(As filed with the Securities and Exchange Commission November 22, 2000)
File No. 70-9643
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 2
on
FORM U-1/A
APPLICATION OR DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
CP&L Energy, Inc. Florida Progress Corporation
411 Fayetteville Street Mall One Progress Plaza
Raleigh, North Carolina 27601 St. Petersburg, Florida 33701
(Names of companies filing this statement and addresses of principal
executive offices)
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None
(Name of top registered holding company parent of each applicant or declarant)
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Robert B. McGehee, Esq. Kenneth E. Armstrong, Esq.
Executive Vice President and Vice President and General Counsel
General Counsel Florida Progress Corporation
Carolina Power & Light Company One Progress Plaza
411 Fayetteville Street Mall St. Petersburg, Florida 33701
Raleigh, North Carolina 27601
(Names and addresses of agents for service)
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The Commission is requested to mail copies of all orders, notices and other
communications to:
Frank A. Schiller, Esq. Timothy S. Goettel, Esq.
Director, Legal Department Hunton & Williams
Carolina Power & Light Company 421 Fayetteville Street Mall
411 Fayetteville Street Mall Raleigh, North Carolina 27601
Raleigh, North Carolina 27601
William T. Baker, Jr., Esq. Joanne C. Rutkowski, Esq.
Thelen Reid & Priest LLP LeBoeuf, Lamb, Greene & MacRae, L.L.P.
40 W. 57th Street, 25th Floor 1875 Connecticut Avenue, N.W.
New York, New York 10019 Washington, D.C. 20009
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TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION..................................1
A. Introduction....................................................1
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B. Other Regulatory Filings........................................2
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C. Overview of the Transaction.....................................3
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D. Description of Parties to the Share Exchange....................4
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1. CP&L Energy and its Subsidiaries...........................4
2. Florida Progress and its Subsidiaries.....................10
E. Description of the Share Exchange..............................13
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F. Operations of the Combined Company.............................16
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G. Approval of CP&L Services as a Service Company.................17
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H. Other Existing Affiliate Service Agreements....................18
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I. Exemption of Florida Progress as a Holding Company.............19
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ITEM 2. FEES, COMMISSIONS AND EXPENSES......................................19
ITEM 3. APPLICABLE STATUTORY PROVISIONS.....................................20
A. Share Exchange Analysis - Overview.............................21
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B. Section 10(b)..................................................22
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1. Section 10(b)(1)..........................................23
2. Section 10(b)(2)..........................................26
3. Section 10(b)(3)..........................................28
C. Section 10(c)..................................................31
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1. Section 10(c)(1)..........................................32
(a) The Share Exchange will be lawful under
Section 8.......................................32
(b) The Share Exchange will not be detrimental to
carrying out the provisions of Section 11.......32
(i) Integration of Electric Operations.........33
(a) Interconnection.......................34
(b) Coordination..........................40
(c) Single Area or Region.................44
(d) Size..................................45
(ii) Retention of NCNG's Gas System.............46
(a) Loss of Economies.....................47
(b) Same State or Adjoining States........50
(c) Size..................................50
(iii)Retention of CP&L's Western North
Carolina Properties as Additional System........50
(a) Loss of Economies.....................51
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(b) Same State or Adjoining States........51
(c) Size..................................52
(iv) Retention of Other Businesses..............52
2. Section 10(c)(2)..........................................56
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D. Section 10(f)..................................................58
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E. Intra-system Transactions......................................58
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1. CP&L Service..............................................58
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2. Services, Goods, and Assets Involving the Utility Operating
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Companies.................................................60
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3. Electric Fuels............................................60
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ITEM 4. REGULATORY APPROVAL.................................................60
A. Required Approvals for Share Exchange..........................60
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1. Antitrust.................................................61
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2. State Approvals...........................................61
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3. Federal Power Act.........................................62
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4. Atomic Energy Act.........................................62
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5. Federal Communications Commission.........................63
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B. Required Approvals for Affiliate Transactions..................63
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1. The North Carolina Utilities Commission...................63
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2. South Carolina Public Service Commission..................64
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3. Florida Public Service Commission.........................65
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ITEM 5. PROCEDURE...........................................................65
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS...................................66
A. EXHIBITS.......................................................66
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B. FINANCIAL STATEMENTS...........................................71
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ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.............................72
ANNEX A - DESCRIPTION OF GENERATING ASSETS OF CP&L
ANNEX B - DESCRIPTION OF GENERATING ASSETS OF FLORIDA POWER
ANNEX C - CP&L ENERGY'S NON-UTILITY SUBSIDIARIES AND INVESTMENTS
ANNEX D - FLORIDA PROGRESS'S NON-UTILITY SUBSIDIARIES AND INVESTMENTS
ii
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The Application-Declaration filed in this proceeding on March 14, 2000, as
amended and restated by Amendment No. 1, filed July 28, 2000, is hereby further
amended and restated to read as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
A. Introduction.
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CP&L Energy, Inc. ("CP&L Energy"), an exempt holding company that owns all
of the issued and outstanding voting securities of Carolina Power & Light
Company ("CP&L"), an electric utility company, and North Carolina Natural Gas
Corporation ("NCNG"), a gas utility company, and Florida Progress Corporation
("Florida Progress"), an exempt holding company that owns all of the issued and
outstanding common stock of Florida Power Corporation ("Florida Power") (jointly
referred to as the "Applicants"), request authorization from the Securities and
Exchange Commission ("Commission") for a proposed business combination between
the two companies and for certain other related transactions. In the proposed
business combination, upon receipt of all necessary approvals, Florida Progress
will become a wholly owned subsidiary of CP&L Energy. Following the consummation
of the proposed transaction, CP&L Energy will register with the Commission as a
holding company pursuant to Section 5 of the Public Utility Holding Company Act
of 1935, as amended (the "Act").1
The combination of CP&L Energy and Florida Progress will result in a larger
and more competitive regional energy supplier. A key motivating factor for the
proposed transaction is the vision shared by the senior managements of CP&L and
Florida Progress concerning the actions needed to respond effectively to the
changes that are occurring in the utility industry. The proposed transaction is
expected to produce substantial benefits to the public, consumers and investors
and will meet all applicable standards of the Act. Among other things, the
Applicants believe that the business combination offers significant strategic
and financial benefits to each company and to their respective shareholders,
employees, customers and the communities in which they do business. These
benefits include, among others:
(i) increased scope, providing an infrastructure capable of supporting
more efficient utility operations, non-utility business activities and
corporate services;
(ii) increased fuel diversification and operating efficiencies, thereby
improving the Applicants' ability to meet the challenges of the
increasingly competitive environment in the utility industry;
(iii) integration of corporate and administrative functions and programs,
including centralized management and coordination and operation of
utility systems;
(iv) reduced operating costs from the coordinated dispatch and operation of
the combined generating assets of the Applicants;
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1 In a separate proceeding (File No. 70-9659), CP&L Energy and Florida
Progress and their respective subsidiaries have filed an application-declaration
under the Act with respect to ongoing activities (including financing
activities) and other matters pertaining to CP&L Energy and its subsidiaries
after CP&L Energy becomes a registered holding company.
1
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(v) increased market capitalization, thereby improving access to capital
markets;
(vi) increased geographic diversity of service territories, reducing
exposure to local changes in economic, competitive and climatic
conditions, enabling the resulting combined entity to withstand risk
and volatility better than either CP&L or Florida Progress on a
stand-alone basis;
(vii) greater purchasing power for items such as fuel and transportation
services, and streamlining of inventories;
(viii) expanded management resources and ability to select leadership from
a larger and more diverse management pool; and
(ix) the ability to play a strong role in the economic development efforts
of the communities that the Applicants now serve.
In summary, the Applicants believe the proposed transaction will
significantly improve their competitive positions and create an enhanced
platform for growth of all segments of their businesses. The Applicants estimate
that efficiencies created by the proposed business combination will generate
total savings (net of costs to achieve) of approximately $1 billion over ten
years. The expected benefits are discussed in further detail in Item 3.C.2.
below.
The proposed transaction documents, as described below, were approved by
the boards of directors of CP&L and CP&L Energy on February 25, 2000, and by the
board of directors of Florida Progress on March 3, 2000. In addition, the
shareholders of CP&L Energy and Florida Progress have approved the proposed
transaction at shareholder meetings held on August 16 and August 17, 2000,
respectively. CP&L Energy has filed a Registration Statement on Form S-4
pursuant to the Securities Act of 1933, which includes the joint proxy
statement/prospectus ("Joint Proxy") to be used in connection with the
shareholder meetings. See EXHIBIT C-1.2
B. Other Regulatory Filings
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Various aspects of the proposed transaction have been approved by: (i) the
Federal Energy Regulatory Commission (the "FERC"); (ii) the North Carolina
Utilities Commission ("NCUC"); (iii) the Nuclear Regulatory Commission (the
"NRC"); and (iv) the Federal Communications Commission (the "FCC"). Moreover,
the Applicants have satisfied the premerger notification and review requirements
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"). In addition to the Commission's approval under the Act, the
foregoing approvals are the only governmental approvals required for the
proposed business combination.3 While there is no formal approval for this
transaction required from the Florida Public Service Commission ("FPSC"), the
companies have been meeting with the FPSC regarding its ongoing jurisdiction
over Florida Power. Similarly, the South Carolina Public Service Commission
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2 Florida Progress has likewise filed a substantially similar definitive
proxy statement with the Commission.
3 Florida Progress has obtained an exemption from the insurance
commissioner of Oklahoma for the indirect change of control of Mid-Continent
Life Insurance Company ("Mid-Continent") that would result from the Share
Exchange.
2
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("SCPSC"), through the conditions that it established in approving CP&L's
reorganization as a holding company (see Item 4, below) and the exercise of its
powers to regulate electric utilities, will continue to have comprehensive
regulatory oversight over CP&L's operations.
It is expected that the proposed transaction will be consummated as soon as
practicable after issuance of the Commission's order in this proceeding. In
order to permit timely consummation of the transaction and the realization of
the substantial benefits it is expected to produce, the Applicants request that
the Commission's review of this Application-Declaration commence and proceed as
expeditiously as practicable.
C. Overview of the Transaction
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On August 22, 1999, CP&L, CP&L Energy (then named "CP&L Holdings, Inc.")
and Florida Progress entered into an Agreement and Plan of Exchange, which was
amended and restated on March 3, 2000 (as so amended and restated, the "Exchange
Agreement"). The Exchange Agreement provides for CP&L Energy to acquire all of
the issued and outstanding common stock of Florida Progress in exchange for a
combination of shares of CP&L Energy common stock and cash (the "Share
Exchange"). Under the terms of the Exchange Agreement, Florida Progress
shareholders may elect to receive $54.00 in cash for each outstanding share of
Florida Progress common stock or a number of shares of CP&L Energy common stock
equal to the exchange ratio (as described below), subject to proration in the
event that Florida Progress shareholders elect to receive more than 65% of the
total consideration for the exchange in cash or more than 35% in CP&L Energy
common stock.
The Exchange Agreement also provides that Florida Progress shareholders
will be entitled to receive one contingent value obligation ("CVO") for each
share of Florida Progress common stock that they hold. Each CVO will represent
the assignable and transferable right to receive a pro rata portion of certain
contingent payments that are based upon the net after-tax cash flow to CP&L
Energy generated by four synthetic fuels plants (referred to as the "EARTHCO"
plants) that were purchased by Florida Progress in October 1999, subsequent to
the date of the original Agreement and Plan of Exchange.4 The CVOs are intended
to provide Florida Progress shareholders with the potential for receiving
additional cash consideration in the Share Exchange linked specifically to the
future performance of the EARTHCO plants.
As a result of the Share Exchange, Florida Progress will become a direct
wholly owned subsidiary of CP&L Energy. A copy of the Exchange Agreement is
filed herewith as EXHIBIT B-1 and a copy of the Contingent Value Obligation
Agreement is filed herewith as EXHIBIT B-7.
Upon completion of the Share Exchange, CP&L Energy will own, directly or
indirectly, all of the common stock of three public utility subsidiary
companies: CP&L, a North Carolina corporation; NCNG, a Delaware corporation; and
Florida Power, a Florida corporation. In addition, CP&L Energy will continue to
own, directly or indirectly, all of the existing non-utility subsidiaries of
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4 These four plants currently produce and sell to unrelated persons a
"qualified fuel" that the Applicants believe qualify for tax credits under
Section 29 of the Internal Revenue Code of 1986, as amended.
3
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CP&L and NCNG and will, as a result of the Share Exchange, indirectly acquire
the non-utility subsidiaries of Florida Progress. See EXHIBIT E-5 (Revised) for
the corporate structure of CP&L Energy following the Share Exchange.
D. Description of Parties to the Share Exchange.
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1. CP&L Energy and its Subsidiaries
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CP&L Energy, a North Carolina corporation, became a holding company over
CP&L and NCNG effective June 19, 2000,5 and claims an exemption on behalf of
itself and its subsidiary companies as such pursuant to Section 3(a)(1) of the
Act and Rule 2 thereunder.6
Carolina Power & Light Company. CP&L Energy's predominant subsidiary, CP&L,
is a regulated public utility incorporated under the laws of the State of North
Carolina. CP&L is primarily engaged in the business of generating, purchasing,
transmitting and distributing electricity in a 33,667 square-mile area of North
Carolina and South Carolina that includes a substantial portion of the coastal
plain of North Carolina extending to the Atlantic Ocean between the Pamlico
River and the South Carolina border, the lower Piedmont section of North
Carolina, and an area of northeastern South Carolina. The principal load centers
within this region include the cities of Raleigh and Wilmington, in central and
eastern North Carolina. CP&L also serves a non-contiguous area in western North
Carolina in and around the City of Asheville. The estimated total population of
the area served is approximately 4.2 million. CP&L is subject to regulation by
the NCUC and the SCPSC with respect to retail electric rates, securities
issuances, affiliate transactions, and other matters, and by FERC with respect
to wholesale electric and electric transmission rates.
CP&L provides retail electric service in more than 200 communities and
wholesale electric service to the North Carolina Eastern Municipal Power Agency
("NCEMPA"), which consists of 32 members, three municipalities, the French Broad
Electric Membership Corporation and the North Carolina Electric Membership
Corporation ("NCEMC"), which consists of 27 members (17 of which are served by
CP&L's system). At December 31, 1999, CP&L was furnishing electric service to
approximately 1.2 million customers.
As of December 31, 1999, CP&L owned or controlled 10,128 MW of installed
generating capability (including the NCEMPA's share of certain jointly-owned
plants that are operated by CP&L), 5,585 pole miles of transmission lines,
including 292 miles of 500 kV lines and 2,857 miles of 230 kV lines, and over
44,294 pole miles of overhead distribution lines and nearly 13,842 miles of
underground distribution lines. In 1999, CP&L's total system energy supply was
61,151 million kWh, of which 56,019 million kWh were generated by units owned or
controlled by CP&L and 5,132 million kWh purchased from third parties. A
complete list and description of CP&L's generating facilities is contained in
Annex A hereto.
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5 See CP&L Energy, Inc., Holding Co. Act Release No. 27188 (June 15, 2000)
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(approving reorganization of CP&L into a holding company structure).
6 See Statement of Form U-3A-2 of CP&L Energy, dated July 12, 2000, in File
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No. 69-487. CP&L Energy intends to maintain its exemption until it completes its
acquisition of Florida Progress.
4
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CP&L is one of the 38 regular members of the Southeastern Electric
Reliability Council ("SERC"), a regional electric reliability and planning
organization whose members cover an area of about 464,000 square miles in 13
southeastern and south-central states, including North Carolina, South Carolina,
Georgia and a portion of the Florida Panhandle. The Virginia-Carolinas Subregion
of SERC ("VACAR") is principally made up of CP&L, Duke Power Company ("Duke
Power"), South Carolina Electric & Gas Company ("SCE&G"), Virginia Electric and
Power Company ("Virginia Power"), and the South Carolina Public Service
Authority (referred to as "Santee Cooper").
CP&L's electric system in and around the city of Asheville in western North
Carolina (sometimes referred to as "CP&L West") is separated from CP&L's much
larger eastern system (sometimes referred to as "CP&L East") by a portion of the
Duke Power system, which serves most of central North Carolina. Although CP&L
operates its eastern and western systems as separate control areas within VACAR,
power supply is centrally controlled and dispatched from CP&L's energy control
center located in Raleigh. CP&L East and CP&L West are physically interconnected
by the transmission facilities of both Duke Power and American Electric Power
Company, Inc. ("AEP"). Historically, peak loads in CP&L's western control area
have exceeded internally available generating capacity. To make up the
short-fall, CP&L for many years reserved up to 275 MW of firm transmission
capacity on the Duke Power system, allowing it to transfer power from CP&L East
to CP&L West. In addition, CP&L had a long-term agreement with Duke Power
providing for the purchase of up to 400 MW of power from Duke Power for delivery
to either CP&L East or CP&L West. As a result of recent additions of generating
capacity in the western control area, however, the power purchase agreement with
Duke Power was allowed to expire at the end of its term in June 1999. At the
same time, it was determined that the transmission requirements between CP&L
East and CP&L West could be met under Duke Power's and/or AEP's open access
tariffs. Accordingly, CP&L terminated the existing firm transmission agreement
with Duke Power coincident with the expiration of the long-term power purchase
agreement.
Although CP&L does not currently contract for long-term firm transmission
service from either Duke Power or AEP specifically for the purpose of wheeling
power between CP&L East and CP&L West, CP&L does utilize the Duke Power
transmission system to facilitate transfers of power between the two areas.7
Also, CP&L relies, in part, on the availability of relatively large amounts of
monthly firm and non-firm transmission capacity on the AEP transmission system.
For example, AEP's OASIS postings show monthly firm and non-firm available
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7 In December 1998, CP&L entered into an agreement to purchase all of the
output of a 500 MW gas-fired independent power project that is located in Duke
Power's service area in South Carolina. In July 2000, CP&L entered into an
agreement for the entire output of two additional gas-fired units at the same
site, which increased the total purchase commitment to approximately 800 MW. The
first three of five units of that project went into service in the summer of
2000, and the fourth and fifth units are expected to go into service in July
2001and June 2002, respectively. Both purchase agreements have an initial term
of 20 years, and provide CP&L with control over the scheduling of the units.
CP&L has reserved long-term transmission rights on the Duke Power system which
will enable it to schedule delivery of the output to either CP&L East or CP&L
West. Deliveries to CP&L East are based on a firm reservation of 460 MW; for
delivery to CP&L West, CP&L relies on the availability of non-firm transmission
capacity under Duke Power's open access tariffs.
5
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transmission capacity ("ATC") values for transfers from CP&L East to CP&L West
varying from 780 MW to 920 MW for the period from October 2000 through October
2001.8
In addition to the currently posted ATC described above, CP&L has reserved
303 MW of firm yearly point-to-point transmission service over the Duke Power
system between CP&L East and CP&L West. This reservation, which runs through
December 2002, was made to support wholesale sales to the Tennessee Valley
Authority ("TVA"), which is directly interconnected with CP&L West. This 303 MW
path allows CP&L to wheel power from its eastern control area over the Duke
Power system, through its western control area, and into TVA, on a firm basis.
However, the 303 MW path can also be used on a non-firm basis to wheel power
from CP&L's eastern control area for delivery to its western control area. Thus,
the path provides an alternative means of moving power across the Duke Power
system.
Although there can be no assurance that transmission capacity posted by
other utilities as available today will be fully available at all times in the
future, it is important to note that additional long-term firm transmission
capacity is currently available for 2001and 2002 (and presumably later years)
across both Duke Power and AEP systems, which could allow for additional power
deliveries, east to west or west to east, of several hundred megawatts.
Moreover, the relatively large amount of transmission capacity posted as
available on a short-term basis over the next 12-month period strongly suggests
that transmission service to interconnect CP&L East and CP&L West will be
available most of the time during 2001and later years, even if CP&L elects not
to reserve any additional capacity on a long-term basis.
In addition to the transmission arrangements described above on the Duke
Power and AEP systems, CP&L also has interconnection agreements with TVA,
Virginia Power, SCE&G, and Santee Cooper.
Finally, CP&L has entered into interchange agreements with other utilities
in VACAR that provide for the purchase and sale of power for hourly, daily,
weekly, monthly or longer periods. In addition, CP&L is currently purchasing 250
MW of generating capacity and associated energy from AEP's Rockport Unit No. 2
in southern Indiana under an agreement which runs through 2009. The power
purchased under this agreement can be scheduled by CP&L for delivery to either
its eastern or western control areas via existing transmission interconnections
with AEP in both areas.
Although CP&L does not engage directly in any material non-utility business
activities,9 it owns all of the securities of five direct non-utility
subsidiaries: Caronet, Inc. ("Caronet"); Capitan Corporation ("Capitan");
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8 OASIS, which stands for "Open-Access Same-Time Information Service," is
the Internet site that all transmission owners were required to establish under
FERC's Order No. 889 (see discussion in Item 3.C.1, below). The OASIS provides
comprehensive information on the availability and price of transmission capacity
that is available to potential purchasers. Because of the limitations on OASIS
postings, information pertaining to the availability of short-term service
beyond 2001 is not available.
9 CP&L derives de minimis revenues from various unregulated activities such
as providing fleet vehicle repair and servicing, transformer maintenance
services, and data processing services to unaffiliated third parties utilizing
existing resources and CP&L personnel who already perform these same functions
for CP&L. In 2000, total revenues from all of these activities are estimated at
approximately $3.1 million. CP&L also derives de minimis revenues from sales of
timber.
6
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CaroFund, Inc. ("CaroFund"); CaroHome, LLC ("CaroHome") and CaroFinancial, Inc.
("CaroFinancial"). CP&L also holds a 50% interest in Eastern North Carolina
Natural Gas Company, LLC ("Eastern"), as well as passive investments in
affordable housing and historic building renovation projects and various venture
capital and local business development enterprises.
o Caronet, an "exempt telecommunications company" ("ETC") within the
meaning of Section 34 of the Act, was organized to hold CP&L's
interests in other companies that own and operate fiber optic
telecommunications facilities and provide Internet-based services.10
o Capitan holds certain land and water rights in Tennessee that are used
in connection with CP&L's hydroelectric operations on the Pigeon
River. It does not conduct any active business operations.
o CaroFund holds a 1% membership interest in CaroHome and participates
with CaroHome and other ventures in which CaroHome has invested in
affordable housing projects for low-income individuals and families
and historic building renovation projects that in each case qualify
for federal and state income tax credits. Most of the properties held
are in North and South Carolina. CP&L holds the remaining 99%
membership interest in CaroHome directly.
o CaroFinancial is an inactive company whose only remaining asset is a
receivable evidencing debt incurred by a CP&L employee stock ownership
plan.
o Eastern is a joint venture between CP&L and Albemarle Pamlico Economic
Development Corporation, a North Carolina non-member, non-profit,
tax-exempt corporation created to encourage infrastructure and
economic development in eastern North Carolina. It was recently
awarded an exclusive certificate of public convenience and necessity
to serve 14 counties in eastern North Carolina that are not now served
with natural gas.11
North Carolina Natural Gas Corporation. NCNG supplies gas or gas
transportation service to approximately 115,000 residential, commercial,
agricultural, industrial and electric utility customers in 110 cities and towns
in eastern and south central North Carolina and to four municipal gas
distribution systems which serve an additional 46,764 end users.12 NCNG's
facilities include approximately 1,128 miles of transmission pipeline of two to
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10 Caronet, Inc. filed an application with the FCC requesting a
determination of ETC status, which was deemed granted following expiration of
the 60-day notice period.
11 See Joint Application of Albemarle Pamlico Economic Development
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Corporation et al., Order Granting Certificate, NCUC Docket No. G-44, Sub 0
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(June 15, 2000). Eastern is currently a limited liability company but will be
converted into a stock corporation in the near future. Eastern will become a
"gas utility company" at such time as its distribution system is placed in
service. CP&L Energy intends to file a separate application under Sections 9(a)
and 10 of the Act with respect to the acquisition and retention of Eastern.
12 CP&L acquired NCNG on July 15, 1999. See Re: Carolina Power & Light
--- --------------------------
Company, et al., 194 P.U.R.4th 258 (July 13, 1999). The common stock of NCNG is
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now held directly by CP&L Energy.
7
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16 inches in diameter and approximately 2,865 miles of distribution mains.13
The estimated total population of the territory served by NCNG is 2.6 million.
NCNG purchases gas for its "bundled" retail sales (which account for
approximately half of the total gas throughput on the NCNG system) under a
variety of long-term, short-term and spot market purchase agreements. Gas is
delivered to NCNG on the Transcontinental Gas Pipe Line Corporation ("Transco")
and Columbia Gas Transmission Corporation ("Columbia Gas") interstate pipeline
systems pursuant to long-term contracts.
There is substantial overlap between CP&L's electric service area and
NCNG's gas service area. Approximately 29% of NCNG's retail and wholesale gas
customers are also electric customers of CP&L.14 Like CP&L, NCNG is subject to
regulation by the NCUC with respect to rates, securities issuances, affiliate
transactions, and other matters.
NCNG holds all of the outstanding stock of four non-utility subsidiaries:
Cape Fear Energy Corporation ("Cape Fear"), NCNG Cardinal Pipeline Investment
Corporation ("Cardinal Investment"), NCNG Pine Needle Investment Corporation
("Pine Needle Investment"), and NCNG Energy Corporation ("NCNG Energy").
o Cape Fear was previously engaged in purchasing natural gas for resale
to large industrial and commercial users and the municipalities served
by NCNG, as well as the business of providing energy management
services. It is currently inactive.
o Cardinal Investment is participating through its membership in
Cardinal Pipeline Company, LLC ("Cardinal Pipeline") in a venture to
acquire an existing intrastate pipeline and to extend such pipeline in
North Carolina. Cardinal Investment holds a 5% interest in Cardinal
Pipeline.
o Pine Needle Investment is participating through its membership in Pine
Needle LNG Company, LLC ("Pine Needle LNG") in a liquefied natural gas
project in North Carolina. Pine Needle Investment holds a 5% interest
in Pine Needle LNG.
o NCNG Energy previously held certain non-utility, energy-related
investments of NCNG that have been transferred to Cardinal Investment
and Pine Needle and sold natural gas to resellers. It is currently
inactive.
Other Subsidiaries of CP&L Energy. In addition to the non-utility
subsidiaries of CP&L and NCNG identified above, CP&L Energy also currently has
four direct non-utility subsidiaries: Strategic Resource Solutions Corp.
("SRS"), Monroe Power Company ("Monroe Power"), CPL Energy Ventures, Inc.
("Energy Ventures"), and CP&L Service Company LLC ("CP&L Service").
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13 Previously, NCNG also conducted a propane distribution business in North
Carolina. NCNG recently sold that business to an unaffiliated third party.
14 This percentage is expected to rise as NCNG extends its distribution
system into areas that are already served by CP&L.
