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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Exact name of each Registrant as specified in I.R.S. 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
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
State of Incorporation: Florida
1-3274 Florida Power Corporation 59-0247770
d/b/a Progress Energy Florida, Inc.
100 Central Avenue
St. Petersburg, Florida 33701
Telephone (727) 820-5151
State of Incorporation: Florida
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 Securities, New York Stock Exchange
Series A, of FPC Capital I (and the Guarantee of Florida
Progress with respect thereto)
Progress Energy Florida, Inc.: 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, 2003, 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 29, 2004, 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
ITEM 9A. CONTROLS AND PROCEDURES
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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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
the Agreement Stipulation and Settlement Agreement related to retail rate matters
APB No. 28 Accounting Principles Board Opinion No. 28, "Interim Financial Reporting"
ARO Asset retirement obligation
Bcf Billion cubic feet
Btu British thermal units
CERCLA or Superfund Comprehensive Environmental Response Compensation & Liability Act
the Code Internal Revenue Code
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company, Florida Progress or FPC Florida Progress Corporation
CP&L Energy CP&L Energy, Inc.
CPI Consumer Price Index
CR3 PEF's nuclear generating plant, Crystal River Unit No. 3
CVO Contingent Value Obligation
DIG Derivatives Implementation Group
DOE United States Department of Energy
Dt Dekatherm
EITF Emerging Issues Task Force
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
Federal Circuit United States Circuit Court of Appeals
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"
FIN No. 46R December 2003 revision of FIN No. 46
Financial Statements Florida Progress' Financial Statements and
Progress Energy Florida's Financial Statements, for the year
ended December 31, 2003 contained under ITEM 8 herein
Florida Power or the Utility Florida Power Corporation d/b/a Progress Energy Florida, Inc.
FPSC Florida Public Service Commission
Funding Corp. Florida Progress Funding Corporation
GAAP Accounting principles generally accepted in the United States of America
Georgia Power Georgia Power Company
IRS Internal Revenue Service
ISO Independent System Operator
kV Kilovolt
kVA Kilovolt-ampere
LTIP Long-Term Incentive Plan
MACT Maximum Available Control Technology
MGP Manufactured Gas Plant
MW Megawatts
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
NRC United States Nuclear Regulatory Commission
NSP Northern States Power
PEF or the Utility Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation
PFA IRS Prefiling Agreement
The Plan Revenue Sharing Incentive Plan
PLRs Private Letter Rulings
4
Preferred Securities FPC-obligated mandatorily redeemable preferred securities of FPC Capital I
Preferred Stock Progress Energy Florida Preferred Stock, $100 par value
Progress Capital Progress Capital Holdings, Inc.
Progress Energy or the Parent Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly Electric Fuels Corporation
Progress Rail Progress Rail Services Corporation
PTC Progress Telecommunications Corporation
PTC LLC Progress Telecom LLC
PVI Progress Ventures, Inc., formerly referred to as Energy Ventures, a business unit 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
RAFT Railcar Asset Financing Trust
Rail Rail Services
RTO Regional Transmission Organization
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
Service Company Progress Energy Service Company, LLC
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. 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. 148 Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123"
SFAS No. 149 Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instrument sand Hedging Activities"
SFAS No. 150 Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity"
SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination
through Open Access Transmission and Standard Market Design
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 2006 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 Progress Energy Florida (PEF)
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 PEF's rate case
settlement; deregulation or restructuring in the electric industry that may
result in increased competition and 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 PEF's energy commodities and
purchased power; economic fluctuations and the corresponding impact on the PEF'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 PEF; the ability of the Company and PEF to maintain
their current credit ratings; the impact of derivative contracts used in the
normal course of business; investment performance of pension and benefit plans
and the ability to control costs; the Company's continued ability to use
Internal Revenue Code Section 29 (Section 29) tax credits related to its coal
and synthetic fuel businesses; 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 PEF'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 PEF. 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 PEF.
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 was incorporated in Florida on
January 21, 1982. 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. In December 2000, CP&L Energy was renamed
Progress Energy, Inc.
Effective January 1, 2003, Florida Power began doing business under the name
Progress Energy Florida, Inc. (PEF). 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, 2003, were $5
billion, and assets at year-end were $9 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 Securities and Exchange
Commission (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 SEC.
Florida Progress' principal business segment is PEF, which encompasses all
regulated public utility operations (See ITEM 1 "Business - Utility Operations -
PEF") and accounts for approximately 63% and 80% of Florida Progress' revenues
and assets, respectively, at year end in 2003. 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 include
Progress Fuels Corporation (Progress Fuels), formerly Electric Fuels Corporation
(Electric Fuels), and Progress Telecommunications Corporation (PTC). In January
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 PTC, the Company's Investment in FPC Capital I, and the
holding company, Florida Progress. PTC 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. In November 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. An SEC order approving the merger of Florida
Progress with Progress Energy required Progress Energy to divest of Rail
Services and certain immaterial, non-regulated investments of Florida Progress
by November 30, 2003. Progress Energy pursued alternatives, but did not find the
right divestiture opportunity by that date. Therefore, Progress Energy applied
for and was granted a three-year extension from the SEC until 2006. 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. In
March 2003, Progress Energy signed a letter of intent to sell the majority of
Railcar Ltd. assets to The Andersons, Inc. The asset purchase agreement was
signed in November 2003, and the transaction closed in February 2004.
7
ACQUISITIONS
Progress Telecommunications Corporation
In December 2003, PTC and Caronet, both indirectly wholly-owned subsidiaries of
Progress Energy, and EPIK Communications, Inc. (EPIK), a wholly-owned subsidiary
of Odyssey Telecorp, Inc. (Odyssey), contributed substantially all of their
assets and transferred certain liabilities to Progress Telecom, LLC (PTC LLC), a
subsidiary of PTC. Subsequently, the stock of Caronet was sold to an affiliate
of Odyssey for $2 million in cash and Caronet became an indirect wholly-owned
subsidiary of Odyssey. Following consummation of all the transactions described
above, PTC holds a 55 percent ownership interest in, and is the parent of, PTC
LLC. Odyssey holds a combined 45 percent ownership interest in PTC LLC through
EPIK and Caronet. See Note 4A to the financial statements for additional
discussion of this transaction.
Acquisition of Natural Gas Reserves
During 2003, Progress Fuels entered into several independent transactions to
acquire approximately 200 natural gas-producing wells with proven reserves of
approximately 190 billion cubic feet (Bcf) from Republic Energy, Inc. and three
other privately-owned companies, all headquartered in Texas. The primary assets
in the acquisition have been contributed to Progress Fuels North Texas Gas,
L.P., a wholly-owned subsidiary of Progress Fuels Corporation. The total cash
purchase price for the transactions was approximately $168 million. See Note 4B
to the financial statements for additional discussion of this transaction.
