10-Q 1 pei_10q-.txt FLORIDA PROGRESS FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______. Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer File Number incorporation, address of principal executive offices, and telephone number Identification Number 1-8349 Florida Progress Corporation 59-2147112 A Florida Corporation 410 South Wilmington Street Raleigh, North Carolina 27601 Telephone (919) 546-6111 1-3274 Florida Power Corporation 59-0247770 A Florida Corporation 100 Central Avenue St. Petersburg, Florida 33701 Telephone (727) 820-5151 NONE (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- This combined Form 10-Q is filed separately by two registrants: Florida Progress Corporation and Florida Power Corporation. Information contained herein relating to either individual registrant is filed by such registrant solely on its own behalf. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of July 31, 2002, each registrant had the following shares of common stock outstanding Registrant Description Shares ---------- ----------- ------ Florida Progress Corporation Common Stock, without par value 98,616,658 (all of which were held by Progress Energy, Inc.) Florida Power Corporation Common Stock, without par value 100 (all of which were held by Florida Progress Corporation)

1 FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION FORM 10-Q - For the Quarter Ended June 30, 2002 Glossary of Terms Safe Harbor For Forward-Looking Statements PART I. FINANCIAL INFORMATION Item 1. Financial Statements Florida Progress Corporation Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Florida Power Corporation Statements of Income Balance Sheets Statements of Cash Flows Notes to Financial Statements Florida Progress Corporation and Florida Power Corporation Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures 2 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined Form 10-Q are defined below: TERM DEFINITION CR3 Florida Power's nuclear generating plant, Crystal River Unit No. 3 DOE United States Department of Energy EPA United States Environmental Protection Agency FASB Financial Accounting Standards Board FDEP Florida Department of Environmental Protection FERC Federal Energy Regulatory Commission Florida Power or the utility Florida Power Corporation Florida Progress or the Company Florida Progress Corporation FPSC Florida Public Service Commission Funding Corp. Florida Progress Funding Corporation IRS Internal Revenue Service MEMCO MEMCO Barge Line, Inc. MGP Manufactured Gas Plant MW Megawatts NRC United States Nuclear Regulatory Commission PLR Private Letter Ruling Preferred Securities 7.10% Cumulative Quarterly Income Preferred Securities, Series A, of FPC Capital I, fully and unconditionally guaranteed by Florida Progress Preferred Stock Florida Power Cumulative Preferred Stock, $100 par value Progress Capital Progress Capital Holdings, Inc. Progress Energy Progress Energy, Inc. Progress Fuels Progress Fuels Corporation, formerly referred to as Electric Fuels Corporation Progress Rail Progress Rail Services Corporation Progress Telecom Progress Telecommunications Corporation Progress Ventures, Inc. Legal entity holding certain non-regulated operations and part of Progress Energy's Progress Ventures business segment PUHCA Public Utility Holding Company Act of 1935, as amended RTO Regional Transmission Organization SEC United States Securities and Exchange Commission Section 29 Section 29 of the Internal Revenue Service Code SFAS Statements of Financial Accounting Standards The Trust FPC Capital I

3 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS The matters discussed throughout this combined Form 10-Q that are not historical facts are forward-looking and, accordingly, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. In addition, forward-looking statements are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" including, but not limited to, statements under the sub-heading "Other Matters" concerning synthetic fuel tax credits and regulatory developments. Any forward-looking statement speaks only as of the date on which such statement is made, and Florida Progress and Florida Power undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made. Examples of factors that you should consider with respect to any forward-looking statements made throughout this document include, but are not limited to, the following: governmental policies and regulatory actions (including those of the Federal Energy Regulatory Commission, the Environmental Protection Agency, the Nuclear Regulatory Commission, the Department of Energy, the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935, as amended and the Florida Public Service Commission), particularly legislative and regulatory initiatives regarding the restructuring of the electricity industry or potential national deregulation legislation; the outcome of legal and administrative proceedings, including proceedings before our principal regulators, and the impact of the settlement of Florida Power's rate case; risks associated with operating nuclear power facilities, availability of nuclear waste storage facilities, and nuclear decommissioning costs; terrorist threats and activities, economic uncertainty caused by such activities on the United States, and potential adverse reactions to United States anti-terrorism activities; changes in the economy of areas served by Florida Progress and Florida Power; the extent to which we are able to obtain adequate and timely rate recovery of costs, including potential stranded costs arising from the restructuring of the electricity industry; weather conditions and catastrophic weather-related damage; general industry trends, changes in technology, increased competition from energy and gas suppliers, and market demand for energy; inflation and capital market conditions; realization of cost savings related to synergies resulting from acquisition by Progress Energy and the success of our direct and indirect subsidiaries; the extent to which we are able to continue to use tax credits associated with the operations of the synthetic fuel facilities; and unanticipated changes in operating expenses and capital expenditures. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of Florida Progress or Florida Power. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the effect of each such factor on Florida Progress or Florida Power. 4 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Florida Progress Corporation CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2002 CONSOLIDATED STATEMENTS of INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2002 2001 2002 2001 ------------------------------------------------------------ ------------- ------------- --------------- ------------- Operating Revenues Electric $ 765,923 $ 783,660 $ 1,452,364 $ 1,594,133 Diversified businesses 359,198 349,988 666,435 684,426 ------------------------------------------------------------ ------------- ------------- --------------- ------------- Total Operating Revenues 1,125,121 1,133,648 2,118,799 2,278,559 ------------------------------------------------------------ ------------- ------------- --------------- ------------- Operating Expenses Fuel used in electric generation 199,123 220,616 399,415 437,003 Purchased power 133,767 126,603 241,731 252,222 Other operation and maintenance 149,983 119,815 281,317 230,681 Depreciation and amortization 75,284 94,646 144,577 246,714 Taxes other than on income 56,792 57,076 113,933 117,185 Diversified businesses 381,369 384,772 706,341 735,369 ------------------------------------------------------------ ------------- ------------- --------------- ------------- Total Operating Expenses 996,318 1,003,528 1,887,314 2,019,174 ------------------------------------------------------------ ------------- ------------- --------------- ------------- Operating Income 128,803 130,120 231,485 259,385 ------------------------------------------------------------ ------------- ------------- --------------- ------------- Other Income (Expense) Interest income 3,154 2,164 3,875 3,927 Other, net (5,842) (5,243) (9,474) (10,983) ------------------------------------------------------------ ------------- ------------- --------------- ------------- Total Other Income (Expense) (2,688) (3,079) (5,599) (7,056) ------------------------------------------------------------ ------------- ------------- --------------- ------------- Income before Interest Charges and Income Taxes 126,115 127,041 225,886 252,329 ------------------------------------------------------------ ------------- ------------- --------------- ------------- Interest Charges Gross interest charges 47,779 48,361 95,310 99,907 Allowance for borrowed funds used during construction (574) (111) (1,033) (204) ------------------------------------------------------------ ------------- ------------- --------------- ------------- Net Interest Charges 47,205 48,250 94,277 99,703 ------------------------------------------------------------ ------------- ------------- --------------- ------------- Income from Continuing Operations before Income Taxes 78,910 78,791 131,609 152,626 Income Taxes (Benefit) (11,446) (23,109) (34,520) (24,899) ------------------------------------------------------------ ------------- ------------- --------------- ------------- Income from Continuing Operations 90,356 101,900 166,129 177,525 Discontinued Operations, net of tax (Note 3): Loss from discontinued operations - (12,089) - (11,726) ------------------------------------------------------------ ------------- ------------- --------------- ------------- Net Income $ 90,356 $ 89,811 $ 166,129 $ 165,799 ------------------------------------------------------------ ------------- ------------- --------------- ------------- See Notes to Interim Financial Statements. 