8
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o SRS directly and through subsidiaries designs, develops, installs, and
provides facilities and energy management software systems and other
services for educational, commercial, industrial and governmental
markets nationwide, and designs, engineers, installs and maintains
building automation systems that control heating, ventilation, air
conditioning and lighting.
o Monroe Power is an "exempt wholesale generator" within the meaning of
Section 32 of the Act 15 that owns and operates a 160 MW simple-cycle
combustion turbine unit located in Monroe, Georgia, the output of
which is sold to the Municipal Electric Authority of Georgia ("MEAG")
under a 5-year contract that commenced in December 1999.
o Energy Ventures, an intermediate holding company, is the sole member
of CPL Synfuels, LLC, which in turn holds a 90% interest in two other
limited liability companies that own synthetic fuels production
facilities located in Virginia and West Virginia. These facilities
produce synthetic fuels from coal that are intended to qualify for
federal income tax credits under Section 29 of the Internal Revenue
Code of 1986, as amended.
o CP&L Service has been formed as a subsidiary service company to
provide management, administrative and other corporate support
services to its associate companies in the CP&L Energy system. See
discussion in Item 1.G., below.
A complete list of CP&L Energy's direct and indirect non-utility
subsidiaries and a description of their businesses is included in Annex C
(Revised) hereto.
For the twelve months ended June 30, 2000, CP&L Energy's consolidated
operating revenues were $3,601,300,000, of which $3,224,700,000 (89.6%) were
derived from electric utility operations, $246,300,000 (6.8%) from regulated
natural gas operations, and $130,300,000 (3.6%) from diversified non-utility
activities, operating income of $883,000,000, and net income of $418,100,000. At
June 30, 2000, CP&L Energy had consolidated assets of $9,771,600,000, including
net utility plant of $6,870,500,000. As of June 30, 2000, CP&L Energy had issued
and outstanding 159,608,055 shares of common stock, without par value. CP&L
Energy's common stock is listed for trading on the New York and Pacific Stock
Exchanges. CP&L's securities are currently rated as follows by Standard &
Poor's: senior secured debt - "BBB+"; senior unsecured debt - "BBB+"; preferred
stock - "BBB-"; and commercial paper - "A-2".
More detailed information concerning CP&L Energy and its subsidiaries is
contained in the Joint Proxy and in CP&L Energy's and CP&L's combined Quarterly
Report on Form 10-Q for the period ended June 30, 2000; CP&L's Annual Report on
Form 10-K for the year ended December 31, 1999, and Quarterly Report on Form
10-Q for the period ended March 31, 2000; NCNG's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998, and Quarterly Reports on Form 10-Q for
1999; and CP&L Energy's and CP&L's Current Reports on Form 8-K, filed on April
20, 2000, June 21, 2000, September 1, 2000, and September 20, 2000, which are
incorporated by reference as EXHIBITS I-1, I-2, I-4, I-5, I-7, I-8, I-10, I-11,
and I-12.
------------------------
15 See Monroe Power Company, 87 FERC P. 61,238 (May 28, 1999).
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9
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2. Florida Progress and its Subsidiaries
-------------------------------------
Florida Progress, a Florida corporation, is a diversified electric utility
holding company that is exempt from registration pursuant to Section 3(a)(1) of
the Act and Rule 2 thereunder.16
Florida Power Corporation. Florida Progress's predominant subsidiary,
Florida Power, is engaged in the generation, purchase, transmission,
distribution, and sale of electricity. Florida Power provides service to
approximately 1.4 million customers in a 20,000 square-mile area of central and
northern Florida and along the west coast of Florida, which includes the cities
of St. Petersburg and Clearwater and the rapidly growing areas around Orlando.17
As of December 31, 1999, Florida Power's total net winter dependable
generating capacity was 8,267 MW, as produced by: (a) fifteen steam units with a
total capacity of 5,492 MW, consisting of (i) a 91.8% share, representing 782
MW, of one nuclear unit located at Crystal River in Citrus County, Florida; (ii)
twelve fossil steam units with a total capacity of 3,958 MW; and (iii) two
combined cycle units with a total capacity of 752 MW; and (b) 44 combustion
turbine peaking units with a total capacity of 2,775 MW. A list and description
of Florida Power's generating facilities is contained in Annex B hereto. Florida
Power also purchases approximately 1,300 MW of power under a variety of
purchased power agreements. These include (x) long-term contracts for the
purchase of approximately 469 MW from other investor-owned utilities, including
a unit power sales agreement (hereafter referred to as the "Southern UPS
Agreement") under which Florida Power purchases approximately 400 MW of
coal-based capacity from power plants located in Georgia and Alabama that are
owned by subsidiaries of Southern Company, and (y) contracts for the purchase of
831 MW from "qualifying facilities." Including both the total net winter
dependable generating capacity of 8,267 MW, and the total purchased power of
1,300 MW, at December 31, 1999, Florida Power had a total capacity resource of
9,567 MW. In 1999, Florida Power's total system energy supply was 40,304 million
kWh, of which 32,261 million kWh was generated by units owned or controlled by
Florida Power and 8,043 million kWh was purchased from third parties.
In addition, as of December 31, 1999, Florida Power owns and maintains
approximately 4,687 circuit miles of high voltage transmission lines, of which
2,645 circuit miles are operated at 500, 230 or 115 kV and the balance are
operated at 69 kV, and 25,409 circuit miles of distribution lines which are
operated at various voltages ranging from 2.4 to 25 kV. Florida Power is subject
to the jurisdiction of the FPSC with respect to retail electric rates, customer
service, planning, construction of facilities, accounting, issuance of
securities, and other matters, and by FERC with respect to wholesale electric
and electric transmission rates, accounting and certain other matters.
Florida Power is a member of the Florida Reliability Coordinating Council
("FRCC"), which is responsible for ensuring the reliability of the bulk power
electric system in peninsular Florida. Florida Power and seven other utilities
have established the Florida Open Access Sametime Information System ("OASIS").
------------------------
16 Florida Progress claims an exemption pursuant to Section 3(a)(1) of the
Act and Rule 2 thereunder. See Statement on Form U-3A-2 of Florida Progress,
filed February 28, 2000, in File No. 69-267.
17 Florida Power derives de minimis revenues, estimated at not more than
$3.3 million in 2000, from constructing transmission and distribution facilities
and providing outage maintenance services to unaffiliated utilities and
constructing relay towers for mobile phones.
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This is an Internet location where transmission customers may obtain
transmission information and submit requests for service or resell service
rights.
Florida Power, Florida Power & Light Company, Jacksonville Electric
Authority and the City of Tallahassee collectively own 13 transmission lines
that interconnect peninsular Florida with Southern Company. These ties, which
range between 69 kV and 500 kV, have a limited transfer capability relative to
the total load in peninsular Florida. The four utilities operate these lines as
a single interface with Southern Company (the "Southern/Florida Interface") and
have allocated and assigned the total transfer capability over the interface
among themselves pursuant to the Florida-Southern Transmission Interface
Allocation Agreement ("Interface Agreement"), dated May 14, 1990.18 Florida
Power is currently allocated 438 MW of the 3,600 MW total import capability over
the Southern/Florida Interface, most of which it uses in connection with
purchases under the Southern UPS Agreement. The export capability from Florida
on the Southern/Florida Interface is 1,900 MW in the summer and 2,500 MW in the
winter, of which Florida Power is allocated 231 MW and 304 MW, respectively.
Other Subsidiaries of Florida Progress. Florida Progress has three direct
non-utility subsidiaries: Progress Capital Holdings, Inc. ("Progress Capital"),
FPC Del, Inc., and Florida Progress Funding Corp. ("Progress Funding").
Progress Capital serves as the holding company for substantially all of
Florida Progress's non-utility operations. Its principal subsidiary is Electric
Fuels Corporation ("Electric Fuels"), which is an energy and transportation
company with operations organized into three business units: energy and related
services, inland marine transportation, and rail services. The energy and
related services business unit mines and sells coal to Florida Power for use at
its Crystal River Energy Complex and to other utility and industrial customers.
This business unit also produces and sells natural gas and synthetic fuel, and
provides marine terminal services and offshore marine transportation. The inland
marine transportation business unit, conducted through MEMCO Barge Line, Inc.,
transports coal and dry-bulk cargoes primarily along the Mississippi, Illinois
and Ohio Rivers, using a fleet of river barges and towboats. The rail services
business unit, conducted primarily through Progress Rail Services Corporation
("Progress Rail"), is one of the largest integrated processors and suppliers of
railroad materials and services in the country. With operations in 24 states,
Mexico and Canada, Progress Rail offers a full range of railcar parts,
maintenance-of-way equipment, rail and other track material, railcar repair
facilities, railcar scrapping and metal recycling, as well as railcar sales and
leasing.
Electric Fuels and its subsidiaries own and/or operate approximately 6,000
railcars, 100 locomotives, 1,200 river barges and 21 river towboats that are
used for the transportation and shipping of coal, steel and other bulk products.
Through joint ventures, Electric Fuels has four oceangoing tug/barge units, and
indirectly owns one-third of a large bulk products terminal located on the
Mississippi River south of New Orleans which handles coal and other products. A
subsidiary of Electric Fuels provides drydocking and repair services to
towboats, offshore supply vessels and barges through its operations near New
Orleans.
------------------------
18 The Interface Agreement has been approved by FERC. See Florida Power &
--- ---------------
Light Company, et al., 52 FERC P. 61,105 (July 30, 1990).
--------------------
11
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Electric Fuels directly and indirectly controls coal reserves located in
eastern Kentucky and southwestern Virginia, and owns and operates both
underground and surface mining facilities, as well as various coal processing
facilities, river and rail transloading facilities and terminals located in
Kentucky, Virginia, Ohio and West Virginia. Electric Fuels owns, in fee,
properties that contain estimated proven and probable coal reserves of
approximately 185 million tons and controls, through mineral leases, additional
proven and probable coal reserves of approximately 30 million tons. Electric
Fuels' total production of coal during 1999 was approximately 3.3 million tons.
Another Electric Fuels subsidiary produces natural gas from property it
leases in western Colorado. All of the gas is sold to non-affiliates.
Electric Fuels also owns, indirectly through subsidiaries, a minority
interest in one limited liability company and a majority interest in a limited
partnership that produce synthetic fuels which Electric Fuels believes qualify
for Federal income tax credits under Section 29 of the Internal Revenue Code.
Together, these two entities own five plants located in eastern Kentucky and
West Virginia. In October 1999, Electric Fuels purchased four additional
synthetic fuel plants.19 Two of the plants were relocated and began operations
at Electric Fuels' coal mines in Kentucky and Virginia. The other two plants
have been relocated to West Virginia and placed in operation in 2000. The
Virginia plant and one of the West Virginia plants were subsequently sold to
limited liability companies in each of which Energy Ventures, a wholly owned
subsidiary of CP&L Energy, indirectly holds a 90% interest.
Electric Fuels supplies substantially all of Florida Power's coal
requirements for its four Crystal River coal-fired units. Most of the coal
delivered by Electric Fuels to Florida Power is purchased from unrelated
producers under several different contracts. Only 15-20% of the coal delivered
by Electric Fuels to Florida Power is sourced from mines owned by Electric
Fuels.
Other direct subsidiaries of Progress Capital are engaged in wholesale
communications and insurance businesses. Progress Telecommunications
Corporation, an ETC within the meaning of Section 34 of the Act, sells wholesale
fiber optic based capacity in Florida to long-distance carriers, Internet
service providers and other telecommunications companies, as well as to large
industrial, commercial and governmental entities.20 Progress Capital also holds
all of the outstanding voting securities of Mid-Continent Life Insurance Company
("Mid-Continent"), a life insurance company. Mid-Continent was placed in
receivership in April 1997 based on assertions that its policy reserves were
understated. Florida Progress has recorded a provision for a loss on its
investment in Mid-Continent. In September 2000, a settlement was reached that
resolves all current policyholder litigation against Florida Progress. The
settlement, which is subject to court approval, should facilitate Florida
Progress's efforts to divest Mid-Continent. Through PIH, Inc., Progress Capital
------------------------
19 As previously indicated, these four synthetic fuels plants, which are
referred to collectively as the EARTHCO plants, were purchased by subsidiaries
of Electric Fuels subsequent to the date of the original Agreement and Plan of
Exchange and are the assets underlying the CVOs.
20 Progress Telecommunications Corporation filed an application with the
FCC for a determination of ETC status, which was deemed granted upon expiration
of the 60-day notice period.
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holds passive interests in affordable housing projects that qualify for federal
income tax credits.
FPC Del, Inc. was formed to hold certain accounts receivable for Florida
Power and Progress Rail. Progress Funding was organized in early 1999 to
facilitate a trust preferred stock financing transaction. A complete list of
Florida Progress's direct and indirect non-utility subsidiaries and a
description of their businesses is included in Annex D (Revised) hereto.
For the twelve months ended June 30, 2000, Florida Progress reported
consolidated operating revenues of $4,092,000,000, of which $2,713,500,000
(66.3%) were derived from electric utility operations and $1,378,500,000 (33.7%)
were derived from diversified non-utility activities (chiefly, the operations of
Electric Fuels), operating income of $576,000,000, and net income of
$357,100,000. As of June 30, 2000, Florida Progress had total assets of
$6,646,400,000, including net utility plant of $3,581,400,000. As of June 29,
2000, Florida Progress had issued and outstanding 98,614,831 shares of common
stock, without par value. These shares are traded on the New York and Pacific
Stock Exchanges. Florida Power's securities are currently rated as follows by
Standard & Poor's: senior secured debt securities - "BBB+"; senior unsecured
debt - "BBB+"; preferred stock - "BBB-"; and commercial paper - "A-2". The
senior unsecured debt and commercial paper ratings of Progress Capital, which
finances Florida Progress's non-utility operations, are "BBB" and "A-2",
respectively.
Additional information concerning Florida Progress and Florida Power and
their operations is contained in the Joint Proxy, and in the combined Annual
Report of Florida Progress and Florida Power on Form 10-K for the year ended
December 31, 1999, the Quarterly Reports of Florida Progress and Florida Power
on Form 10-Q for the quarters ended March 31 and June 30, 2000, and the Current
Reports on Form 8-K of Florida Progress, dated August 16, August 31, and
September 27, 2000, which are incorporated by reference as EXHIBITS I-3, I-6,
I-9, I-13, I-14, and I-15.
E. Description of the Share Exchange
---------------------------------
The Exchange Agreement provides that, upon the effective time of the Share
Exchange, each share of Florida Progress common stock will be automatically
exchanged for the right to receive $54.00 in cash, CP&L Energy common stock, or
a combination of cash and CP&L Energy common stock. as described below.
Completion of the Share Exchange will not occur until certain approvals,
including shareholder approvals, have been obtained and certain other conditions
described in the Exchange Agreement are satisfied or waived. These are discussed
more fully in parts A and B, above. The Share Exchange will become effective
upon the filing of articles of share exchange with the Secretary of State of the
State of North Carolina and the Department of State of the State of Florida, or
at a later date as provided in the articles of share exchange, in accordance
with the relevant provisions of North Carolina and Florida law, respectively.
In the Share Exchange, each share of Florida Progress common stock issued
and outstanding at the effective time of the Share Exchange will automatically
be exchanged for the right to receive the exchange consideration to be paid by
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<PAGE>
CP&L Energy. Florida Progress shareholders may elect to receive in exchange for
each share of Florida Progress common stock that is held either of:
o $54.00 in cash; or
o a number of shares of CP&L Energy common stock equal to the exchange
ratio, which is designed to provide Florida Progress shareholders with
CP&L Energy common stock having a market value of $54.00, subject to
the limitations described below.
The exchange ratio will be determined by dividing $54.00 by the average of
the closing sale price per share of CP&L Energy common stock as reported on the
New York Stock Exchange Composite Tape on each of the twenty consecutive trading
days ending with the fifth trading day immediately preceding the closing date
(the "Average Closing Price"). However, if the Average Closing Price is greater
than $45.39, the exchange ratio will be fixed at 1.1897, and if the Average
Closing Price is less than $37.13, the exchange ratio will be fixed at 1.4543.
The actual value of stock consideration received for each Florida Progress share
will depend on the market value of CP&L Energy common stock at the completion of
the Share Exchange. Therefore, if the Average Closing Price is less than $37.13,
then each share of Florida Progress common stock exchanged for stock
consideration will be valued in the Share Exchange at less than $54.00, and if
the Average Closing Price is more than $45.39, then each share of Florida
Progress common stock exchanged for stock consideration will be valued in the
Share Exchange at more than $54.00. The exchange ratio was arrived at through
arms-length negotiations between CP&L and Florida Progress. The exchange ratio
and the actual number of shares of CP&L Energy common stock Florida Progress
shareholders will receive will not be determined until after Florida Progress
shareholders vote on the Share Exchange.
After Florida Progress shareholder elections have been tabulated, the
election amounts of cash and CP&L Energy common stock will be subject to
allocation and proration to achieve a mix of the aggregate exchange
consideration that is 65% cash and 35% CP&L Energy common stock. As a result,
Florida Progress shareholders may receive a different combination of cash and
CP&L Energy common stock than they elect.
Depending on the exchange ratio, the Share Exchange will result in Florida
Progress shareholders holding between 20% and 24% of all outstanding shares of
CP&L Energy common stock following consummation of the Share Exchange, giving
effect to the shares to be issued in the Share Exchange and based on the number
of shares of Florida Progress and CP&L Energy common stock outstanding shortly
before the date of the Joint Proxy.
A table illustrating the exchange ratio and the number of shares of CP&L
Energy common stock and cash consideration that will be exchanged for each 100
shares of Florida Progress common stock, based on various Average Closing Prices
for CP&L Energy common stock, is set forth on page 7 of the Joint Proxy.
One condition to the obligation of Florida Progress to complete the Share
Exchange is that the Average Closing Price not be less than $30.00, which is
25.7% lower than the 20-day average closing price of CP&L common stock
immediately before the execution of the original Agreement and Plan of Share
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<PAGE>
Exchange on August 22, 1999. If the Average Closing Price is below the $30.00
threshold (subject to adjustments for any stock splits), Florida Progress would
have a "walk-away" right.
The Share Exchange is not designed to qualify as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended.
Accordingly, the exchange of Florida Progress stock will be a taxable sale of
stock for income tax purposes.
The Share Exchange will be accounted for by CP&L Energy using the purchase
method of accounting for a business combination in accordance with generally
accepted accounting principles. Under this method of accounting, the assets and
liabilities of Florida Progress will be recorded at their fair values, and, if
necessary, any excess of the consideration paid over those amounts will be
recorded as goodwill. The results of operations and cash flows of Florida
Progress will be included in CP&L Energy's financial statements prospectively as
of the completion of the Share Exchange. As a result of the Share Exchange,
approximately $3 billion could be allocated to goodwill and amortized by CP&L
Energy over a period not to exceed 40 years. Florida Progress and Florida Power
each has a significant amount of publicly-held debt. Accordingly, a new
accounting and reporting basis for the separate financial statements of Florida
Progress and Florida Power is not required. Filed herewith as EXHIBIT J is a
letter addressing the application of pushdown accounting to the transaction.
As previously indicated, in addition to the consideration described above,
shareholders of Florida Progress will receive one CVO for each share of Florida
Progress common stock that they hold. In the aggregate, the holders of the CVOs
will be entitled to 50% of the net after-tax cash flow generated by the four
EARTHCO plants in excess of $80 million for each of the years 2001 through 2007.
Payments will be made with respect to tax years beyond 2007 only if CP&L Energy
is unable to use all of the tax credits generated before 2008 and therefore
carries over and uses some of the tax credits in subsequent years. Moreover, if
in any year from 2001 through 2007 CP&L Energy does not fully realize the $80
million preference amount, the amount below $80 million for such year would be
carried over to years 2008 and thereafter. Before any such payment is made to
holders of CVOs, the tax credit carry-forward will be applied to satisfy any
remaining preference for the year in which the tax credit was generated. The
holders of CVOs also may be entitled to a portion of the proceeds if CP&L Energy
sells any of the EARTHCO plants.
The Exchange Agreement also provides that the combined company's corporate
headquarters will be located in Raleigh, North Carolina. CP&L Energy may also
maintain a regional headquarters for the operations of Florida Power in St.
Petersburg, Florida. Upon consummation of the Share Exchange, CP&L Energy will
have a 14-member board, to which Florida Progress may appoint 4 directors,
subject to approval by CP&L Energy. The CP&L Energy bylaws provide that the
board shall be divided into three classes, each as nearly as possible equal in
number to the others, with the classes being elected for staggered 3-year terms.
It is expected that certain of the senior executive officers of CP&L and Florida
Progress will become the senior executive officers of CP&L Energy following the
Share Exchange.
Initially, CP&L Energy will finance the cash portion of the Share Exchange,
which is estimated not to exceed $3.5 billion, and other costs of the
transaction with a $3.75 billion bank facility with a maturity of 364 days that
15
<PAGE>
will act as a backstop for the issuance of commercial paper. CP&L Energy may
extend one-half of the facility for an additional year. It is anticipated that
the bank facility/commercial paper will be refinanced with long-term debt within
twelve months of closing. A copy of the bank credit facility is filed herewith
as EXHIBIT B-5.
F. Operations of the Combined Company
----------------------------------
As explained more fully in Item 3 below, the primary electric system of
CP&L in eastern North Carolina and South Carolina and the electric system of
Florida Power will together comprise an integrated electric utility system
within the meaning of Section 2(a)(29)(A) of the Act. Although the Applicants
believe that the record in this proceeding would support a finding that the
electric utility properties of CP&L in western North Carolina, in and around the
city of Asheville, also form a part of that same integrated electric utility
system, the standards for retention of these properties as an additional public
utility system, which are set forth in clauses A - C of Section 11(b)(1) (the
"`ABC' Clauses"), are clearly satisfied. See Item 3, below.
The facilities of CP&L and Florida Power will be interconnected via a 50 MW
firm south to north transmission path (the "Contract Path") over the Southern
Company and Duke Power transmission systems that will extend from the Southern
/Florida Interface to the Duke Power/CP&L eastern control area interface. (See
EXHIBIT E-6). The Contract Path has been reserved for an initial one-year
period, commencing January 1, 2001, and is subject to the right to extend for
additional one-year periods. CP&L Energy commits to exercise its right to extend
the term of the Contract Path for at least two additional one-year terms unless,
at the time of such renewal, it is no longer necessary to extend the term of the
Contract Path in order to satisfy the physical interconnection requirement under
the Act.21 CP&L and Florida Power will enter into a System Integration
Agreement ("Integration Agreement") pursuant to which they will jointly plan all
future generation facilities, coordinate the dispatch of their respective power
plants, and centralize fuel supply and plant maintenance programs, among other
things. See EXHIBIT B-6. Other corporate support functions of the two companies
will be centralized in CP&L Service, a subsidiary service company of CP&L
Energy.
The gas distribution properties of NCNG constitute an integrated gas
utility system, as defined in Section 2(a)(29)(B) of the Act. As more fully
explained in Item 3, below, the standards for retention of NCNG by CP&L Energy
as an additional public utility system, which are set forth in the "ABC"
Clauses, will be met.
The combination of the complementary expertise and infrastructure of CP&L
and Florida Progress will create a major regional utility in the southeastern
United States, one of the highest customer growth areas in the country. The
combined company will have a broader customer base and more diverse portfolio of
generating assets, and will have the size and scope to be an effective
participant in the emerging and increasingly competitive electric and natural
gas utility markets. For the twelve months ended June 30, 2000, the pro forma
combined revenues for the two companies is approximately $7.7 billion. The
combined company will serve approximately 2.5 million electricity customers in a
------------------------
21 Maintaining a firm contract path across the Duke Power system may become
unnecessary as a result of recent developments. See discussion in Item
3.C.1.(b), below.
16
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50,000-square-mile retail service area and have about 18,500 MW of generating
capacity.
G. Approval of CP&L Service as a Service Company.
----------------------------------------------
As indicated, CP&L Energy is the sole member of CP&L Service, a North
Carolina limited liability company that has been organized to provide CP&L, NCNG
and other companies in the CP&L Energy system, and, after the Share Exchange,
Florida Power and other companies in the Florida Progress system, with various
administrative, management and corporate support services. CP&L Service will
enter into Service Agreements with each of its associate public-utility
companies and each of its associate non-utility companies. The forms of the
Utility and Non-Utility Service Agreements are filed as EXHIBITS B-2 (Rev) and
B-3 (Rev) hereto. CP&L Energy requests that the Commission find, pursuant to
Rule 88(b), that CP&L Service's organization and the conduct of its business
meet the requirements of Section 13(b) of the Act with respect to providing
reasonable assurance of efficient and economical performance of services for the
benefit of its associate companies, at cost, fairly and equitably allocated
among them.
CP&L Service will be staffed by employees of CP&L and Florida Progress and
their respective subsidiaries who will be transferred over time to CP&L Service,
and will be headquartered in Raleigh. The Service Agreements provide that CP&L
Service may provide its associate companies with certain administrative and
corporate support services, such as strategic planning, treasury, tax,
accounting, legal, human resources, information systems, investor relations and
public relations. For any service provided, CP&L Service will be reimbursed for
its cost of providing the service, determined in accordance with Rules 90 and
91. To the extent possible, CP&L Service will identify and assign all of its
direct costs incurred in providing any service to a client company, including
labor overheads (e.g., payroll taxes, employee benefits, etc.). Other costs that
cannot be identified to a particular client company, or which benefit all
clients, will be allocated to all client companies in accordance with the
methods of allocation included in Appendix A to the Service Agreement.
Following the Share Exchange, CP&L Service will evaluate and consider
changes to the methods of allocation described in Appendix A in order to assure
a fair and equitable allocation of costs of CP&L Service to all associate
companies, including CP&L Energy. Among other possible changes, CP&L Service
will review its experience in applying the "modified Massachusetts formula
ratio," as defined in Appendix A to the Service Agreement, to categories of
services that typically benefit all associate companies, and will propose such
changes or alternative methods of allocation as may be necessary to assure that
CP&L Energy bears an appropriate share of CP&L Service's costs. CP&L Service
will propose such changes, if required, in accordance with the 60-day letter
procedure described below in Item 3.E.1., on a timetable that will allow for
full implementation of such changes not later than March 31, 2002.
CP&L Service will maintain its accounts, cost-accounting procedures and
other records in accordance with the requirements of the Commission's Uniform
System of Accounts for Mutual Service Companies and Subsidiary Service Companies
utilizing, however, the chart of accounts specified in the FERC Uniform System
of Accounts for Public Utilities and Licensees (18 C.F.R. Part 101) . EXHIBIT
B-8 hereto summarizes the policies and procedures that will be used to implement
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the Service Agreements. CP&L Service will prepare and submit a policies and
procedures manual to the staff of the Division of Investment Management not
later than June 30, 2001. CP&L Service will file an annual report on Form
U-13-60 in accordance with Rule 94, commencing with the report for calendar year
2001.
