to pay off
26
Railcar Ltd. lease obligations. The transaction is still subject to various
closing conditions including financing, due diligence and the completion of a
definitive purchase agreement. The net loss in 2001 includes a $108.1 million
after-tax long-lived asset impairment, which is discussed in Note 7 of the
Florida Progress consolidated financial statements and an after-tax loss on the
sale of scrap operations of $18.7 million. Rail Services' results for both years
were affected by a downturn in the overall economy, decreases in rail service
procurement by major railroads and a downturn in the domestic scrap market. Rail
Services' 2002 results were favorably impacted by aggressive cost cutting, new
business opportunities and restructuring initiatives.
An SEC order approving the merger of Florida Progress with Progress Energy
requires Progress Energy to divest of Rail Services by November 30, 2003.
Progress Energy is actively pursuing alternatives, but does not expect to find
the right divestiture opportunity by that date. Therefore, Progress Energy plans
to seek an extension from the SEC.
OTHER
The Other segment includes telecommunications, holding company and financing
expenses and had net losses from continuing operations of $162.6 million and
$28.3 million in 2002 and 2001, respectively. The increase in net loss is due
primarily to the recognition of asset impairments and related charges in the
telecommunications business unit. This is partially offset by lower interest
charges resulting from lower interest rates and the capitalization of interest
related to the building of nonregulated generating plants.
Progress Telecom had net losses of $156.2 million and $10.9 million for 2002 and
2001, respectively. The decrease in earnings in 2002, when compared to 2001, is
primarily due to asset impairments and after tax charges of $144.0 million. See
Note 7 to the Florida Progress consolidated financial statements for further
discussion of these charges.
Application of Critical Accounting Policies and Estimates
Florida Progress prepared its consolidated financial statements in accordance
with accounting principles generally accepted in the United States. In doing so,
certain estimates were made that were critical in nature to the results of
operations. The following discusses those significant estimates that may have a
material impact on its financial results and are subject to the greatest amount
of subjectivity. Senior management has discussed the development and selection
of these critical accounting policies with the Audit Committee of Progress
Energy's Board of Directors.
Utility Regulation
Florida Power is subject to regulation that sets the prices (rates) it is
permitted to charge customers based on the costs that regulatory agencies
determine Florida Power is permitted to recover. At times, regulators permit the
future recovery through rates of costs that would be currently charged to
expense by a nonregulated company. This ratemaking process results in deferral
of expense recognition and the recording of regulatory assets based on
anticipated future cash inflows. As a result of the changing regulatory
framework, a significant amount of regulatory assets has been recorded. Florida
Power continually reviews these assets to assess their ultimate recoverability
within the approved regulatory guidelines. Impairment risk associated with these
assets relates to potentially adverse legislative, judicial or regulatory
actions in the future. Additionally, the state regulatory agency often provides
flexibility in the manner and timing of the depreciation of property, nuclear
decommissioning costs and amortization of the regulatory assets. Note 12 to the
Florida Progress consolidated financial statements provides additional
information related to the impact of utility regulation on Florida Power.
Asset Impairments
Florida Progress evaluates the carrying value of long-lived assets for
impairment whenever indicators exist. Examples of these indicators include
current period losses combined with a history of losses, or a projection of
continuing losses, or a significant decrease in the market price of a long-lived
asset group. If an indicator exists, the asset group held and used is tested for
recoverability by comparing the carrying value to the sum of undiscounted
expected future cash flows directly attributable to the asset group. If the
asset group is not recoverable through undiscounted cash flows or if the asset
group is to be disposed of, an impairment loss is recognized for the difference
27
between the carrying value and the fair value of the asset group. A high degree
of judgment is required in developing estimates related to these evaluations and
various factors are considered, including projected revenues and cost and market
conditions.
During 2002, Florida Progress recorded pre-tax long-lived asset impairments of
$214.6 million related to its telecommunications business. See Note 7 to the
Florida Progress consolidated financial statements for further information on
this impairment and other charges. The fair value of these assets was determined
using an external valuation study heavily weighted on a discounted cash flow
methodology and using market approaches as supporting information. However, if
the telecommunications market continues to deteriorate, the Company's
telecommunications related assets may be further adversely affected.
Synthetic Fuels Tax Credits
Florida Progress, through the Energy and Related Services business unit,
produces synthetic fuel from coal fines. 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 feedstock used to produce such synthetic fuel. Any
synthetic fuel tax credit amounts not utilized are carried forward indefinitely
and are included in deferred taxes on the accompanying Consolidated Balance
Sheet. All of Florida Progress's synthetic fuel facilities have received 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 Progress
Energy fails 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.