5 Florida Progress Corporation CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) June 30, December 31, Assets 2002 2001 ------------------------------------------------------------------------------------------------ Utility Plant Electric utility plant in service $ 7,206,421 $ 7,151,729 Accumulated depreciation (4,083,609) (3,984,308) ------------------------------------------------------------------------------------------------ Utility plant in service, net 3,122,812 3,167,421 Held for future use 7,921 8,274 Construction work in progress 404,033 292,883 Nuclear fuel, net of amortization 51,388 62,536 ------------------------------------------------------------------------------------------------ Total Utility Plant, Net 3,586,154 3,531,114 ------------------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents 25,191 5,201 Accounts receivable 375,276 357,038 Unbilled accounts receivable 74,919 63,080 Receivable from affiliates 39,971 26,976 Notes receivable from affiliates 9,723 - Taxes receivable 4,331 14,761 Deferred income taxes 21,070 32,334 Inventory 520,610 485,891 Deferred fuel cost 5,186 15,147 Prepayments 26,676 10,748 Other current assets 34,243 48,175 ------------------------------------------------------------------------------------------------ Total Current Assets 1,137,196 1,059,351 ------------------------------------------------------------------------------------------------ Deferred Debits and Other Assets Regulatory assets 138,908 157,725 Unamortized debt expense 20,355 21,021 Nuclear decommissioning trust funds 409,853 406,100 Diversified business property, net 869,438 669,078 Miscellaneous other property and investments 109,769 117,535 Prepaid pension costs 215,466 202,167 Other assets and deferred debits 170,670 147,713 ------------------------------------------------------------------------------------------------ Total Deferred Debits and Other Assets 1,934,459 1,721,339 ------------------------------------------------------------------------------------------------ Total Assets $ 6,657,809 $ 6,311,804 ------------------------------------------------------------------------------------------------ Capitalization and Liabilities ------------------------------------------------------------------------------------------------ Capitalization Common stock $ 1,608,437 $ 1,409,034 Retained earnings 672,735 666,201 Accumulated other comprehensive loss (2,683) (2,985) ------------------------------------------------------------------------------------------------ Total Common Stock Equity 2,278,489 2,072,250 Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497 Unsecured note with Parent 500,000 500,000 Long-term debt, net 2,024,909 2,143,934 ------------------------------------------------------------------------------------------------ Total Capitalization 4,836,895 4,749,681 ------------------------------------------------------------------------------------------------ Current Liabilities Current portion of long-term debt 102,860 88,053 Accounts payable 286,930 285,524 Payable to affiliates 133,055 116,520 Notes payable to affiliates 292,009 147,583 Interest accrued 66,705 67,861 Customer deposits 123,060 118,285 Accrued taxes other than on income 75,196 16,361 Other current liabilities 113,521 128,004 ------------------------------------------------------------------------------------------------ Total Current Liabilities 1,193,336 968,191 ------------------------------------------------------------------------------------------------ Deferred Credits and Other Liabilities Accumulated deferred income taxes 203,633 165,816 Accumulated deferred investment tax credits 50,501 54,387 Regulatory liabilities 48,746 45,643 Other liabilities and deferred credits 324,698 328,086 ------------------------------------------------------------------------------------------------ Total Deferred Credits and Other Liabilities 627,578 593,932 ------------------------------------------------------------------------------------------------ Commitments and Contingencies (Note 11) ------------------------------------------------------------------------------------------------ Total Capitalization and Liabilities $ 6,657,809 $ 6,311,804 ------------------------------------------------------------------------------------------------ See Notes to Interim Financial Statements. 6 Florida Progress Corporation CONSOLIDATED STATEMENTS of CASH FLOWS Six Months Ended (Unaudited) June 30, (In thousands) 2002 2001 ----------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 166,129 $ 165,799 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations - (2,682) Estimated loss on disposal of discontinued operations - 14,408 Depreciation and amortization 189,555 288,497 Deferred income taxes and investment tax credits, net 22,950 22,518 Deferred fuel cost 9,961 4,222 Changes in working capital, net of effects from sale or acquisition of business Net increase in accounts receivable (38,231) (27,375) Net increase in inventories (35,639) (85,123) Net (increase) decrease in prepaids and other current assets (2,179) 9,353 Net increase (decrease) in accounts payable 11,681 (5,195) Net increase in other current liabilities 23,000 28,412 Other 9,373 (75,314) ----------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 356,600 337,520 ----------------------------------------------------------------------------------------------------------------------- Investing Activities: Utility property additions (187,979) (121,701) Diversified business property additions (62,688) (47,307) Nuclear fuel additions (108) (33,058) Proceeds from sale of asset - 5,532 Acquisition, net of cash acquired (17,355) - Other investing activities (7,427) (15,115) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (275,557) (211,649) ----------------------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds from issuance of long-term debt - 87 Net decrease in commercial paper reclassified to long-term debt (47,420) - Net increase in intercompany notes 134,703 147,590 Net decrease in short-term indebtedness - (165,243) Retirement of long-term debt (58,626) (36,429) Equity contribution from parent 70,617 33,466 Dividends paid to parent (159,595) (109,224) Other financing activities (732) (2,244) ----------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (61,053) (131,997) ----------------------------------------------------------------------------------------------------------------------- Cash Used in Discontinued Operations (17) ----------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 19,990 (6,143) ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of the Period 5,201 24,200 ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 25,191 $ 18,057 ----------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period - interest (net of amount capitalized) $ 80,153 $ 97,659 income taxes (net of refunds) $ 10,517 $ (86,670) See Note 6 for non-cash investing and financing activities. See Notes to Interim Financial Statements. 7 Florida Power Corporation INTERIM FINANCIAL STATEMENTS June 30, 2002 STATEMENTS of INCOME Three Months Ended Six Months Ended (Unaudited) June 30, June 30, (In thousands) 2002 2001 2002 2001 -------------------------------------------------------- ------------- ------------- -------------- ------------- Operating Revenues Electric $ 765,923 $ 783,660 $ 1,452,364 $ 1,594,133 Operating Expenses Fuel used in electric generation 199,123 220,616 399,415 437,003 Purchased power 133,767 126,603 241,731 252,222 Operation and maintenance 149,983 119,815 281,317 230,681 Depreciation and amortization 75,284 94,646 144,577 246,714 Taxes other than on income 56,792 57,076 113,933 117,185 -------------------------------------------------------- ------------- ------------- -------------- ------------- Total Operating Expenses 614,949 618,756 1,180,973 1,283,805 -------------------------------------------------------- ------------- ------------- -------------- ------------- Operating Income 150,974 164,904 271,391 310,328 -------------------------------------------------------- ------------- ------------- -------------- ------------- Other Income (Expense) Interest income 569 739 1,276 777 Other, net (740) (3,187) (2,075) (4,941) -------------------------------------------------------- ------------- ------------- -------------- ------------- Total Other Income (Expense) (171) (2,448) (799) (4,164) -------------------------------------------------------- ------------- ------------- -------------- ------------- Income before Interest Charges and Income Taxes 150,803 162,456 270,592 306,164 -------------------------------------------------------- ------------- ------------- -------------- ------------- Interest Charges Gross interest charges 28,624 27,945 57,363 57,033 Allowance for borrowed funds used during construction (574) (111) (1,033) (204) -------------------------------------------------------- ------------- ------------- -------------- ------------- Net Interest Charges 28,050 27,834 56,330 56,829 -------------------------------------------------------- ------------- ------------- -------------- ------------- Income before Income Taxes 122,753 134,622 214,262 249,335 Income Taxes 45,622 49,933 79,010 92,662 -------------------------------------------------------- ------------- ------------- -------------- ------------- Net Income 77,131 84,689 135,252 156,673 Dividends on Preferred Stock 378 378 756 756 -------------------------------------------------------- ------------- ------------- -------------- ------------- Earnings for Common Stock $ 76,753 $ 84,311 $ 134,496 $ 155,917 -------------------------------------------------------- ------------- ------------- -------------- ------------- See Notes to Interim Financial Statements. 