CP&L, Florida Power and NCNG also request authorization to provide
services, upon request, to CP&L Service or to other associate companies
utilizing personnel who will not be transferred to CP&L Service and other
resources and capabilities developed in the conduct of their public utility
operations. Such services include transmission and distribution support,
customer service support, telecommunications support, nuclear support, power
operations support, gas and energy services support, and information technology
support, among others. In addition, Florida Power employees may, if requested,
provide certain corporate support services (e.g., legal, internal audit,
financial and risk management, cash management, etc.) to CP&L Service and/or
Electric Fuels on an interim basis, pending the transfer of such employees to
CP&L Service. It is anticipated that the Florida Power employees who would
provide these types of services will be transferred to CP&L Service effective
January 1, 2002, at which point all corporate support service functions will be
conducted through CP&L Service. As appropriate, CP&L, Florida Power and NCNG
will enter into Service Agreements with associate companies within the CP&L
Energy system, the form of which is filed herewith as EXHIBIT B-4 (Rev). All
such transactions will be performed at cost.
H. Other Existing Affiliate Service Agreements.
-------------------------------------------
The Applicants also request approval, to the extent required, to continue
performance under two pre-existing long-term coal supply agreements between
Electric Fuels and Florida Power, and to enter into extensions thereof on terms
consistent with the current agreements. Under an agreement dated February 1,
1977, as amended, Electric Fuels supplies coal to Units 1 and 2 of Florida
Power's Crystal River generating station, and under an agreement dated December
12, 1978, as amended, Electric Fuels supplies coal to Units 4 and 5 of the
Crystal River station. As previously indicated, most of the coal delivered by
Electric Fuels to Florida Power is sourced from unaffiliated mines. Coal
purchased by Electric Fuels from affiliate suppliers under long-term contracts
is priced at market rates in accordance with an FPSC order, and coal purchases
from affiliate suppliers under spot contracts are at market prices that are
subject to review by the FPSC.
The price Electric Fuels charges Florida Power under the two contracts for
rail-delivered coal is equal to the sum of the costs incurred by Electric Fuels
for coal, which includes (a) Electric Fuels' cost of coal, (b) the cost of
transportation to the Crystal River station by rail, (c) Electric Fuels' other
expenses relating to procurement and transportation (including quality analysis,
laboratory and laboratory-related expenses, railcar and locomotive expenses,
depreciation, amortization, general and administrative expenses, interest, and a
provision for income taxes), and (d) a return on Electric Fuels' equity
investment associated with assets dedicated to regulated businesses, primarily
the railcars and locomotives, at the rate of return on equity authorized by the
FPSC for Florida Power (currently 12%). The price Electric Fuels charges Florida
Power under the two contracts for water-delivered coal is equal to the sum of
Electric Fuels' cost of coal, Electric Fuels' expenses, as described in clause
(c) above, and a market-based component for water borne transportation under a
methodology approved by the FPSC.
18
<PAGE>
The Applicants believe that the pricing terms under the two coal supply
agreements are permitted by Rules 81, 90(d)(2) and 92(b), as applicable.
I. Exemption of Florida Progress as a Holding Company.
--------------------------------------------------
For a period of up to eight years following the Share Exchange, CP&L Energy
proposes to retain Florida Progress as a wholly owned subsidiary, and Florida
Progress will continue to own all of the issued and outstanding common stock of
Florida Power, Progress Capital, and its other non-utility subsidiaries. Before
the end of the eight-year period, CP&L Energy will take steps to make Florida
Power a first tier subsidiary of CP&L Energy, either by dissolving Florida
Progress, causing Florida Progress to distribute the common stock of Florida
Power to CP&L Energy, merging Florida Power into Florida Progress, or such other
transaction as may be economically and legally beneficial to CP&L Energy and its
subsidiaries (including Florida Progress and its subsidiaries). CP&L Energy's
reasons for preserving Florida Progress as a subsidiary holding company on an
interim basis are discussed below in Item 3.B.3.
CP&L Energy represents that Florida Progress will not issue any additional
equity securities or debt securities, other than to CP&L Energy. Florida
Progress's sole purpose following the Share Exchange will be to hold the
securities of Florida Power, Progress Capital, and its other non-utility
subsidiaries and to provide credit support for the indebtedness of certain of
those subsidiaries. Florida Progress will not engage in any business operations
of its own.
In its capacity as a holding company, Florida Progress will continue to be
entitled to an exemption pursuant to Section 3(a)(1) of the Act because both
Florida Progress and Florida Power are incorporated in Florida, the state in
which all of Florida Power's operations are conducted. Accordingly, Florida
Progress requests that the Commission issue an order exempting it from the
registration requirements of Section 5 of the Act pursuant to Section 3(a)(1).
Florida Progress acknowledges that such order shall have no effect upon the
status of Florida Progress and its subsidiaries as direct and indirect
subsidiaries of CP&L Energy, a registered holding company, following the Share
Exchange.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
It is currently estimated that the fees, commissions and expenses paid or
incurred, or to be paid or incurred, directly or indirectly, in connection with
the Share Exchange, including the Commission's filing fees under the Securities
Act of 1933 and expenses associated with soliciting proxies, will total
approximately $41.4 million, as follows.
Commission filing fee for Registration Statement on Form S-4........$1,002,990
Accountants' fees.....................................................$500,000
Legal fees and expenses.............................................$4,800,000
Shareholder communications (printing and proxy solicitation)........$1,810,000
NYSE listing fee......................................................$178,000
19
<PAGE>
Exchanging, printing and engraving of stock certificates............$1,000,000
Investment bankers' fees and expenses:
Salomon Smith Barney..........................................$18,000,000
Merrill Lynch.................................................$10,000,000
Economists' fees and expenses.......................................$2,000,000
Miscellaneous.......................................................$2,109,010
---------
TOTAL.........................................................$41,400,000
ITEM 3. APPLICABLE STATUTORY PROVISIONS
The following sections of the Act and the Commission's rules thereunder are
or may be directly or indirectly applicable to the proposed Share Exchange:
Section of the Act Transactions to which section or rule
------------------ may be applicable:
-------------------------------------
3(a) Exemption of Florida Progress as a
holding company.
4, 5 Registration of CP&L Energy as a holding
company following consummation of the
Share Exchange.
6(a), 7 Issuance by CP&L Energy of common stock,
CVOs and commercial paper to finance
acquisition of shares of Florida
Progress common stock.
9(a)(2), 10(a), (b), (c) and (f) Acquisition by CP&L Energy of common
stock of Florida Progress and Florida
Power.
8, 9(c)(3), 11(b), 32, 34 Retention by CP&L Energy of the western
North Carolina electric properties of
CP&L and the retail gas utility
operations of NCNG as additional
integrated public utility systems;
retention of other businesses of CP&L
Energy and Florida Progress and their
direct and indirect subsidiaries.
13(b) Approval of the services to be provided
by CP&L Service to CP&L, NCNG, and
Florida Power in accordance with the
Utility Service Agreement; approval of
20
<PAGE>
services to be provided by CP&L Service
to the direct and indirect non-utility
subsidiaries of CP&L Energy in
accordance with the Non-Utility Service
Agreement; approval of other service
agreements between CP&L, NCNG and
Florida Power; and approval of
continuation and extension of coal
supply agreements between Electric Fuels
and Florida Power.
Rules
-----
80-92 Affiliate transactions, generally.
88 Organization of CP&L Service as a
service company subsidiary in the CP&L
Energy system.
A. Share Exchange Analysis - Overview
----------------------------------
Section 9(a)(2) of the Act provides that it is unlawful, without approval
of the Commission under Section 10, "for any person . . . to acquire, directly
or indirectly, any security of any public-utility company, if such person is an
affiliate . . . of such company and of any other public-utility or holding
company, or will by virtue of such acquisition become such an affiliate." Under
the definition set forth in Section 2(a)(11), an "affiliate" of a specified
company means "any person that directly or indirectly owns, controls, or holds
with power to vote, 5 per centum or more of the outstanding voting securities of
such specified company," and "any company 5 per centum or more of whose
outstanding voting securities are owned, controlled, or held with power to vote,
directly or indirectly, by such specified company." As a result of the proposed
Share Exchange, CP&L Energy, which already owns all of the common stock of CP&L
and NCNG, will acquire all of the outstanding voting securities of Florida
Progress, the parent company of Florida Power. The Share Exchange therefore
requires prior Commission approval under the standards of Section 10. In this
regard, the relevant standards are set forth in Sections 10(b), 10(c), and 10(f)
of the Act.
As set forth more fully below, the Share Exchange complies with all of the
applicable provisions of Section 10 of the Act and should be approved by the
Commission. Specifically, the Commission should find that:
o the consideration to be paid in the Share Exchange is fair and
reasonable;
o the Share Exchange will not create detrimental interlocking relations
or concentration of control;
21
<PAGE>
o the Share Exchange will not result in an unduly complicated capital
structure for the CP&L Energy system;
o the Share Exchange is in the public interest and the interests of
investors and consumers;
o the Share Exchange is consistent with Section 8 of the Act and not
detrimental to carrying out the provisions of Section 11;
o the Share Exchange will tend toward the economical and efficient
development of an integrated electric utility system; and
o the Share Exchange will comply with all applicable state laws.
B. Section 10(b)
-------------
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a) unless
the Commission finds that:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or to
an extent detrimental to the public interest or the interests of
investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly,
in connection with such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of the
holding-company system of the applicant or will be detrimental to the
public interest or the interests of investors or consumers or the
proper functioning of such holding-company system.
1. Section 10(b)(1)
----------------
The standards of Section 10(b)(1) are satisfied because the proposed Share
Exchange will not "tend towards interlocking relations or the concentration of
control of public-utility companies, of a kind or to an extent detrimental to
the public interest or the interests of investors or consumers." By its nature,
any merger results in new links between previously unrelated companies. The
Commission has recognized, however, that such interlocking relationships are
permissible in the interest of efficiencies and economies. Northeast Utilities,
-------------------
50 S.E.C. 427, 443 (1990) ("Northeast Utilities"), as modified, 50 S.E.C. 511
------------------- -----------
(1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992)
------------- ----------------------
(finding that interlocking relationships are necessary to integrate the two
merging entities). The links that will be established as a result of the Share
22
<PAGE>
Exchange are not the types of interlocking relationships targeted by Section
10(b)(1), which was primarily aimed at preventing utility mergers unrelated to
operating synergies.22
The Exchange Agreement provides that the board of directors of CP&L Energy
will consist of fourteen directors, ten of whom will be designated by CP&L
Energy and four of whom will be designated by Florida Progress from the Florida
Progress board of directors, subject to the approval of CP&L Energy.23 In
addition, various contractual arrangements among the companies in the CP&L
Energy system will be established, including the following:
o Florida Power will enter into the Utility Service Agreement with CP&L
Service. Likewise, Florida Progress's direct and indirect non-utility
subsidiaries will enter into the Non-Utility Service Agreement with
CP&L Service. Through the consolidation of functions into CP&L
Service, the CP&L Energy system will achieve substantial economies and
efficiencies. By entering into these service agreements, Florida
Progress and its direct and indirect subsidiaries will receive
services from CP&L Service and effectively avail themselves of these
economies and efficiencies.
o CP&L and Florida Power will enter into the Integration Agreement,
which will provide for coordination of production-related activities,
including inter-system sales of capacity and energy, joint planning,
and joint maintenance programs. This agreement is discussed further
below.
These arrangements are necessary to integrate Florida Power fully into the CP&L
Energy system and will therefore be in the public interest and the interest of
investors and consumers. Forging such relationships is beneficial to the
protected interests under the Act and, thus, is not prohibited by Section
10(b)(1). Moreover, because substantial benefits will accrue to the public,
investors and consumers from the affiliation of CP&L Energy and Florida
Progress, whatever interlocking relationships may arise from the combination are
not detrimental.
In applying Section 10(b)(1) to a utility acquisition, the Commission must
further determine whether such acquisition will result in "the type of
structures and combinations at which the Act was specifically directed." Vermont
-------
Yankee Nuclear Power Corp., 43 S.E.C. 693, 700 (1968). The CP&L Energy-Florida
-------------------------
Progress strategic combination will not create a "huge, complex and irrational
system" but, rather, will afford the opportunity to achieve economies of scale
and efficiencies for the benefit of investors and consumers. See American
--- --------
Electric Power Company, Inc., 46 S.E.C. 1299, 1307 (1978) ("1978 AEP Order"). As
--------------------------- --------------
explained in the Joint Proxy (included in EXHIBIT C-1 hereto), the primary
objective of the Share Exchange is to position the companies to participate in
the growing and increasingly competitive energy markets. The Share Exchange will
------------------------
22 See Section 1(b)(4) of the Act (finding that the public interest and
interests of consumers and investors are adversely affected "when the growth and
extension of holding companies bears no relation to the economy of management
and operation or the integration and coordination of related operating
properties . . ..").
23 The Applicants acknowledge the requirements of Section 17(c) of the Act
and Rule 70 thereunder with respect to limitations upon directors and officers
of registered holding companies and subsidiary companies thereof having
affiliations with commercial banking institutions and investment bankers and
undertake that, upon completion of the Share Exchange, they will be in
compliance with the applicable provisions thereof.
23
<PAGE>
combine the strengths of the companies, enabling them to offer customers a
broader array of energy products and services more efficiently and
cost-effectively than either could alone, and at the same time create a larger
and more diverse asset and customer base with enhanced opportunities for
operating efficiencies and risk diversification.
While the combination of CP&L Energy and Florida Progress will create a
large electric utility system, it certainly will not be one that exceeds the
economies of scale of current electric generation and transmission technology.
If approved, the CP&L Energy system will serve approximately 2.5 million
electric customers, as well as 164,000 gas customers. On a pro forma basis, as
of June 30, 2000, CP&L Energy will have consolidated assets of about $19.5
billion, including net utility plant of approximately $10.5 billion. For the
twelve months ended June 30, 2000, pro forma combined operating revenues totaled
approximately $7.7 billion. The combined companies will own or control about
18,500 MW of generating capacity.
The following table shows CP&L Energy's size after the Share Exchange
relative to other registered holding company systems that compete with CP&L and
Florida Power in the southeastern U.S. power market in terms of total assets,
operating revenues and electric customers (all data as of and for the year ended
December 31, 1999, unless otherwise noted):
System Total Assets Operating Revenues Electric Customers
($ Millions) ($ Millions) (Thousands)
---------- ---------- ---------
Southern 38,396 11,585 3,871
AEP (pro 35,700 12,416 4,800
forma)
Dominion 29,059* 8,800** 2,000
(pro
forma)
Entergy 22,985 8,773 2,522
CP&L 19,537*** 7,203 2,500
Energy
Notes:
-----
* Total assets as of September 30, 1999
** Revenues for year ended December 31, 1998
* ** Total assets as of June 30, 2000
As the foregoing table indicates, while CP&L Energy will be among the
larger of the registered electric utility holding companies, it will be
substantially smaller than Southern Company and AEP, and somewhat smaller
than Entergy Corp., which has announced a merger with FPL Group, the parent
of Florida Power & Light Company, to form a registered holding company system
that will have more than $38 billion in total assets. All of these companies
24
<PAGE>
compete with CP&L and Florida Power in the southeastern U.S. power market.
The Commission has approved a number of acquisitions involving larger and
similarly-sized operating utilities. See, e.g., Entergy Corporation, 51
--- ---- --------------------
S.E.C. 869 (1993) ("Entergy Corp.") (acquisition of Gulf States Utilities;
------------
combined assets at time of acquisition in excess of $22 billion); Dominion
---------
Resources, Inc., Holding Co. Act Release No. 27113 (Dec. 15, 1999) ("Dominion
-------------- ---------
Resources") (acquisition of Consolidated Natural Gas Company; combined
---------
assets at time of acquisition of $29.0 billion); and American Electric Power
------------------------
Company, Inc., et al., Holding Co. Act Release No. 27185 (June 14, 2000)
--------------------
("2000 AEP Order") (acquisition of Central and South West Corp.; combined
----------------
assets of $35.7 billion as of December 31, 1999).
The Commission has rejected an interpretation of Section 10(b)(1) that
would impose per se limits on the post-merger size of a registered holding
company. Instead, the Commission assesses the size of the resulting system with
reference to the economic efficiencies that can be achieved through the
integration and coordination of utility operations. The Commission in the
1978 AEP Order noted that, although the framers of the Act were concerned about
--------------
"the evils of bigness, they were also aware that the combination of isolated
local utilities into an integrated system afforded opportunities for economies
of scale, the elimination of duplicate facilities and activities, the sharing of
production capacity and reserves and generally more efficient operations...
[and] [t]hey wished to preserve these opportunities." 1978 AEP Order, 46 S.E.C.
--------------
at 1309. By virtue of the Share Exchange, CP&L Energy will be in a position to
realize precisely these types of benefits. Among other things, the Share
Exchange is expected to yield labor cost savings, corporate and administrative
and purchasing savings, and cost of fuel savings. These expected economies and
efficiencies from the combined utility operations are described in greater
detail in Item 3. C.2. below.
Finally, Section 10(b)(1) also requires the Commission to consider possible
anticompetitive effects of a proposed combination. See Municipal Electric
--- ------------------
Association of Massachusetts v. SEC, 413 F.2d 1052 (D.C. Cir. 1969). As the
---------------------------- ---
Commission noted in Northeast Utilities, the "antitrust ramifications of an
-------------------
acquisition must be considered in light of the fact that public utilities are
regulated monopolies and that federal and state administrative agencies regulate
the rates charged to customers." Northeast Utilities, 50 S.E.C. at 445 (citing
-------------------
1978 AEP Order, 46 S.E.C. at 1324 - 25). In this case, CP&L Energy and Florida
--------------
Progress have filed Notification and Report Forms with the Department of Justice
and the Federal Trade Commission pursuant to the HSR Act describing the effects
of the Share Exchange on competition in the relevant market. On July 12, 2000,
the Applicants were notified that the applicable waiting period under the HSR
Act had been terminated.
The competitive impact of the Share Exchange on wholesale power markets was
also considered by FERC, which approved the merger in an order issued July 12,
2000. (See EXHIBIT D-4) ("FERC Order"). Specifically, FERC considered the
----------
effects of combining CP&L's and Florida Power's generation (horizontal market
power), the effects of combining generation and transmission (one aspect of
vertical market power), and the effects of combining electric and natural gas
assets. FERC determined that the merger "will not adversely affect competition
as a result of combining generation" (FERC Order, p. 10), and "will not enhance
the Applicants' ability to adversely affect prices or output in electricity
markets through the use of generation and transmission." (FERC Order, p. 13). In
order to address possible concerns about the effects of the merger on
competition, the Applicants voluntarily committed to divest 135 MW of generation
25
<PAGE>
resources (85 MW by CP&L and 50 MW by Florida Power) for a six-year period. FERC
also found that CP&L's and Florida Power's respective commitments to file for
approval to join regional transmission organizations ("RTOs") by October 16,
2000, addressed any potential vertical market power issues associated with
ownership of electric transmission and generation. Finally, FERC concluded that,
because of NCNG's small size, the merger "will not adversely affect competition
as a result of combining control over delivered gas and electricity facilities."
(FERC Order, p. 14).
The Commission has found, and the courts have agreed, that it may
appropriately rely upon the FERC with respect to such matters. See City of
--- -------
Holyoke v. SEC, 972 F.2d at 363-64, quoting Wisconsin's Environmental Decade v.
-------------- ------- -----------------------------------
SEC, 882 F.2d 523, 527 (D.C. Cir. 1989). For these reasons, the proposed
---
transaction will not "tend toward interlocking relations or the concentration of
control" of public utility companies, of a kind or to the extent detrimental to
the public interest or the interests of investors or customers within the
meaning of Section 10(b)(1).
2. Section 10(b)(2)
---------------
Section 10(b)(2) precludes approval of an acquisition if the consideration
to be paid in connection with the transaction, including all fees, commissions
and other remuneration, is "not reasonable or does not bear a fair relation to
the sums invested in or the earning capacity of .. the utility assets underlying
the securities to be acquired." The Commission has found "persuasive evidence"
that the standards of Section 10(b)(2) are satisfied where, as here, the agreed
consideration for an acquisition is the result of arms-length negotiations
between the managements of the companies involved, supported by opinions of
financial advisors. See Entergy Corp., 51 S.E.C. at 879; Southern Company,
--- ------------ ----------------
Holding Co. Act Release No. 24579 (Feb. 12, 1988).
The agreed price, which represents a 30% premium to Florida Progress's
shareholders (based on the 20-day average closing price ended August 20, 1999 of
Florida Progress's stock), was the product of extensive and vigorous arms-length
negotiations between CP&L and Florida Progress. These negotiations were preceded
by intensive due diligence, analysis and evaluation of the assets, liabilities
and business prospects of each of the respective companies.
Under the Exchange Agreement, Florida Progress shareholders will also
receive CVOs, which will entitle them to receive payments based on the net
after-tax cash flow generated by the EARTHCO plants. In effect, the CVOs will
provide Florida Progress shareholders the opportunity to earn additional cash
consideration that is directly linked to the performance of non-utility assets
that were purchased by Florida Progress subsequent to the date of the original
Agreement and Plan of Share Exchange. As explained in the Joint Proxy, it is not
possible to know precisely the value of the CVOs at this time, or to predict the
extent to which any market for the CVOs will develop. The amount of payments, if
any, with respect to the CVOs will depend on and be subject to several factors,
including the actual annual production of the EARTHCO plants, the level of sales
of that production, the operations of the EARTHCO plants, the qualification of
the synthetic fuels produced for federal income tax credits and the ability of
CP&L Energy to utilize any such tax credits. Based on various assumptions
provided by Florida Progress's management, it is estimated that the Florida
Progress share of the annual net after-tax cash flow represented by the CVOs
26
<PAGE>
could reach an average of $30 million over the years in which the rights to
these payments can accrue to the CVO holders. This would entitle a holder of 100
CVOs to receive a payment of approximately $30 for each year. If the assumptions
made by Florida Progress's management differ materially from actual results, the
payments to CVO holders would vary significantly from the projected amounts.
Nationally-recognized investment bankers for CP&L and Florida Progress have
reviewed extensive information concerning the companies, analyzed the agreed per
share price employing a variety of valuation methodologies, and opined that the
purchase price is fair, from a financial point of view, to the respective
holders of CP&L common stock and Florida Progress common stock as of the date of
the Exchange Agreement. See EXHIBITS G-1 and G-2. The assistance of independent
consultants in fixing the agreed-upon consideration has been recognized by the
Commission as evidence that the requirements of Section 10(b)(2) have been met.
Southern Company, supra.
---------------- -----
Finally, the transaction has been approved by overwhelming majorities of
the shareholders of both Florida Progress and CP&L Energy.
Another consideration under Section 10(b)(2) is the overall fees,
commissions and expenses to be incurred in connection with the Share Exchange.
CP&L Energy and Florida Progress believe that these items will be reasonable and
fair in light of the size and complexity of proposed transaction relative to
other utility mergers and acquisitions, and that the anticipated benefits of the
Share Exchange to the public, investors and consumers are consistent with recent
precedents and meet the standards of Section 10(b)(2).
CP&L Energy and Florida Progress together estimate that they will incur a
combined total of approximately $41.4 million in fees, commissions and expenses
in connection with the Share Exchange. (See Item 2 - Fees, Commissions and
Expenses). The Applicants believe that the estimated fees and expenses in this
matter bear a fair relation to the value of their respective companies and the
benefits to be achieved by the Share Exchange, and further that the fees and
expenses are fair and reasonable in light of the size and complexity of the
Share Exchange. See Northeast Utilities, supra (noting that fees and expenses
--- ------------------- -----
must constitute normal costs and represent a minor part of the overall
acquisition). Sixty-five percent of Florida Progress's common stock will be
exchanged for cash consideration of $54.00 per share. Thirty-five percent of
Florida Progress's common stock will be converted into a number of shares of
CP&L Energy common stock based on the exchange ratio. Based on the average CP&L
closing price per share as reported on the NYSE for the twenty day period ending
on the fifth trading day before the end of the second fiscal quarter of 2000
(the period for which pro forma financial information is available), which was
$33.434, CP&L would issue approximately 50,196,000 shares of common stock in the
transaction for thirty-five percent of the Florida Progress common stock
outstanding on June 30, 2000. The Share Exchange would be valued at
approximately $5.140 billion, based on these assumptions, and ignoring the value
of the CVOs. The total estimated fees and expenses of approximately $41.4
million represent approximately .81% of the value of the consideration (other
than the CVOs) to be paid.
The estimated fees in this case are consistent with (and in fact generally
lower than) percentages previously approved by the Commission. See, e.g.,
--- ---
Entergy Corp., 51 S.E.C. at 881, n. 63 (fees and expenses of $38 million,
------------
27
<PAGE>
representing approximately 2% of the value of the consideration paid to the
shareholders of Gulf States Utilities); Dominion Resources, 71 SEC Docket at 697
------------------
(fees and expenses totaling $55.5 million, representing approximately .87% of
the estimated total consideration to be paid to shareholders of Consolidated
Natural Gas Co.); and 2000 AEP Order, 72 SEC Docket at 1601, n. 40 (total fees,
--------------
commissions and expenses of approximately $72.7 million, representing 1.1% of
the value of the total consideration paid by AEP to the shareholders of Central
and South West Corp.).
3. Section 10(b)(3)
----------------
Section 10(b)(3) requires the Commission to determine whether the Share
Exchange will "unduly complicate the capital structure" or be "detrimental to
the public interest or the interest of investors or consumers or the proper
functioning" of the CP&L Energy system.
The capital structure of the CP&L Energy system will be substantially
similar to the capital structures of existing registered holding company
systems. See, e.g., American Electric Power, 47 S.E.C. 215 (1980). The
--- --- -----------------------
shareholders of Florida Progress will receive CP&L Energy common stock and cash.
CP&L Energy will own, directly or indirectly, 100% of the common stock of CP&L,
Florida Power and NCNG. Hence, the transaction will not create any publicly-held
minority stock interest in any public utility company. The existing debt
securities of CP&L, Florida Power and CP&L's and Florida Progress's non-utility
subsidiaries will likewise remain outstanding without change. The only voting
securities of CP&L Energy that will be publicly held after the Share Exchange
will be CP&L Energy common stock.
The continued existence of Florida Progress as a secondary holding company
for a period of up to eight years following the Share Exchange will not unduly
complicate CP&L Energy's capital structure. In this regard, the Commission under
similar circumstances has permitted AEP to retain Central and South West Corp.
as a secondary holding company for a period of no more than eight years.