Westchester Acquisition
In April 2002, Progress Fuels acquired 100% of Westchester Gas Company
(Westchester). The acquisition included approximately 215 natural gas-producing
wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering
systems. The aggregate purchase price was approximately $153 million. See Note
4C to the financial statements for additional discussion of this transaction.
DIVESTITURES
Mesa Hydrocarbons, Inc. Divestiture
In September 2003, the Finance Committee as authorized by the Progress Energy
Board of Directors adopted a resolution approving the sale of certain
gas-producing properties owned by Mesa Hydrocarbons, LLC, a wholly-owned
subsidiary of Progress Fuels. In October 2003, the Company completed the sale of
these assets. The primary components of the assets sold were oil and gas leases
and wells. Net proceeds from the sale were approximately $97 million. The
Company recorded this transaction in the fourth quarter of 2003. See Note 3A to
the financial statements for additional discussion of this transaction.
Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a resolution
authorizing the sale of the majority of the assets of Railcar Ltd., a leasing
subsidiary included in the Rail Services segment. An estimated impairment on
assets held for sale was recognized in December 2002 to write-down the assets to
be sold to fair value less the costs to sell.
In March 2003, the Company signed a letter of intent to sell the majority of
Railcar Ltd. assets to The Andersons, Inc. The asset purchase agreement was
signed in November 2003, and the transaction closed in February 2004. Net
proceeds from the sale were approximately $82 million. See Note 3B to the
financial statements.
Sale of MEMCO Barge Line, Inc.
In July 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. In November 2001, Progress
Energy completed the sale of the Inland Marine Transportation segment to AEP
Resources, Inc., a wholly-owned subsidiary of American Electric Power. See Note
3C to the financial statements.
8
UTILITY OPERATIONS - PEF
GENERAL
PEF was incorporated in Florida in 1899, and is an operating public utility
primarily engaged in the generation, purchase, transmission, distribution and
sale of electricity. At December 31, 2003, PEF had a total summer generating
capacity (including jointly-owned capacity) of approximately 8,544 megawatts
(MW).
PEF provided electric service during 2003 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. PEF is interconnected with 20 municipal
and nine rural electric cooperative systems. Major wholesale power sales
customers include Seminole Electric Cooperative, Inc., Florida Municipal Power
Agency, Florida Power & Light Company and Tampa Electric Company. PEF is subject
to the rules and regulations of the Federal Energy Regulatory Commission (FERC)
and the Florida Public Service Commission (FPSC).
BILLED ELECTRIC REVENUES
PEF'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 2003 2002 2001
------------- ---- ---- ----
Residential 55% 55% 54%
Commercial 24% 24% 24%
Industrial 7% 7% 7%
Others 6% 6% 6%
Wholesale 8% 8% 9%
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.
FUEL AND PURCHASED POWER
General
PEF's consumption of various types of fuel depends on several factors, the most
important of which are the demand for electricity by PEF's customers, the
availability of various generating units, the availability and cost of fuel and
the requirements of federal and state regulatory agencies. PEF's energy mix for
the last three years is presented in the following table:
ENERGY MIX PERCENTAGES
Fuel Type 2003 2002 2001
--------- ---- ---- ----
Coal (a) 36% 33% 33%
Oil 16% 16% 16%
Nuclear 14% 15% 15%
Gas 13% 15% 14%
Purchased Power 21% 21% 22%
(a) Includes synthetic fuel from unrelated third parties and petroleum coke.
PEF 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, PEF believes that its fuel supply contracts,
as described below, will be adequate to meet its fuel supply needs.
9
PEF's average fuel costs per million British thermal units (Btu) for the last
three years were as follows:
AVERAGE FUEL COST
(per million Btu)
2003 2002 2001
---- ---- ----
Coal (a) $ 2.42 $ 2.43 $ 2.16
Oil 4.38 3.77 3.81
Nuclear 0.50 0.46 0.47
Gas 5.98 4.06 4.52
Weighted-average 3.07 2.60 2.59
(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.
Purchased Power
PEF, along with other Florida utilities, buys and sells power in the wholesale
market on a short-term and long-term basis. At December 31, 2003, PEF had a
variety of purchase power agreements for the purchase of approximately 1,313 MW
of firm power. These agreements include (1) long-term contracts for the purchase
of about 474 MW of purchased power with other investor-owned utilities,
including a contract with The Southern Company for approximately 414 MWs, and
(2) approximately 839 MWs of capacity under contract with certain qualifying
facilities (QFs). The capacity currently available from QFs represents about 10%
of PEF's total installed system capacity.
REGULATORY MATTERS
General
PEF is subject to the jurisdiction of the FPSC with respect to, among other
things, rates and service for electric energy sold at retail, retail service
territory and issuances of securities. In addition, PEF 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.
Retail Rate Matters
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.
In March 2002, the parties in PEF's rate case entered into a Stipulation and
Settlement Agreement (the Agreement) related to retail rate matters. The
Agreement was approved by the FPSC and 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 PEF's base rate earnings fall below a
10% return on equity, PEF may petition the FPSC to amend its base rates. The
Agreement is described in more detail in Note 7B to the financial statements.
Fuel and Other Cost Recovery
PEF's operating costs not covered by the utility's base rates include fuel,
purchased power, 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 (ECRC)
which permits 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 are recovered through
this recovery clause in the same manner as the other existing clause mechanisms.
10
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
PEF owns and operates one nuclear generating plant, Crystal River Unit No. 3
(CR3), which is subject to regulation by the Nuclear Regulatory Commission
(NRC). The NRC's jurisdiction encompasses broad supervisory and regulatory
powers over the construction and operation of nuclear reactors, including
matters of health and safety, antitrust considerations and environmental impact.
PEF has a license to operate its nuclear generating plant through December 3,
2016. PEF currently has a 91.8% ownership interest in CR3. In February 2003, PEF
notified the NRC of its intent to submit an application to extend the plant
license in the first quarter of 2009. A condition of the operating license for
each unit requires an approved plan for decontamination and decommissioning. The
nuclear unit is periodically removed from service to accommodate normal
refueling and maintenance outages, repairs and certain other modifications.
The nuclear power industry faces uncertainties with respect to the cost and
long-term availability of sites for disposal of spent nuclear fuel and other
radioactive waste, compliance with changing regulatory requirements, nuclear
plant operations, increased capital outlays for modifications, the technological
and financial aspects of decommissioning plants at the end of their licensed
lives and requirements relating to nuclear insurance.
During 2002, the NRC issued bulletins to companies that hold licenses for
pressurized water reactors (PWRs) requiring information on the structural
integrity of the reactor vessel head and requiring additional inspection
standards. The Company filed responses as required. Inspection of the vessel
head at the Company's PWR plant was performed during the previous outage. 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. The vessel
head at CR3 was replaced during its regularly scheduled refueling outage in
2003.
OTHER MATTERS
Regional Transmission Organizations
As a result of Order 2000, PEF, 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. See Note 7C to the financial
statements for further discussion of RTOs.
Standard Market Design
In July 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 all
transmission owning utilities transfer control of their transmission facilities
to an independent third party.