8 Florida Power Corporation BALANCE SHEETS (Unaudited) (In thousands) June 30, December 31, Assets 2002 2001 --------------------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 7,206,421 $ 7,151,729 Accumulated depreciation (4,083,609) (3,984,308) --------------------------------------------------------------------------------------------------------------- Utility plant in service, net 3,122,812 3,167,421 Held for future use 7,921 8,274 Construction work in progress 404,033 292,883 Nuclear fuel, net of amortization 51,388 62,536 --------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 3,586,154 3,531,114 --------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 8,020 - Accounts receivable 205,034 185,562 Unbilled accounts receivable 74,919 63,080 Receivable from affiliates 15,190 16,424 Notes receivable from affiliates 9,723 119,799 Deferred income taxes 21,070 32,334 Inventory 205,246 188,630 Deferred fuel cost 5,186 15,147 Prepayments and other current assets 8,942 4,336 --------------------------------------------------------------------------------------------------------------- Total Current Assets 553,330 625,312 --------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 138,908 157,725 Unamortized debt expense 11,338 11,844 Nuclear decommissioning trust funds 409,853 406,100 Miscellaneous other property and investments 43,476 46,442 Prepaid pension costs 209,651 198,351 Other assets and deferred debits 15,288 21,274 --------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 828,514 841,736 --------------------------------------------------------------------------------------------------------------- Total Assets $ 4,967,998 $ 4,998,162 --------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities --------------------------------------------------------------------------------------------------------------- Capitalization Common stock $ 1,081,257 $ 1,081,257 Retained earnings 925,284 950,387 --------------------------------------------------------------------------------------------------------------- Total Common Stock Equity 2,006,541 2,031,644 Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497 Long-term debt, net 1,501,007 1,619,280 --------------------------------------------------------------------------------------------------------------- Total Capitalization 3,541,045 3,684,421 --------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 101,937 32,000 Accounts payable 160,679 143,828 Payable to affiliates 126,556 189,817 Taxes accrued 29,764 1,768 Interest accrued 54,383 54,440 Customer deposits 123,060 118,285 Accrued taxes other than on income 66,892 9,202 Other current liabilities 48,182 57,778 --------------------------------------------------------------------------------------------------------------- Total Current Liabilities 711,453 607,118 --------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 406,853 394,828 Accumulated deferred investment tax credits 49,999 53,875 Regulatory liabilities 48,746 45,643 Other liabilities and deferred credits 209,902 212,277 --------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 715,500 706,623 --------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 11) --------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 4,967,998 $ 4,998,162 --------------------------------------------------------------------------------------------------------------- See Notes to Interim Financial Statements. 9 Florida Power Corporation STATEMENTS of CASH FLOWS Six Months Ended (Unaudited) June 30, (In thousands) 2002 2001 --------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 135,252 $ 156,673 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 157,166 249,542 Deferred income taxes and investment tax credits, net 16,073 4,397 Deferred fuel cost 9,961 4,222 Changes in working capital: Net increase in accounts receivable (30,077) (29,657) Net increase in inventories (16,616) (37,809) Net (increase) decrease in prepaids and other current assets (4,606) 5,691 Net increase (decrease) in accounts payable (46,410) 16,487 Net increase in other current liabilities 80,808 73,619 Other (4,786) (78,760) --------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 296,765 364,405 --------------------------------------------------------------------------------------------------------------- Investing Activities: Property additions (187,979) (121,701) Nuclear fuel additions (108) (33,058) Other investing activities (1,859) (9,139) --------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (189,946) (163,898) --------------------------------------------------------------------------------------------------------------- Financing Activities: Net increase in commercial paper reclassified to long-term debt (47,420) (74,930) Net increase (decrease) in intercompany notes 110,076 (10,353) Retirement of long-term debt (1,100) (1,000) Dividends paid to parent (159,599) (109,223) Dividends paid on preferred stock (756) (756) --------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (98,799) (196,262) --------------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 8,020 4,245 --------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of the Period - 3,380 --------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 8,020 $ 7,625 --------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest (net of amount capitalized) $ 56,387 $ 59,519 income taxes (net of refunds) $ 10,348 $ 20,849 See Notes to Interim Financial Statements. 10

Florida Progress Corporation and Florida Power Corporation NOTES TO INTERIM FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization. Florida Progress Corporation (the Company or Florida Progress) is ------------- a holding company under the Public Utility Holding Company Act of 1935 (PUHCA). The Company became subject to the regulations of PUHCA when it was acquired by Progress Energy, Inc. (Progress Energy or the Parent). Florida Progress' two primary subsidiaries are Florida Power Corporation (Florida Power) and Progress Fuels Corporation (Progress Fuels). Florida Power is a regulated public utility engaged in the generation, transmission, distribution and sale of electricity in portions of Florida. Florida Power is regulated by the Florida Public Service Commission (FPSC) and the Federal Energy Regulatory Commission (FERC). Progress Fuels is a diversified non-utility energy company, whose principal business segments are Energy & Related Services and Rail Services. Progress Fuels' Rail Services and the non-Florida portion of its Energy & Related Services operations report their results one-month in arrears, due to their wide-ranging geographical locations. Basis of Presentation. These financial statements have been prepared in ------------------------ accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Because the accompanying consolidated interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles, they should be read in conjunction with the audited financial statements for the period ended December 31, 2001 and notes thereto included in Florida Progress' and Florida Power's Form 10-K for the year ended December 31, 2001. The amounts included in the consolidated interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present Florida Progress' and Florida Power's financial position and results of operations for the interim periods. Due to seasonal weather variations and the timing of outages of electric generating units, the results of operations for interim periods are not necessarily indicative of amounts expected for the entire year. Certain reclassifications have been made to prior-year amounts to conform to the current year's presentation. In preparing financial statements that conform with generally accepted accounting principles, management must make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses reflected during the reporting period. Actual results could differ from those estimates. NOTE 2. FINANCIAL INFORMATION BY BUSINESS SEGMENT The Company's principal business segment is Florida Power, an electric utility engaged in the generation, purchase, transmission, distribution and sale of electricity primarily in Florida. The other reportable business segments are Progress Fuels' Energy & Related Services and Rail Services. The Inland Marine Transportation business, formerly a business segment, was sold in November 2001 (See Note 3). The Energy & Related Services includes coal and synthetic fuel operations, natural gas production and sales, river terminal services and off-shore marine transportation. Rail Services' operations include railcar repair, rail parts reconditioning and sales, railcar leasing and sales, rail and track material sales, and scrap metal recycling. These activities include maintenance and reconditioning of salvageable scrap components of railcars, locomotive repair, right-of-way maintenance and operating manufacturing facilities for new rail cars. The other category consists primarily of Progress Telecommunications, the Company's telecommunications subsidiary, the Company's investment in FPC Capital Trust, which holds the Preferred Securities, and the holding company, Florida Progress Corporation. Progress Telecommunications markets wholesale fiber-optic based capacity service in the Eastern United States and also markets wireless structure attachments to wireless communication companies and governmental entities. Florida Progress allocates a portion of its operating expenses to business segments. 11 Financial data for business segments for the periods covered in this Form 10-Q are presented in the table below: Energy and Related Rail (In thousands) Utility Services Services (a) Other Consolidated ----------------------------------------------- ------------ -------------- -------------- --------------- --------------- Three months ended June 30, 2002: Revenues $ 765,923 $ 84,288 $ 210,534 $64,376 $1,125,121 Intersegment revenues -- 127,889 855 (128,744) -- Income (loss) from continuing operations 76,753 37,719 2,947 (27,063) 90,356 Total assets 4,967,998 807,829 607,617 274,365 6,657,809 =============================================== ============ ============== ============== =============== =============== Energy and Related Rail Utility Services Services Other Consolidated ----------------------------------------------- ------------ -------------- -------------- --------------- --------------- Three months ended June 30, 2001: Revenues $ 783,660 $ 91,800 $ 225,861 $32,327 $1,133,648 Intersegment revenues -- 111,896 541 (112,437) -- Income (loss) from continuing operations 84,311 38,242 (9,690) (10,963) 101,900 Total assets 4,925,985 438,526 802,536 255,981 6,423,028 =============================================== ============ ============== ============== =============== =============== Energy and Related Rail Utility Services Services (a) Other Consolidated ----------------------------------------------- ------------ -------------- -------------- --------------- --------------- Six months ended June 30, 2002: Revenues $1,452,364 $154,303 $ 379,903 $ 132,229 $ 2,118,799 Intersegment revenues -- 259,819 1,350 (261,169) -- Income (loss) from continuing operations 134,496 68,466 2,246 (39,079) 166,129 Total assets 4,967,998 807,829 607,617 274,365 6,657,809 =============================================== ============ ============== ============= =============== =============== Energy and Related Rail Utility Services Services Other Consolidated ----------------------------------------------- ------------ -------------- ------------- ---------------- --------------- Six months ended June 30, 2001: Revenues $1,594,133 $ 176,488 $ 450,026 $57,912 $2,278,559 Intersegment revenues -- 192,412 578 (192,990) -- Income (loss) from continuing operations 155,917 67,423 (11,788) (34,027) 177,525 Total assets 4,925,985 438,526 802,536 255,981 6,423,028 =============================================== ============ ============== ============= ================ =============== (a) Rail Services' total segment assets at June 30, 2002, decreased from the prior year due to asset sales and impairments recorded in the fourth quarter of 2001.