See 2000 AEP Order, 72 SEC Docket at 1593; see too Energy East Corp. ("Energy
--- -------------- --- --- ---------------- ------
East"), Holding Co. Act Release No. 27224 (Aug. 31, 2000) (proposal to maintain
----
four intermediate holding companies for up to five years granted). The continued
existence of Florida Progress will preserve certain financing and structural
benefits that have already been achieved by Florida Progress. Specifically, the
structure will permit Florida Progress to maintain in place financing
arrangements under which debt securities and preferred securities issued by
non-utility subsidiaries of Florida Progress, primarily to fund investments in
unregulated businesses, have been guaranteed by Florida Progress. The
elimination of Florida Progress as a secondary holding company would necessitate
repayment or redemption of these outstanding securities or the assumption by
CP&L Energy of Florida Progress's obligations under its guarantees. In either
case, significant refinancing and other transactional costs would be involved.
In addition, CP&L Energy has determined that it is in the interests of its
investors to preserve Florida Progress as a secondary holding company in that it
will allow CP&L Energy to realize certain potential future Federal income tax
benefits. CP&L Energy's acquisition of Florida Progress is designed to give CP&L
Energy an income tax basis in the common stock of Florida Progress equal to the
acquisition price of approximately $5.14 billion, which could be several billion
dollars more than Florida Progress's income tax basis in its subsidiaries. CP&L
28
<PAGE>
Energy desires to preserve its tax basis in the common stock of Florida Progress
in order to minimize taxable gain, and income tax incurred, upon any future
disposition of any portion of Florida Progress's assets. If Florida Progress
were dissolved or merged into CP&L Energy, the basis in the common stock of
Florida Progress would be eliminated without any corresponding increase in the
basis of the stock of the Florida Progress subsidiaries, thus depriving CP&L
Energy of the potentially valuable tax basis. Moreover, that basis cannot be
transferred to the common stock of Florida Progress subsidiaries distributed by
Florida Progress to CP&L Energy within five years after the Share Exchange.
The incurrence by CP&L Energy of approximately $3.5 billion of indebtedness
to finance the cash portion of the purchase price will also not result in an
unduly complicated capital structure for the resulting CP&L Energy system.
Acquisition financing of the type contemplated by CP&L Energy is expressly
permitted by Section 7(c)(2)(A) of the Act. As addressed in File No. 70-9659,
CP&L Energy intends to refinance the acquisition debt following the Share
Exchange through the issuance of longer term securities and/or using proceeds
from the possible sale of some non-core assets. The Commission has previously
authorized registered holding companies to issue debt to finance an acquisition
under similar circumstances. See Dominion Resources, supra; SCANA Corporation,
--- ------------------ ----- -----------------
Holding Co. Act Release No. 27133 (Feb. 9, 2000); and Energy East, supra.
----------- -----
Finally, the issuance of the CVOs by CP&L Energy will not represent a
permanent part of CP&L Energy's capitalization. Although these securities will
remain outstanding for a period of years, they will be reflected in CP&L
Energy's financial statements as a contractual commitment to make cash payments
depending upon various factors relating to the EARTHCO plants. Moreover, the
CVOs achieve the desired effect of allocating a portion of the potential upside
from the future performance of the EARTHCO plants to those investors who were
most directly placed at risk when the investment in the EARTHCO plants was made,
namely, the Florida Progress common shareholders.
Set forth below are summaries of the capital structures of CP&L Energy and
Florida Progress as of June 30, 2000, and the pro forma consolidated capital
structure of CP&L Energy (assuming the Share Exchange had been consummated on
June 30, 2000):
29
<PAGE>
CP&L Energy and Florida Progress Historical Consolidated Capital Structures
(dollars in millions)
CP&L Energy Florida Progress
----------- ----------------
Common stock equity $3,460.1 48.7% $2,092.5 42.1%
Preferred securities */ 59.4 0.8 333.5 6.7
-
Long-term debt, incl. 2,722.5 38.3 1,820.2 36.6
current portion
Short-term debt **/ 864.5 12.2 726.0 14.6
-- ----- ----- ----- -----
Total $7,106.5 100.0% $4,972.2 100.0%
CP&L Energy Pro Forma Consolidated Capital Structure
(dollars in millions) (unaudited)
Common stock equity $5,137.4 34.0%
Preferred securities */ 392.9 2.6
-
Long-term debt, incl. 8,004.1 52.9
current portion
Short-term debt **/ 1,590.6 10.5
-- ------- ----
Total $15,125.0 100.0%
*/ Includes preferred stock and company-obligated mandatorily redeemable
-
preferred securities.
**/ Includes amounts ($750 million in the case of CP&L Energy and $500
--
million in the case of Florida Progress) that are reclassified to long-term debt
for external reporting purposes.
As the foregoing shows, even taking into account the acquisition debt, CP&L
Energy's pro forma consolidated common equity to total capitalization ratio of
34.0% will comfortably exceed the "traditionally acceptable 30% level."24
See Northeast Utilities, 50 S.E.C. at 440, n. 47. Moreover, the transaction will
--- -------------------
------------------------
24 Under section 7(d)(1) of the Act, the Commission generally has required
a registered holding company system and its public-utility subsidiaries to
maintain a 65/30 debt/common equity ratio, the balance generally being preferred
equity. Such debt/equity capitalization requirement was included in Rule 52, as
originally adopted, as applied to securities issued by public-utility
subsidiaries, but was eliminated in 1992.
30
<PAGE>
have no effect on the capitalization of CP&L, Florida Power or NCNG. Common
equity as a percentage of capitalization of each of these three companies is and
will remain well over 30%. Ratings of the senior debt securities of CP&L and
Florida Power have not changed since the Share Exchange was announced in August
1999.
Section 10(b)(3) also requires the Commission to determine whether the
proposed combination will be detrimental to the public interest, the interests
of investors or consumers or the proper functioning of the combined CP&L Energy
system. The proposed transaction between CP&L Energy and Florida Progress is
entirely consistent with the proper functioning of a registered holding company
system. CP&L's and Florida Power's utility operations will be integrated.
Further, the combination will result in substantial, otherwise unavailable,
savings and benefits to the public and to consumers and investors of both
companies, and the integration of CP&L and Florida Power will improve the
efficiency of their respective systems. The integration of CP&L and Florida
Power is described below in Item 3.C.1.(b) and the benefits and savings are
described in Item 3.C.2.
Finally, the Share Exchange has been approved by several other regulatory
authorities. These regulatory approvals assure that the interests of customers
will be adequately protected. FERC's approval also confirms that the transaction
will have no adverse effect on competition. Moreover, as noted by the Commission
in approving Entergy Corporation's acquisition of Gulf States Utilities,
"concerns with respect to investors' interests have been largely addressed by
developments in the federal securities laws and the securities markets
themselves." Entergy Corp., 51 S.E.C. at 883. CP&L Energy, CP&L, Florida
------------
Progress and Florida Power will all be reporting companies subject to the
disclosure requirements of the 1934 Act following the completion of the Share
Exchange. The various reports previously filed by CP&L and Florida Progress
under the Act contain readily available information concerning the Share
Exchange. For these reasons, the Applicants believe that the Share Exchange will
be in the public interest and the interest of investors and consumers and will
not be detrimental to the proper functioning of the resulting holding company
system.
C. Section 10(c)
-------------
Section 10(c) of the Act provides that, notwithstanding the provisions of
Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of section 8 or is
detrimental to the carrying out of the provisions of section 11; or
(2) the acquisition of securities or utility assets of a public utility or
holding company unless the Commission finds that such acquisition will
serve the public interest by tending towards the economical and the
efficient development of an integrated public utility system.
31
<PAGE>
1. Section 10(c)(1)
(a) The Share Exchange will be lawful under Section 8
Section 10(c)(1) first requires that the Share Exchange be lawful under
Section 8. That section was intended to prevent holding companies, by the use of
separate subsidiaries, from circumventing state restrictions on common ownership
of gas and electric operations. The Share Exchange will not result in any new
situation of common ownership of so-called "combination" systems within a given
state. CP&L provides electric service and its subsidiary, NCNG, provides gas
service in North Carolina. The affiliation of CP&L and NCNG was expressly
approved by the NCUC. Accordingly, the Share Exchange does not raise any issue
under Section 8.
(b) The Share Exchange will not be detrimental to carrying out the
provisions of Section 11
Section 10(c)(1) also requires that the Share Exchange not be "detrimental
to the carrying out of the provisions of section 11." Section 11(b)(1) directs
the Commission generally to limit a registered holding company "to a single
integrated public-utility system." At issue is whether the combination of CP&L
and Florida Power, each of which is an electric utility, will result in a system
that is "detrimental to the carrying out of the provisions of section 11."
In the early years of its administration of the Act, the Commission
construed Section 11(b)(1) to preclude significant geographic expansion by
holding company systems. However, as the Commission has acknowledged, the Act
"creates a system of pervasive and continuing economic regulation that must in
some measure at least be fashioned from time to time to keep pace with changing
economic and regulatory climates."25 In recent decisions, the Commission has
cited U.S. Supreme Court and Circuit Court of Appeals cases that recognize that
an agency is not required to "establish rules of conduct to last forever,"26
but must "adapt [its] rules and policies to the demands of changing
circumstances"27 and to "treat experience not as a jailer but as a teacher."28
Consequently, the Commission has attempted to "respond flexibly to the
legislative, regulatory and technological changes that are transforming the
structure and shape of the utility industry," as recommended by the Division of
Investment Management (the "Division") in its June 1995 report to the Commission
entitled "The Regulation of Public-Utility Holding Companies" (the "1995
------------------------
25 Union Electric Co., 45 S.E.C. 489 at n. 52 (1974), quoted in
-----------------
Consolidated Natural Gas Co., Holding Co. Act Release No. 26512 (April 30, 1996)
---------------------------
(authorizing international joint venture to engage in energy marketing
activities); Eastern Utilities Associates, Holding Co. Act Release No. 26232
----------------------------
(Feb. 15, 1995) (removing restrictions on energy management activities); and
Southern Co., 50 S.E.C. 1328 (1992) (approving acquisition of foreign
-----------
public-utility subsidiary company).
26 Rust v. Sullivan, 500 U.S. 173 (1991); American Trucking Assns., Inc. v.
---- -------- -----------------------------
Atchison, T.&S.F.R. Co., 387 U.S. 397 (1967); Shawmut Assn. v. SEC, 146 F.2d 791
---------------------- ------------ ---
(1st Cir. 1945).
27 NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10,
----------------------
1999), citing Rust v. Sullivan at 186-187. Accord, Sempra Energy, Holding Co.
---- -------- ------- -------------
Act Release No. 26971 n.23 (Feb. 1, 1999) (interpreting the integration
standards of the Act as applied to gas companies in light of developments in the
gas industry).
28 NIPSCO Industries, Inc., supra, citing Shawmut Assn. v. SEC at 796-97.
----------------------- ----- -------------- ---
32
<PAGE>
Report"). Indeed, with specific reference to the integration requirements of the
Act, the 1995 Report explains:
The statute recognizes ... that the application of the integration
standards must be able to adjust in response to changes in "the state of
the art." As discussed previously, the Division believes the SEC must
respond realistically to the changes in the utility industry and interpret
more flexibly each piece of the integration equation.29
Moreover, the ultimate question has always been whether, on the facts of a given
matter, the proposed transaction will lead to a recurrence of the evils the Act
was intended to address.30 See also Sempra Energy, Holding Company Act Release
No. 26971 (Feb. 1, 1999), 69 SEC Docket at 108, in which the Commission
acknowledged that "we have taken notice of developments that have occurred in
the gas industry, and have interpreted the Act and analyzed proposed
transactions in light of these changed and changing circumstances."
As explained more fully below, the combination of the electric operations
of CP&L and Florida Power will result in a single, integrated electric utility
system.
(i) Integration of Electric Operations
The threshold question is whether the electric utility properties of
Florida Power can be combined with those of CP&L to form a single "integrated
public-utility system," which, as applied to electric utility companies, is
defined in Section 2(a)(29)(A) to mean:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility assets,
whether owned by one or more electric utility companies, are physically
interconnected or capable of physical interconnection and which under
normal conditions may be economically operated as a single interconnected
and coordinated system confined in its operations to a single area or
region, in one or more States, not so large as to impair (considering the
state of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
As the definition suggests, and as the Commission has observed, Section 11
is not intended to impose "rigid concepts" but rather creates a "flexible"
standard designed "to accommodate changes in the electric utility industry."
UNITIL Corp., 50 S.E.C. 961, 967 (1992) (citing Mississippi Valley Generating
----------- ------ -----------------------------
Co., 36 S.E.C. 159, 186 (1955)); see also Yankee Atomic Electric. Co., 36 S.E.C.
-- --- ---- --------------------------
552, 564 - 565 (1955) ("We think it is clear from the language of Section
2(a)(29)(A), which defines an integrated public utility system, that Congress
did not intend to imposed [sic] rigid concepts with respect thereto.")
(citations omitted); and Madison Gas and Electric Company v. SEC, 168 F.3d.
---------------------------------------
1337, 1343 (D.C. Cir. 1999) ("By its terms . . . section 10(c)(1) does not
require that new acquisitions comply to the letter with section 11"). Section
2(a)(29)(A) expressly directs the Commission to consider the "state of the art"
------------------------
29 1995 Report at 71.
30 1978 AEP Order, 46 S.E.C. at 1306.
--------------
33
<PAGE>
in analyzing the integration requirement. As indicated above, the Commission is
not constrained by its past decisions interpreting the integration standards
based on a different "state of the art." See 1978 AEP Order, 46 S.E.C at 1310
--- --------------
(noting that the state of the art -- technological advances in generation and
transmission, unavailable thirty years earlier -- served to distinguish a prior
case and justified "large systems spanning several states.").
(a) Interconnection. The first requirement for an integrated
---------------
electric utility system is that the electric generation and/or transmission
and/or distribution facilities comprising the system be "physically
interconnected or capable of physical interconnection." Historically, the
Commission has focused on physical interconnection through facilities that the
merger parties own or, by contract, control.31 However, the 1995 Study
recommended that the Commission "adopt a more flexible interpretation of the
geographic and physical integration standards, with more emphasis on whether an
acquisition will be economical and subject to effective regulation." 1995 Report
at 70. The 1995 Report also recommended that the Commission should increasingly
rely on an acquisition's demonstrated economies and efficiencies, rather than
upon physical interconnection, to meet the integration standard. Id. at 73. The
1995 Report noted that the Act provides the necessary flexibility and that the
application of the integration standards must be able to adjust in response to
changes in the "state of the art." The 1995 Report concluded that it would be a
logical extension of prior orders for the Commission to find that wheeling and
other forms of sharing power (such as reliability councils and proposed regional
transmission groups) also qualify as interconnection. This recommendation is
particularly significant in view of FERC's open access transmission policy, as
set forth in Order No. 888 and its progeny, 32 and, more recently, the issuance
of Order No. 2000, which establishes the framework for the formation of RTOs and
provides economic incentives for utilities to participate in the timely
formation of qualified RTOs.33
------------------------
31 See, e.g., Northeast Utilities, 50 S.E.C. 427 (1990) at n.75
-------- -------------------
supplemented, 50 S.E.C. 511 (1991), aff'd sub nom. City of Holyoke v. SEC., 972
----- ------- ----------------------
F.2d 358 (D.C. Cir. 1992) (Northeast had the right to use a Vermont Electric
line for ten years, with automatic two-year extensions, subject to termination
upon two years notice, in order to provide power to a Northeast affiliate.);
Centerior Energy Corp., 49 S.E.C. 472 (1986) (Cleveland Electric Illuminating
---------------------
Company and Toledo Edison Company were connected by a line owned by Ohio Edison.
All three were members of the Central Area Power Coordination Group ("CAPCO").
The line connecting Cleveland Electric, Ohio Edison and Toledo Edison was a
CAPCO line with segments owned by each of the three named utilities); Cities
------
Service Power & Light Co., 14 S.E.C. 28, 53 n. 44 (1943) (two companies in the
------------------------
same holding company system were found to be interconnected where energy was
transmitted between two separated parts of the system over a transmission line
owned by the United States Bureau of Reclamation, under an arrangement which
afforded the system the privilege of using the line).
32 See "Promoting Wholesale Competition Through Open Access
--- ---------------------------------------------------
Non-Discriminatory Transmission Service by Public Utilities; Recovery of
-----------------------------------------------------------
Stranded Costs by Public Utilities and Transmitting Utilities," Order No. 888,
FERC Stats. & Regs., Regulations Preambles, P. 31,036 (1996), order on
--------
rehearing, FERC Stats. & Regs., Regulations Preambles, P. 31,048 (1997) (Order
---------
No. 888-A), order on rehearing, 81 FERC P. 61,248 (1997) (Order No. 888-B),
------------------
order on rehearing, 82 FERC P. 61,046 (1998) (Order No. 888-C).
------------------
33 See "Regional Transmission Organizations," Order No. 2000, 89 FERC P.
--- -----------------------------------
61,285 (Dec. 20, 1999), order on rehearing 90 FERC P. 61,201 (Feb. 25, 2000)
------------------
(Order No. 2000-A). Order 2000 require all regulated utilities (other than those
already participating in an approved independent system operator) that own,
operate or control interstate transmission facilities to file by October 15,
2000, a proposal for an RTO, or a description of any efforts made by the utility
to participate in an RTO, or, alternatively, an explanation of the reasons for
not participating and any obstacles to participation in an RTO.
34
<PAGE>
The cornerstone of Order No. 888 is the concept of "comparability," i.e.,
the principle that all transmission users should have access to transmission
capacity that is comparable to the access enjoyed by the owner of the
transmission. To enforce that principle, Order No. 888 mandates that all public
utilities provide non-discriminatory access to their transmission systems
pursuant to standard open access transmission tariffs (called "OATTs"). Under
Order No. 889, a companion rule to Order No. 888, FERC also mandated that
transmission owners establish a comprehensive information system regarding the
availability and price of their transmission service on an Internet site called
"Open-Access Same-Time Information System," or OASIS for short.34 The OASIS
provides a practical and efficient means for non-contiguous utilities to use the
interstate transmission grid to interconnect their facilities and coordinate
their operations. Because of these changes affecting the "state of the art" of
the electric utility industry, it is now possible for non-contiguous utilities,
or, like CP&L, a single utility that serves non-contiguous areas, to realize the
advantages of coordinated operation, to jointly use their various generating
assets on an economic basis and otherwise act as an integrated electric utility
system through the use of OATTs and OASIS in the same manner as if they had
constructed a direct physical interconnection between their systems.
Importantly, "open access" as dictated by Order Nos. 888 and 889, provides an
easy to use, day-to-day means of coordinating electric operations, with minimal
notice and at standard terms, without the delay and expense that was previously
associated with separately negotiating transmission service from other
transmission owners.
In Order No. 2000, FERC went a step further by establishing certain ground
rules, and a timetable, for the development of RTOs. RTOs are expected to carry
forward the concepts of comparability and open access. They will serve as the
vehicle for implementing non-discriminatory open access transmission service
across regional areas, which will have the effect of bringing distant utility
systems closer together.
As previously noted, CP&L and Florida Power will be physically
interconnected following the Share Exchange via the Contract Path, which will
extend from the Southern/Florida Interface to the Duke Power/CP&L eastern
control area interface, a distance of about 350 miles. The Contract Path will
utilize a portion of the transfer capability of the Southern Company and Duke
Power transmission systems to enable 50 MW of electricity to be transferred on a
firm basis from Florida Power to the CP&L eastern control area interface. The
Contract Path map filed herewith as EXHIBIT E-6 identifies the major
transmission providers and utilities in the Southeast, and the interconnections
between them. The Contract Path is shown by the red line connecting Florida
Power and CP&L at its eastern control area interface. Although the
interconnections between transmission providers are depicted by a single line on
the map, they are, in fact, comprised of multiple physical transmission lines
(tielines), as follows:35
------------------------
34 See "Open Access Same-Time Information System (formerly Real-Time
--- ------------------------------------------------------------
Information Network) and Standards of Conduct," Order No. 889, FERC Stats. &
---------------------------------------------
Regs., Regulations Preambles, P. 31,035 (1996), order on rehearing, III FERC
------------------
Stats. & Regs., Regulations Preambles P. 61,253 (1997) (Order No. 889-A). Order
No. 889 also established standards for transmission providers that require
employees in transmission system operations to function independently of those
employees who are engaged in wholesale merchant functions and the OATTs to be
implemented in a fair and impartial manner.
35 In Energy East Corp., supra, the Commission determined that the
---------------- -----
interconnection requirement was met on the basis of a 50 MW firm transmission
path that would allow New York State Electric & Gas Corp. and Central Maine
Power to transfer electric energy over six of the eight transmission lines that
comprise the intertie between the two power pools in which those companies
operate.
35
<PAGE>
Florida Power - Southern Company Tielines:
-----------------------------------------
1. Suwanee - Sterling (230 kV)
2. Port St. Joe - Callaway (230 kV)
3. Jasper - Tarver (115 kV)
4. Jasper - Wrights Chapel (115 kV)
5. Suwanee - Twin Lakes (115 kV)
6. Woodruff - Plant Scholtz (115 kV)
Southern Company - Duke Power Tielines:
--------------------------------------
1. Norcross - Oconee (500 kV)
2. Hartwell - Anderson (230 kV) (2)
3. RB Russell - Greenwood (230 kV)
Duke Power - CP&L (Eastern Control Area) Tielines:
-------------------------------------------------
1. Oakboro - Rockingham (230 kV) (2)
2. E. Durham - Roxboro Plant (230 kV) (2)
3. E. Durham - Durham (230 kV)
4. E. Durham - Method (230 kV)
5. Eno - Roxboro Plant (230 kV) (2)
6. Wateree Plant - Camden Dupont (115 kV)
7. Wateree Plant - Camden Junction (115 kV)
8. New port - Richmond (500 kV)
"(2)" denotes double circuit tieline
To reserve the Contract Path, CP&L has reserved firm transmission service
on the Southern Company and Duke Power transmission systems from south to north
for an initial one-year period, commencing January 1, 2001, which is subject to
the right to extend for additional one year terms. CP&L Energy commits to
exercise its right to extend the term of the Contract Path for a period of at
least two additional one-year terms unless, at the time of such renewal, it is
no longer necessary to extend the term of the Contract Path in order to satisfy
the physical interconnection requirement under the Act. In this regard, CP&L,
Duke Power and SCE&G have announced plans to transfer responsibility for
planning and operating their combined transmission systems to an independent RTO
that would provide transmission services over such systems at single-system
rates. The formation of that RTO, which is expected to begin operation no later
than December 15, 2001, will enable CP&L and Florida Power to engage in
interconnected system operations without separate reservations of transmission
capacity across both the CP&L and Duke Power transmission systems.
The Applicants expect to use the Contract Path to serve native load
within CP&L's service territory by providing energy from Florida Power when it
is economical to do so, as well as to market Florida Power capacity and energy
36
<PAGE>
to third parties. In addition, the Contract Path may also provide a source of
reserve capacity for CP&L. The Contract Path, coupled with the availability of
significant non-firm transmission capacity between the two companies, as
described below, will enable the Applicants to substitute more economic power
from generation resources located in one control area for generation resources
in another control area when the substitute generation resources are less
expensive to run.
The Contract Path, in and of itself, satisfies the physical
interconnection requirement of Section 2(a)(29)(A). In a series of recent
cases, the Commission has held that the interconnection requirement is met
where the parties have obtained a firm contract path over intervening utility
transmission systems that they have the right to use whenever needed. See,
-----
e.g., 2000 AEP Order, supra; New Century Energies, Inc. ("Xcel"), Holding Co.
--- -------------- ------ ------------------------- ----
Act Release No. 27212 (Aug. 16, 2000); Energy East Corp., et al., Holding Co.
-------------------------
Act Release No. 27224 (Aug. 31, 2000); and Exelon Corporation, Holding Co.
------------------
Act Release No. 27256 (Oct. 19, 2000). In each of these cases, the
applicants reserved one-way, firm, point-to-point transmission service on
third-party facilities for an initial one-year term, and committed to
exercise their rights to extend the term for at least two additional years or
to find an alternative interconnection if the contract rights were not
renewed.36 In Xcel and Exelon Corp., the Commission also considered
---- -----------
commitments by the applicants to maximize the use of available non-firm
transmission to satisfy the interconnection requirement.
In this case, the Contract Path contemplates wheeling across only two
utility systems (Southern Company and Duke Power), both of which, like CP&L, are
members of SERC. In today's utility market, two wheels does not constitute an
unusually long transmission path. Further, as discussed below, CP&L and Florida
Power are clearly within a "single area or region."
The Contract Path is a reasonable and cost-effective means of
interconnecting the CP&L and Florida Power systems. Importantly, it will enable
the Applicants to operate their systems in a coordinated manner, as described
below, thereby producing economies and efficiencies of operation. Although the
capacity of the Contract Path is relatively modest, this is in part dictated by
the fact that opportunities for power exchanges between CP&L and Florida Power
will likely be limited in the near term. Each company is currently obligated to
provide service to its respective native load customers (including its full
requirements wholesale customers). The amount of generating capacity available
to each company after serving its native load is relatively small, particularly
during peak load conditions on its system. Consequently, it is expected that
energy exchanges between CP&L and Florida Power will tend to occur initially
over periods of relatively short duration, e.g., a few hours or days at a time.
For such short-term and intermittent exchanges, a purchase of a larger block of
firm, year-round, transmission service would be uneconomical and, in fact, would
------------------------
36 In its 2000 AEP Order, the Commission rejected arguments that the term
--------------
of a contract path must be long, or indefinite, and that a contract path cannot
be used to interconnect two "distant" utilities, in the absence of announced
plans to construct alternative transmission facilities. See 2000 AEP Order, 72
--- --------------
SEC Docket at 1604 - 1605. After reviewing its earlier decisions, the Commission
noted that the length of a contract path is not relevant in determining whether
two utilities can satisfy the "physical interconnection" requirement of Section
2(a)(29)(A). Rather, the length of a contract path appears to be relevant only
to whether the resulting system would be confined to a "single area or region,"
thereby securing the benefits of localized management, efficient operation, and
effective regulation.
37
<PAGE>
run counter to FERC's vision of the short-term wholesale market under Order Nos.
888 and 889.
Under Order Nos. 888 and 889, transmission users no longer need to build
their own transmission lines or lease them from third parties in order to secure
reliable transmission capacity. Indeed, the primary purpose and effect of Order
Nos. 888 and 889 is to give transmission users rights of access to third party
facilities that are on a par with the rights of the transmission owners.
Consequently, transmission users do not need to buy more transmission than they
need to support specific transactions.