Pension and Other Postretirement Benefits
Florida Progress' reported costs of providing pension and other postretirement
benefits (described in Note 15 to the Florida Progress consolidated financial
statements), primarily health benefits, are dependent on numerous factors
resulting from actual plan experience and assumptions of future experience. For
example, such costs are impacted by employee demographics, changes made to plan
provisions, and key actuarial assumptions such as rates of return on plan
assets, discount rates used in determining benefit obligations and annual costs
and, for other postretirement benefits, medical trend rates.
Due to a decline in market interest rates for high-quality (AAA/AA) debt
securities, which are used as the benchmark for setting the discount rate,
Florida Progress lowered the discount rate to 6.60% at December 31, 2002, which
will increase the 2003 benefit costs recognized. In addition, the continuing
declines in the equity markets have adversely affected the fair value of plan
assets, which will also increase the benefit costs recognized in 2003.
Evaluations of the effects of these factors has not been completed, but the
Florida Progress estimates that 2003 total cost for pension and other
postretirement benefits will increase by approximately $26 million over the
amount recorded in 2002, due in large part to these factors. The majority of
that increase has been anticipated and reflected in the Florida Progress's
budgeting/forecasting process. Recoveries in the level of interest rates and
equity markets would, correspondingly, have positive effects on future years'
benefit cost recognition.
Florida Progress has substantial pension plan assets, with a fair value of
approximately $687.4 million at December 31, 2002. Florida Progress's expected
rate of return on pension plan assets has been 9.25%. Under the accounting
standard for pension accounting, the expected rate of return used in pension
cost recognition is a long-term rate of return; therefore, Florida Progress
would only adjust that return if its fundamental assessment of the debt and
equity markets changes or its investment policy changes significantly. Florida
Progress continues to believe that its pension plan's investment mix supports
the long-term rate of 9.25% being used. A 0.25% change in the expected rate of
return for 2002 would have changed 2002 pension cost by approximately $2.0
million.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Florida Progress' utility and diversified operations are capital-intensive
businesses. Florida Progress relies upon its operating cash flow, commercial
paper facilities and its ability to access long-term capital markets for its
liquidity needs. Since a substantial majority of Florida Progress' operating
costs are related to its regulated electric utility, a significant portion of
these costs are recovered from customers through fuel and energy cost recovery
clauses.
28
At Florida Power, cash from operations is the primary source of cash for the
utility's construction expenditures. Florida Power's estimated capital
requirements for 2003, 2004 and 2005 are $590 million, $450 million and $500
million, respectively.
In addition to funding its construction commitments with cash from operations,
the companies access the capital markets through the issuance of commercial
paper, secured and unsecured notes, preferred securities and equity through
Progress Energy, which can offer issuances of common stock. Risk factors
associated with commercial paper back up credit facilities and credit ratings
are discussed below under "Risk Factors".
Florida Power's interim financing needs are funded primarily through its
commercial paper program. In addition, Florida Power has an uncommitted bank bid
facility that authorizes them to borrow and re-borrow. The facility was
established to temporarily supplement commercial paper borrowings, as needed.
In addition to funding the working capital needs of its diversified businesses
primarily through its commercial paper program, Progress Energy can issue
long-term debt to fund the capital requirements of Progress Fuels.
CASH FLOW FROM OPERATING ACTIVITIES
Florida Progress' cash from operations of $671 million decreased $280.2 million
compared with 2001 due primarily to lower operating cash flow at Florida Power.
The utility's operating cash flow decreased by $500 million, due primarily to
higher working capital requirements.
Florida Progress' cash from operations of $928.2 million in 2001 increased
$430.5 million compared with 2000 due primarily to improved operating cash flow
at Florida Power. The utility's improved operating cash flow was due to customer
growth and the recovery of fuel costs previously deferred. Florida Power is
allowed full recovery of prudently incurred costs through rates charged to
customers.
CASH FLOW FROM INVESTING ACTIVITIES
Cash requirements for investing activities during 2002 of $647.7 million
increased $144.8 million when compared with 2001. The increase was due mainly to
an increase in utility property additions of $196.6 million compared to 2001.
Cash requirements for investing activities during 2001 decreased $43.7 million
when compared with 2000 due primarily to lower investing activity at Florida
Progress' diversified operations.
Florida Power's construction expenditures, including nuclear fuel, totaled
$550.1 million, $396.5 million and $286.8 million for 2002, 2001 and 2000,
respectively. These expenditures are primarily for distribution lines and
generating facilities necessary to meet the needs of the utility's growing
customer base.
In planning for its future generation needs, Florida Power develops a forecast
of annual demand for electricity, including a forecast of the level and duration
of peak demands during the year. These forecasts have historically been
developed using a 15% reserve margin. The reserve margin is the difference
between a company's net system generating capacity and the maximum demand on the
system. In December 1999, the FPSC approved a joint proposal by Florida Power,
Florida Power & Light and Tampa Electric Company to increase the reserve margin
to 20% by 2004.
In response, Florida Power