Franchise Agreements
PEF holds franchises with varying expiration dates in 107 of the municipalities
in which it distributes electric energy. PEF also serves 14 other municipalities
and in all its unincorporated areas without franchise agreements. The general
effect of these franchises is to provide for the manner in which PEF occupies
rights-of-way in incorporated areas of municipalities for the purpose of
constructing, operating and maintaining an energy transmission and distribution
system. See Note 19 to the financial statements for further discussion of
franchise agreements.
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.
11
Assessing the amount of stranded costs for a utility requires various
assumptions about future market conditions, including the future price of
electricity. The single largest stranded cost exposure for PEF is its commitment
to QFs. PEF has taken a proactive approach to this industry issue. PEF continues
to seek 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).
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. In January 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.
The Rail Services business segment, 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 two business units: the Locomotive and Railcar Services (LRS)
and Engineering and Trackwork (E&TW).
The LRS unit is primarily focused on railroad rolling stock that includes
freight cars, transit cars and locomotives, the repair and maintenance of these
units, the manufacturing or reconditioning of major components for these units
and scrap metal recycling. The E&TW unit 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 division of the LRS unit supports both business
units through its reclamation of reconditionable material and 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.
In March 2003, the Company signed a letter of intent to sell Railcar Ltd. to The
Andersons, Inc. The asset purchase agreement was signed in November 2003, and
the transaction closed in February 2004.
With operations in 23 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.
PROGRESS TELECOM LLC
In December 2003, PTC and Caronet, both indirectly wholly-owned subsidiaries of
Progress Energy, and EPIK Communications, Inc. (EPIK), a wholly-owned subsidiary
of Odyssey Telecorp, Inc. (Odyssey) contributed substantially all of their
assets and transferred certain liabilities to PTC LLC, a subsidiary of PTC.
Subsequently, the stock of Caronet, a Progress Energy Carolinas subsidiary, was
sold to an affiliate of Odyssey for $2 million in cash and Caronet became an
indirect wholly-owned subsidiary of Odyssey. Following consummation of all the
transactions described above, PTC holds a 55 percent ownership interest in, and
is the parent, of PTC LLC. The accounts of PTC LLC are included in the Company's
financial statements since the transaction date.
PTC LLC 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. PTC LLC markets wholesale fiber-optic-based capacity
service in the Eastern United States to long-distance carriers, internet service
providers and other telecommunications companies. PTC LLC also markets wireless
structure attachments to wireless communication companies and governmental
entities. At December 31, 2003, PTC LLC owned and managed approximately 8,500
route miles and more than 420,000 fiber miles of fiber-optic cable.
PTC LLC competes with other providers of fiber-optic telecommunications
services, including local exchange carriers and competitive access providers, in
the Eastern United States.
12
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.
For additional information regarding asset and investment impairments related to
the Company's investments in the telecommunications industry, See Note 9 to the
financial statements.
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 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, west,
Canada and Mexico. Factors contributing to Progress Fuels' success in these
markets include a competitive cost structure and strategic locations. There are,
however, numerous competitors in each of these markets, although no one
competitor is dominant in any industry.
Progress Fuels' gas production operations compete in the East Texas/North
Louisiana region. Factors contributing to success include a competitive cost
structure. Although there are numerous small, independent competitors in this
market, the major oil and gas producers dominate this industry.
13
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
At December 31, 2003, PEF's fourteen 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 8,544 MW. At
December 31, 2003, PEF had the following generating facilities:
- ----------------------------------------------------------------------------------------------------------
PEF Summer Net
No. of In-Service Ownership Capability (a)
Facility Location Units Date Fuel (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 2 1999-2003 Gas/Oil 100 998
Tiger Bay Fort Meade, FL 1 1997 Gas 100 207
------- ---------------
Total 3 1,205
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/Oil 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 91.78 838 (b)(d)
------- ---------------
Total 1 838
TOTAL 63 8,544
- ----------------------------------------------------------------------------------------------------------
(a) Amounts represent PEF'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) PEF and Georgia Power Company (Georgia Power) are co-owners of a 143 MW
advanced combustion turbine located at PEF's Intercession City site (P11).
Georgia Power has the exclusive right to the output of this unit during the
months of June through September. PEF has that right for the remainder of
the year.
(d) During 2003, a power uprate increased the net summer capability of this
unit to 838 MWs. The Maximum Dependable Capability (MDC) was restated in
January 2004.
At December 31, 2003, including both the total generating capacity of 8,544 MWs
and the total firm contracts for purchased power of 1,313 MWs, PEF had total
capacity resources of approximately 9,857 MWs.
Several entities have acquired undivided ownership interests in CR3 in the
aggregate amount of 8.22%. PEF and Georgia Power are co-owners of a 143 MW
advance combustion turbine located at PEF's Intercession City site (P11).
Georgia Power has the exclusive right to the output of this unit during the
months of June through September. PEF has that right for the remainder of the
year. Otherwise, PEF 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. PEF also owns certain easements over private property on which
transmission and distribution lines are located.
At December 31, 2003, PEF had approximately 5,000 circuit miles of transmission
lines.
14
DIVERSIFIED OPERATIONS
Progress Fuels controls, either directly or through subsidiaries, coal reserves
located in eastern Kentucky and southeastern Virginia of approximately 60
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 PEF's existing generating units. Progress Fuels' total production of coal
during 2003 was approximately 3.5 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, 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 in East Texas, North Texas and Louisiana
with total proven natural gas and oil reserves of approximately 358 billion
cubic feet equivalent. Progress Fuels' natural gas and oil production in 2003
was 25.4 billion cubic feet equivalent.
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 23 states, Mexico and Canada.
Progress Rail 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.
PTC provides wholesale telecommunications services throughout the Eastern United
States. PTC LLC incorporates more than 420,000 fiber miles in its network,
including over 185 Points-of-Presence, or physical locations where a presence
for network access exists.
15
ITEM 3. LEGAL PROCEEDINGS
1. 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, PEF was served with a class action lawsuit seeking
damages, declaratory and injunctive relief for the alleged improper use of
electric transmission easements. The plaintiffs contend that the licensing
of fiber-optic telecommunications lines to third parties or
telecommunications companies for other than PEF's internal use along the
electric transmission line right-of-way exceeds the authority granted in
the easements. In June 1999, the plaintiffs amended their complaint to add
PTC 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. In November 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. In February 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 was pending
before the First District Court of Appeal. Subsequent to filing these
motions, the Company and the appellants reached a settlement resolving the
appellants' dispute. The settlement was contingent upon the trial court
approving a mandatory class settlement consistent with the First District
Court of Appeal's February 2003 opinion. In May 2003 the trial court
entered an Amended Final Judgment again approving the mandatory class
settlement, consistent with the First District Court of Appeals' February
2003 opinion. No appeals have been taken from that judgment, and the time
to appeal has expired. In July 2003, PEF, the class representatives and the
appellants filed a joint withdrawal of all pending motions with the First
District Court of Appeal. The First District Court of Appeal acknowledged
the withdrawal of all pending motions and issued a mandate in July 2003.