CP&L and Florida Power have concluded that the Contract Path is adequate
in the near term to support anticipated levels of energy flows from Florida
Power to CP&L. It will provide the companies with 50 MW of firm transmission
capacity at all times. Of course, there may be times when the companies will
want to exchange more than 50 MW for economy reasons. Rather than reserve firm
transmission on an annual basis to support such intermittent transactions,
however, the companies will rely on transmission service generally available
from intervening utilities on an as-needed basis. This is where FERC's open
access transmission policy plays a direct role in the interconnection of CP&L
and Florida Power. There are numerous transmission paths over which electricity
can be moved from Florida to CP&L. Power can be exported from Florida through
the transmission system of Southern Company, the Municipal Electric Authority of
Georgia ("MEAG"), or the Georgia Transmission Company ("GTC"). From any one of
these three systems, the power can be transmitted to CP&L through the
transmission systems of Duke Power, SCE&G or Santee Cooper.37
The total transmission capacity of these paths is significant. For
example, the OASIS postings of the relevant transmission providers as of
February 24, 2000 can be used to show that relatively large amounts of monthly
non-firm transmission will be available over the next 12 months, which could be
used by CP&L and Florida Power to transmit power in a northerly direction. The
most restrictive period of posted capacity available to transmit power across
the intervening transmission providers in Georgia (i.e., Southern Company, MEAG
and GTC) and through any of the Carolina utilities (i.e., Duke Power, SCE&G or
Santee Cooper) to CP&L's eastern control area was during June, July, and August
of 2000, when only 263 MW was available. The reduction in available transmission
capacity during the summer 2000 months was due primarily to existing confirmed
firm monthly reservations made by transmission customers of Southern Company for
this period. However, the majority (nearly 700 MW) of these reservations were
previously purchased on behalf of Florida Power and therefore could be used by
Florida Power or CP&L to deliver power to Southern Company (assuming the merger
was effective during the relevant timeframe). The amount of transmission
capacity as derived from OASIS in all other examined months is much greater,
ranging from at least 1,286 MW to 1,921 MW. In addition, there are usually
significant amounts of non-firm hourly transmission, which can be used for
economy transactions, that can be made available by the Georgia transmission
providers as a result of the benefit of netting the predominant north-to-south
flows against south-to-north flows. The amount of available transmission
capacity posted by the intervening transmission providers simply reflects the
capability of the transmission facilities in this region, reduced by any
------------------------
37 An additional transmission path is available through Southern Company
and TVA into CP&L's western control area.
38
<PAGE>
confirmed reservations made by transmission customers (including CP&L and
Florida Power) of those providers. (See Southeast transmission map, filed
---
herewith as EXHIBIT E-2). More importantly, the OASIS postings indicate that a
significant amount of transmission is available over an entire 12-month period,
which suggests that CP&L and Florida Power will be able to obtain additional
non-firm transmission capacity under the open access transmission tariffs of the
intervening utilities on an as-needed basis, as contemplated by Order No. 888.
The foregoing clearly shows that non-firm transmission capacity will be
available (i.e., remaining) for the next twelve months, even after consideration
of the confirmed reservations by CP&L and Florida Power and other parties.
Although there can be no assurance that capacity posted as available today will
be fully available at all times in the future, it is important to note that
additional long-term transmission capacity (over and above the 50 MW Contract
Path) is currently available for 2001 (and presumably later years) across
several of the intervening transmission providers. This could allow for
additional power deliveries by Florida Power to CP&L of several hundred MW.
Moreover, the relatively large amount of capacity posted as available on a
short-term basis over the next 12-month period strongly suggests that
transmission service to interconnect CP&L and Florida Power in a south-to-north
direction will be available most of the time during 2001 and later years, even
if the Applicants elect not to reserve any additional capacity on a long-term
basis.
Reservation of transmission on an as-needed basis is efficient and is the
most pro-competitive approach to interconnecting the Applicants' systems. By
making large, long-term reservations of firm transmission, CP&L and Florida
Power could constrain parts of the grid, to the detriment of other potential
transmission users. Therefore, part of CP&L's and Florida Power's plan to
interconnect and integrate their systems involves the exercise of their rights,
under Order No. 888, to reserve available transmission capacity only as it is
needed. The apparent availability of transmission capacity on an as-needed
basis, coupled with the long term reservation of the 50 MW Contract Path between
Florida Power and CP&L, plainly demonstrates that the two systems will be
"physically interconnected or capable of physical interconnection," as required
by Section 2(a)(29)(A).
The Applicants also considered obtaining a north-to-south transmission
path into Florida from the CP&L system. However, the import capability into
Florida over the Southern/Florida Interface currently is fully subscribed on a
firm basis. Any additional reservation of long-term firm transmission capacity
by CP&L into Florida (assuming it were available) could prevent competing
suppliers of generation from obtaining firm transmission service for delivery of
power to Florida markets and therefore raise concerns about the potential
anti-competitive effects of the transaction. In any event, the Applicants do not
believe that it is necessary in order to satisfy the integration requirements
under the Act for the companies to reserve any additional firm transmission
capacity into Florida solely to facilitate energy transfers by CP&L to Florida
Power. As previously indicated, Florida Power already holds 438 MW of transfer
capacity into Florida, its allocated share under the Interface Agreement. This
represents about one-ninth of the total transfer capability into peninsular
Florida over the Southern/Florida Interface. Although Florida Power is currently
using substantially all of that allocated capacity to support its purchases
under the Southern UPS Agreement, when that agreement terminates, Florida Power
39
<PAGE>
would have the right to use its allocated share of transfer capacity to purchase
power from other sources outside Florida, including CP&L.
In addition, while the 3,600 MW total transfer capacity on the
Southern/Florida Interface is fully subscribed on a firm basis, the actual net
flows in the southbound direction exceed 3,000 MW in only 7.7% of the hours and
exceed 2000 MW in only 41.4% of the hours, based on available data.38 In
another words, southbound flows across the Southern/Florida Interface are under
2000 MW almost 58% of the time. Thus, even without the ability to reserve a firm
north-to-south contract path from CP&L to Florida Power, it appears that the
companies will be able to obtain non-firm transmission capacity when and as
needed during most hours.
(b) Coordination. Historically, the Commission has interpreted
------------
the requirement that an integrated electric system be economically operated
under normal conditions as a single interconnected and coordinated system "to
refer to the physical operation of utility assets as a system in which, among
other things, the generation and/or flow of current within the system may be
centrally controlled and allocated as need or economy directs." See, e.g.,
--- ----
Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25, 1998), 66 SEC
--------------
Docket at 1267, citing The North American Company, 11 S.E.C. 194, 242
--------------------------
(1942), aff'd, 133 F.2d 148 (2d Cir. 1943), aff'd on constitutional issues,
----- ----- -- ---------------------
327 U.S. 686 (1946). The Commission has noted that, through this standard,
"Congress intended that the utility properties be so connected and operated
that there is coordination among all parts, and that those parts bear an
integral operating relationship to one another." See Cities Service Co., 14
--- ------------------
S.E.C. 28 at 55 (1943).
As in 2000 AEP Order, Xcel, and Exelon Corp., the Applicants do not intend
-------------- ---- -----------
to engage in joint economic dispatch of the combined CP&L and Florida Power
facilities in a manner similar to registered systems that effectively operate as
tight power pools. Rather, they intend to coordinate power supply through the
FERC-approved Integration Agreement, which is based on the system integration
agreements used to effectuate the mergers in 2000 AEP Order and Xcel. The
-------------- ----
Integration Agreement is an "umbrella" agreement that will supplement rather
than replace existing operating and transmission agreements, which will remain
in place. This will help to assure that the Share Exchange does not result in
cost or benefit transfers between CP&L and Florida Power to the detriment of
ratepayers. In addition, the companies will coordinate through joint marketing
efforts and combining of management and administrative support functions, among
other measures.
Under the Integration Agreement, CP&L and Florida Power will coordinate
the planning, operation and maintenance of generating capacity resources and the
dispatch of electricity throughout the combined system. The Integration
Agreement will provide for coordinated dispatch. Under this arrangement, system
dispatchers will arrange for economy energy sales where such sales will lower
the operating costs of the purchasing company. To allay any concerns that state
commissions and FERC may have, the sales will not be made if the purchaser has a
better purchase opportunity, or the seller has a better sales opportunity. The
Integration Agreement also provides for short-term capacity and associated
------------------------
38 See Prepared Direct Testimony of Dr. J. Stephen Henderson, Exhibit No.
---
CF-1300 to FERC Application (vol. 3) (Exhibit D-1 hereto), p. 18, n. 8, and
Exhibit No. CF-1302 thereto (tabulation of power flows).
40
<PAGE>
energy sales, subject to the same limitations. The Integration Agreement also
provides for joint generation planning and the common procurement of resources,
although, again, the agreement addresses potential state concerns by making
explicit that any resource additions will comply with applicable state
procurement requirements. Additionally, the Integration Agreement also vests in
CP&L, as agent, the responsibility of arranging joint sales and purchases of
electricity, as described below, and makes provision for the allocation of
associated costs and revenues.
CP&L and Florida Power will also coordinate through joint marketing and
trading of electricity in wholesale markets, both as a buyer and seller. System
dispatchers will continually monitor the generation needs and capacity of the
CP&L/Florida Power systems. CP&L and Florida Power already have the ability to
reach common suppliers, purchasers, and trading hubs in various combinations.
Thus, there will be opportunities for CP&L and Florida Power to operate their
generation assets in a coordinated fashion by buying and selling power in the
wholesale market to decrease the overall production costs of the two systems.
The diversity of weather, generator outages, fuel supply and localized economic
conditions will create opportunities to allocate resources more efficiently.
This can be accomplished without the need to actually move power from the CP&L
system or Florida Power system to the other company's system on a regular or
sustained basis. For example, Florida Power's 400 MW of capacity and associated
energy under the Southern UPS Agreement could be used from time to time to
support CP&L's long-term firm sales of power to MEAG (up to 160 MW), Santee
Cooper (200 MW of peaking capacity after 2001) or NCEMC (800 MW of peaking
capacity, 450 MW of which is located in Duke Power's control area). Similarly,
CP&L's wholly owned subsidiary, Monroe Power Company, which owns and operates a
160 MW simple-cycle unit in central Georgia and is planning to add an additional
160 MW unit in 2001, could, subject to the availability of transmission, support
Florida Power's wholesale sales. Further, the combined resources of CP&L and
Florida Power can be used to make opportunity sales in common trading hubs such
as the Entergy and TVA markets.
In order to take advantage of the opportunities presented by coordinated
operation, CP&L will run a system dispatch model of the utilities' combined
resources on a day-ahead basis. The model will identify opportunities for CP&L
and Florida Power to exchange power on an economy basis and to make short-term
off-system sales. The operating history of CP&L and Florida Power demonstrates
that each system has power to supply to the other from time-to-time. The
following table shows the amount of short-term sales and purchases in MWh made
by CP&L and Florida Power during 1999:
Month CP&L Florida Power
----- ---- -------------
Sales Purchases Sales Purchases
----- --------- ----- ---------
Jan. 271,741 4,177 109,144 14,208
Feb. 209,589 4,550 184,667 4,846
Mar. 469,187 7,713 197,854 17,664
Apr. 689,660 100 69,909 90,852
41
<PAGE>
May 432,541 6,842 65,084 63,958
June 399,523 83,079 113,477 48,163
July 371,374 183,295 149,852 32,377
Aug. 290,128 249,134 118,214 55,798
Sept. 266,712 102,405 56,661 40,243
Oct. 352,938 23,117 56,368 118,101
Nov. 349,880 40,591 84,277 19,654
Dec. 417,759 130,974 107,997 25,411
The foregoing illustrates that both CP&L and Florida Power have the
generating capability to export bulk power at various times and that at certain
times they both need to import power to meet their native load requirements.39
More importantly, the systems relative periods of surplus and short-fall are
different. For example, during April, May and October, which are relatively mild
months in the Carolinas, CP&L had significantly more sales than purchases.
During that period, Florida Power clearly had little excess or a deficit of
power supply resulting in relatively high purchases. Conversely, during the peak
winter months of January, February and December, CP&L had a greater need for
purchased power, while Florida Power was in an excess power position. Obviously,
the data above reflects the operation of CP&L and Florida Power as stand-alone
systems. A goal of coordinating those operations on a day-ahead basis (as well
as coordinating marketing efforts and planning) will be to maximize the use of
such excess power. In some cases CP&L and Florida Power may provide power to
each other. In other cases it may be possible to coordinate the use of both
systems excess to make sales to third parties that neither system could make
individually.
When and how these opportunities for coordinated operations arise will
depend on a number of factors, including the availability of CP&L's and Florida
Power's generating units, the demand for power in various geographic markets,
the relative cost of CP&L's and Florida Power's excess capacity and energy at
the time, the availability and cost of capacity and energy on other systems and
the cost and availability of transmission.
One set of circumstances that can provide an opportunity to take advantage
of coordinated operations is the load diversity between CP&L and Florida Power
during winter months. As might be expected, Florida Power's average system load
------------------------
39 Inclusion of power purchases under long-term unit power sales agreements
would produce results that would not adequately reflect the ability of these
systems to export power to each other or to others. These purchases are counted
as imports even though, as a practical matter, they are treated like generation
owned by CP&L and Florida Power for planning and operational purposes. For
example, Florida Power purchases 400 MW from Southern Company under the Southern
UPS Agreement. Similarly, CP&L currently purchases 250 MW from AEP's Rockport
unit under a long-term agreement. Further, the Southern UPS and the AEP Rockport
purchases contribute a large amount to the utilities' purchased power accounts
because they are unit purchases from low cost, baseload coal plants that that
operate around the clock.
42
<PAGE>
is heavier during the hot summer months. Surprisingly, however, Florida Power
usually experiences its annual peak load during the winter. This is due to the
high percentage of electric heating in its service area. On the few relatively
cold days that occur during the Florida winter, the space heating load drives up
electric usage, often resulting in an annual peak. As a result, Florida Power
must have sufficient generating capacity available to meet its winter peak load
conditions, but during most of the winter months, it does not need all of that
the capacity. Coordinated operations may allow Florida Power to provide some of
that excess capacity to CP&L, which generally experiences high loads in the
winter. This weather diversity during the winter appears to be borne out by the
1999 operating results set forth above. The 50 MW Contract Path will be
available to facilitate such exchanges. Also as noted above, there is additional
transmission available to be purchased on a short-term basis as needed. In this
way, both of the CP&L and Florida Power systems can be benefited - CP&L by
having access to additional capacity to plan for and meet its winter load
requirements and Florida Power by having a ready outlet for excess capacity.40
Finally, the operations of CP&L and Florida Power and their respective
affiliates will be coordinated in various other ways. Among other things,
virtually all management, administrative and corporate support services will be
provided by CP&L Service to its associate companies. In addition, the accounting
functions of the combined system will be consolidated through the use of a
single system. CP&L Energy will have a single accounting organization which will
be managed by a single team in one or more locations. The coordination and
integration of the combined system is expected to be further achieved through
the coordination and integration of information system networks; procurement
organizations; organizational structures for power generation, energy delivery
and customer relations; and support services.
As indicated, the Applicants do not intend to implement an automated
economic dispatch model that would control the output and delivery of all system
generating resources on a system-wide basis, without regard to ownership. The
Applicants believe any proposal to operate in such a manner would not be well
received by their respective state commissions, for at least two reasons: First,
as regulated utilities, CP&L and Florida Power are required to obtain the best
terms in the market, rather than simply assume that resources available through
an affiliate will be the lowest cost source of supply. And second, as already
noted above, each of the utilities will be expected to provide its respective
native load customers with the benefits associated with each utility's existing
assets. That requirement is reflected by the terms of the Integration Agreement
and makes automated economic dispatch impractical at this time.
Under Section 2(a)(29)(A), the Commission must also find that the resulting
interconnected and coordinated system may be "economically operated." This calls
for a determination that coordinated operation of the combined company's
facilities is likely to produce economies and efficiencies. The question of
whether a combined system will be economically operated under Section 10(c)(2)
and Section 2(a)(29)(A) was recently addressed by the U.S. Court of Appeals in
------------------------
40 Sales to CP&L are not the only possible use of Florida Power's excess
capacity during the winter months. In fact, if CP&L has a more economical way to
serve its load, it will do so. Similarly, if there is a better market for
Florida Power's excess capacity, it will be sold into that market. However, CP&L
and Florida Power's coordinated and centralized operations may allow them to act
on opportunities on shorter notice and under conditions that would not be
possible if they were dealing with third parties.
43
<PAGE>
Madison Gas and Electric Company v. SEC, 168 F.3d 1337 (D.C. Cir. 1999). In that
-------------------------------- ---
case, the court determined that in analyzing whether a system will be
economically coordinated, the focus must be on whether the acquisition "as a
whole" will "tend toward efficiency and economy." Id. at 1341. The Share
Exchange will clearly meet this standard. As explained in Item 3.C.2. below,
CP&L Energy and Florida Progress estimate that the net savings from the Share
Exchange will reach at least $100 million annually in the first full year
following closing.
In short, all aspects of the combined system will be centrally and
efficiently planned and operated. As with other merger applications approved by
the Commission, the combined system will be capable of being economically
operated as a single interconnected and coordinated system as demonstrated by
the variety of means through which its operations will be coordinated and the
efficiencies and economies expected to be realized by the proposed transaction.
(c) Single Area or Region. As required by Section 2(a)(29)(A),
---------------------
the operations of CP&L and Florida Power will be confined to a "single area or
region in one or more States." While the terms "area" and "region" are not
defined in the Act, the "single area or region" requirement does not mandate
that a system's operations be confined to a small geographic area or a single
state."41 The Commission has specifically found that the combining systems need
not be contiguous in order for the requirement to be met.42 Rather, the
Commission has stated that the single area or region test should be applied
flexibly when doing so does not undercut the policies of the Act against
"scatteration" -- that is, "the ownership of widely dispersed utility properties
which do not lend themselves to efficient operation and effective state
regulation." See Sempra Energy, supra, 69 SEC Docket at 108.
--- ------------- -----
Moreover, the Division has recommended that the Commission "interpret the
'single area or region' requirement flexibly, recognizing technological
advances, consistent with the purposes and provisions of the Act" and that the
Commission place "more emphasis on whether an acquisition will be economical."
1995 Report at 66, 69. The Division has recognized that "recent institutional,
legal and technological changes ... have reduced the relative importance of...
geographical limitations by permitting greater control, coordination and
efficiencies" and "have expanded the means for achieving the interconnection and
economic operation and coordination of utilities with noncontiguous service
territories." 1995 Report at 69. It has also recognized that the concept of
geographic "integration" has been affected by "technological advances on the
ability to transmit electric energy economically over longer distances, and
other developments in the industry, such as brokers and marketers." Id. The
--
Commission has clearly acknowledged the importance of these technological
------------------------
41 In considering size, the Commission has consistently found that utility
systems spanning multiple states satisfy the single area or region requirement
of the Act. For example, the Entergy system covers portions of four states
(Entergy Corp, supra), and the Southern Company system provides electric service
-------------------
to customers in portions of four states (Southern Co., supra). As early as 1945,
-------------------
the Commission found that the operations of American Electric Power in seven
states were confined to a single region or area. American Gas and Electric Co.,
----------------------------
21 S.E.C. 575 (1945).
42 See, e.g., Conectiv, Inc. Holding Co. Act Release No. 26832 (Feb. 25,
-------- -------- ---
1998); cf. New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug.
-- -------------------------
1, 1997) (finding that electric utilities located in two different power pools,
in two different reliability councils, in both the eastern and western U.S.
interconnected systems, and with a physical separation of 300 miles, were in the
same area or region).
44
<PAGE>
advances and developments in its application of the "single area or region" test
in 2000 AEP Order, Xcel and Exelon Corp.
-------------- ---- -----------
The Applicants believe that the CP&L Energy electric system will satisfy
the "single area or region" requirement. The retail service area of the CP&L
Energy system will be confined to three states (North and South Carolina and
Florida) in a defined geographic region - the southeastern United States. (See
---
Service Area Map filed as EXHIBIT E-1 hereto). Further, while neither CP&L nor
Florida Power has any retail customer base in Georgia, both make wholesale sales
to customers in Georgia, and CP&L, through a subsidiary, has already constructed
and is planning future construction of generating assets located in Georgia.
Similarly, Florida Power controls approximately 400 MW of generating capacity
located in Georgia and Alabama under the Southern UPS Agreement. Moreover,
Georgia Power jointly owns with Florida Power a 150 MW combustion turbine unit
located at Intercession City in Osceola County, Florida. Georgia Power uses its
portion of the output from this unit to serve loads in Georgia. Thus, the
Carolinas, Georgia and Florida are clearly part of a single bulk power marketing
region.
Moreover, although the physical distance between CP&L and Florida Power's
retail service areas is approximately 350 miles, Applicants do not believe that
the combination of CP&L and Florida Power would contravene the policy of the Act
against "scatteration." As noted in Sempra Energy, supra, the Act is directed
------------- -----
against "the growth and extension of holding companies [that] bears no relation
to economy of management and operation or the integration and coordination of
related operating properties." 69 SEC Docket at 109 (quoting Section 1(b)(4) of
the Act). In this case, the electric operations of CP&L and Florida Power will
be economically operated as a single interconnected and coordinated system.
Further, as indicated, CP&L and Florida Power operate in a defined geographic
region (the Southeast U.S.) and both own or control substantial generating
assets that are located in Georgia and in the parts of North Carolina and South
Carolina that are not served by CP&L. Finally, as demonstrated below, the
combined system will not have an adverse effect upon localized management,
efficient operation or effective regulation.
(d) Size. The final clause of Section 2(a)(29)(A) requires the
----
Commission to look to the size of the combined system (considering the state of
the art and the area or region affected) and its effect upon localized
management, efficient operation, and the effectiveness of regulation. In the
instant matter, these standards are easily met. The size of the CP&L Energy
electric system will not impair the advantages of localized management,
efficient operation or the effectiveness of regulation. Instead, the proposed
transaction will actually increase the efficiency of operations.
Localized Management -- The Commission has found that an
acquisition does not impair the advantages of localized management where the new
holding company's "management [would be] drawn from the present management"
(Centerior Energy Corp, 49 S.E.C. at 479), or where the acquired company's
---------------------
management would remain substantially intact. (1978 AEP Order, supra). The
Commission has noted that the distance of corporate headquarters from local
management was a "less important factor in determining what is in the public
interest" given the "present-day ease of communication and transportation."
1978 AEP Order, 46 S.E.C. at 1312. The Commission also evaluates localized
--------------
45
<PAGE>
management in terms of whether a merged system will be "responsive to local
needs." Id.
--
The management of CP&L Energy will be drawn primarily from the existing
management of CP&L and Florida Progress and their subsidiaries. CP&L Energy will
maintain its corporate headquarters in Raleigh, North Carolina. The electric
utility subsidiaries will continue to operate through regional offices with
local service centers and line crews available to respond to customers' needs.
CP&L Energy will preserve the well-established delegations of authority --
currently in place at CP&L and Florida Power -- which permit the local, district
and regional management teams to budget for, operate and maintain the electric
distribution system, and to schedule work forces in order to continue to provide
the high quality of service which the customers of CP&L and Florida Power have
enjoyed in the past. In short, CP&L and Florida Progress will continue to be
managed on a day-to-day basis at a local level, particularly in areas that must
be responsive to local needs. Accordingly, the advantages of localized
management will not be impaired.
Efficient Operation -- As discussed above in the analysis of
Section 10(b)(1), the size of CP&L Energy will not impair efficient operation;
rather, the Share Exchange will result in significant economies and
efficiencies, as described in Item 3.C.2 below. Operations (as described in Item
1.F.) will be more efficiently performed on a centralized basis because of
economies of scale, standardized operating and maintenance practices and closer
coordination of system-wide matters.
Effective Regulation -- The proposed transaction will not impair
the effectiveness of regulation at either the state or federal level. Florida
Power will continue to be regulated by the FPSC with respect to retail rates,
service and related matters. CP&L will continue to be regulated by the NCUC and
SCPSC with respect to retail rates, service and related matters.43 On the
federal level, CP&L Energy will be fully regulated as a registered holding
company. The electric utility subsidiaries of CP&L Energy will continue to be
regulated by FERC with respect to interstate electric sales for resale and
transmission services, by the NRC with respect to the operation of nuclear
facilities, and by the FCC with respect to certain communications matters.
(ii) Retention of NCNG's Gas System
Under the "ABC" clauses of Section 11(b)(1), a registered holding company
can own "one or more" additional integrated systems if certain conditions are
met. Specifically, the Commission must find that (A) the additional system
"cannot be operated as an independent system without the loss of substantial
economies which can be secured by the retention of control by such holding
------------------------
43 The CP&L and Florida Power management structures are designed to
facilitate communications with state regulators. Each company has established
departments which have responsibility for state regulatory, environmental and
corporate communications and have other external relations purposes. These
departments provide a point of contact with each of the state regulatory and
environmental offices and have the responsibility for handling all regulatory
contacts, including making state regulatory filings and answering customer
inquiries to the regulatory commissions. It is expected that these departments
will continue to perform these same functions within the respective utility
companies after the Share Exchange.
46
<PAGE>
company of such system," (B) the additional system is located in one state or
adjoining states, and (C) the combination of systems under the control of a
single holding company is "not so large ... as to impair the advantages of
localized management, efficient operation, or the effectiveness of regulation."
Section 2(a)(29)(B) defines an "integrated public utility system" as
applied to gas utility companies as:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by being
operated as a single coordinated system confined in its operation to a
single area or region, in one or more States, not so large as to impair
(considering the state of the art and the area or region affected) the
advantages of localized management, efficient operation, and the
effectiveness of regulation: Provided, that gas utility companies deriving
natural gas from a common source of supply may be deemed to be included in
a single area or region.
NCNG's gas distribution system constitutes an integrated gas system. NCNG
supplies gas to 110 cities and towns and four municipal gas distribution systems
in a contiguous area of eastern and south central North Carolina. It purchases
gas from a variety of out-of-state sources (chiefly in the Gulf Coast and
southwest producing areas), most of which is delivered to NCNG pursuant to
long-term contracts with Transco and Columbia Gas.
(a) Loss of Economies. Clause A requires a showing that each
-----------------
additional integrated system cannot be operated as an independent system without
the loss of substantial economies which can be secured by the retention of
control by a holding company of such system. The Commission has historically
considered four ratios as a "guide" to determining whether lost economies are
"substantial" under Section 11(b)(1)(A). Specifically, the Commission has
examined the estimated loss of economies expressed in terms of the ratio of
increased expenses to the system's total operating revenues, operating revenue
deductions, gross income and net income. See Engineers Public Service Co., 12
--- ---------------------------
SEC 41 (1942), rev'd on other grounds and remanded, 138 F. 2d 936 (DC Cir.