NOTE 3. DISCONTINUED OPERATIONS On July 23, 2001, Progress Energy announced the disposition of the Inland Marine Transportation segment of the Company, which was operated by MEMCO Barge Line, Inc. Inland Marine provides transportation of coal, agricultural and other dry-bulk commodities as well as fleet management services. Progress Energy entered into a contract to sell MEMCO Barge Line, Inc., to AEP Resources, Inc., a wholly-owned subsidiary of American Electric Power. On November 1, 2001, the Company completed the sale of the Inland Marine Transportation segment. The results of operations for the three and six months ended June 30, 2001, have been restated for the discontinued operations of the Inland Marine Transportation segment. The net income of these operations is reported in the Consolidated Statements of Income under discontinued operations. 12 Results for discontinued operations for the three and six months ended June 30, 2001, were as follows: (in thousands) Three Months ended Six Months ended June 30, 2001 June 30, 2001 ------------------------ ---------------------- Revenues $ 41,039 $ 75,307 ======================== ====================== Earnings before income taxes $ 3,800 $ 4,530 Income taxes 1,481 1,848 ------------------------ ---------------------- Net earnings 2,319 2,682 Estimated loss on disposal of discontinued operations, including provision of $5,468 for pre-tax operating income during phase-out period, (net of applicable income tax expense of $1,231) 14,408) (14,408) ------------------------ ---------------------- Loss from discontinued operations $ (12,089) $ (11,726) ======================== ======================

NOTE 4. IMPACT OF NEW ACCOUNTING STANDARD During the second quarter of 2001, the Financial Accounting Standards Board (FASB) issued interpretations of Statements of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities," (SFAS No. 133) indicating that options in general cannot qualify for the normal purchases and sales exception, but provided an exception that allows certain electricity contracts, including certain capacity-energy contracts, to be excluded from the mark-to-market requirements of SFAS No. 133. The interpretations were effective July 1, 2001. Those interpretations did not require the Company to mark-to-market any of its electricity capacity-energy contracts currently outstanding. In December 2001, the FASB revised the criteria related to the exception for certain electricity contracts, with the revision to be effective April 1, 2002. The revised interpretation did not result in any significant changes to the Company's assessment of mark-to-market requirements for its current contracts. If an electricity or fuel supply contract in its regulated businesses is subject to mark-to-market accounting, there generally would be no income statement effect of the mark-to-market because such contracts are generally reflected in fuel adjustment clauses so that the contract's mark-to-market gain or loss would be recorded as a regulatory asset or liability. Any mark-to-market gains or losses in its non-regulated businesses would affect income unless those contracts qualify for hedge accounting treatment. The application of the new rules is still evolving and further guidance from the FASB is expected, which could additionally impact the Company's financial statements. Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This statement clarifies the criteria for recording of other intangible assets separately from goodwill. See Note 5 for more information. The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in July 2001. This statement provides accounting requirements for retirement obligations associated with long-lived assets and is effective January 1, 2003. This statement requires that the present value of retirement costs for which the Company has a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period. The liability is then accreted over time by applying an interest method of allocation to the beginning liability. The Company is in the process of identifying retirement obligations. Areas that are being reviewed include electric transmission and distribution, gas production and distribution, nuclear decommissioning, all generating facilities, coal mines, synthetic fuel facilities, terminals, telecommunication assets, and assets that require special handling under environmental regulations. The Company is also in the process of quantifying the obligations that have been identified under the measurement rules described in the standard. Florida Power does not expect there to be any impact on earnings from this statement. For unregulated companies, the Company currently cannot predict the earnings impact. NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This statement clarifies the criteria for recording of other intangible assets separately from goodwill. Effective January 1, 2002, goodwill is no longer subject to amortization over its estimated useful life. Instead, goodwill is subject to at least an annual assessment for impairment by applying a two-step fair-value based test. This assessment could result in periodic impairment charges. The Company has completed the first step of the initial transitional goodwill impairment test, which indicated that the Company's goodwill was not impaired as of January 1, 2002. 13 The changes in the carrying amount of goodwill for the six months ended June 30, 2002, are as follows: (in thousands) Balance as of January 1, 2002 $11,101 Acquisitions 33,747 --------- Balance as of June 30, 2002 $44,848 The acquired goodwill relates to the acquisition of Westchester Gas Company in April 2002 (see Note 6). As of June 30, 2002, all goodwill has been assigned to the Energy and Related Services segment. As required by SFAS No. 142, the results for the prior year's periods have not been restated. A reconciliation of net income as if SFAS No. 142 had been adopted is presented below for the three and six months ended June 30, 2001, and the years ended December 31, 2001, 2000 and 1999. Three Months Six Months Year Ended Year Ended Year Ended (in thousands) Ended Ended 2001 2000 1999 June 30, 2001 June 30, 2001 ------------------ ----------------- ----------------- ------------------ ----------------- Reported net income $ 89,811 $ 165,799 $ 244,331 $ 144,241 $ 314,897 Add back: Goodwill amortization 393 1,173 2,394 3,001 5,509 --------- ---------- --------- ---------- ---------- Adjusted net income $ 90,204 $ 166,972 $ 246,725 $ 147,242 $ 320,406

The Company has no other significant intangible assets as of June 30, 2002, and December 31, 2001. Florida Power has no goodwill and no significant intangible assets as of June 30, 2002, and December 31, 2001. NOTE 6. FUEL ACQUISITION On April 26, 2002, Progress Fuels Corporation acquired 100% of Westchester Gas Company. The acquisition included approximately 215 producing natural gas wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems located within a 25-miles radius of Jonesville, Texas, on the Texas-Louisiana border. The aggregate purchase price of approximately $153 million consisted of cash consideration of approximately $22 million and the issuance of 2.5 million shares of Progress Energy common stock valued at approximately $129 million. The purchase price includes approximately $1.7 million of direct transaction costs. The purchase price was allocated primarily to fixed assets based on the preliminary fair values of the assets acquired. The excess of the purchase price over the preliminary fair value of the net identifiable assets and liabilities acquired has been recorded as goodwill. Based on this preliminary allocation, goodwill of approximately $34 million has been recorded. The preliminary purchase price allocation is subject to adjustment for changes in the preliminary assumptions and analyses used, pending additional information including final asset valuations and allocations to gas properties. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of operations for Westchester have been included in the Company's consolidated financial statements since the date of acquisition. The pro forma results of operations would not be materially different than the reported results of operations for the three and six months ended June 30, 2002, or for the comparable periods of the prior year. NOTE 7. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES (QUIPS) OF A SUBSIDIARY TRUST HOLDING SOLELY FLORIDA PROGRESS GUARANTEED SUBORDINATED DEFERRABLE INTEREST NOTES In April 1999, FPC Capital I (the Trust), an indirect wholly owned subsidiary of the Company, issued 12 million shares of $25 par cumulative Company-obligated mandatorily redeemable preferred securities (Preferred Securities) due 2039, with an aggregate liquidation value of $300 million and an annual distribution rate of 7.10%, payable quarterly. Currently, all 12 million shares of the Preferred Securities that were issued are outstanding. Concurrent with the issuance of the Preferred Securities, the Trust issued to Florida Progress Funding Corporation (Funding Corp.) all of the common securities of the Trust (371,135 shares), for $9.3 million. Funding Corp. is a direct wholly owned subsidiary of the Company. The existence of the Trust is for the sole purpose of issuing the Preferred Securities and the common securities and using the proceeds thereof to purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable Interest Notes (subordinated notes) due 2039, for a principal amount of $309.3 million. The subordinated notes and the Notes Guarantee (as discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds from the sale of the subordinated notes were advanced to Progress Capital Holdings, Inc. (PCH), and used for general corporate purposes including the repayment of a portion of certain outstanding short-term bank loans and commercial paper. 