Under the terms of the mandatory class settlement, PEF made settlement
payments to class members in August 2003. The settlement payments did not
have a material adverse effect upon PEF's financial condition or results of
operations. (See Note 19 to the Financial Statements -Legal Matters.)
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 in January 1998,
asserting securities fraud, breach of contract and other claims in
connection with the sale to it by two of the defendants in December 1996 of
their interests in Advanced Separation Technologies, Incorporated (AST), a
corporation engaged in the business of designing and assembling proprietary
separation equipment. Prior to closing, Progress Capital, a wholly-owned
subsidiary of Florida Progress, owned 80% 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 $58 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. All parties filed motions for summary
judgment in July 2001. The summary judgment motions of Calgon and the other
selling shareholder were denied in April of 2002. The summary judgment
motion of Florida Progress was withdrawn pending a legal challenge to
portions of the report of Calgon's expert, Arthur Andersen, which had been
used to oppose summary judgment. In September 2003, the United States
District Court for the Western District of Pennsylvania issued final orders
excluding from evidence in the case that portion of Arthur Andersen's
damage analysis based on the discounted cash flow methodology of valuation.
The Court did not exclude Arthur Andersen's use of the guideline publicly
traded company methodology in its damage analysis. Florida Progress filed a
renewed motion for summary judgment in October 2003, which is pending. The
Company cannot predict the outcome of this matter, but will present a
vigorous defense. (See Note 19 to the Financial Statements.)
16
3. U.S. Global, LLC v. Progress Energy, Inc. et al, Case No. 03004028-03
Progress Synfuel Holdings, Inc. et al. v. U.S. Global, LLC, Case No.
03004028-03
A number of Progress Energy, Inc. subsidiaries and affiliates are parties
to two lawsuits arising out of an Asset Purchase Agreement dated as of
October 19, 1999, by and among U.S. Global LLC (Global), EARTHCO, certain
affiliates of EARTHCO (collectively the EARTHCO Sellers), EFC Synfuel LLC
(which is owned indirectly by Progress Energy, Inc.) and certain of its
affiliates, including Solid Energy LLC, Solid Fuel LLC, Ceredo Synfuel LLC,
Gulf Coast Synfuel LLC (currently named Sandy River Synfuel LLC)
(collectively the Progress Affiliates), as amended by an Amendment to
Purchase Agreement as of August 23, 2000 (the Asset Purchase Agreement).
Global has asserted that pursuant to the Asset Purchase Agreement it is
entitled to (1) interests in two synthetic fuel facilities currently owned
by the Progress Affiliates, and (2) an option to purchase additional
interests in the two synthetic fuel facilities.
The first suit was filed in the Circuit Court for Broward County, Florida
on March 4, 2003 (the Florida Global Case). The Florida Global Case asserts
claims for breach of the Asset Purchase Agreement and other contract and
tort claims related to the Progress Affiliates' alleged interference with
Global's rights under the Asset Purchase Agreement. The Florida Global Case
requests an unspecified amount of compensatory damages, as well as
declaratory relief. On December 15, 2003, the Progress Affiliates filed a
motion to dismiss the Third Amended Complaint in the Florida Global Case.
The second suit was filed by the Progress Affiliates in the Superior Court
for Wake County, North Carolina seeking declaratory relief consistent with
the Company's interpretation of the Asset Purchase Agreement (the North
Carolina Global Case). Global was served with the North Carolina Global
Case in April 2003.
In May 2003, Global moved to dismiss the North Carolina Global Case for
lack of personal jurisdiction over Global. In the alternative, Global
requested that the court decline to exercise its discretion to hear the
Progress Affiliates' declaratory judgment action. In August 2003, the Wake
County Superior Court denied Global's motion to dismiss and entered an
order staying the North Carolina Global Case, pending the outcome of the
Florida Global Case. The Progress Affiliates have appealed the Superior
Court's order staying the case; Global has cross appealed the denial of its
motion to dismiss for lack of personal jurisdiction. The North Carolina
Court of Appeals has not set a hearing date for the Progress Affiliates'
Appeal or Global's cross appeal. The Company cannot predict the outcome of
these matters, but will vigorously defend against all allegations.
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).
17
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 PEF. PEF'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, 2003, PEF'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 2003 that were not
registered under the Securities Act.
Florida Progress does not have any equity compensation plans under which its
equity securities are issued.
PEF
All of PEF'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,
PEF has paid quarterly dividends to Florida Progress totaling the amounts shown
in the Statements of Common Equity in the Financial Statements. PEF'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, 2003, PEF's
ability to pay dividends was not limited by these restrictions.
PEF did not issue any equity securities during 2003 that were not registered
under the Securities Act.
PEF does not have any equity compensation plans under which its equity
securities are issued.
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).
18
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, 2003 and 2002 were $443 million and $230 million, respectively. The increase
in income from continuing operations in 2003 is primarily due to:
o Impairments recognized in 2002 related to the telecommunications and
railcar business operations.
o An increase in retail growth at PEF in 2003.
o Growth in natural gas production and sales.
o Higher synthetic fuel sales.
o Lower interest charges.
Partially offsetting these items were the:
o Net impact of the 2002 Florida Rate settlement.
o Increased benefit-related expenses.
o Higher depreciation expense at both PEF and the Energy and Related Services
segment.
These and other key operating results are discussed by segment below.
PEF
PEF'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, their annual
usage and the impact of weather. Since PEF serves a predominately retail
customer base, operating results are primarily influenced by the level of retail
sales and the costs associated with those sales. In addition, the current
economic conditions in the service territories may impact the annual demand for
electricity.
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.
PEF contributed segment profits of $295 million and $323 million in 2003 and
2002, respectively. The decrease in profits in 2003, when compared to 2002, was
primarily due to the impact of the 2002 rate case stipulation, higher benefit
costs primarily related to higher pension expense, higher depreciation and the
impact of unfavorable weather. These amounts were partially offset by continued
customer growth and lower interest charges.
PEF's profits in 2003 and 2002 were affected by the outcome of the Florida Power
rate case stipulation, which included a one-time retroactive revenue refund in
2002, a decrease in retail rates of 9.25% (effective May 1, 2002), provisions
for revenue sharing with the retail customer base, lower depreciation and
amortization and increased service revenue rates. See Note 7B to the Financial
Statements for further discussion of the rate case settlement.