-----------------------------------
1943), vacated as moot, 332 US 788 (1947) ("Engineers"), and New England
--------- -----------
Electric System ("NEES"), 41 S.E.C. 886, 893 - 899 (1964). In Engineers, the
--------------- ---- ---------
Commission suggested that cost increases resulting in a 6.78% loss of operating
revenues, a 9.72% increase in operating revenue deductions, a 25.44% loss of
gross income, and 42.46% loss of net income would afford an "impressive basis
for finding a loss of substantial economies" associated with a divestiture. 12
SEC at 59. In NEES, the Commission observed that cost increases resulting in a
----
4.8% loss of operating revenues, a 6% increase in operating revenue deductions
(excluding federal income taxes), a 23.3% loss of gross income (before federal
income taxes) and a 29.9% loss of net income (before taxes) would afford an
"impressive basis for finding a loss of substantial economies." 41 S.E.C. 888,
at 889. See also, Dominion Resources, Inc., Holding Co. Act Release No. 27113
-------- -----------------------
(Dec. 15, 1999), 71 SEC Docket at 698 (cost increases from divestiture that were
"in most instances" consistent with the thresholds established in NEES satisfied
----
clause A).
In a number of early decisions, the Commission considered the increases
in operational expenses that were anticipated upon divestiture, but also took
into account, as offsetting benefits, the significant competitive advantages
47
<PAGE>
that were perceived to flow from a separation of gas and electric
operations. Among these was the assumption that a combination of gas and
electric operations is typically disadvantageous to the gas operations and,
hence, the assumption that the public interest and the interests of investors
and consumers (the protected interests under the Act) are promoted by a
separation of gas and electric operations. In more recent cases, the
Commission has taken notice of the modern trend towards creation of complete
energy services companies which can offer customers an array of fuels to meet
their complete energy needs through a "one-stop" energy company, an industry
shift that the Commission has expressly recognized. See New Century
--- ------------
Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997), Ameren
--- -------
Corporation, Holding Co. Act Release No. 26809 (Dec. 30, 1997), and WPL
----------- ----
Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998).
-------------
In New Century Energies, Inc., supra, the Commission applied the "ABC"
------------------------- -----
Clauses to a proposed acquisition of two unaffiliated utilities by a new holding
company. The Commission reconsidered and rejected the emphasis in many of its
earlier cases requiring evidence of a severe, even crippling, effect of
divestment upon the separated system. The Commission stated that this approach
is outmoded in the contemporary utility industry. The Commission noted that, "in
these circumstances, separation of gas and electric businesses may cause the
separated entities to be weaker competitors than they would be together."
New Century Energies, supra, 65 SEC Docket 288 - 289. This factor therefore
-------------------- -----
operates to compound the loss of economies represented by increased costs. This
view was repeated in WPL Holdings, Inc. In that case, the Commission noted that,
-----------------
although franchised monopolies are still the rule, competition among energy
suppliers is increasing and increased expenses of separate operation may no
longer be offset, as they were in NEES, supra, by a gain of qualitative
---- -----
competitive benefits, but rather may be compounded by a loss of these benefits.
More recently, in Northeast Utilities, Holding Co. Act Release No. 27127 (Jan.
-------------------
31, 2000), the Commission approved the acquisition by a registered electric
utility holding company of the stock of a relatively small gas company serving
customers in substantially the same area upon finding that the companies would
operate on a coordinated basis and would realize significant cost savings after
a period of four to five years.
CP&L Energy has prepared a study that quantifies the economic impact of a
divestiture of NCNG (EXHIBIT K-1 hereto). The study shows that divestiture of
NCNG as a stand-alone company would result in an increase in annual operating
costs of approximately $12.5 million. These increased costs would result
primarily from additional capital costs and annual operating and maintenance
costs in several categories, including one-time transition costs associated with
establishing NCNG as a separate company. The projected $12.5 million increase in
annual operating costs represents a 5.65% loss of gas operating revenues, a
6.17% increase in gas operating revenue deductions, a 66.90% loss of gross gas
income, and a 308.34% loss of net gas income. These percentages are consistent
with those that the Commission found adequate to support retention in Engineers,
---------
NEES and Dominion Resources, supra.
---- ------------------ -----
In this case, permitting CP&L Energy to retain NCNG will also assure NCNG
access to greater financial and other resources, and, at the same time, enable
CP&L to evolve into a total energy services provider and achieve the other
strategic goals it envisioned in acquiring NCNG. In this regard, a combination
electric and gas utility system can offer a wide range of benefits to customers,
including the convenience and efficiency of dealing with a single energy
48
<PAGE>
supplier. From the customer's standpoint, this can reduce transaction costs
incurred in gathering and analyzing information, contacting energy suppliers,
negotiating terms of multiple service contracts and paying bills. Combining gas
and electric operations can also simplify community planning on energy-related
matters. For utility shareholders and employees, a total energy service provider
is better positioned to respond to a competitive environment and to remain an
attractive investment opportunity for shareholders and an appealing employer for
utility employees.
In contrast, CP&L Energy's competitive position in the market would suffer
as a result of any divestiture of NCNG because, as the electric and gas
industries continue to converge, energy suppliers must be able to offer their
customers a range of energy options. One other gas company in North Carolina
(Public Service Company of North Carolina) has already completed a business
combination with an out-of-state utility that is primarily an electric company
(SCANA Corporation).44 In this connection, it is appropriate for the Commission
to consider that, in approving the affiliation of CP&L and NCNG, the NCUC found
that North Carolina utility customers would benefit in several important
respects. Specifically, the NCUC found that the combination of CP&L and NCNG
would help ensure CP&L an adequate, reliable and cost-effective supply of
natural gas for its gas-fired electric generating assets; promote the expansion
of intrastate natural gas transmission lines in North Carolina, in that the
overall economies of expansion plans would improve when CP&L's need for gas as a
fuel is combined with NCNG's need for gas transportation; and make it more
likely that natural gas service would be extended into unserved parts of North
Carolina as and when CP&L gas-fired generating units become the "anchor tenant"
providing the economic justification for expansion of gas service into the
nearby local communities. 194 PUR 4th at 262 - 264. While not all of these
benefits are quantifiable, they are undoubtedly important. In this regard,
although CP&L has owned NCNG for only a short time, the two companies are
already working together to develop new pipeline expansions into eastern North
Carolina and are jointly managing their portfolios of gas supply, transportation
and storage assets.
Further, in approving CP&L's acquisition of NCNG, the NCUC also adopted a
comprehensive code of conduct and related set of regulatory conditions designed
to, among other things, prevent CP&L and NCNG from unreasonably favoring their
affiliates, assure the continuation of competition between gas and electric
service, and prevent discrimination against other gas-fired electric generators.
Accordingly, to the extent that the preservation of inter-modal competition
between gas and electric service was a significant reason for forcing the
separation of secondary gas systems in the past, it is clear that these concerns
have been addressed by the NCUC.
As indicated above and in more recent Commission precedents, the Commission
has adopted a new model of regulation under the Act which permits convergence of
energy services under a registered holding company and which promotes
competition among energy providers. In New Century Energies, supra, the
-------------------- -----
Commission relied on both increased expenses and the potential loss of
competitive advantages that could result from separation from the electric
system in approving the merger. The Applicants believe that, consistent with
recent precedents, the Commission should in this case defer to the judgment of
the NCUC as to the strategic benefits that North Carolina consumers will realize
------------------------
44 See SCANA Corporation, Holding Co. Act Release No. 27133 (Feb. 9, 2000).
--- -----------------
49
<PAGE>
from the combination of CP&L and NCNG, which would be forfeited if CP&L Energy
were obligated to divest NCNG.
(b) Same State or Adjoining States. The proposed Share Exchange
------------------------------
does not raise any issue under Section 11(b)(1)(B) of the Act, as NCNG is
located and operates exclusively in North Carolina, a state in which CP&L
operates. Thus, the requirement that each additional system be located in one
state or adjoining states is satisfied.
(c) Size. Further, retention of NCNG as an additional integrated
----
system raises no issue under Section 11(b)(1)(C) of the Act. The combination of
the systems under the control of a single holding company will not be "not so
large ... as to impair the advantages of localized management, efficient
operation, or the effectiveness of regulation." As the Commission has recognized
elsewhere, the determinative consideration is not size alone or size in an
absolute sense, either big or small, but size in relation to its effect, if any,
on localized management, efficient operation and effective regulation. From
these perspectives, it is clear that the continued combination of the gas
operations under CP&L Energy is not too large.
Based on data through September 30, 1999 (pro forma to include the results
of operations of NCNG for 12 months), and giving effect to the Share Exchange,
NCNG's natural gas operations will represent only 2.4% of net utility plant of
CP&L Energy; operating revenues for the natural gas operations will represent
only 3.1% of total utility revenues; and natural gas customers will constitute
only 4.2% of all utility customers, while electric operations will represent
95.8%.
As indicated, since acquiring NCNG, the gas procurement functions of NCNG
and CP&L have been centralized. CP&L now administers the combined portfolios of
supply, transportation and storage contracts for the two companies. In most
other respects, the local operations of NCNG continue to be handled from NCNG's
regional offices. Management is therefore geographically close to the gas
operations, thereby preserving the advantages of localized management. Finally,
from the standpoint of regulatory effectiveness, it must be reiterated that the
NCUC just recently approved CP&L's acquisition of NCNG subject to regulatory
conditions and adoption of a code of conduct designed to preserve competition
and prevent against other forms of affiliate abuse.
(iii) Retention of CP&L's Western North Carolina Properties as
Additional System
As described in Item 1, CP&L serves approximately 131,000 customers in a
seven-county area in and around the City of Asheville, in western North
Carolina. This area is separated from CP&L's much larger eastern system by a
portion of the Duke Power system. The western system has been part of CP&L since
1926, when CP&L acquired Asheville Power & Light Company. CP&L East and CP&L
West are interconnected by the transmission facilities of both Duke Power and
AEP, and both operate as parts of the VACAR subregion of SERC. Power supply,
dispatch and planning of new generation for both areas have long been
coordinated on a single system basis. Transfers of electricity between CP&L East
50
<PAGE>
and CP&L West for both reliability and economy purposes have been frequent and
substantial.45 For example, in 1997, 1998 and 1999, transfers from CP&L East
through Duke Power to CP&L West totaled 365,000 MWh, 890,000 MWh, and 542,000
MWh, respectively. The 1999 transfers from east to west represented about 16% of
the electricity purchased by CP&L West's customers in that year (3.4 million
MWh).
As previously indicated, CP&L does not currently contract for long-term
firm transmission service from either Duke Power or AEP specifically for the
purpose of wheeling power between CP&L East and CP&L West. However, CP&L Energy
believes that the record in this proceeding supports a finding that CP&L's
eastern and western systems together constitute an "integrated" electric system.
The apparent availability of transmission capacity on an as-needed basis under
the OATTs of Duke Power and AEP, together with other transmission arrangements
on the Duke Power and AEP systems that allow for the delivery of power to either
CP&L East or CP&L West, plainly demonstrate that CP&L East and CP&L West are
"physically interconnected or capable of physical interconnection," as required
by Section 2(a)(29)(A) of the Act.
If the Commission nevertheless concludes that CP&L's eastern and western
systems do not constitute an integrated system, CP&L Energy requests that the
Commission find, under the "ABC" Clauses, that the western system may be
retained as an additional integrated electric system. As discussed below, the
retention of CP&L's western system satisfies the requirements of the "ABC"
Clauses.
(a) Loss of Economies. Clause A requires a showing that each
-----------------
additional integrated system cannot be operated as an independent system without
the loss of substantial economies which can be secured by the retention of
control by a holding company of such system. CP&L Energy has prepared a study
that quantifies the economic impact of a divestiture of CP&L's western system
(EXHIBIT K-2 hereto). The divestiture of CP&L West as a stand-alone company
would result in an increase in annual operating revenues of approximately $51.7
million. This would represent 18.32% of electric operating revenues of the
western system for the year ended December 31, 1999, 25.36% of electric
operating revenue deductions, 66.02% of electric gross income, and 142.78% of
electric net income. These percentages are consistent with those that the
Commission found adequate to support retention in Engineers, NEES and Dominion
--------- ---- --------
Resources, supra..
--------- -----
(b) Same State or Adjoining States. CP&L's western system is
------------------------------
located entirely in North Carolina, a state in which CP&L's primary electric
utility system operates. Thus, the requirement under Section 11(b)(1)(B) of the
Act that each additional system be located in one state or adjoining states is
satisfied.
------------------------
45 In this regard, the existing physical and operating characteristics
between CP&L's eastern and western control areas are distinguishable from those
that the Commission found in New Century Energies, supra, where it permitted New
-------------------- -----
Century to retain Cheyenne Light, Fuel and Power Company ("Cheyenne") as an
"additional" electric system under the "ABC" Clauses. In that case, as the
Commission noted, the electric operations of Cheyenne and New Century's
principal utility subsidiary, Public Service Company of Colorado, are not
interconnected or coordinated. Among other things, Cheyenne purchases all of its
electrical requirements from nonassociate utilities that operate in a different
regional power pool.
51
<PAGE>
(c) Size. Further, retention of CP&L's utility properties in
----
western North Carolina as an additional integrated system raises no issue under
Section 11(b)(1)(C) of the Act. The combination of the systems under the control
of a single holding company will not be "not so large ... as to impair the
advantages of localized management, efficient operation, or the effectiveness of
regulation." As the Commission has recognized elsewhere, the determinative
consideration is not size alone or size in an absolute sense, either big or
small, but size in relation to its effect, if any, on localized management,
efficient operation and effective regulation.
CP&L West will constitute a relatively small part of the combined electric
utility operations of CP&L and Florida Progress. On a pro forma basis, for the
year ended December 31, 1999, CP&L West will represent approximately 5.4% of the
combined electric utility system in terms of number of customers (131,000
compared to 2.6 million), approximately 3.8% in terms of operating electric
utility revenues ($221.9 million compared to $5.77 billion), and approximately
3.7% in terms of kWh sales (3.4 billion kWh compared to 93 billion kWh).
(iv) Retention of Other Businesses
With certain exceptions noted below, the non-utility interests of CP&L
Energy and Florida Progress are retainable under the standards of Section
11(b)(1) of the Act. Corporate charts showing the subsidiaries, including
non-utility subsidiaries of CP&L Energy and Florida Progress, are filed as
EXHIBITS E-3 (Revised) and E-4 (Revised). A corporate chart showing the
projected arrangement of these subsidiaries under CP&L Energy is filed as
EXHIBIT E-5 (Revised). Filed as EXHIBIT L hereto is a memorandum that addresses
the legal basis for retention of the non-utility subsidiaries and investments of
CP&L Energy and Florida Progress.
Standard for retention: Section 11 (b)(1) permits a registered holding
company to retain "such other businesses as are reasonably incidental, or
economically necessary or appropriate, to the operations of [an] integrated
public utility system." The Commission has historically interpreted this
provision to require an operating or "functional" relationship between the
non-utility activity and the system's core utility business. See, e.g.
---------
Michigan Consolidated Gas Co., 44 S.E.C. 361 (1970), aff'd, 444 F.2d 913
----------------------------- -----
(D.C. Cir. 1971); United Light and Railways Co., 35 S.E.C. 516 (1954); CSW
----------------------------- ----
Credit, Inc., 51 S.E.C. 984 (March 2, 1994); and Jersey Central Power and
------------ -------------------------
Light Co., Holding Co. Act Release No. 24348 (March 18, 1987).
---------
In 1997, in response to a recommendation made by the Division in the 1995
Report, the Commission adopted Rule 58,46 which conditionally exempts from the
pre-approval requirements of Sections 9(a) and 10 of the Act the acquisition by
a registered holding company of securities of companies engaged in certain
specified categories of "energy-related" businesses which the Commission has
determined, on the basis of experience, are so closely related to the business
of a public-utility company as to be considered in the ordinary course of a
public utility business. In adopting Rule 58, the Commission "has sought to
respond to developments in the industry by expanding its concept of a functional
relationship." Rule 58 Release at 11. Importantly, Rule 58 does not require that
non-utility businesses of the type covered by the rule be "functionally" related
------------------------
46 "Exemption of Acquisition by Registered Public-utility Holding Companies
-----------------------------------------------------------------------
of Securities of Non-utility Companies Engaged in Certain Energy-related and
----------------------------------------------------------------------------
Gas-related Activities," Holding Co. Act Release No. 26667 (Feb. 14, 1997)
----------------------
("Rule 58 Release").
52
<PAGE>
to a holding company's utility operations at all. As set forth more fully in
Annexes C (Revised) and D (Revised) the non-utility business interests that CP&L
Energy will hold, directly or indirectly, following the Share Exchange meet the
Commission's standards for retention, with one exception. Many of CP&L Energy's
non-utility subsidiaries fit within the definition of "energy-related company"
under Rule 58.
In approving New Century Energies' retention of the non-utility businesses
of its utility subsidiaries in 1997, the Commission also excluded such
businesses from the limitation upon investment in "energy-related companies"
under Rule 58, noting that the restrictions of Section 11(b)(1) are applicable
to registered holding companies and not to exempt holding companies. Rule 58
provides in section (a)(1)(ii) thereof that investments in non-utility
activities that are exempt under Rule 58 cannot exceed 15% of the consolidated
capitalization of the registered holding company. In its statement supporting
the adoption of the Rule, the Commission stated:
The Commission believes that all amounts that have actually been invested
in energy-related companies pursuant to commission order prior to the date
of effectiveness of the Rule should be excluded from the calculation of
aggregate investment under Rule 58. The Commission also believes it is
appropriate to exclude from the calculation all investments made prior to
that date pursuant to available exemptions.
Rule 58 Release at 50-51. Because CP&L Energy and Florida Progress are both
exempt holding companies, none of the investments they have heretofore made in
non-utility businesses, as described in Annex C (Revised) and Annex D (Revised)
hereto, were pursuant to Commission order. Accordingly, investments made by the
two companies prior to the effective date of the Share Exchange should not be
counted in the calculation of the 15% investment limitation.47
The Applicants acknowledge that Florida Progress's interest in
Mid-Continent, a life insurance subsidiary company, is not retainable under the
standards of Section 11(b)(1) of the Act, and commit to divest this interest
upon court approval of a rehabilitation plan for Mid-Continent and settlement of
litigation against Florida Progress. Under a plan of rehabilitation filed in May
2000 and recommended by the Oklahoma insurance commissioner (as the receiver),
American Fidelity Assurance Company ("American Fidelity") would acquire
Mid-Continent's policies. On September 26, 2000, the Oklahoma County District
Court approved the acquisition of Mid-Continent's policies by American Fidelity.
At the same time, Florida Progress entered into a settlement that would resolve
all current policyholder litigation against Florida Progress. A proposed
agreement would also settle litigation against Florida Progress that was filed
in December 1997 by the receiver. Under the terms of the agreement, Florida
Progress would make certain payments totaling $17.5 million that would be held
in a fund and used to offset future increases in policy premiums. In addition,
Florida Progress would contribute the common stock of Mid-Continent to the
receiver. The rehabilitation plan and the settlement agreements are subject to
approval by the Oklahoma County District Court. The court has scheduled a
fairness hearing on February 21, 2001 on both the plan and the settlement
agreements. If the plan and settlement agreements are approved, Florida Progress
------------------------
47 See, e.g., New Century Energies, Inc., supra n. 42; and SCANA
-------- ------------------------- ------- -----
Corporation, supra n. 44.
----------- -------
53
<PAGE>
would relinquish its interest in Mid-Continent shortly thereafter. Any
divestiture of Mid-Continent will comply with all applicable state laws.
Likewise, the Applicants acknowledge that Florida Progress's limited
partnership interest in the Tampa Bay Devil Rays, Ltd. ("Devil Rays"), which
owns a Major League Baseball franchise, is not retainable under the standards of
Section 11(b)(1) of the Act. Florida Progress holds a 5.8% interest in the Devil
Rays as a class B limited partner. As a limited partner, Florida Progress has no
role in the management of the partnership. Under the terms of the partnership
agreement, the transfer of a limited partner's interest to a third party is
subject to various limitations and restrictions. The agreement obligates the
partnership to repurchase each class B limited partner's interest in cash on the
eighth anniversary of the date on which the Devil Rays baseball team commenced
play, which will occur in March, 2006, unless such class B limited partner
exercises its right to convert its interest to that of a class A limited
partner. Florida Progress will endeavor to sell its interest in the Devil Rays
following the Share Exchange but, in any event, commits to sell its interest in
the Devil Rays back to the partnership in accordance with the provisions of the
partnership agreement. Florida Progress will not exercise its right to convert
its class B limited partnership interest to that of a class A limited partner.
CP&L Energy requests that the order of the Commission in this proceeding
(1) require that CP&L Energy take such steps as are necessary to cause Florida
Progress to sell or otherwise dispose of its interest in the Devil Rays for
cash; (2) find that such sale or disposition is necessary or appropriate to the
integration or simplification of the CP&L Energy holding company system and to
effectuate the provisions of Section 11(b)(1); (3) require CP&L Energy to take
the appropriate actions to complete the sale or disposition of Florida
Progress's interest in the Devil Rays not later than March 31, 2006; (4) require
that the net proceeds from such sale or disposition be invested by Florida
Progress as a contribution to the capital, or as paid-in surplus, of Progress
Capital, within 90 days of the receipt thereof; and (5) find that such
contribution is necessary or appropriate to the integration or simplification of
the CP&L Energy holding company system. This will enable CP&L Energy to obtain
the tax treatment for any gain on such sale or disposition provided for in
section 1081 of the Code.
CP&L, directly and through CaroHome, and Progress Capital, through PIH,
Inc., together hold interests in a total of 60 different limited partnerships or
limited liability companies that own affordable housing and historic building
renovation properties that qualify for federal and state income tax credits. The
aggregate investments of CP&L and PIH, Inc. in these ventures is approximately
$83.2 million and $49.5 million, respectively. Five of the 53 investments held
by CP&L and all seven of those held by PIH, Inc. are in syndicated national
funds that own portfolios of affordable housing projects located throughout the
United States. The remaining 48 investments held by CP&L, directly or
indirectly, are in entities that own and manage individual properties that are
located in North and South Carolina. All but two of these (Enston Home LP and
Willow Run, LLC) are located within the combined CP&L/NCNG service territory.
CaroFund is co-developing and, under the organizational documents, will act as
co-manager of five of the 48 project entities: Grove Arcade Restoration LLC, HGA
Development, LLC, and Historic Property Management, LLC, which are involved in
an historic building restoration project in Asheville, North Carolina; and
Raleigh-CaroHome/WCK, LLC and Trinity Ridge LLC, which are developing affordable
housing projects in the Raleigh, North Carolina, area.
54
<PAGE>
CP&L Energy requests that the Commission reserve jurisdiction over its
retention of the two projects that are located outside the combined CP&L/NCNG
service territory. CP&L Energy will file a post-effective amendment in this
proceeding not later than November 30, 2001, in which CP&L Energy will either
set forth the legal basis upon which it is entitled to retain these investments
or its plan to dispose of them. In addition, CP&L Energy requests that the
Commission reserve jurisdiction over its retention of the five projects in which
it has an "active" investment interest. CP&L Energy undertakes to either sell
these five investments or take steps to have CaroHome's ownership interest in
each entity converted into that of a passive investor prior to November 30,
2003.
As described in Item 1, above, Florida Progress's predominant non-utility
subsidiary, Electric Fuels, engages through numerous direct and indirect
subsidiaries in various domestic energy businesses, including coal mining and
synthetic fuel production, that are permitted businesses under Rule 58. Electric
Fuels is also engaged in extensive river and ocean barging and rail
transportation operations, and in various businesses that are related to those
operations, including operating bulk storage, drydocking and railcar repair
facilities, and marketing and selling railcar parts, among others. The
Applicants recognize that there is an issue as to whether certain of Electric
Fuels' subsidiaries qualify as "energy-related companies" under Rule 58 or are
otherwise retainable under the standards of Section 11(b(1). The Applicants have
not completed their analysis of this question and therefore request that the
Commission reserve jurisdiction over CP&L Energy's retention of the following
subsidiaries of Electric Fuels: Dixie Fuels Limited, Dixie Fuels II, Limited,
MEMCO Barge Line, Inc., Progress Metal Reclamation Company, and Progress Rail
Services Corporation, all of which are direct subsidiaries of Electric Fuels;
and Cincinnati Bulk Terminals, Inc., Kanawha River Terminals, Inc., Marigold
Dock, Inc., Elmwood Marine Services, Inc., Conlease, Inc., International Marine
Terminals Partnership, I.M.T. Land Corp., West Virginia Auto Shredding,
Chemetron-Railway Products, Inc., FM Industries, Inc., Kentuckiana Railcar
Repair and Storage Facility, LLC, PRS International Sales Company, Inc.,
Progress Rail Services de Mexico, S.A. de C.V., Progress Rail Canada
Corporation, Progress Rail Holdings, Inc., Progress Vanguard Corporation,
Railcar, Ltd., Southern Machine and Tool Company, United Industries, Inc.,
Servicios Ferroviarios Progress, S. de R.L. de C.V., Servicios Administrativos
Progress, S. de R.L. de C.V., Progress Rail Transcanada Corporation, Awayland
Coal Company, Inc., Homeland Coal Company, Inc., Kentucky May Coal Company,
Inc., Little Black Mountain Coal Reserves, Inc., Little Black Mountain Land
Company, Powell Mountain, Inc., Progress Land Corporation, Powell Mountain Joint
Venture, Diamond May Coal Company, Kentucky May Mining Company, Diamond May
Mining Company, Dulcimer Land Company, PMCC. Inc., Powell Mountain Coal Company,
Inc., Murphy Land Company, Inc., and Dulcimer Land Company, all of which are
indirect subsidiaries of Electric Fuels (collectively, the "Specified EFC
Subsidiaries").
At December 31, 1999, the Specified EFC Subsidiaries accounted for $1,188.4
million (or 89.2%) of Electric Fuels' consolidated assets, and, for the year
then ended, $1,190.9 million (or 80.6%) of Electric Fuels' consolidated revenues
and $55.9 million (or 89.4%) of Electric Fuels' net income.
CP&L holds passive investment interests ranging between 3.1% and 15.79% in
eight different venture capital funds. Two of the eight funds invest in new and
existing companies that are engaged in the development and commercialization of
electrotechnologies related to energy conservation, storage and conversion,
55
<PAGE>
energy efficiency and greenhouse gas reduction, and two make investments in new
business ventures in North and South Carolina in order to attract business and
create jobs. CP&L Energy requests that the Commission reserve jurisdiction over
the retention of passive investments in the remaining four funds: Carousel
Capital Partners, LP, South Atlantic Private Equity Fund IV, LP, Utility
Competitive Advantage Fund, LLC and Utility Competitive Advantage Fund II, LLC
("Specified Funds").
CP&L Energy will file a post-effective amendment in this proceeding not
later than November 30, 2001, in which CP&L Energy will either set forth the
legal basis upon which it is entitled to retain any or all of the Specified EFC
Subsidiaries and the Specified Funds, or, alternatively, will commit to divest
some or all of the Specified EFC Subsidiaries and Specified Funds. CP&L Energy
requests that any order of the Commission that requires CP&L Energy to divest
any of these interests pursuant to Section 11(b)(1) of the Act permit CP&L
Energy to take the appropriate actions to complete the disposition not later
than November 30, 2003, in order to satisfy the requirements of section 1081 of
the Internal Revenue Code, as amended. This will enable CP&L Energy to obtain
the tax treatment for any such disposition provided for in section 1081.
