Florida Progress Annual Report
Written with elderly and non-English speaking utility customers in mind, the first draft of this annual report was well-received, with very few corrections from 25 reviewing officers, directors and vice presidents. My work was finished three weeks early.

Progress...on the threshold of opportunity

[Inside cover]

  • Investor Highlights
  • Contents
  • Company Profile
  • Letter to Shareholders
  • Progress. . .
    On the Threshold
    of Opportunity
  • Management’s
    Discussion & Analysis
  • Reports from
    Management & Auditors
  • Consolidated Financial
  • Notes to Consolidated
    Financial Statements
  • Selected Data (1985-1995)
  • Directors and Officers
  • Investor Information

[Page 1]

Knocking Down the Door to the Future

It takes more than conventional tools of the industry to break down the door to the future. It takes the vision to see a new universe ahead and the confidence to cross the threshold of opportunity.

Today, Florida Progress stands ready, with a strategic plan for growth to guide us into new worlds of competition.

We intend to apply new technologies in executing our strategies. We're plannning to establish business partnerships and creative alliances with other top-performing companies to accelerate our progress. And we plan to continue making acquisitions that complement our existing operations.

Florida Progress is well-positioned at the forefront of the future. This is Progress...on the Threshold of Opportunity.

[Exerpt from Company Profile]

Progress. . . on the Threshold of Opportunity

Florida Progress comprises two principal businesses, Florida Power Corporation and Electric Fuels Corporation, vertically integrated in electric utility, energy and transportation industries. Overall, we are working to become a progressive, growth company that is well-positioned to grow.

In this annual report, we’ll look at each business unit, its objectives and roles in advancing Florida Progress’ success. On the threshold of opportunity, we intend to grow your company both strategically and aggressively.

Florida Power

Florida Power is opening doors of opportunity to become one of the nation's leading energy companies. Preparing for the future, the company has reorganized into three strategic business units which are separate, relatively independent organizations operating on their own within the corporation. The three business units are responsible for your electric utility's three primary activities: 1. energy generation, 2. transmission and distribution, and 3. customer service, marketing and new product development.

This structure allows each business unit to focus attention on its distinct functions and target markets. The following describes each strategic business unit, its functions, 1996 performance and future opportunities.

Energy Supply

The Energy Supply strategic business unit is responsible for fossil fuel and nuclear generation operations. Its primary function is the reliable production of bulk energy at the lowest possible cost. Further, Energy Supply seeks to maintain a versatile energy generation portfolio in the future and to generate excess energy for sale to others. The business unit is open to strategic alliances with companies who can help strengthen Florida Power’s position as the low cost energy producer.

Our plants are efficient, cost effective and environmentally-compliant. Fossil fuel-driven units have placed Florida Power in the Top 10 for steam unit efficiency every year since 1986. In November 1996, the units ranked (xxxx) in benchmark comparisons with PowerGen, a Great Britain electric utility.

Today, approximately 60 percent of Florida Power's energy supply comes from coal, a reliable energy source available at stable market prices. We are also building a 470 megawatt generation complex in Polk County at a lower estimated per-kilowatt cost than recently built generation facilities. Contributing to the cost savings, Florida Power reached an agreement to buy Westinghouse equipment at very low prices. First-phase completion is projected for 1998.

This new construction will position Florida Power to continue offering aggressive pricing in the future, incrementally, as competitive opportunities grow in the bulk power market.

Florida Power already complies with the federal Clean Air Act. Four of our Crystal River units burn compliance and low sulphur coal. The Polk County energy plant under construction will use natural gas when it goes on-line, to coincide with tighter Clean Air Act emission standards in 1998.

Also, two peaking units were converted to gas and oil-fired facilities at a modest cost in 1995-96 to give Florida Power Corporation diversity and a competitive edge in 1997.

After sustaining 90 to 100 percent capacity output during 1993-95, Crystal River Unit 3 nuclear plant was taken off-line in 1996 for maintenance, refueling and to resolve some equipment design-based and mechanical adjustment issues. The Nuclear Regulatory Commission involved itself in management of this issue and formed a panel with Florida Power and other industry experts to develop a restart plan of action. New plant management, [ name to come ] was named to replace plant manager xxxxx, who resigned in December 1996.

The current plan calls for returning the plant to service on [ date to come ].

Florida Power has approximately 12 megawatts of purchased power, or 26 percent of our total system generation. In an effort to reduce future obligations, Florida Power is working to buy out or buy down qualifying facilities contracts. These obligations date back to the early 1990s. At that time, Florida Power complied with federal mandates for all utilities and contracted with qualifying facilities to buy energy at a cost comparable to Florida Power’s own cost for energy generation.

Today, with improvements in plant efficiency, these qualifying facility costs are higher than Florida Power’s systemwide average costs. Management believes that government-mandated costs should not be paid by our customers, which is why we are now negotiating to reduce or restructure these contracts. We are committed to minimizing all of our operating costs, including purchased power, to continue offering competitive rates.