A comparison of the results of operations of PEF for the past two years follows:
19
Revenues
PEF's electric revenues for the years ended December 31, 2003 and 2002 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 2003 % Change 2002
- ---------------------------------------------------------------------------------------
Residential $ 1,691 2.8% $ 1,645
Commercial 740 1.2 731
Industrial 219 3.8 211
Governmental 181 4.6 173
Revenue Sharing Refund (35) - (5)
Retroactive Retail Rate Refund - - (35)
--------------- ----------------
Total Retail Revenues 2,796 2.8 2,720
Wholesale 227 (1.3) 230
Unbilled (2) - (3)
Miscellaneous 131 13.9 115
--------------- ----------------
Total Electric Revenues $ 3,152 2.9% $ 3,062
- ---------------------------------------------------------------------------------------
PEF's electric energy sales for the years ended December 31, 2003 and 2002 and
the percentage change by year and by customer class are as follows:
- --------------------------------------------------------------------------------------
(in thousands of mWh)
- --------------------------------------------------------------------------------------
Customer Class 2003 % Change 2002
- --------------------------------------------------------------------------------------
Residential 19,429 3.6% 18,754
Commercial 11,553 1.2 11,420
Industrial 4,000 4.3 3,835
Governmental 2,974 4.4 2,850
------------ ------------
Total Retail Energy Sales 37,956 3.0 36,859
Wholesale 4,323 3.4 4,180
Unbilled 233 - 5
------------ ------------
Total mWh Sales 42,512 3.6% 41,044
- --------------------------------------------------------------------------------------
PEF's revenues, excluding fuel revenues of $1,487 million and $1,402 million in
2003 and 2002, respectively, increased $5 million from 2002 to 2003. Revenues
were favorably impacted in 2003 by $49 million, primarily as a result of
customer growth (approximately 36,000 additional customers). In addition, other
operating revenues were favorable $16 million due primarily to higher wheeling
and transmission revenues and higher service charge revenues (resulting from
increased rates allowed under the 2002 rate settlement). These increases were
partially offset by the negative impact of the rate settlement, lower wholesale
sales and the impact of unfavorable weather. The provision for revenue sharing
increased $12 million in 2003 compared to the $5 million provision recorded in
2002. Revenues in 2003 were also impacted by the final resolution of the 2002
revenue sharing provisions as the FPSC issued an order in July 2003 that
required PEF to refund an additional $18 million to customers related to 2002.
The 9.25% rate reduction from the settlement accounted for an additional $46
million decline in revenues. The 2003 impact of the rate settlement was
partially offset by the absence of the prior year interim rate refund of $35
million. Lower wholesale revenues (excluding fuel revenues) of $17 million and
the $8 million impact of milder weather also reduced base revenues during 2003.
Expenses
Fuel and Purchased Power
Fuel used in generation and purchased power increased $87 million in 2003 when
compared to $1,349 million in 2002. The increase is due to higher costs to
generate electricity and higher purchased power costs as a result of an increase
in volume due to system requirements and higher natural gas prices.
20
Operations and Maintenance (O&M)
O&M expense increased $49 million in 2003, when compared to $591 million in
2002. The increase is largely related to increases in certain benefit-related
expenses of $36 million which was primarily due to higher pension expense of $27
million during the year. Additionally higher operational costs related to the
CR3 nuclear outage and plant maintenance contributed to the increase.
Depreciation and Amortization
Depreciation and amortization increased $12 million in 2003 when compared to
$295 million in 2002. Depreciation increased primarily as a result of additional
assets being placed into service which was partially offset by lower
amortization of the Tiger Bay regulatory asset of $2 million, which was fully
amortized in September 2003.
Interest Expense
Interest charges decreased $15 million in 2003 compared to $106 million in 2002
primarily due to the reversal of a regulatory liability for accrued interest
related to previously resolved tax matters.
Income Tax Expense
In 2003 and 2002 $13 million and $20 million, respectively, of the tax benefit
that was previously held at the Company's holding company was allocated to PEF.
As required by an SEC order issued in 2002, holding company tax benefits are
allocated to profitable subsidiaries. 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 $166 million and $122 million for 2003 and 2002,
respectively. The following summarizes Energy and Related Services' segment
profits for the years ended 2003 and 2002:
- ----------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------
(in millions)
- ----------------------------------------------------------------------
Synthetic fuel operations $ 134 $ 102
Natural gas operations 34 10
Coal fuel and other operations (2) 10
-----------------------------
Segment profits $ 166 $ 122
- ----------------------------------------------------------------------
Synthetic Fuel Operations
Synthetic fuel operations generated profits of $134 million and $102 million for
the years ended December 31, 2003 and 2002, respectively. The production and
sale of the synthetic fuel generate operating losses, but qualify for tax
credits under Section 29 of the Internal Revenue Code, which more than offset
the effects of such losses. The operations resulted in the following losses
(prior to tax credits) and tax credits for 2003 and 2002.
- ---------------------------------------------------------------------------
(in millions) 2003 2002
- ---------------------------------------------------------------------------
Tons sold 7.5 6.5
After-tax losses (excluding tax credits) $ (79) $ (68)
Tax credits 213 170
--------------------------------
Net Profit $ 134 $ 102
- ---------------------------------------------------------------------------
Synthetic fuels net profits for 2003 increased as compared to 2002 due to higher
sales, improved margins and a higher tax credit per ton. The 2003 tax credits
also include a $7.5 million favorable true-up from 2002. Additionally, synthetic
fuels results in 2003 include 13 months of operations for some facilities. Prior
to the fourth quarter of 2003, results of these synthetic fuels operations had
been recognized one month in arrears. The net impact of this action increased
net income by $2 million for the year.
21
Natural Gas Operations
Natural gas operations generated profits of $34 million and $10 million for the
years ended December 31, 2003 and 2002, respectively. The increase in production
and price resulting from the acquisitions of Westchester Gas in 2002 and North
Texas Gas in the first quarter of 2003 drove increased revenue and earnings in
2003 compared to 2002. In October 2003, the Company completed the sale of
certain gas-producing properties owned by Mesa Hydrocarbons, LLC. See Notes 4B,
4C and 3A to the Financial Statements for discussions of the Westchester Gas
Company and the North Texas Gas acquisitions and the Mesa disposition. The
following summarizes the production and revenues of the natural gas and oil
operations for 2003 and 2002 by facility.
- ----------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------
Production in billion cubic feet equivalent
Mesa 4.8 6.0
Westchester 13.5 5.8
NTG 7.1 -
-------------------------
Total Production 25.4 11.8
-------------------------
Revenues in millions
Mesa $ 13 $ 15
Westchester 65 24
NTG 38 -
-------------------------
Total Revenues $ 116 $ 39
-------------------------
Gross Margin
In millions of $ $ 91 $ 29
As a % 78% 74%
- ----------------------------------------------------------------------------
Coal Fuel and Other Operations
Coal fuel and other operations generated losses of $2 million and profits of $10
million for the years ended December 31, 2003 and 2002, respectively. Coal
segment profits decreased $12 million from 2002 to 2003. This decrease is due
primarily to the recording of an impairment on certain assets at the Kentucky
May Coal Mine for $10 million after-tax. See Note 9 to the financial statements.