Several non-utility subsidiaries of CP&L Energy and Florida Progress that
are listed and described in Exhibit L are currently inactive. In the event that
CP&L Energy seeks to reactivate any of these inactive companies after CP&L
Energy registers, CP&L Energy commits to file a post-effective amendment to
request authority to engage in the proposed activities if such authorization is
required under the Act.
2. Section 10(c)(2)
----------------
Because the Share Exchange is expected to result in substantial cost
savings and synergies, it will tend toward the economical and efficient
development of an integrated public utility system, thereby serving the public
interest, as required by Section 10(c)(2) of the Act.
The Share Exchange will produce economies and efficiencies more than
sufficient to satisfy the standards of Section 10(c)(2) of the Act. Although
some of the anticipated economies and efficiencies will be fully realized only
in the longer term, they are properly considered in determining whether the
standards of Section 10(c)(2) have been met. See 1978 AEP Order, supra at 1320 -
--- -------------- -----
1321. Some potential benefits cannot be precisely estimated; nevertheless, they
too are entitled to be considered. As the Commission has observed, "[s]pecific
dollar forecasts of future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not precisely
quantifiable." Centerior Energy Corp., 49 S.E.C. at 480.
---------------------
The Applicants have estimated the nominal dollar value of synergies from
the Share Exchange to be approximately $1 billion (net of costs to achieve) over
ten years. The Share Exchange is expected to yield several types of presently
quantifiable benefits and savings in the following areas:48
------------------------
48 All amounts are before transaction expenses (estimated at approximately
$41.4 million) and certain transition costs, e.g., severance costs, relocation
---
expenses, etc. (estimated at $109 million).
56
<PAGE>
Integration of Corporate Functions. The combined company should be able to
reduce the number of redundant functions where the staffing levels are
relatively fixed and do not directly vary with an increase or decrease in the
number of employees or customers. Preliminary analyses indicate the integration
of duplicative functions could result in net labor savings of $24 to $32 million
in 2001 and increase to $38 to $45 million in 2003 and each year thereafter.
Integration of Corporate Programs. The combined company should be able to
integrate corporate and administrative programs which will reduce non-labor
costs in the areas of insurance, advertising, professional services, benefits
plan administration, credit facilities, association dues, and shareholder
services, among others. In addition, future operational expenditures in the area
of information systems that each company would make on a stand-alone basis
should be significantly reduced. Initial examinations project the elimination of
duplicate corporate programs could result in savings of $24 to $32 million in
2001 and rise to $30 to $37 million in 2003 and each year thereafter.
Purchasing Economies. The combined company should be able to centralize
purchasing functions. It should also be able to obtain purchasing leverage
resulting in greater volume discounts for materials and services. Initial
estimates indicate the combined company could save $2 to $3 million in 2001
increasing to $4 to $6 million in 2003 and each year thereafter in O&M expense
through initiatives to centralize purchasing and utilize greater leverage with
suppliers. The capital investment savings related to purchasing centralization
is expected to range from $16 to $18 million in 2001 to $11 to $13 million in
2003 and each year thereafter.
Fuel Procurement. The combined company should achieve economies as a result
of its integrated purchasing to meet its larger combined fuel requirements. More
analyses are necessary and underway to reasonably estimate the amount of savings
anticipated from the fuel procurement activities of the combined company.
Currently, at least $1 to $2 million annually in savings is projected.
Business Optimization. The combined company is considering the
implementation of best practice initiatives which initial estimates indicate
could yield savings of $24 to $30 million in 2001 and increase to $32 to $40
million in 2003 and each year thereafter.
In addition to the benefits described above, there are other benefits
which, while presently difficult to quantify, are nonetheless substantial. These
include:
Improved Competitive Capability: A combined CP&L Energy/Florida Progress
will be able to meet the challenges of the increasingly competitive environment
in the utility industry more effectively than either CP&L Energy or Florida
Progress standing alone. The Share Exchange will create the opportunity for
strategic, financial and operational benefits for customers in the form of
stable rates over the long term and for shareholders in the form of improved
access to capital markets and financial flexibility.
Expanded Management Resources: A combined CP&L Energy/Florida Progress will
be able to draw on a larger and more diverse mid and senior-level management
pool to lead the new company forward in an increasingly competitive environment
for the delivery of energy, and should be better able to attract and retain the
57
<PAGE>
most qualified employees. The employees of CP&L Energy should also benefit from
new opportunities in the expanded organization.
More Diverse Service Territory: The combined service territories of CP&L
and Florida Power will be larger and more diverse than either of the service
territories of CP&L or Florida Power as independent entities. This increased
geographical diversity will mitigate the risk of changes in economic,
competitive or climatic conditions in any given sector of the combined service
territory.
These expected savings will meet or exceed the anticipated savings in a
number of recent acquisitions approved by the Commission. See, e.g., Dominion
--- --- --------
Resources, supra, (estimated quantifiable benefits of $700 million over the
--------- -----
first ten years following merger); LG&E Energy Corp., Holding Co. Act Release
----------------
No. 26866 (April 20, 1998) (estimated savings of $687.3 million over ten years);
WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998)
-----------------
(estimated savings of $680 million over ten years); Conectiv, supra (estimated
-------- -----
savings of $500 million over ten years); Ameren Corporation, supra (estimated
------------------ -----
savings of $686 million over ten years); New Century Energies, supra (estimated
-------------------- -----
net savings of $770 million over ten years); and TUC Holding Company, supra
------------------- -----
(estimated savings of $505 million over ten years).
D. Section 10(f)
-------------
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an application
is made under this section unless it appears to the satisfaction of the
Commission that such State laws as may apply in respect of such acquisition
have been complied with, except where the Commission finds that compliance
with such State laws would be detrimental to the carrying out of the
provisions of section 11.
As described below under Item 4. "Regulatory Approvals," CP&L Energy and
Florida Progress intend to comply with all applicable North Carolina, South
Carolina and Florida state laws regarding each state's ongoing jurisdiction over
CP&L, Florida Power and NCNG.
E. Intra-system Transactions
-------------------------
The CP&L Energy system companies will engage in a variety of affiliate
transactions for the provision of goods, services, and construction. Certain of
these transactions are elaborated upon below. The sale of goods and services by
CP&L Energy system companies to other CP&L Energy system companies will be
carried out in accordance with the requirements and provisions of Rules 87, 90
and 91 unless otherwise authorized by the Commission by order or by rule.
1. CP&L Service
------------
Rule 88(b) provides that "[a] finding by the Commission that a subsidiary
company of a registered holding company ... is so organized and conducted, or to
be so conducted, as to meet the requirements of Section 13(b) of the Act with
respect to reasonable assurance of efficient and economical performance of
58
<PAGE>
services or construction or sale of goods for the benefit of associate
companies, at cost fairly and equitably allocated among them (or as permitted by
[Rule] 90), will be made only pursuant to a declaration filed with the
Commission on Form U-13-1, as specified in the instructions for that form, by
such company or the persons proposing to organize it." In this
Application-Declaration, Applicants are not requesting authorization to
establish a new service company, but rather are requesting that the Commission
authorize CP&L Service, a service company that will be organized by CP&L Energy
prior to the Share Exchange, to extend its activities to Florida Progress and
its direct and indirect subsidiaries following the consummation of the Share
Exchange. Accordingly, the Applicants request that the Commission find that CP&L
Service will be so organized and shall be so conducted as to meet the
requirements of Section 13(b), and, further, determine that this
Application-Declaration constitutes a filing on Form U-13-1 for purposes of Rule
88.
CP&L Service will be the service company subsidiary for the CP&L Energy
system. Specifically, CP&L Service will provide services to CP&L, NCNG and
Florida Power pursuant to the Utility Service Agreement and to CP&L Energy and
its direct and indirect non-utility subsidiaries pursuant to the Non-Utility
Service Agreement. In accordance with the Utility and Non-Utility Service
Agreements, services provided by CP&L Service will be directly assigned,
distributed or allocated by activity, project, program, work order or other
appropriate basis. To accomplish this, employees of CP&L Service will record
their labor and expenses to bill the appropriate client company. Costs of CP&L
Service will be accumulated in accounts of the service company and be directly
assigned, distributed, or allocated to the appropriate client company in
accordance with the guidelines set forth in the Utility Service Agreement and
the Non-Utility Service Agreement. There will be an internal audit group which,
among other things, will audit the assignment of service company charges to
client companies. It is anticipated that CP&L Service will be staffed primarily
by transferring personnel from CP&L and Florida Progress and their respective
subsidiaries. CP&L Service's accounting and cost allocation methods and
procedures will be structured so as to comply with the Commission's standards
for service companies in registered holding company systems. CP&L Service will
conduct substantial operations in Raleigh, North Carolina, where the
headquarters of CP&L Energy and CP&L are located. It may also have a presence in
St. Petersburg, Florida, the headquarters of Florida Progress and Florida Power.
As compensation for services, both the Utility and Non-Utility Service
Agreements provide that each client company shall pay to CP&L Service the cost
to CP&L Service of rendering such services for or on its behalf. Where more than
one client company is involved in or has received benefits from a service
performed, the Service Agreement sets forth methods of assigning, distributing,
or allocating CP&L Service costs to each client company, as well as to other
associate companies. Such methods of assignment, distribution or allocation of
costs may be modified or changed by CP&L Service without the necessity of an
amendment to the Service Agreement provided that, in such instances, all
services rendered shall be at actual cost thereof, fairly and equitably
assigned, distributed or allocated, all in accordance with the requirements of
the Act and any orders thereunder. Thus, charges for all services provided by
CP&L Service to client companies will be as determined under Rules 90 and 91 of
the Act. In the event that any material changes to the Service Agreement or
allocations are needed to more accurately allocate costs, Applicants would
propose those to the Commission as they become known. The Non-Utility Service
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Agreement contains provisions similar to those of the Utility Service Agreement.
Thus, services provided by CP&L Service to non-utility client companies pursuant
to the Non-Utility Service Agreement will also be charged as determined under
Rules 90 and 91 of the Act.
Moreover, the Utility and Non-Utility Service Agreements provide that no
material change in the organization of CP&L Service, the type and character of
the companies to be serviced, the methods of allocating costs to associate
companies, or in the scope or character of the services to be rendered subject
to Section 13 of the Act, or any rule, regulation or order thereunder, shall be
made unless and until CP&L Service shall first have given the Commission written
notice of the proposed change not less than sixty days prior to the proposed
effectiveness of any such change. If, upon the receipt of any such notice, the
Commission shall notify CP&L Service within the sixty day period that a question
exists as to whether the proposed change is consistent with the provisions of
Section 13 of the Act, or of any rule, regulation or order thereunder, then the
proposed change shall not become effective unless and until CP&L Service shall
have filed with the Commission an appropriate declaration regarding such
proposed change and the Commission shall have permitted such declaration to
become effective.
Applicants believe that the Utility Service Agreement and the Non-Utility
Service Agreement are structured so as to comply with Section 13 of the Act and
the Commission's rules and regulations thereunder.
2. Services, Goods, and Assets Involving the Utility Operating
-----------------------------------------------------------
Companies
---------
CP&L, NCNG and Florida Power may provide services to one another and to
other associate companies, using those resources and capabilities that each of
these companies has developed in the conduct of its own business. These services
will be provided to associate companies in accordance with Rules 87, 90 and 91.
Moreover, in accordance with Rules 87, 90 and 91, certain goods may be provided
through a leasing arrangement or otherwise by one utility operating company to
one or more associate companies, and certain assets may be used by one utility
operating company for the benefit of one or more other associate companies.
3. Electric Fuels
--------------
Electric Fuels will continue to supply substantially all of the coal
requirements of the four coal-fired units at Florida Power's Crystal River
Generating Station pursuant to two existing coal supply agreements. Most of the
coal supplied under these agreements is purchased by Electric Fuels from
unaffiliated suppliers. The Applicants believe that the pricing formulas under
these agreements comply with the requirements of Section 13(b) of the Act and
Rules 81 and 90 through 92, as applicable.
ITEM 4. REGULATORY APPROVAL
A. Required Approvals for Share Exchange.
-------------------------------------
Set forth below is a summary of the regulatory approvals that Applicants
expect to obtain in connection with the Share Exchange. Completion of the Share
Exchange is subject to obtaining regulatory approvals on terms and conditions
that may not reasonably be expected to have a material adverse effect on the
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business, operations, properties, assets, condition (financial or otherwise),
results of operations or prospects of CP&L Energy or Florida Progress.
1. Antitrust
---------
The HSR Act and the related rules and regulations prohibit CP&L, CP&L
Energy and Florida Progress from completing the Share Exchange until CP&L, CP&L
Energy and Florida Progress submit required information to the Antitrust
Division of the Department of Justice and the Federal Trade Commission ("FTC")
and the specified HSR Act waiting period requirements have been satisfied. The
Applicants filed the premerger notifications under the HSR Act on June 9, 2000.
On July 12, 2000, the Applicants received notice of early termination of the
required waiting period.
Even though the HSR Act waiting period has been terminated, the Antitrust
Division or the FTC may later challenge the Share Exchange on antitrust grounds.
If the Share Exchange is not completed within 12 months after the expiration or
earlier termination of the initial HSR Act waiting period, CP&L, CP&L Energy and
Florida Progress would be required to submit new information to the Antitrust
Division and the FTC, and a new HSR Act waiting period would begin.
2. State Approvals
----------------
Carolina Power & Light. The Share Exchange has been approved by the NCUC by
order dated August 22, 2000. See EXHIBIT D-2 hereto. The NCUC determined that
the Share Exchange is "justified by the public convenience and necessity, and
that the proposed securities transaction in connection therewith is for a lawful
object, is compatible with the public interest, is consistent with the proper
performance by CP&L and NCNG of their service to the public, and will not impair
their ability to provide that service at just and reasonable rates." EXHIBIT
D-2, p. 13. Subject to the plenary jurisdiction of the SCPSC over the operations
of CP&L, neither the Share Exchange nor the issuance of CP&L Energy common stock
in connection with the Share Exchange requires any approval by, or filing with,
the SCPSC. CP&L will continue its practice of constructively working with both
the NCUC and the SCPSC regarding such commissions' ongoing jurisdiction over
CP&L's operations.
Florida Power. Florida Power is subject to the jurisdiction of the FPSC.
Subject to the plenary jurisdiction of the FPSC over the operations of Florida
Power, no filing or approval of the Share Exchange by the FPSC is required by
Florida law. CP&L, CP&L Energy and Florida Progress will continue Florida
Progress's practice of constructively working with the FPSC regarding its
ongoing jurisdiction over Florida Power.
Following the Share Exchange, the regulatory authorities in North Carolina,
South Carolina and Florida will retain applicable authority over the rates and
capital structure of the utilities, affiliated interest transactions and
non-utility businesses.
Mid-Continent, an indirect subsidiary of Florida Progress, is a life
insurance company domiciled in the state of Oklahoma. Florida Progress has
announced its intention to divest Mid-Continent and has obtained an exemption
61
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from the insurance regulatory authority in Oklahoma with respect to the indirect
change of control of Mid-Continent caused by the Share Exchange.
3. Federal Power Act
-----------------
Under the Federal Power Act ("FPA"), the FERC will approve a combination of
electric utilities if it finds that the transaction is "consistent with the
public interest." In reviewing a combination of electric utilities, the FERC
generally evaluates whether the transaction will:
o adversely affect competition;
o adversely affect rates; or
o impair the effectiveness of regulation.
On February 3, 2000, CP&L and Florida Power filed a combined application
with the FERC requesting that the FERC approve the Share Exchange under the FPA.
In connection with this application, the two companies also filed a comparable
open access transmission service tariff pursuant to which transmission services
and specified ancillary services will be offered on a non-discriminatory basis
over the combined systems of CP&L and Florida Power and related agreements under
the FPA, to become effective upon consummation of the Share Exchange. The FERC
application is filed as EXHIBIT D-3 hereto.
On July 12, 2000, the FERC issued an order authorizing the Share Exchange
and accepting with one modification the rate schedules included in the combined
application that are to become effective upon consummation of the Share
Exchange. The FERC also accepted commitments by CP&L and Florida Power to
participate in separate FERC-approved RTOs, as clarified to provide for CP&L and
Florida Power each to make a filing with the FERC on or before October 15, 2000
in which it proposes to transfer operational control of its transmission
facilities to an RTO on or before December 15, 2001. Finally, the FERC accepted
the proposal of CP&L and Florida Power to divest a total of 135 MW of generating
capacity (85 MW in the case of CP&L and 50 MW in the case of Florida Power) in
the Carolinas and Florida through sales of system capacity for a period of six
years after consummation of the Share Exchange. The FERC order is filed as
EXHIBIT D-4 hereto.
4. Atomic Energy Act
-----------------
Florida Power holds an NRC operating license for its Crystal River nuclear
generating facility. The operating license authorizes Florida Power to own and
operate the facility. The Atomic Energy Act provides that a license may not be
transferred or in any manner disposed of, directly or indirectly, through
transfer of control unless the NRC finds that the transfer complies with the
Atomic Energy Act and consents to the transfer. Florida Power has filed an
application with the NRC seeking approval for the indirect transfer of control
of Florida Power resulting from the Share Exchange and to reflect the fact that,
after the Share Exchange, although continuing to own and operate the Crystal
River facility, Florida Power will become an operating company subsidiary of the
combined company. The NRC application was filed with the NRC on January 31,
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2000, and is included as EXHIBIT D-5 hereto, and the NRC order approving the
transfer, dated May 22, 2000, is filed as EXHIBIT D-6 hereto.
5. Federal Communications Commission
---------------------------------
The FCC must approve the transfer of control of telecommunications permits
or licenses. The Communications Act of 1934 prohibits the transfer, assignment
or disposal in any manner of any construction permit or station license, or any
rights thereunder, to any person without authorization from the FCC. In
addition, a carrier must obtain permission prior to acquisition or operation of
new lines and may not construct or extend a line, or transmit via such lines,
without prior FCC approval. Pursuant to the Communications Act, the FCC will
approve a transfer of control if it serves the public convenience, interest and
necessity. The Applicants have obtained the necessary approvals from the FCC to
transfer licenses held by both Florida Power and Progress Telecommunications and
to amend licenses and tariffs, as appropriate. The FCC applications
(collectively filed as EXHIBIT D-7 hereto) were filed on May 11, 2000, and
granted on various dates between May 24, 2000 and July 18, 2000.
B. Required Approvals for Affiliate Transactions.
---------------------------------------------
In addition to the foregoing approvals required for the Share Exchange, the
state public service commissions in North Carolina, South Carolina and Florida
all exercise some degree of regulatory oversight over transactions between
regulated public utilities and their affiliates and associate companies.
1. The North Carolina Utilities Commission.
---------------------------------------
Under N.C. Gen. Stat. ss. 62-153(b), all contracts entered into by a public
utility subject to the jurisdiction of the NCUC with any affiliated holding
company or company providing management, operating, construction, engineering,
financing or purchasing services must be filed with the NCUC. The utility cannot
pay an affiliate for services under any such contract without first obtaining
NCUC approval. As part of its order approving the reorganization of CP&L into a
holding company structure, the NCUC has imposed certain regulatory conditions on
CP&L Energy and its affiliates related to the filing and review of service
agreements, asset transfers, financings, and other affiliate agreements. See In
--- --
the Matter of Carolina Power & Light Company, et al., Docket Nos. E-2, SUB 753,
---------------------------------------------------
P-708, SUB 5, and G-21, SUB 387, Order Approving Application (May 17, 2000).49
For example, condition 4 forbids CP&L and NCNG from taking of any service from
an affiliated company "where the costs incurred for that service (whether
directly or through allocation) exceed market value." Id., Regulatory Condition
4.
CP&L, NCNG and CP&L Energy also committed to request this Commission to
include the following language designed to preserve the NCUC's jurisdiction over
the treatment in rates of any affiliate contracts in any order issued by the
------------------------
49 The NCUC Order approving the reorganization of CP&L was filed as Exhibit
D-2 to CP&L Energy's Application-Declaration in File No. 70-9559.
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Commission approving the creation of CP&L Energy and the acquisition of CP&L and
NCNG:50
Approval of this application in no way precludes the NCUC from scrutinizing
and disallowing charges incurred or made or allowing or imputing a
different level of such charges when setting rates for services rendered to
customers of affiliated public utilities in North Carolina. (Regulatory
Condition 3).
The Commission further finds that its approval of this acquisition or
future financing arrangements does not preclude the NCUC or other
regulatory authority from setting rates based on the assumption of a
capital structure, a corporate structure, debt costs or equity costs that
varies from the structure(s) or cost(s) approved by the Commission in this
Order. (Regulatory Condition 6).
CP&L, NCNG, CP&L Energy and their affiliates recognize that the NCUC wishes
to preserve its state law authority, under present or future state law, to
require approval of transfers of control or ownership of any asset or
portion thereof from CP&L, NCNG, or one or more of their affiliates to
nonjurisdictional operations, affiliates, or nonaffiliates. Without
conceding their right to assert that the NCUC does not and should not have
such authority, CP&L, NCNG, CP&L Energy and their affiliates request the
Commission to state, in its order approving the instant acquisition, that
the Commission does not intend its approval of the acquisition to preclude
a future state commission order mandating or otherwise exercising state
authority over such a transfer of assets. (Regulatory Condition 10).
2. South Carolina Public Service Commission.
----------------------------------------
The SCPSC also has statutory authority to review affiliated interests'
transactions and charges, "if so ordered by the [Public Service] Commission,"
under the Code of Laws of South Carolina, ss. 58-27-2090. The SCPSC may examine
the fairness and reasonableness of affiliate transactions and determine the
"absence of injurious effect upon the public interest" in order to decide
whether any affiliate fees and charges may be allowed "for rate-making
purposes." Id. As part of its order approving the reorganization of CP&L into a
holding company structure, the SCPSC has imposed certain regulatory conditions
on CP&L Energy and its affiliates related to the filing and review of service
agreements, asset transfers, financings, and other affiliate agreements. See RE:
--- --
Carolina Power & Light Company, et al., Docket Bo. 1999-434-E/C - Order No.
-------------------------------------
2000-0229, Order Approving Transfer of Ownership to a Holding Company and
Approving Stipulation (March 6, 2000).51 The SCPSC order contains substantially
similar Regulatory Conditions as were established by the NCUC, including
conditions related to agreements and transactions with affiliates.
------------------------
50 The Applicants are requesting that the quoted language instead be
included in the Commission's order approving the Share Exchange since CP&L
Energy will become a registered holding company as a result of the Share
Exchange.
51 The SCPSC Order approving the reorganization of CP&L was filed as
Exhibit D-4 to CP&L Energy's Application-Declaration in File No. 70-9559.
64
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As was the case in North Carolina, CP&L and CP&L Energy committed to
request this Commission to include the following language designed to preserve
the SCPSC's jurisdiction over the treatment in rates of any affiliate contracts
in any order issued by the Commission approving the creation of CP&L Energy and
the acquisition of CP&L:52
Approval of this application in no way precludes the SCPSC from
scrutinizing and disallowing charges incurred or made or allowing or
imputing a different level of such charges when setting rates for services
rendered to customers of affiliated public utilities in South Carolina.
(Regulatory Condition 42).
CP&L and CP&L Energy recognize that the SCPSC wishes to preserve its state
law authority under present or future state law, to require approval of
transfers of control or ownership of any asset or portion thereof from CP&L
to one or more nonpublic utility operations, or other affiliates, or
non-affiliates. Notwithstanding the reservation of CP&L's and CP&L Energy's
rights to assert that the SCPSC does not and should not have such
authority, CP&L and CP&L Energy request the Commission to state, in its
order approving the instant application, that the Commission does not
intend its approval of the application to preclude a future state
commission order mandating or otherwise exercising state authority over
such a transfer of assets. (Regulatory Condition 46).
The Commission further finds that its approval of this acquisition or
future financing arrangements does not preclude the SCPSC or other
regulatory authority from setting rates based on the assumption of a
capital structure, a corporate structure, debt costs or equity costs that
varies from the structure(s) or cost(s) approved by the Commission in this
Order. (Regulatory Condition 50).
3. Florida Public Service Commission.
---------------------------------
The FPSC does not require investor-owned utilities to obtain advance
approval of transactions with affiliated companies. Instead, pursuant to FPSC
Rule 25-6.1351, the FPSC requires investor-owned utilities to file an annual
Diversification Report listing all transactions with affiliated companies for
FPSC review. Each utility must maintain detailed records to facilitate auditing
and analysis of these transactions. The FPSC has authority to take corrective
action to safeguard ratepayers from any adverse effects of affiliated
transactions where deemed appropriate.
ITEM 5. PROCEDURE
The Commission has heretofore published a Federal Register notice under
Rule 23 with respect to the filing of this Application/Declaration. (Holding Co.
Act Release No. 27208 (Aug. 4, 2000)). The Applicants intend to consummate the
Share Exchange as soon as practicable after the Commission has issued its order
in this proceeding in order that consumers and investors can begin to realize
------------------------
52 As indicated in n. 50, above, the Applicants are requesting that the
quoted language instead be included in the Commission's order approving the
Share Exchange since CP&L Energy will become a registered holding company as a
result of the Share Exchange.
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the substantial benefits of the transaction that have been described elsewhere
in this Application/Declaration. The Applicants request that the Commission
issue an order granting and permitting this Application/Declaration to become
effective not later than November 20, 2000 in order to accommodate a closing not
later than November 30, 2000.
Applicants waive a recommended decision by a hearing officer or any other
responsible officer of the Commission and request that there be no thirty-day
waiting period between the issuance of the Commission's order and the date on
which it is to become effective. Applicants consent to the Division of
Investment Management assisting in the preparation of the Commission's decision
or order in this matter, unless such Division opposes this Application.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS:
--------
A-1 Amended and Restated Articles Incorporated by reference
of Incorporation of CP&L to Exhibit B to
Energy Registration Statement on
Form S-4 in File No.
333-86243
A-2 Amended and Restated By-Laws Incorporated by reference
of CP&L Energy to Exhibit C to
Registration Statement on
Form S-4 in File No.