14 The Company has fully and unconditionally guaranteed the obligations of Funding Corp. under the subordinated notes (the Notes Guarantee). In addition, the Company has guaranteed the payment of all distributions required to be made by the Trust, but only to the extent that the Trust has funds available for such distributions (Preferred Securities Guarantee). The Preferred Securities Guarantee, considered together with the Notes Guarantee, constitutes a full and unconditional guarantee by the Company of the Trust's obligations under the Preferred Securities. The subordinated notes may be redeemed at the option of Funding Corp. beginning in 2004 at par value plus accrued interest through the redemption date. The proceeds of any redemption of the subordinated notes will be used by the Trust to redeem proportional amounts of the Preferred Securities and common securities in accordance with their terms. Upon liquidation or dissolution of Funding Corp., holders of the Preferred Securities would be entitled to the liquidation preference of $25 per share plus all accrued and unpaid dividends thereon to the date of payment. These Preferred Securities are classified as long-term debt on Florida Progress' consolidated balance sheets. NOTE 8. FLORIDA POWER RATE CASE SETTLEMENT On March 27, 2002, the parties in Florida Power's rate case entered into a Stipulation and Settlement Agreement (the Agreement) related to retail rate matters. The Agreement was approved by the Florida Public Service Commission (FPSC) on April 23, 2002. The Agreement is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if Florida Power's base rate earnings fall below a 10% return on equity, Florida Power may petition the FPSC to amend its base rates. The Agreement provides that Florida Power will reduce its retail revenues from the sale of electricity by an annual amount of $125 million. The Agreement also provides that Florida Power will operate under a Revenue Sharing Incentive Plan (the Plan) through 2005, and thereafter until terminated by the FPSC, that establishes annual revenue caps and sharing thresholds. The Plan provides that retail base rate revenues between the sharing thresholds and the retail base rate revenue caps will be divided into two shares - a 1/3 share to be received by Florida Power's shareholders, and a 2/3 share to be refunded to Florida Power's retail customers; provided, however, that for the year 2002 only, the refund to customers will be limited to 67.1% of the 2/3 customer share. The retail base rate revenue sharing threshold amounts for 2002 will be $1,296 million and will increase $37 million each year thereafter. The Plan also provides that all retail base rate revenues above the retail base rate revenue caps established for each year will be refunded to retail customers on an annual basis. For 2002, the refund to customers will be limited to 67.1% of the retail base rate revenues that exceed the 2002 cap. The retail base revenue caps for 2002 will be $1,356 million and will increase $37 million each year thereafter. The Agreement also provides that beginning with the in-service date of Florida Power's Hines Unit 2 and continuing through December 31, 2005, Florida Power will be allowed to recover through the fuel cost recovery clause a return on average investment and depreciation expense for Hines Unit 2, to the extent such costs do not exceed the Unit's cumulative fuel savings over the recovery period. Hines Unit 2 is a 516 MW combined-cycle unit under construction and currently scheduled for completion in late 2003. Additionally, the Agreement provides that Florida Power will effect a mid-course correction of its fuel cost recovery clause to reduce the fuel factor by $50 million for the remainder of 2002. The fuel cost recovery clause will operate as it normally does, including, but not limited to any additional mid-course adjustments that may become necessary, and the calculation of true-ups to actual fuel clause expenses. Florida Power will suspend accruals on its reserves for nuclear decommissioning and fossil dismantlement through December 31, 2005. Additionally, for each calendar year during the term of the Agreement, Florida Power will record a $62.5 million depreciation expense reduction, and may, at its option, record up to an equal annual amount as an offsetting accelerated depreciation expense. In addition, Florida Power is authorized, at its discretion, to accelerate the amortization of certain regulatory assets over the term of the Agreement. There was no accelerated depreciation expense recorded for the three and six months ended June 30, 2002. Under the terms of the Agreement, Florida Power agreed to continue the implementation of its four-year Commitment to Excellence Reliability Plan and expects to achieve a 20% improvement in its annual System Average Interruption Duration Index by no later than 2004. If this improvement level is not achieved for calendar years 2004 or 2005, Florida Power will provide a refund of $3 million for each year the level is not achieved to 10% of its total retail customers served by its worst performing distribution feeder lines. 15 The Agreement also provides that Florida Power will refund to customers $35 million of revenues Florida Power collected during the interim period since March 13, 2001. This one-time retroactive revenue refund was recorded in the first quarter of 2002 and will be returned to retail customers over an eight-month period ending December 31, 2002. NOTE 9. FINANCING ACTIVITIES In February 2002, $50 million of Progress Capital Holdings, Inc. (PCH) medium-term notes, 5.78% Series, matured. Progress Energy funded this maturity through the issuance of commercial paper. On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54% Series, matured. Florida Power funded this maturity through the issuance of commercial paper. On July 11, 2002, Florida Power announced the redemption of $108.55 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 A Due January 1, 2027, $90 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 B Due February 1, 2022, and $10.115 million principal amount of Pasco County Pollution Control Refunding Revenue Bonds, Series 1992A Due February 1, 2022, at 102% of the principal amount of such bonds and $32.2 million principal amount of Pinellas County Pollution Control Refunding Revenue Bonds, Series 1991 Due December 1, 2014 at 101% of the principal amount of such bonds. These redemptions were finalized on August 12, 2002. On July 16, 2002, Florida Power issued $108.55 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due January 1, 2027, $100.115 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022 and $32.2 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002C Due January 1, 2018. Proceeds from this issuance were used to redeem Florida Power's pollution control revenue refunding bonds above. NOTE 10. COMPREHENSIVE INCOME Comprehensive income for Florida Progress for the three and six months ended June 30, 2002, was $91.1 million and $166.4 million, respectively. Comprehensive income for Florida Progress for the three and six months ended June 30, 2001, was $89.8 million and $165.5 million, respectively. Items of other comprehensive income for the three and six-month periods consisted primarily of foreign currency translation adjustments. Florida Power does not have any items of other comprehensive income. NOTE 11. COMMITMENTS AND CONTINGENCIES Contingencies 1) Impairment of Long-Lived Assets - Due to the recent decline of the telecommunications industry, the Company has initiated a valuation study to assess the recoverability of Progress Telecom's long-lived assets, which totaled approximately $288 million at June 30, 2002. The Company expects to record an impairment in the third quarter. Progress Telecom is currently providing broadband services to WorldCom Inc. and its subsidiaries. Due to WorldCom Inc.'s bankruptcy filing in July 2002, the Company is assessing what impact, if any, the WorldCom Inc. developments will have on Progress Telecom's operations. The Company does not expect the WorldCom Inc. developments to have a material impact on its consolidated results of operations, financial position or cash flows. 2) IRS Audit - One of Progress Fuels' synthetic fuel entities, Colona Synfuel Limited Partnership, L.L.L.P., is being audited by the IRS. The Company has been allocated approximately $202 million in tax credits to date for this synthetic fuel entity. In management's opinion, the Company is complying with all the necessary requirements to be allowed such credits and believes it is likely, although it cannot provide certainty, that it will prevail if challenged by the IRS on any credits taken. The timing for the ultimate disposition of this audit is uncertain. 3) Claims and Uncertainties -- The Company is subject to federal, state and local regulations addressing air and water quality, hazardous and solid waste management and other environmental matters. 16 Various organic materials associated with the production of manufactured gas, generally referred to as coal tar, are regulated under federal and state laws. The lead or sole regulatory agency that is responsible for a particular former coal tar site depends largely upon the state in which the site is located. There are several MGP sites to which Florida Power has some connection. In this regard, Florida Power, with other potentially responsible parties, is participating in investigating and, if necessary, remediating former coal tar sites with several regulatory agencies, including, but not limited to, the U.S. Environmental Protection Agency (EPA) and the FDEP. In addition, the Company is periodically notified by regulators such as the EPA and various state agencies of their involvement or potential involvement in site, other than MGP sites, that may require investigation and/or remediation. There are two former MGP sites and 8 other active waste sites or categories of sites associated with Florida Power that have required or are anticipated to require investigation and/or remediation costs. As of June 30, 2002, Florida Power has accrued approximately $8.4 million for probable and reasonably estimable costs at these sites. Florida Power believes that the maximum liability it can currently estimate on these sites is $12.9 million. As more activity occurs at these sites, Florida Power will assess the need to adjust the accruals. These accruals have been recorded on an undiscounted basis. Florida Power measures its liability for these sites based on available evidence including its experience in investigation and/or remediation of contaminated sites, which includes assessing and developing cost-sharing arrangements with other potentially responsible parties. A rollforward of the balance in this accrual is not provided due to the immateriality of this activity in the periods presented. As part of the sale of the Inland Marine Transportation segment to AEP Resources in 2001, Florida Progress established an accrual to address liabilities which may result from known and unknown environmental liabilities but primarily to address contamination in soil and potentially groundwater at one site. The balance in this accrual is $9.9 million at June 30, 2002. Florida Progress estimates that its maximum contractual liability to AEP Resources associated with Inland Marine Transportation segment is $60 million. These accruals have been determined on an undiscounted basis. Florida Progress measures its liability for this site based on estimable and probable remediation scenarios. A rollforward of the balance in this accrual is not provided due to the immateriality of this activity for the periods presented. The Company believes that it is reasonably possible that additional costs, which cannot be currently estimated, may be incurred related to the environmental indemnification provision beyond the amounts accrued. The Company cannot predict the outcome of this matter. The Company is also currently in the process of assessing potential costs and exposures at other sites it has been notified of. As the assessments are developed and analyzed, the Company will accrue costs for the sites to the extent the costs are probable