Rail Services
Rail's operations represent the activities of Progress Rail Services Corporation
(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 contributed losses of $1 million and $47 million for the years ended
December 31, 2003 and 2002, respectively. The net loss in 2002 includes a $45
million after-tax impairment on assets held for sale related to Railcar Ltd., a
leasing subsidiary of Progress Rail. In March 2003, the Company signed a letter
of intent to sell the majority of Railcar Ltd. assets to the Andersons, Inc. The
asset purchase agreement was signed in November 2003, and the transaction closed
on February 12, 2004. As such assets of Railcar Ltd. have been reported as
assets held for sale. See Note 3B to the Financial Statements for discussion of
this planned divestiture. Excluding the impairment loss recorded in 2002,
profits for Rail were flat year over year 2003 compared to 2002. 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.
An SEC order approving the merger of FPC and CP&L Energy required the Company to
divest of Progress Rail by November 30, 2003. However, the SEC has granted an
extension until 2006.
OTHER
The Other segment includes telecommunications, holding company and financing
expenses and had net losses from continuing operations of $17 million and $168
million in 2003 and 2002, respectively. The decrease in the net loss is due
primarily to the absence of asset impairments and related charges in the
telecommunications business unit that were recorded in the prior year.
22
PTC had net losses of $3 million and $156 million for 2003 and 2002,
respectively. The increase in earnings in 2003, when compared to 2002, is
primarily due to asset impairments and after-tax charges of $144 million. See
Note 9 to the Financial Statements for further discussion of these charges. In
December 2003, PTC and Caronet, Inc., both indirectly wholly-owned subsidiaries
of Progress Energy, and EPIK Communications, Inc., a wholly-owned subsidiary of
Odyssey Telecorp, Inc., contributed substantially all of their assets and
transferred certain liabilities to PTC LLC, a subsidiary of PTC. Subsequently,
the stock of Caronet, a subsidiary of Progress Energy Carolinas, was sold to an
affiliate of Odyssey for $2 million in cash and Caronet became an indirect
wholly-owned subsidiary of Odyssey. Following consummation of all the
transactions described above, PTC holds a 55 percent ownership interest in, and
is the parent of PTC LLC. Odyssey holds a combined 45 percent ownership interest
in PTC LLC through EPIK and Caronet. The accounts of PTC LLC are included in the
Company's Consolidated Financial Statements since the transaction date.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Florida Progress and PEF prepared their 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
PEF is subject to regulation that sets the prices (rates) it is permitted to
charge customers based on the costs that regulatory agencies determine PEF 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. PEF 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 7 to the financial statements provides additional
information related to the impact of utility regulation on PEF.
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
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.
Due to the reduction in coal production at the Kentucky May Coal Mine, the
Company evaluated its long-lived assets in 2003 and recorded an impairment of
$15 million on a pre-tax basis during the fourth quarter of 2003. See Note 9 to
the financial statements for further information on this impairment. Fair value
was determined based on discounted cash flows.
During 2002, Florida Progress recorded pre-tax long-lived asset impairments of
$215 million related to its telecommunications business. See Note 9 to the
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.
23
Synthetic Fuels Tax Credits
Florida Progress, through the Energy and Related Services business unit,
produces coal-based solid 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 and
that the fuel was produced from a facility that was placed in service before
July 1, 1998. Any synthetic fuel tax credit amounts not utilized due to the
imposition of the alternative minimum tax are carried forward indefinitely. See
Note 13 to the financial statements for further information on the synthetic
fuel tax credits. 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 Costs
As discussed in Note 14 to the financial statements, Florida Progress and PEF
maintains qualified non-contributory defined benefit retirement (pension) plans.
The reported costs of providing pension 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, actual plan asset returns and key actuarial
assumptions such as rates of return on plan assets and discount rates used in
determining benefit obligations and annual costs.
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 6.3% at December 31, 2003, which
will increase the 2004 benefit costs recognized, all other factors remaining
constant. However, after a few years of negative asset returns due to equity
market declines, plan assets performed very well in 2003, with returns of
approximately 30%. That positive asset performance will result in decreased
pension cost in 2004. Evaluations of the effects of these factors have not been
completed, but Florida Progress estimates that 2004 total cost recognized for
pension will decrease by approximately $12 million from the amount recorded in
2003, due in large part to these factors.
Florida Progress has pension plan assets, with a fair value of approximately
$849 million at December 31, 2003. Florida Progress' expected rate of return on
pension plan assets is 9.25%. The Company reviews this rate on a regular basis.
Under SFAS No. 87, 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 believes that
its pension plans' asset investment mix and historical performance support the
long-term rate of 9.25% being used. Florida Progress does not adjust the rate in
response to short-term market fluctuations such as the abnormally high market
return levels of the latter 1990's, recent years' market declines and the market
rebound in 2003. A 0.25% change in the expected rate of return for 2003 would
have changed 2003 pension cost by approximately $2 million. Approximately 95% of
Florida Progress' pension assets and obligations are attributable to PEF.
Another factor affecting Florida Progress' and PEF's pension cost, and
sensitivity of the cost to plan asset performance, is its selection of a method
to determine the market-related value of assets, i.e., the asset value to which
the 9.25% long-term expected rate of return is applied. SFAS No. 87 specifies
that entities may use either fair value or an averaging method that recognizes
changes in fair value over a period not to exceed five years, with the method
selected applied on a consistent basis from year to year. Florida Progress uses
the fair value method of determining market-related value. Changes in plan asset
performance are reflected in pension cost sooner under the fair value method
than the five-year averaging method and, therefore, pension cost tends to be
more volatile using the fair value method.
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.
24
The Company and its subsidiaries participate in two internal money pools,
operated by Progress Energy, to more effectively utilize cash resources and to
reduce outside short-term borrowings. Short-term borrowing needs are met first
by available funds of the money pool participants. Borrowing companies pay
interest at a rate designed to approximate the cost of outside short-term
borrowings. Subsidiaries, which invest in the money pool, earn interest on a
basis proportionate to their average monthly investment. Funds may be withdrawn
from or repaid to the pool at any time without prior notice.
At PEF, cash from operations is the primary source of cash for the utility's
construction expenditures. PEF's estimated capital requirements for 2004, 2005
and 2006 are approximately $430 million, $490 million and $450 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".
PEF's interim financing needs are funded primarily through its commercial paper
program. In addition, PEF 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 provided by operations of $664 million decreased $17
million compared with 2002 due primarily to a change in deferred taxes. The
utility's operating cash flow increased by $36 million, due primarily to changes
in working capital, partially offset by increased deferred fuel costs as a
result of rising prices.
CASH FLOW FROM INVESTING ACTIVITIES
Cash requirements for investing activities during 2003 of $938 million increased
$281 million when compared with 2002. The increase was due primarily to
diversified property additions in 2003.
PEF's construction expenditures, including nuclear fuel, totaled $599 million
and $550 million for 2003 and 2002, respectively. These expenditures are
primarily for transmission and distribution assets and generating facilities
necessary to meet the needs of the utility's growing customer base.
In planning for its future generation needs, PEF 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 PEF, Florida Power & Light and Tampa
Electric Company to increase the reserve margin to 20% by 2004.