In 1996, legislative and regulatory forces continued to offer new rules, orders and calls to action that will restructure the electric utility industry. Federal and state agencies in various jurisdictions have been interpreting these proposals differently. It is expected that Energy Supply will be the first area to be deregulated.

In general, utilities with large residential customer bases are more stable in changing times. Florida Power has a primarily residential customer base, which positions the company well as the industry undergoes the restructuring. We have added about [ number to come ] customers in 1996 and many of Florida’s high growth markets are served by Florida Power.

Also contributing to our strength, Florida Power has a low percentage of industrial sales compared with the industry average. That typically means a lower risk of industrial revenues lost to competition.

In 1995 and 1996, Energy Supply began focusing emphasis on its core strengths in service: steam and combustion turbine plant maintenance, power plant performance testing and fuel supply services. Today, its Systems Maintenance Crew is well-prepared to support the business unit’s growing needs. Moreover, Energy Supply is increasing its profitability by serving companies outside of Florida Power. This activity not only generates revenue for your company, it also keeps talented contractors employed and available to Florida Power.

In April, 1996, the company’s System Maintenance Crew completed a $500,000 contract to overhaul a combustion turbine for Florida Crushed Stone, in Brooksville. An industrial customer of Florida Power, Florida Crushed Stone operates a large limerock mine and cement-processing facility. An Energy Supply crew supervised the processor’s 133-megawatt power plant shutdown and maintenance operation, and won a satisfied customer whose maintenance needs are ongoing. The group further landed a [number of ] maintenance packages and a [$] contract with Seminole Electric Cooperative at its coal-fired plant located near Palatka.

In 1996, Energy Supply also completed two gas conversion projects at Intercession City in central Florida, earning a high level of customer satisfaction. The business unit is bidding on four more conversions for 1997.

Energy Delivery

The Energy Delivery strategic business unit is responsible for maintaining a reliable transmission and distribution network, high quality delivery services and fair and competitive pricing. The group serves existing customers and seeks to help expand Florida Power's customer base.

Its operation faces changes in the future. The National Energy Policy Act of 1992 (NEPAct) redefined the wholesale electric power market. Still being interpreted, NEPact encourages electric utilities to permit access to their transmission lines by non-utility power producers. It urges deregulation and competition.

Today, deregulation is still evolving. Legislative, regulatory and market forces, slowly but surely, are opening up competition.

In 1995, the Federal Energy Regulatory Commission proposed new rules designed to open the nation’s transmission network to all wholesale customers.

Florida Power has been offering open access transmission in contracts with wholesale customers since 1972 through the Florida Electric Coordinating Group. In response to the Commission’s new proposals, the company formed the Power Marketing strategic business unit to buy and sell energy in the wholesale marketplace, in 1995.

This bulk power segment offers some opportunities to Florida Power and some practical limitations to immediate competition from outside the state. Among the opportunities, Florida Power’s very cost-effective transmission system allows a competitive-rate tariff. Furthermore, participation in the wholesale market allows Florida Power to offset fixed costs that otherwise would have to be allocated to retail customers.

In general, the wholesale segment yields less profit than the retail business. Even so, the Power Marketing strategic business unit will compete aggressively for wholesale business opportunities that provide a reasonable return to the company.

A practical limitation to near-term competition is Florida’s geography. Its peninsular shape limits any transmission and import capability to and from utilities in the north (the state of Georgia). Comparing estimates for delivered costs, no electric utility in the Southeast can deliver power to the company’s 32-county service territory more cost-efficiently than Florida Power. Also, most of Florida Power’s transmission capacity is already under contract. These factors make Florida relatively unattractive to outside competition.

Florida Power has built a cost-effective transmission system that allows competitive rates under an open access tariff. New residents settle in Florida every day, keeping retail growth prospects strong.

Florida Power seeks to expand its transmission grid to achieve growth and to accommodate higher power flows. This expansion would ensure that use does not overload capacity. Anticipating a need, in mid-1996, the Energy Delivery strategic business unit began relocating transmission and distribution employees to Orlando.

This move puts Energy Delivery resources nearest the fast growing service areas that offer immediate opportunities. The company has allocated a portion of the operations and maintenance budget for strategic expenditures that will provide a competitive advantage in the future.

In 1996, the Federal Energy Regulatory Commission proposed new codes of conduct to promote comparable treatment for all network users in the wholesale marketplace. It ruled that energy transmission operations must be separated from energy generation operations. Further, it ruled that electric utilities must simultaneously inform all companies who generate energy about transmission capacity that is available.

To comply, Florida Power moved Energy Control Center transmission operations and the Energy Delivery strategic business unit to Orlando, physically separating them from utility marketing operations. Further, the Power Marketing group now operates in a secured trading floor area in St. Petersburg.

The Energy Control Center uses the Open Access Same-time Information System to simultaneously inform all of the state’s bulk power suppliers and purchasers about available transmission capacity. Power Marketing learns about available capacity at the same as its competitors.

In addition to expanding Florida Power’s grid, the Energy Delivery business unit contracts its expertise in operations and maintenance work to companies outside Florida Power, contributing to higher revenues for your electric utility.

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