and can be reasonably estimated. There has been and may be further proposed federal legislation requiring reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon dioxide and mercury setting forth national caps and emission levels over an extended period of time. This national multi-pollutant approach would have significant costs which could be material to the Company's consolidated financial position or results of operations. Some companies may seek recovery of the related cost through rate adjustments or similar mechanisms. The Company cannot predict the outcome of this matter. The EPA has been conducting an enforcement initiative related to a number of coal-fired utility power plants in an effort to determine whether modifications at those facilities were subject to New Source Review requirements or New Source Performance Standards under the Clean Air Act. Florida Power was asked to provide information to the EPA as part of this initiative and cooperated in providing the requested information. The EPA has initiated enforcement actions against other utilities as part of this initiative, some of which have resulted in or may result in settlement agreements, ranging from $1.0 billion to $1.4 billion. A utility that was not subject to a civil enforcement action settled its New Source Review issues with the EPA for $300 million. These settlement agreements have generally called for expenditures to be made over extended time periods, and some of the companies may seek recovery of the related costs through rate adjustments. The Company cannot predict the outcome of this matter. In July 1997, the EPA issued final regulations establishing a new eight-hour ozone standard. In October 1999, the District of Columbia Circuit Court of Appeals ruled against the EPA with regard to the federal eight-hour ozone standard. The U.S. Supreme Court has upheld, in part, the District of Columbia Circuit Court of Appeals decision. Further litigation and rulemaking are anticipated. The Company cannot predict the outcome of this matter. Florida Power has filed claims with the Company's general liability insurance carriers to recover costs arising out of actual or potential liabilities. Some claims have settled and others are still pending. While management cannot predict the outcome of these matters, the outcome is not expected to have a material effect on the financial position or results of operations. 17 LEGAL MATTERS Age Discrimination Suit -- Florida Power and Florida Progress have been named defendants in an age discrimination lawsuit. The number of plaintiffs remains at 116, but four of those plaintiffs have had their federal claims dismissed and 74 others have had their state age claims dismissed. While no dollar amount was requested, each plaintiff seeks back pay, reinstatement or front pay through their projected dates of normal retirement, costs and attorneys' fees. In October 1996, the Federal Court approved an agreement between the parties to provisionally certify this case as a class action suit under the Age Discrimination in Employment Act. Florida Power filed a motion to decertify the class and in August 1999, the Court granted Florida Power's motion. In October 1999, the judge certified the question of whether the case should be tried as a class action to the Eleventh Circuit Court of Appeals for immediate appellate review. In December 1999, the Court of Appeals agreed to review the judge's order decertifying the class. In anticipation of a potential ruling decertifying the case as a class action, plaintiffs filed a virtually identical lawsuit, which identified all opt-in plaintiffs as named plaintiffs. On July 5, 2001, the Eleventh Circuit Court of Appeals ruled that as a matter of law, disparate claims cannot be brought under the Americans with Disabilities Act (ADEA). This ruling has the effect of decertifying the case as a class action. On October 3, 2001, the plaintiffs filed a petition in the United States Supreme Court, requesting a hearing of the case, on the issue of whether disparate claims can be brought under the ADEA. On December 3, 2001, the United States Supreme Court agreed to hear the case. Oral arguments on the issue were held on March 20, 2002. On April 1, 2002, the U.S. Supreme Court issued a per curiam affirmed order in the case stating they had improvidently granted the oral argument and they would uphold the ruling of the Eleventh Circuit Court of Appeals. Therefore, the case will remain decertified. As a result of the decertification, the trial court has grouped the plaintiffs cases to be tried. The trial for the first set of twelve plaintiffs began on July 22, 2002. The jury entered a verdict in favor of Florida Power in that trial on August 9, 2002. The other plaintiffs' trial dates have not been set. The Company cannot predict the outcome of this matter. In December 1998, during mediation in this age discrimination suit, plaintiffs alleged damages of $100 million. Company management, while not believing plaintiffs' claim to have merit, offered $5 million in an attempt to settle all claims. Plaintiffs rejected that offer. Florida Power and the plaintiffs engaged in informal settlement discussions, which terminated on December 22, 1998. As a result of the plaintiffs' claims, management has identified a probable range of $5 million to $100 million with no amount within that range a better estimate of probable loss than any other amount; accordingly, Florida Power has accrued $5 million. In December 1999, Florida Power also recorded an accrual of $4.8 million for legal fees associated with defending its position in these proceedings. There can be no assurance that this litigation will be settled, or if settled, that the settlement will not exceed $5 million. Additionally, the ultimate outcome, if all cases are litigated, cannot presently be determined. Franchise Litigation -- Seven cities, with a total of approximately 59,000 customers, have sued Florida Power in various circuit courts in Florida. The lawsuits principally seek 1) a declaratory judgment that the cities have the right to purchase Florida Power's electric distribution system located within the municipal boundaries of the cities, 2) a declaratory judgment that the value of the distribution system must be determined through arbitration, and 3) injunctive relief requiring Florida Power to continue to collect from Florida Power's customers and remit to the cities, franchise fees during the pending litigation, and as long as Florida Power continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of the franchise ordinances under which Florida Power had agreed to collect such fees. Three circuit courts have entered orders requiring arbitration to establish the purchase price of Florida Power's electric distribution facilities within three cities. One appellate court has held that one city has the right to determine the value of Florida Power's facilities within the city through arbitration. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system, nor has there been any proceeding to determine the value at which such a purchase could be made. Arbitration in one of the cases is scheduled to occur in the third quarter of 2002. In July 2002, Florida Power reached a settlement with one of the cities and signed a new franchise agreement that includes a purchase option at the end of the 30-year agreement. The Company cannot predict the outcome of these matters. Other Legal Matters -- Florida Progress and Florida Power are involved in various other claims and legal actions arising in the ordinary course of business, some of which involve substantial amounts. Where appropriate, accruals have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect upon either company's consolidated financial position, results of operations or liquidity. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS Florida Progress' consolidated income from continuing operations was $90.4 million for the three months ended June 30, 2002, compared to earnings of $101.9 million for the same period in 2001. Florida Progress' consolidated income from continuing operations for the six months ended June 30, 2002 was $166.1 million compared to earnings of $177.5 million for the same period in 2001. Business segment results and the factors affecting them are discussed below: FLORIDA POWER CORPORATION Florida Power, the largest subsidiary of Florida Progress, reported earnings for common stock of $76.8 million for the second quarter of 2002, compared to $84.3 million for the comparable period in 2001. For the six months ended June 30, 2002, Florida Power reported earnings for common stock of $134.5 million compared to $155.9 million for the comparable period in 2001. Florida Power's earnings for the three and six months ended June 30, 2002, were negatively affected by the outcome of the Florida Power rate case settlement, which included a one-time retroactive revenue refund of $35 million, $21 million after tax, recorded in the first quarter of 2002, as well as a decrease in retail rates, which was partially offset by reductions in depreciation in accordance with the settlement. See Note 8 to the Interim Financial Statements for additional information on the settlement. In addition, Florida Power results for the three months and six months ended were negatively affected by increase in operations and maintenance expense as described more fully below. Florida Power's electric revenues for the three and six months ended June 30, 2002 and 2001 and the percentage change by customer class are as follows (in millions): --------------------------------------- --------------------------------------- ---------------------------------------- Three Months Ended June 30, Six Months Ended June 30, --------------------------------------- ---------------------------------------- Customer Class 2002 % Change 2001 2002 % Change 2001 --------------------------------------- ------------- ------------ ------------ ------------- ------------- ------------ Residential $395.6 2.5% $386.0 $774.8 (1.3)% $784.9 Commercial 183.4 (4.7) 192.5 350.2 (0.3) 351.4 Industrial 55.1 (6.9) 59.2 105.1 (6.7) 112.6 Governmental 43.5 (1.6) 44.2 83.5 1.8 82.0 Retroactive Retail Revenue Refund - - - (35.0) - - --------------------------------------- ------------- ------------ ------------ ------------- ------------- ------------ Total Retail Revenues 677.6 (0.6) 681.9 1,278.6 (3.9) 1,330.9 Wholesale 55.8 (10.3) 62.2 108.3 (32.3) 159.9 Unbilled 5.4 - 17.5 11.8 - (4.8) Miscellaneous 27.1 22.6 22.1 53.7 (50.3) 108.1 --------------------------------------- ------------- ------------ ------------ ------------- ------------- ------------ Total Electric Revenues $765.9 (2.3)% $783.7 $1,452.4 (8.9)% $1,594.1 --------------------------------------- ------------- ------------ ------------ ------------- ------------- ------------