In response, PEF constructed a second generating unit at the Hines site. Hines
Unit 2 was placed into service in December 2003. Hines Unit 2 is the same
combined-cycle technology as Hines Unit 1 and has a summer generating capacity
of approximately 516 MW. In addition, PEF has begun construction of a third unit
at the Hines Energy Complex.
Progress Fuels' capital expenditures for 2003 and 2002 were $313 million and
$102 million, respectively. These capital expenditures have been primarily for
the expansion of its natural gas operations.
The Company received net proceeds of approximately $97 million in October 2003
for the sale of its Mesa gas properties located in Colorado. Proceeds were
primarily used to reduce short-term debt.
CASH FLOW FROM FINANCING ACTIVITIES
During 2003, PEF took advantage of low interest rates and refinanced several
issues of debt. Long-term debt financing activity was limited to refinancing of
PEF's debt discussed below.
In February 2003 PEF issued $425 million of 4.80% First Mortgage Bonds, Due
March 1, 2013 and $225 million of 5.90% First Mortgage Bonds Due March 1, 2033.
Proceeds from the bond issue were used to redeem the aggregate outstanding
balance ($150 million) of 8% First Mortgage Bonds Due December 1, 2022, to
25
refinance PEF's secured and unsecured indebtedness, $70 million of which matured
on March 1, 2003, and $145 million of which matured on July 1, 2003 and to repay
the balance of PEF's outstanding commercial paper, with the remaining proceeds
used to reduce the outstanding balance of notes payable to affiliated companies.
PEF's 8% First Mortgage Bonds due December 1, 2022 were redeemed at a price of
103.75% of the principal amount outstanding ($150 million) plus accrued interest
to the redemption date of March 24, 2003.
In July 2003, $110 million of PEF's First Mortgage Bonds, 6.0% Series and $35
million of medium-term notes, 6.62% Series, matured.
In November 2003, PEF issued $300 million of First Mortgage Bonds, 5.10% Series,
Due December 1, 2015. Proceeds from this issuance were used to redeem in
December 2003 the $100 million aggregate outstanding balance of its 7% First
Mortgage Bonds, Due 2023 at 103.19% of the principal amount of such bonds and to
reduce the outstanding balance of its notes payable to affiliated companies.
The amount of debt issued by PEF in November took into consideration debt
maturities and other financing needs for 2004. As such, PEF does not anticipate
the need to issue long-term debt in 2004.
The Company's financial policy precludes issuing commercial paper in excess of
its supporting lines of credit. At December 31, 2003, the total amount of
commercial paper outstanding was zero. The Company is required to pay minimal
annual commitment fees to maintain its credit facilities.
In April 2003, PEF entered into a new $200 million 364-day credit agreement and
a new $200 million three-year credit agreement, replacing its prior credit
facilities (which had been a $90 million 364-day facility and a $200 million
five-year facility). The new PEF credit facilities contain a defined maximum
total debt to total capital ratio of 65%; at December 31, 2003 the calculated
ratio, as defined, was 51.5%. The new credit facilities also contain a
requirement that the ratio of EBITDA, as defined in the facilities, to interest
expense to be at least 3 to 1; at December 31, 2003 the calculated ratio, as
defined, was 9.22 to 1.
PEF's credit facilities include a provision under which lender could refuse to
advance funds in the event of a material adverse change in the borrower's
financial condition.
Each of these credit agreements contains a cross-default provision for defaults
of indebtedness in excess of $10 million. Under these provisions, if the
applicable borrower or certain affiliates fail to pay various debt obligations
in excess of $10 million the lenders could accelerate payment of any outstanding
borrowing and terminate their commitments to the credit facility.
PEF has an uncommitted bank bid facility authorizing it to borrow and re-borrow,
and have loans outstanding at any time, up to $100 million. At December 31,
2003, there were no outstanding loans against these facilities. PEF currently
has filed registration statements under which it can issue an aggregate of $50
million of various long-term debt securities.
Credit Rating Matters
The major credit rating agencies have currently rated the Company's securities
as follows:
Moody's
Investors Service Standard & Poor's
Progress Energy Florida, Inc.
Corporate Credit/Issuer Rating Not Applicable BBB
Commercial Paper P-1 A-2
Senior Secured Debt A1 BBB
Senior Unsecured Debt A2 BBB
FPC Capital I
Preferred Stock* Baa1 BB+
Progress Capital Holdings, Inc.
Senior Unsecured Debt* A3 BBB-
*Guaranteed by Florida Progress Corporation
26
These ratings reflect the current views of these rating agencies and no
assurances can be given that these ratings will continue for any given period of
time. However, the Company monitors its financial condition as well as market
conditions that could ultimately affect its credit ratings.
The Company and its subsidiaries' debt indentures and credit agreements do not
contain any "ratings trigger" which would cause the acceleration of interest and
principal payments in the event of a ratings downgrade. However, a ratings
downgrade could increase our borrowing costs. See the "Risk factors" section of
this Form 10-K.
In February 2003, Moody's Investors Service lowered the outlook of PEF (A1
senior secured) and Progress Capital Holdings Inc. (A3 senior unsecured) from
stable to negative and lowered the trust preferred rating of FPC Capital I from
A3 to Baa1 with a negative outlook.
In February 2003, Fitch Ratings Service downgraded the ratings of PEF. The
ratings outlook is stable. PEF's senior secured rating was changed to A- from
AA- and its senior unsecured rating was changed to BBB+ from A+. PEF's
short-term rating was changed to F-2 from F-1+.
In August 2003, Standard & Poor's Ratings Services (S&P) credit rating agency
lowered its corporate credit rating on PEF and Florida Progress to BBB from
BBB+. The outlook of the Companies' ratings was changed from negative to stable.
These credit rating changes have not had a material impact on the companies'
access to capital or their financial results.
Interest Rate Derivatives
Progress Energy and its subsidiaries, including the Company and PEF, are exposed
to various risks related to changes in market conditions. The Company has a risk
management committee that is chaired by the Chief Financial Officer and includes
senior executives from various business groups. The risk management committee is
responsible for administering risk management policies and monitoring compliance
with those policies by all subsidiaries.
The Company manages its market risk in accordance with its established risk
management policies, which may include entering into various derivative
transactions.
The Company uses interest rate derivative instruments to adjust the fixed and
variable rate debt components of its debt portfolio and to hedge interest rates
with regard to future fixed rate debt issuances.
Progress Fuels periodically enters into derivative instruments to hedge its
exposure to price fluctuations on natural gas sales. At December 31, 2003,
Progress Fuels had approximately 19 Bcf of cash flow hedges in place for its
natural gas production. These positions extend through December 2005.
NEW ACCOUNTING STANDARDS
See Note 2 to the financial statements for a discussion of the anticipated
impact of new accounting standards.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FLORIDA PROGRESS
Market risk represents the potential loss arising from adverse changes in market
rates and prices. Florida Progress is exposed to certain market risks, including
changes in interest rates with respect to its long-term debt and fluctuations in
the return on marketable securities with respect to its nuclear decommissioning
trust funds. The Company manages its market risk in accordance with its
established risk management policies, which may include entering into various
derivative transactions.
These financial instruments are held for purposes other than trading. The risks
discussed below do not include the price risks associated with non-financial
instrument transactions and positions associated with Florida Progress'
operations, such as sales commitments and inventory.
INTEREST RATE RISK
The Company manages its interest rate risks through the use of a combination of
fixed and variable rate debt. Variable rate debt has rates that adjust in
periods ranging from daily to monthly. Interest rate derivative instruments may
be used to adjust interest rate exposures and to protect against adverse
movements in rates.
The following tables provide information at December 31, 2003 and 2002, about
the Company's interest rate risk sensitive instruments. The tables present
principal cash flows and weighted-average interest rates by expected maturity
dates for the fixed long-term debt and the FPC obligated mandatorily redeemable
securities of trust. The tables also include estimates of the fair value of the
Company's interest rate risk sensitive instruments based on quoted market prices
for these or similar issues.
- -------------------------------------------------------------------------------------------------------------------
Fair Value
December
December 31, 2003 2004 2005 2006 2007 2008 Thereafter Total 31, 2003
- -------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 68 $ 49 $ 109 $ 124 $ 127 $ 1,398 $ 1,875 $ 2,007
Average interest rate 6.61% 6.66% 6.96% 6.78% 6.72% 5.65% 5.93% -
Variable rate long-
term debt - - - - - $ 241 $ 241 $ 241
Average interest rate - - - - - 1.04% 1.04% -
FPC mandatorily redeemable
securities
of Trust - - - - - $ 309 $ 309 $ 313
Fixed rate - - - - - 7.10% 7.10% -
Unsecured note with parent - - - - - $ 500 $ 500 $ 544
Average interest rate - - - - - 6.43% 6.43% -
- -------------------------------------------------------------------------------------------------------------------
28
- ----------------------------------------------------------------------------------------------------------------
Fair Value
December 31,
December 31, 2002 2003 2004 2005 2006 2007 Thereafter Total 2002
- ----------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 275 $ 68 $ 49 $ 109 $ 124 $ 826 $ 1,451 $ 1,598
Average interest rate 6.42% 6.57% 6.66% 6.98% 6.79% 6.97% 6.82% -
Variable rate long-
term debt - - - - - $ 241 $ 241 $ 241
Average interest rate - - - - - 1.11% 1.11% -
FPC mandatorily
redeemable securities
of Trust - - - - - $ 300 $ 300 $ 303
Fixed rate 7.10% 7.10% -
Unsecured note with
parent - - - - - $ 500 $ 500 $ 512
Average interest rate - - - - - 6.43% 6.43% -
Interest rate forward
contracts (a) $ 35 - - - - - $ 35 $ (0.5)
(a) Treasury Rate Lock agreement on $35 million designed as cash flow hedge of
anticipated fixed-rate debt issuance.
PEF
The information required by this item is incorporated herein by reference to the
Florida Progress Quantitative and Qualitative Disclosures About Market Risk
insofar as it relates to PEF.
The following tables provide information at December 31, 2003 and 2002, about
PEF's interest rate risk sensitive instruments.
- ----------------------------------------------------------------------------------------------------------------
Fair Value
December 31, 2003 December 31
2004 2005 2006 2007 2008 Thereafter Total 2003
- ----------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 43 $ 48 $ 48 $ 89 $ 82 $ 1,399 $ 1,709 $ 1,820
Average interest rate 6.69% 6.72% 6.76% 6.80% 6.87% 5.65% 5.85% -
Variable rate long-
term debt - - - - - $ 241 $ 241 $ 241
Average interest rate - - - - - 1.04% 1.04% -
- ----------------------------------------------------------------------------------------------------------------
29
Fair Value
December 31,
December 31, 2002 2003 2004 2005 2006 2007 Thereafter Total 2002
- ----------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 217 $ 43 $ 48 $ 48 $ 89 $ 782 $ 1,227 $ 1,351
Average interest rate 6.15% 6.69% 6.72% 6.76% 6.80% 7.00% 6.80% -
Variable rate long-
term debt - - - - - $ 241 $ 241 $ 241
Average interest rate - - - - - 1.11% 1.11% -
Interest rate forward $ 35 - - - - - $ 35 $ (0.5)
contracts (a)
(a) Treasury Rate Lock agreement on $35 million designed as cash flow hedge of
anticipated fixed-rate debt issuance.
MARKETABLE SECURITIES PRICE RISK
PEF maintains trust funds, as required by the Nuclear Regulatory Commission, to
fund certain costs of decommissioning its nuclear plants. These funds are
primarily invested in stocks, bonds and cash equivalents, which are exposed to
price fluctuations in equity markets and to changes in interest rates. At
December 31, 2003 and 2002, the fair values of these funds were approximately
$433 million and $374 million, respectively. The Company actively monitors its
portfolio by benchmarking the performance of its investments against certain
indices and by maintaining, and periodically reviewing, target allocation
percentages for various asset classes. The accounting for nuclear
decommissioning recognizes that the Company's regulated electric rates provide
for recovery of these costs, net of any trust fund earnings, and therefore,
fluctuations in trust fund marketable security returns do not affect the
earnings of the Company.
COMMODITY PRICE RISK
The Company is exposed to the effects of market fluctuations in the price of
natural gas, electricity and other energy-related products marketed and
purchased as a result of its ownership of energy-related assets. The Company's
exposure to these fluctuations is significantly limited by the cost-based
regulation of PEF.
Progress Fuels uses natural gas hedging instruments to manage a portion of the
market risk associated with fluctuations in the future sales price of Progress
Fuels' natural gas. In addition, the Company may from time to time engage in
limited economic hedging and trading activity using natural gas and electricity
financial instruments. Refer to Note 15 to the financial statements for
additional information with regard to the Company's commodity contracts and use
of derivative financial instruments.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements, supplementary data and
consolidated financial statement schedules are included herein:
Page
Independent Auditors' Report - Deloitte and Touche LLP 32
Consolidated Financial Statements - Florida Progress Corporation:
Consolidated Statements of Income and Comprehensive Income for the Years Ended
December 31, 2003, 2002 and 2001 33
Consolidated Balance Sheets at December 31, 2003 and 2002 34
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 35
Consolidated Statements of Common Equity for the Years Ended December 31, 2003, 2002
and 2001 36
Consolidated Quarterly Financial Data (Unaudited) 36
Financial Statements - Florida Power Corporation d/b/a Progress Energy Florida:
Statements of Income and Comprehensive Income for the Years Ended
December 31, 2003, 2002 and 2001 37
Balance Sheets at December 31, 2003 and 2002 38
Statements of Cash Flows for the Years Ended December 31, 2003, 2002
and 2001 39
Statements of Common Equity for the Years Ended December 31, 2003, 2002
and 2001