Florida Power's electric energy sales for the three and six months ended June 30, 2002 and 2001, and the percentage change by customer class are as follows (in thousands of mWh): --------------------------------------- --------------------------------------- ---------------------------------------- Three Months Ended June 30, Six Months Ended June 30, --------------------------------------- ---------------------------------------- Customer Class 2002 % Change 2001 2002 % Change 2001 --------------------------------------- ------------- ------------ ------------ ------------- ------------- ------------ Residential 4,515 11.1% 4,063 8,575 1.2% 8,472 Commercial 2,857 2.8 2,780 5,313 2.1 5,203 Industrial 994 (1.6) 1,010 1,876 (5.7) 1,989 Governmental 715 5.9 675 1,335 3.4 1,291 --------------------------------------- ------------- ------------ ------------ ------------- ------------- ------------ Total Retail Energy Sales 9,081 6.5 8,528 17,099 0.8 16,955 Wholesale 976 (7.9) 1,060 1,956 (16.6) 2,346 Unbilled 443 - 555 474 - 59 --------------------------------------- ------------- ------------ ------------ ------------- ------------- ------------ Total mWh sales 10,500 3.5% 10,143 19,529 0.9% 19,360 --------------------------------------- ------------- ------------ ------------ ------------- ------------- ------------

19 As a result of the settlement of the Florida Power rate case, effective May 1, 2002, Florida Power reduced its rates by 9.25%. The effect of this reduction was to reduce revenue by $20.6 million for the second quarter of 2002. Partially offsetting the decrease in rates and one-time refund as part of the settlement detailed above were the impacts of favorable weather and customer growth. In addition, revenues for the first six months of 2002 decreased when compared to the same period in the prior year due to the recognition of $63 million of deferred revenue in the first quarter of 2001, which is included in miscellaneous revenues in the table above. In 2001, the deferred revenues were offset by accelerated amortization of the Tiger Bay regulatory asset, discussed below, and therefore, had no earnings impact. Fuel used in generation and purchased power decreased $14.3 million and $48.1 million for the three and six months ended June 30, 2002, when compared to $347.2 million and $689.2 million, respectively, for the same periods in the prior year, primarily due to lower oil and gas prices, partially offset by an increase in coal prices. In addition, the decrease for the three months ended June 30, 2002, was due to the lowered recovery of fuel expense as part of the mid-course correction of Florida Power's fuel cost recovery clause as part of the settlement. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, have no material impact on operating results. Operations and maintenance expense increased by $30.2 million and $50.6 million for the three and six months ended June 30, 2002, respectively, when compared to operations and maintenance expense of $119.8 million and $230.7 million, respectively, for the same periods in the prior year. These amounts have increased due to a decreased pension credit in the current year ($12.2 million and $16.6 million lower for the three and six months ended June 30, 2002); increased other employee benefit costs, primarily driven by medical costs (approximately $3 million and $6 million for the three and six months ended June 30, 2002); increased spending related to system reliability, including the Commitment to Excellence program aimed at increasing Florida Power's customer satisfaction ($7.8 million and $13.0 million for the three and six months ended June 30, 2002); and increased support charges from the Service Company as a result of lower vacancy rates in the prior year subsequent to the FPC acquisition. Depreciation and amortization expense decreased by $19.4 million and $102.1 million for the three and six months ended June 30, 2002, when compared to expense of $94.6 million and $246.7 million, respectively, for the same periods in the prior year. The Florida Power rate case settlement provides for ongoing reductions in depreciation, nuclear decommissioning and fossil dismantlement costs that reduced the amount of depreciation recorded by $19.6 million and $39.2 million for the three and six months ended June 30, 2002, respectively. In addition, the first half of 2001 depreciation includes $63 million of accelerated amortization on the Tiger Bay regulatory asset associated with deferred revenue from 2000. PROGRESS FUELS CORPORATION Progress Fuels makes up the majority of Florida Progress' diversified operations. The results of operations for Progress Fuels' Energy and Related Services and Rail Services units are discussed below. Energy and Related Services - Earnings at the Energy and Related Services Group ---------------------------- decreased $0.5 million for the three months ended June 30, 2002, and increased $1.0 for the six months ended June 30, 2002, when compared to the same periods in the prior year. The Energy and Related Services segment sold 2.1 million and 3.6 million tons of synthetic fuel for the three and six months ended June 30, 2002, respectively, compared to 2.1 million and 3.9 million tons, respectively, for the same periods in the prior year. The sales resulted in tax credits of $55.8 million and $99.7 million being recorded for the three and six months ended June 30, 2002, respectively, compared to tax credits of $58.8 million and $103.2 million, respectively, for the same periods in the prior year. The production and sale of the synthetic fuel from these facilities qualifies for tax credits under Section 29 of the Code. See "Synthetic Fuels" under OTHER MATTERS below for additional discussion of these tax credits. Rail Services - Results in the Rail Services group improved $12.6 million and ------------- $14.0 million for the three and six months ended June 30, 2002, respectively, when compared to net losses of $9.7 million and $11.8 million, respectively, for the same periods in the prior year. Rail Services 2001 operations were negatively affected by the significant downturn in the domestic scrap market and the continuing weak market for railcar parts. Rail Service's revenues decreased $15.0 million and $69.4 million for the three and six months ended June 30, 2002 due to the continued weak business environment. In addition, Rail Services' transition from acting as a scrap reseller in 2001 to acting as a scrap resale agent in 2002 and asset sales in 2001 decreased revenues. Corresponding decreases in operating costs and the impact of targeted cost cutting measures more than offset these revenue reductions. 20 OTHER The other group includes telecommunications, holding company and financing expenses. The decreased loss over the first quarter of 2001 is due primarily to the intra-period income tax allocation adjustment. Generally accepted accounting principles require companies to apply a levelized effective tax rate to interim periods that is consistent with the estimated annual rate. Income tax expense was increased by $19.0 million and $21.8 million for the three and six months ended June 30, 2002, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was increased by $5.5 million and $20.4 million for the three and six months ended June 30, 2001, respectively. The tax credits associated with the Company's synthetic fuel operations lower the overall effective tax rate. These credits, along with seasonal earnings variations, can also cause large swings in the effective tax rate for interim periods. Therefore, this adjustment will vary each quarter, but have no effect on net income for the year. Progress Telecom recorded revenues of $11.4 million and a net loss of $5.7 million for the quarter compared with revenues of $11.1 million and a net loss of $2.0 million for the same period last year. For the six months ended June 30, 2002, Progress Telecom recorded revenues of $22.4 million and a net loss of $9.7 compared with revenues of $21.3 million and a net loss of $4.0 million for the same period last year. Due to the recent decline of the telecommunications industry, the Company has initiated a valuation study to assess the recoverability of Progress Telecom's long-lived assets, which totaled approximately $288 million at June 30, 2002. The Company expects to record an impairment in the third quarter. Progress Telecom is currently providing broadband services to WorldCom Inc. and its subsidiaries. Due to WorldCom Inc.'s bankruptcy filing in July 2002, the Company is assessing what impact, if any, the WorldCom Inc. developments will have on Progress Telecom's operations. The Company does not expect the WorldCom Inc. developments to have a material impact on its consolidated results of operations, financial position or cash flows. MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES Statements of Cash Flows and Financing Activities Cash provided by operating activities increased $19.1 million for the six months ended June 30, 2002, when compared to the corresponding period in the prior year. The increase in cash from operating activities for the 2002 period is due to changes in the balances of certain current assets and liabilities due to operational fluctuations. Net cash used in investing activities increased $63.9 million for the six months ended June 30, 2002, when compared to the corresponding period in the prior year. This is primarily due to increased expenditures on Florida Power's construction program and the acquisition of Westchester Gas Company (See Note 6 to the Interim Financial Statements). During the first six months of 2002, $188.0 million was spent on the Florida Power construction program and $62.7 million was spent in diversified operations. The acquisition of Westchester Gas Company resulted in a net cash outflow of $17.4 million. Net cash used in financing activities decreased $70.9 million for the six months ended June 30, 2002, when compared to the corresponding period in the prior year. The decrease is primarily due to the Company paying off $165.2 of short-term indebtedness in the prior year. This decrease was offset with increases in the net equity transactions with the parent and intercompany borrowings in the current year. In February 2002, $50 million of Progress Capital Holding (PCH) medium-term notes, 5.78% Series, matured. Progress Energy funded this maturity through the issuance of commercial paper. On March 28, 2002, Standard & Poor's affirmed Progress Energy's corporate credit rating of BBB+ and Florida Power's rating but revised the outlook for Progress Energy to negative from stable. S&P stated that its change in outlook reflects the increased business risk at Progress Energy's Progress Ventures business unit and lower-than-projected credit protection measures. The change in outlook by the rating agency has not affected the Company's access to liquidity nor the cost of its short-term borrowings. The Company is committed to maintaining its current ratings and is currently assessing the situation with the rating agency to determine an appropriate course of action, if necessary, to address its concerns. On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54% Series, matured. Florida Power funded this maturity through the issuance of commercial paper. On July 11, 2002, Florida Power announced the redemption of $108.55 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 A Due January 1, 2027, $90 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 B Due February 1, 2022, and $10.115 million principal amount of Pasco County Pollution Control Refunding Revenue Bonds, Series 1992A Due February 1, 2022, at 102% of the principal amount of such bonds and $32.2 million principal amount of Pinellas County Pollution Control Refunding Revenue Bonds, Series 1991 Due December 1, 2014 at 101% of the principal amount of such bonds. These redemptions were finalized on August 12, 2002. 21 On July 16, 2002, Florida Power issued $108.55 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due January 1, 2027, $100.115 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022 and $32.2 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002C Due January 1, 2018. Proceeds from this issuance were used to redeem Florida Power's pollution control revenue refunding bonds above. Future Commitments As of June 30, 2002, both Florida Progress' and Florida Power's contractual cash obligations and other commercial commitments has not changed materially from what was reported in the 2001 Annual Report on Form 10-K. OTHER MATTERS Florida Power Rate Case Settlement On March 27, 2002, the parties in Florida Power's rate case entered into a Stipulation and Settlement Agreement (the Agreement) related to retail rate matters. The Agreement was approved by the FPSC on April 23, 2002. The Agreement is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if Florida Power's base rate earnings fall below a 10% return on equity, Florida Power may petition the FPSC to amend its base rates. See Note 8 to the Interim Financial Statements for additional information on the Agreement. Fuel Acquisition On April 26, 2002, Progress Fuels finalized the acquisition of Westchester Gas Company, which includes approximately 215 producing natural gas wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems. The aggregate purchase price of approximately $153 million consisted of cash consideration of approximately $22 million and the issuance of 2.5 million shares of Progress Energy common stock valued at approximately $129 million. The purchase price includes approximately $1.7 million of direct transaction costs. The properties are located within a 25-mile radius of Jonesville, Texas, on the Texas-Louisiana border. This transaction added 140 billion cubic feet (Bcf) of gas reserves to Progress Fuels' fuel business. See Note 6 to the Interim Financial Statements for additional information on this acquisition. Synthetic Fuels Tax Credits The Company, through Progress Fuels and its subsidiaries, produces synthetic fuel from coal. The production and sale of the synthetic fuel qualifies for tax credits under Section 29 of the Internal Revenue Code (Section 29) if certain requirements are satisfied, including a requirement that the synthetic fuel differs significantly in chemical composition from the coal used to produce such synthetic fuel. All of the Company's synthetic fuel facilities have received favorable private letter rulings from the Internal Revenue Service (IRS) with respect to their operations. These tax credits are subject to review by the IRS, and if the Company failed to prevail through the administrative or legal process, there could be a significant tax liability owed for previously taken Section 29 credits, with a significant impact on earnings and cash flows. Tax credits for the year ended December 31, 2001 and the six months ended June 30, 2002, were $213.4 million and $99.7 million, respectively, offset by operating losses, net of tax, of $110.3 million and $43.2 million, respectively, for the same periods. One synthetic fuel entity, Colona Synfuel Limited Partnership, L.L.L.P., from which the Company has been allocated approximately $202 million in tax credits to date, is being audited by the IRS. Total Section 29 credits generated to date are approximately $503 million. In management's opinion, the Company is complying with the private letter rulings and all the necessary requirements to be allowed such credits under Section 29 and believes it is likely, although it cannot provide certainty, that it will prevail if challenged by the IRS on any credits taken. The current Section 29 tax credit program will expire in 2007. 22 Standard Market Design On July 31, 2002, the Federal Energy Regulatory Commission (FERC) issued its Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design (SMD NOPR). The proposed rules set forth in the SMD NOPR would require, among other things, that 1) all transmission owning utilities transfer control of their transmission facilities to an independent third party; 2) transmission service to bundled retail customers be provided under the FERC-regulated transmission tariff, rather than state-mandated terms and condition; 3) new terms and conditions for transmission service be adopted nationwide, including new provisions for pricing transmission in the event of transmission congestion; 4) new energy markets be established for the buying and selling of electric energy; and 5) load serving entities be required to meet minimum criteria for generating reserves. If adopted as proposed, the rules set forth in the SMD NOPR would materially alter the manner in which transmission and generation services are provided and paid for. Progress Energy is reviewing the SMD NOPR and expects to file comments. Currently, comments are due to be filed on October 14, 2002. FERC also has indicated that it expects to issue final rules during the first quarter of 2003. The Company cannot predict the outcome of this rulemaking or the possible outcome of any further proceedings, including appeals, related to this matter. Franchise Litigation Seven cities, with a total of approximately 59,000 customers, have sued Florida Power in various circuit courts in Florida. The lawsuits principally seek 1) a declaratory judgment that the cities have the right to purchase Florida Power's electric distribution system located within the municipal boundaries of the cities, 2) a declaratory judgment that the value of the distribution system must be determined through arbitration, and 3) injunctive relief requiring Florida Power to continue to collect from Florida Power's customers and remit to the cities, franchise fees during the pending litigation, and as long as Florida Power continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of the franchise ordinances under which Florida Power had agreed to collect such fees. Three circuit courts have entered orders requiring arbitration to establish the purchase price of Florida Power's electric distribution facilities within three cities. One appellate court has held that one city has the right to determine the value of Florida Power's facilities within the city through arbitration. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system, nor has there been any proceeding to determine the value at which such a purchase could be made. Arbitration in one of the cases is scheduled to occur in the third quarter of 2002. In July 2002, Florida Power reached a settlement with one of the cities and signed a new franchise agreement that includes a purchase option at the end of the 30-year agreement. The Company cannot predict the outcome of these matters. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Florida Progress Corporation Certain market risks are inherent in Florida Progress' financial instruments, which arise from transactions entered into in the normal course of business. Florida Progress' primary exposures are changes in interest rates with respect to long-term debt, commercial paper reclassified as long-term debt and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. Florida Progress' exposure to return on marketable securities for the decommissioning trust funds has not changed materially since December 31, 2001. In addition, Florida Progress' exposure to changes in interest rates from the Company's fixed rate long-term debt, commercial paper reclassified as long-term debt, FPC mandatorily redeemable securities of trust and unsecured note with parent at June 30, 2002, was not materially different than at December 31, 2001. Florida Power Corporation Certain market risks are inherent in Florida Power's financial instruments, which arise from transactions entered into in the normal course of business. Florida Power's primary exposures are changes in interest rates with respect to long-term debt, commercial paper reclassified as long-term debt and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. Florida Power's exposure to return on marketable securities for the decommissioning trust funds has not changed materially since December 31, 2001. In addition, Florida Power's exposure to changes in interest rates from its fixed rate long-term debt and commercial paper reclassified as long-term debt at June 30, 2002, was not materially different than at December 31, 2001. 23 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 1. Wanda L. Adams, et al. v. Florida Power Corporation and Florida Progress Corporation, U.S. District Court, Middle District of Florida, Ocala Division, Case No. 95-123-C.V.-OC-10. See prior discussion of this matter in the 2001 Form 10-K, Item 3, paragraph 2. On October 3, 2001, the plaintiffs filed a petition in the United States Supreme Court, requesting a hearing of the case, on the issue of whether disparate claims can be brought under the Americans with Disabilities Act (ADEA). On December 3, 2001, the United States Supreme Court agreed to hear the case. Oral arguments on the issue were held on March 20, 2002. On April 1, 2002, the U.S. Supreme Court issued a per curiam affirmed order in the case stating they had improvidently granted the oral argument and they would uphold the ruling of the Eleventh Circuit Court of Appeals. Therefore, the case will remain decertified. As a result of the decertification, the trial court has grouped the plaintiffs cases to be tried. The trial for the first set of twelve plaintiffs began on July 22, 2002. The jury entered a verdict in favor of Florida Power in that trial on August 9, 2002. The other plaintiffs' trial dates have not been set. The Company cannot predict the outcome of this matter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K filed during or with respect to the quarter: Florida Progress Corporation and Florida Power Corporation None 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLORIDA PROGRESS CORPORATION FLORIDA POWER CORPORATION (Registrants) Date: August 13, 2002 By: /s/ Peter M. Scott III ------------------------------------ Peter M. Scott III Executive Vice President and Chief Financial Officer By: /s/ Robert H. Bazemore, Jr. ----------------------------------- Robert H. Bazemore, Jr. Vice President and Controller Chief Accounting Officer 25

FLORIDA PROGRESS CORP 10-Q