333-86243
A-3 Restated Charter of CP&L, as Incorporated by reference
amended on May 10, 1996 to Exhibit 3(i) to
Quarterly Report on Form 10-Q
for the quarter ended June 30,
1997 in File No. 1-3382
A-4 By-Laws of CP&L, as amended Incorporated by reference
on March 17, 1999 to Exhibit 3b(3) to Annual
Report on Form 10-K for the
year ended December 31, 1998
in File No. 1-3382
A-5 Restated Articles of Incorporated by reference
Incorporation of Florida to Exhibit 3(a) to the
Progress, as amended November Annual Report on Form 10-K
25, 1991 for the year ended December
31, 1991 in File No. 1-8349
A-6 Bylaws of Florida Progress, Incorporated by reference
as amended July 10, 2000 to Exhibit 3 to the
Quarterly Report on Form 10-Q
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for the quarter ended June 30,
2000 in File No. 1-8349
A-7 Amended Articles of Incorporated by reference
Incorporation of Florida to Exhibit 3(a) to the
Power, as amended September Annual Report on Form 10-K
24, 1987 for the year ended December
31, 1991 in File No. 1-3274
A-8 Bylaws of Florida Power, as Incorporated by reference
amended January 21, 1988 to Exhibit 3.(b) to Annual
Report on Form 10-K for the
year ended December 31, 1995
in File No. 1-3274
B-1 Amended and Restated Included as "Annex A" to
Agreement and Plan of the Joint Proxy (included
Exchange, dated as of August in EXHIBIT C-1 hereto)
22, 1999, as amended and restated -----------
March 3, 2000, by and among CP&L,
Florida Progress and CP&L Energy
B-2 Form of Service Agreement Filed herewith
(Revised) between CP&L
Service and Utility Company
Affiliates
B-3 Form of Service Agreement Filed herewith
(Revised) between CP&L
Service and Non-Utility
Company Affiliates
B-4 Form of Service Agreement Filed herewith
(Revised) between Utility
Company and Associate
Companies in the CP&L Energy
System
B-5 Credit Agreement for Filed herewith
Acquisition Debt
B-6 System Integration Agreement Previously filed
B-7 Contingent Value Obligation Included as "Annex D" to
Agreement the Joint Proxy (included
in EXHIBIT C-1 hereto)
-----------
B-8 Policies and Procedures of Filed herewith
CP&L Service (Revised)
67
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C-1 Registration Statement of Incorporated by reference
CP&L Energy on Form S-4 to File No. 333-40836
(including the Definitive
Joint Proxy Statement of CP&L
Energy and Florida Progress)
C-2 Joint Preliminary Proxy of Incorporated by reference
CP&L Energy and Florida to File No. 1-3382 (CP&L)
Progress on Schedule 14A and File No. 1-8349
(Florida Progress)
D-1 NCUC Application Previously filed
D-2 NCUC Order Filed herewith
D-3 FERC Application under Previously filed (Paper
Section 203 of the Federal format filing on Form SE
Power Act pursuant to continuing
hardship exemption)
D-4 FERC Order of Approval Previously filed
D-5 NRC Application under Atomic Previously filed
Energy Act
D-6 NRC Order Previously filed (Paper
format filing on Form SE
pursuant to continuing
hardship exemption)
D-7 FCC Application for Transfer Filed herewith (Paper
of Licenses format filing on Form SE
pursuant to continuing
hardship exemption)
D-8 FCC Order Filed herewith (Paper
format filing on Form SE
pursuant to continuing
hardship exemption)
D-9 NCUC Order Approving CP&L Filed herewith
Acquisition of NCNG
E-1 Map of Combined Service Areas Previously filed (Paper
of CP&L, Florida Power and format filing - Form SE)
NCNG
E-2 Transmission Map of Southeast Previously filed (Paper
format filing - Form SE)
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E-3 CP&L Energy corporate chart Filed herewith (Paper
(Revised) format filing - Form SE)
E-4 Florida Progress corporate Filed herewith (Paper
chart (Revised) format filing - Form SE)
E-5 CP&L Energy combined company Filed herewith. (Paper
corporate chart (Revised) format filing - Form SE)
E-6 Contract Path Map Previously filed (Paper
format filing - Form SE)
F Opinion of Counsel Filed herewith
G-1 Opinion of Salomon Smith Included as "Annex B" to
Barney Inc. the Joint Proxy (included
in EXHIBIT C-1 hereto)
-----------
G-2 Opinion of Merrill Lynch, Included as "Annex C" to
Pierce, Fenner & Smith the Joint Proxy (included
Incorporated in EXHIBIT C-1 hereto)
-----------
H Form of Federal Register Previously filed
Notice
I-1 Annual Report of CP&L on Incorporated by reference to
Form 10-K for the year ended File No. 1-3382
December 31, 1999
I-2 Annual Report of NCNG on Incorporated by reference to
Form 10-K for the fiscal File 0-82
year ended September 30, 1998
I-3 Combined Annual Report of Incorporated by reference to
Florida Progress and Florida File Nos. 1-8349 and 1-3274
Power on Form 10-K for the
year ended December 31, 1999
I-4 Quarterly Report of CP&L on Incorporated by reference to
Form 10-Q for the quarter File No. 1-3382
ended March 31, 2000
I-5 Quarterly Report of NCNG on Incorporated by reference to
Form 10-Q for the quarter File No. 0-82
ended December 31, 1998
I-6 Combined Quarterly Report of Incorporated by reference to
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Florida Progress and Florida File Nos. 1-8349 and 1-3274
Power on Form 10-Q for the
quarter ended March 31, 2000
I-7 Combined Quarterly Report of Incorporated by reference to
CP&L Energy and CP&L on Form File Nos. 1-15929 and 1-3382
10-Q for the quarter ended
June 30, 2000
I-8 Quarterly Report of NCNG on Incorporated by reference to
Form 10-Q for the quarter File No. 0-82
ended March 31, 1999
I-9 Combined Quarterly Report of Incorporated by reference to
Florida Progress and Florida File Nos. 1-8349 and 1-3274
Power on Form 10-Q for the
quarter ended June 30, 2000
I-10 Quarterly Report of NCNG on Incorporated by reference to
Form 10-Q for the quarter File No. 0-82
ended June 30, 1999
I-11 Combined Current Report of Incorporated by reference to
CP&L Energy and CP&L on Form File Nos. 1-15929 and 1-3382
8-K, filed September 1, 2000
I-12 Current Report of CP&L Incorporated by reference to
Energy on Form 8-K, filed File No. 1-15929
September 20, 2000
I-13 Combined Current Report of Incorporated by reference to
Florida Progress and Florida File Nos. 1-8349 and 1-3274
Power on Form 8-K, dated
August 16, 2000
I-14 Combined Current Report of Incorporated by reference to
Florida Progress and Florida File Nos. 1-8349 and 1-3274
Power on Form 8-K, dated
August 31, 2000
I-15 Combined Current Report of Incorporated by reference to
Florida Progress and Florida File Nos. 1-8349 and 1-3274
Power on Form 8-K, dated
September 27, 2000
J Letter Concerning "Push Filed herewith
Down" Accounting
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K-1 Analysis of Loss of Filed herewith
Economies on Divestiture of
NCNG
K-2 Analysis of Loss of Filed herewith
Economies on Divestiture of
CP&L's Western North
Carolina Electric Properties
L Analysis of Legal Basis for Filed herewith
Retention of Non-Utility
Businesses of CP&L Energy
and Florida Progress
M Historical and pro forma Filed herewith (filed
capitalization and cash flow confidentially pursuant to
tables for CP&L and Florida Rule 104)
Progress and pro forma
capitalization and cash flow
tables for CP&L Energy
B. FINANCIAL STATEMENTS:
--------------------
FS-1 CP&L Consolidated Statements See Annual Report of CP&L
of Income for last three on Form 10-K for the year
fiscal years ended December 31, ended December 31, 1999 in
1999 File No. 1-3382 (EXHIBIT I-1
-----------
hereto)
FS-2 CP&L Consolidated Balance See Annual Report of CP&L
Sheets as of December 31, on Form 10-K for the year
1999 ended December 31, 1999 in
File No. 1-3382 (EXHIBIT I-1
-----------
hereto)
FS-3 NCNG Consolidated Statements See Annual Report of NCNG
of Income for the last three on Form 10-K for the fiscal
fiscal years ended September 30, year ended September 30, 1998
1998 in File No. 0-82 (EXHIBIT I-2
-----------
hereto)
FS-4 NCNG Consolidated Balance See Annual Report of
Sheet as of September 30, 1998 Florida Power on Form 10-K
for the fiscal year ended
September 30, 1998 in File
No. 0-82 (EXHIBIT I-2
-----------
hereto)
FS-5 Florida Progress Consolidated See Annual Report of
Statements of Income for the Florida Progress on Form
last three fiscal years ended 10-K for the year ended
December 31, 1999 December 31, 1999 in File
No. 1-8349 (EXHIBIT I-3
-----------
hereto)
FS-6 Florida Progress Consolidated See Annual Report of
Balance Sheet as of December Florida Progress on Form
31, 1999 10-K for the year ended
71
<PAGE>
December 31, 1999 in File
No. 1-8349 (EXHIBIT I-3
-----------
hereto)
FS-7 Florida Power Statements of See Annual Report of
Income for the last three Florida Power on Form 10-K
fiscal years ended December for the year ended
31, 1999 in File No. 1-3274 December 31, 1999 (EXHIBIT I-3
-----------
hereto)
FS-8 Florida Power Balance Sheet See Annual Report of
as of December 31, 1999 Florida Power on Form 10-K
for the year ended December
31, 1999 in File No. 1-3274
(EXHIBIT I-3 hereto)
-----------
FS-9 Unaudited Pro Forma Combined Filed herewith
Condensed Balance Sheet as of
June 30, 2000, and Statement of
Income for the twelve
months ended June 30, 2000
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The proposed transaction will neither involve a "major federal action" nor
"significantly affect the quality of the human environment," as those terms are
used in Section 102(2)(c) of the National Environmental Policy Act. The proposed
transaction will not result in changes in the operations of the Applicants that
would have any impact on the environment. No Federal agency has prepared or is
preparing an environmental impact statement with respect to the reorganization.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, each of the undersigned companies has duly caused this amended Application
Declaration to be signed on its behalf by the undersigned thereunto duly
authorized.
CP&L ENERGY, INC.
By: /s/ Robert B. McGehee
---------------------------------
Name: Robert B. McGehee
Title: Executive Vice President, General
Counsel and Chief Administrative
Officer
FLORIDA PROGRESS CORPORATION
By: /s/ Kenneth E. Armstrong
---------------------------------
Name: Kenneth E. Armstrong
Title: Vice President and General Counsel
Date: November 22, 2000
73
<PAGE>
ANNEX C (REVISED)
NON-UTILITY SUBSIDIARIES AND INVESTMENTS OF CP&L ENERGY
1. Wholly owned subsidiaries of CP&L Energy, Inc.:
<TABLE>
<CAPTION>
------------------ --------------- ---------------------------------------- ------------------ --------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
ORGANIZATION EXHIBIT L
------------------ --------------- ---------------------------------------- ------------------ --------------
<S> <C> <C> <C> <C>
Strategic North Carolina An energy services company which, Rule 1, 3
Resource directly and through subsidiaries, 58(b)(1)(i);
Solutions Corp. designs, develops, installs, and also Cinergy
provides energy and facilities -------
management software systems and other Corp., HCAR
services for educational, commercial, 26662 (Feb. 7,
industrial and governmental markets 1997);
nationwide. Conectiv, Inc.,
(For subsidiaries, see part 4, below) -------------
HCAR 26832 (Feb.
25, 1998)
------------------ --------------- ---------------------------------------- ------------------ --------------
CP&L Service North Carolina Organized to provide various Section 13(b); 1, 4
Company LLC administrative, management and Rule 88(b)
corporate support services to CP&L
Energy and CP&L Energy's Utility and
Non-Utility subsidiaries
------------------ --------------- ---------------------------------------- ------------------ --------------
CPL Energy North Carolina Organized to hold certain investments Intermediate 1, 3
Ventures, Inc. in synthetic fuel operations and other Non-Utility
non-regulated energy businesses, Holding Company
including exempt wholesale generators. (New Century
(For subsidiaries, see part 7, below) -----------
Energies, Inc.,
-------------
HCAR No. 27000
(Apr. 7, 1999))
------------------ --------------- ---------------------------------------- ------------------ --------------
Monroe Power North Carolina Owns and operates a 160 MW Section 32 - EWG 1, 3
Company simple-cycle combustion turbine unit
in Monroe, Georgia.
------------------ --------------- ---------------------------------------- ------------------ --------------
2. Subsidiaries of Carolina Power & Light Company (percentage interest
indicated):
------------------ --------------- ---------------------------------------- ------------------ --------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
ORGANIZATION EXHIBIT L
------------------ --------------- ---------------------------------------- ------------------ --------------
Capitan Tennessee Organized to hold title to certain WPL Holdings, 1, 4
Corporation land and water rights used in CP&L's --------------
(100%) utility operations. Inc., HCAR No.
26856 (Apr. 14,
1998); New
---
Century
-------
Energies, Inc.,
-------------
HCAR No. 27212
(Aug. 16, 2000)
------------------ --------------- ---------------------------------------- ------------------ --------------
<PAGE>
------------------ --------------- ---------------------------------------- ------------------ --------------
CaroFinan- Delaware Formed to hold certain passive Inactive 1, 6
cial, Inc. (100%) financial investments. Its only
remaining asset is a promissory note
receivable evidencing debt incurred by
company ESOP plan.
------------------ --------------- ---------------------------------------- ------------------ --------------
CaroFund, Inc. North Carolina Owns a 1% membership interest in WPL Holdings, 1, 4, 5, 6
(100%) CaroHome, LLC and participates as a --------------
limited partner in certain CaroHome Inc., Ameren
affordable housing projects for ------
low-income individuals and historic Corp., HCAR
building renovation projects in North -----
and South Carolina. (See note to part 26809 (Dec. 30,
9, below). 1997), Exelon
------
Corp., HCAR No.
----
27256 (Oct. 19,
2000)
------------------ --------------- ---------------------------------------- ------------------ --------------
CaroHome, LLC North Carolina Promotes CP&L's investments in Same 1, 4, 5, 6
(100%) */ affordable housing for low-income
- individuals and in historic building
renovation projects. (For investments
held, see part 9, below).
------------------ --------------- ---------------------------------------- ------------------ --------------
Caronet, Inc. North Organized to hold and operate certain Section 34 - 1, 4
(100%) Carolina and fiber optic telecommunications assets ETC
Virginia and to hold minority investments in
telecommunications/information
services companies. (For subsidiaries,
see part 5, below)
------------------ --------------- ---------------------------------------- ------------------ --------------
Eastern North North Carolina Organized to construct and operate gas Will become a 1, 6, 7
Carolina Natural pipeline and distribution system in 14 "gas utility
Gas, LLC (50%) eastern counties of North Carolina. company."
(Separate
application to
be filed)
------------------ --------------- ---------------------------------------- ------------------ --------------
*/ CP&L holds 99% interest directly and remaining 1% indirectly through
-
CaroFund.
3. Passive investments held by Carolina Power & Light Company (percentage
interest indicated):
------------------ --------------- ---------------------------------------- ------------------ --------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
ORGANIZATION EXHIBIT L
------------------ --------------- ---------------------------------------- ------------------ --------------
Absolut Limited North Carolina Passive investment in affordable WPL Holdings; 5
Partnership LP housing ------------
(99%) Ameren Corp.
-----------
------------------ --------------- ---------------------------------------- ------------------ --------------
Better Homes for North Carolina Passive investment in affordable Same 5
Garner LP (99%) housing
------------------ --------------- ---------------------------------------- ------------------ --------------
2
<PAGE>
------------------ --------------- ---------------------------------------- ------------------ --------------
Capital City Low North Carolina Passive investment in affordable Same 5
Income Housing housing
LP (99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Walnut Street LP North Carolina Passive investment in historic Same 5
(99%) building renovation project
------------------ --------------- ---------------------------------------- ------------------ --------------
Powerhouse North Carolina Passive investment in historic Same 5
Square, LLC building renovation project
(99.9%)
------------------ --------------- ---------------------------------------- ------------------ --------------
WNC California Passive investment in affordable Exelon Corp. 5
Institutional housing. (Syndicated national fund) -----------
Tax Credit Fund,
LP (99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Maxey Flats, LLC Virginia Organized to handle environmental Funcionally 9
(3%) clean up. Contributions go towards related to
remediation of Superfund site. CP&L's utility
operations
------------------ --------------- ---------------------------------------- ------------------ --------------
Pantellos Delaware Provides e-supply chain solutions to Section 34 - ETC 9
Corporation (1%) electric and gas utilities and others
through Internet-based eMarketplace.
------------------ --------------- ---------------------------------------- ------------------ --------------
Utech Venture Delaware Provides venture capital for new Rule 7
Capital technology to benefit electric 58(b)(1)(ii);
Corporation utilities, augment research and General Public
(9.76%) development, provide investors with a --------------
window on technical developments, and Utilities Corp.,
provide partnering opportunities to --------------
new start-up companies that offer new HCAR 26230 (Feb.
products and services to the utility 8, 1995); Exelon
industry. ------
Corp.
----
------------------ --------------- ---------------------------------------- ------------------ --------------
Utech Climate Delaware Established to make investments in Same 7
Challenge Fund entrepreneurial companies that offer
LP (9.8%) products or services that will
generate greenhouse gas emission reductions
for submission to the Department of Energy as
Climate Challenge Credits.
------------------ --------------- ---------------------------------------- ------------------ --------------
NC Enterprise North Carolina This partnership was established to WPL Holdings; 8
Fund, LP (5%)*/ assist new business ventures in the --------------
- State of North Carolina. Exelon Corp.
-----------
------------------ --------------- ---------------------------------------- ------------------ --------------
I-40 North Carolina Organized to build and to sell or Same 8
Enterprises, LLC lease an industrial building in the
(49%) Northchase Industrial Park located on
Interstate 40 in New Hanover County.
------------------ --------------- ---------------------------------------- ------------------ --------------
3
<PAGE>
------------------ --------------- ---------------------------------------- ------------------ --------------
Southeast North Carolina Organized to build and to sell or Same 8
Regional Park lease an industrial building in the
Development Southeast Regional Park located in
Company, LLC Columbus County.
(33.33%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Palmetto Seed South Carolina This partnership was established to Same 9
Capital assist new business ventures in the
Challenge Fund State of South Carolina.
LP (3.7%)
------------------ --------------- ---------------------------------------- ------------------ --------------
South Atlantic Florida Provides equity funds to Jurisdiction 8
Private Equity privately-owned emerging growth reserved
Fund IV, LP companies in both technology and
(8.9%) non-technology related markets, with
an emphasis on investments located in
Florida, the southeastern United
States and Texas.
------------------ --------------- ---------------------------------------- ------------------ --------------
Carousel Capital North Carolina Venture capital fund that focuses on Jurisdiction 8
Partners, LP investments in established, reserved
(3.1%) strategically positioned, mid-sized
companies located primarily in the
Southeast.
------------------ --------------- ---------------------------------------- ------------------ --------------
Utility Delaware Seeks long-term capital appreciation Jurisdiction 7
Competitive through venture capital investments in reserved
Advantage Fund, entrepreneurial ventures that assist
LLC (11.1%) utilities in retaining and building
their customer base, improving cost
efficiencies, and/or generating new
revenue opportunities.
------------------ --------------- ---------------------------------------- ------------------ --------------
Utility Delaware Same Jurisdiction 7
Competitive reserved
Advantage Fund
LLC II (15.79%)
------------------ --------------- ---------------------------------------- ------------------ --------------
*/ NCNG also holds a .248567% interest in NC Enterprise Fund.
-
4. Wholly owned subsidiaries of Strategic Resource Solutions Corp.:
------------------ --------------- ---------------------------------------- ------------------ --------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
ORGANIZATION EXHIBIT L
------------------ --------------- ---------------------------------------- ------------------ --------------
Applied Computer Delaware Develops and sells energy and Rule 3
Technologies facilities software systems for 58(b)(1)(i);
Corp. educational institutions. Cinergy Corp.;
------------
Conectiv, Inc.
-------------
------------------ --------------- ---------------------------------------- ------------------ --------------
4
<PAGE>
------------------ --------------- ---------------------------------------- ------------------ --------------
ACT Controls, North Carolina Develops and installs energy and Same 3
Inc. facilities management systems for
educational institutions.
------------------ --------------- ---------------------------------------- ------------------ --------------
Spectrum North Carolina Develops, installs and services energy Same 3
Controls, Inc. and facilities management systems for
educational institutions as well as
commercial and industrial customers.
------------------ --------------- ---------------------------------------- ------------------ --------------
SRS Engineering North Carolina Sole purpose is to hold professional Inactive 3
Corp. engineering license in North
Carolina.
------------------ --------------- ---------------------------------------- ------------------ --------------
5. Subsidiaries of Caronet, Inc. (percentage ownership indicated):
------------------ --------------- ---------------------------------------- ------------------ --------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
ORGANIZATION EXHIBIT L
------------------ --------------- ---------------------------------------- ------------------ --------------
Interpath Delaware Organized as an application service Section 34 - ETC 4
Communications, provider offering a full range of
Inc. (35%) managed application services,
Internet-protocol based applications
and Internet consulting to
businesses. (For subsidiaries, see
part 6, below)
------------------ --------------- ---------------------------------------- ------------------ --------------
CFN FiberNet, North Carolina Organized to market wholesale capacity Same 4
LLC (20%) to network carriers for its five
members in Virginia, North Carolina
and South Carolina.
------------------ --------------- ---------------------------------------- ------------------ --------------
6. Subsidiary of Interpath Communications, Inc. (percentage ownership
indicated):
------------------ --------------- ---------------------------------------- ------------------ --------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
ORGANIZATION EXHIBIT L
------------------ --------------- ---------------------------------------- ------------------ --------------
Autonomous Delaware Organized as a national IP network Section 34 - ETC 4
Networks, LLC with points of presence in four major
(33-1/3%%) U.S. cities. A full mesh ATM
(asynchronous transfer mode) network
implemented on leased circuits connects the
points of presence.
------------------ --------------- ---------------------------------------- ------------------ --------------
7. Wholly-owned subsidiaries of CPL Energy Ventures, Inc.:
------------------ --------------- ---------------------------------------- ------------------ --------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
ORGANIZATION EXHIBIT L
------------------ --------------- ---------------------------------------- ------------------ --------------
CPL Synfuels, LLC North Carolina Organized to hold membership interests Non-Utiltiy 3
in two synthetic fuels projects. (For Holding Company
subsidiaries, see part 8, below).
------------------ --------------- ---------------------------------------- ------------------ --------------
5
<PAGE>
8. Subsidiaries of CPL Synfuels, LLC (percentage ownership indicated):
------------------ --------------- ---------------------------------------- ------------------ --------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
ORGANIZATION EXHIBIT L
------------------ --------------- ---------------------------------------- ------------------ --------------
Solid Fuel, LLC Delaware Owns facility that produces synthetic Rule 3
(90%) fuel from coal fines and other 58(b)(1)(vi);
byproducts of coal. Rule 58(b)(1)(x)
------------------ --------------- ---------------------------------------- ------------------ --------------
Sandy River Delaware Owns facility that produces synthetic Same 3
Synfuel, LLC fuel from coal fines and other
(90%) byproducts of coal.
------------------ --------------- ---------------------------------------- ------------------ --------------
Colona Synfuel, Delaware Owns facility that produces synthetic Same 3
LLLP (9%) fuel from coal fines and other
byproducts of coal.
------------------ --------------- ---------------------------------------- ------------------ --------------
9. Passive investments held by CaroHome, LLC (percentage interest
indicated):
------------------ --------------- ---------------------------------------- ------------------ --------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
ORGANIZATION EXHIBIT L
------------------ --------------- ---------------------------------------- ------------------ --------------
ARV Partners California Passive investment in affordable Exelon Corp. 5
IV-Anaheim, LP housing. (Syndicated national fund). -----------
(19.8%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Dominion ARV Ohio Passive investment in affordable Same 5
Villa, LP (19.3%) housing. (Syndicated national fund).
------------------ --------------- ---------------------------------------- ------------------ --------------
Cedar Tree Washington Passive investment in affordable Same 5
Properties, LP housing. (Syndicated national fund).
(25%)
------------------ --------------- ---------------------------------------- ------------------ --------------
First Partners Massachusetts Passive investment in affordable Same 5
II, LP (15.8%) housing. (Syndicated national fund).
------------------ --------------- ---------------------------------------- ------------------ --------------
Affordable North Carolina Passive investment in affordable WPL Holdings; 5
Housing housing. ------------
Developers, LLC Ameren Corp.
(51%) -----------
------------------ --------------- ---------------------------------------- ------------------ --------------
Bradford Place North Carolina Passive investment in affordable Same 5
of Fuquay-Varina housing.
LP (99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Siler City - North Carolina Passive investment in affordable Same 5
Cateland Place housing.
LLC (99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Creston Commons, North Carolina Passive investment in affordable Same 5
LLC (99.99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
6
<PAGE>
------------------ --------------- ---------------------------------------- ------------------ --------------
Lumberton-Chestnut North Carolina Passive investment in affordable Same 5
Place LLC (99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
Dillon South Carolina Passive investment in affordable Same 5
Apartments of housing.
South Carolina*
(99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Excelsior North Carolina Passive investment in affordable Same 5
Apartments LP* housing.
(99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Garden Spring North Carolina Passive investment in affordable Same 5
Housing housing.
Association, LLC
(99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
The Garner North Carolina Passive investment in historic Same 5
School building renovation project.
Apartments LP
(99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Wilmington-Hooper North Carolina Passive investment in historic Same 5
School Apts, LLC building renovation project.
(99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Mountainside LLC North Carolina Passive investment in affordable Same 5
(99.99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
Meadow Spring North Carolina Passive investment in affordable Same 5
Housing Assoc. housing.
LLC (99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Hartsville South Carolina Passive investment in affordable Same 5
Apartments LP* housing.
(99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Manor Associates South Carolina Passive investment in affordable Same 5
LP* (99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
Asheboro-North North Carolina Passive investment in affordable Same 5
Forest LLC (99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
7
<PAGE>
------------------ --------------- ---------------------------------------- ------------------ --------------
Northgate II LLC North Carolina Passive investment in affordable Same 5
(99.99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
Knightdale North Carolina Passive investment in affordable Same 5
Development LLC housing.
(99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Parkview Housing North Carolina Passive investment in affordable Same 5
Associate LP housing.
(99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Prairie Limited North Carolina Passive investment in historic Same 5
Liability building renovation project.
Company (99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Ridgewood North Carolina Passive investment in affordable Same 5
Housing Assoc housing.
LLC (99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Arden-River Glen North Carolina Passive investment in affordable Same 5
LLC (99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
Rockwood North North Carolina Passive investment in affordable Same 5
LLC (99.99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
Rockwood AH-1 North Carolina Passive investment in affordable Same 5
LP* (99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
Marion South Carolina Passive investment in affordable Same 5
Apartments LP* housing.
(99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Spring Forest North Carolina Passive investment in affordable Same 5
Housing Assoc, housing.
LLC (99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Bishopville South Carolina Passive investment in affordable Same 5
Apartments LP* housing.
(99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Havelock-Tyler North Carolina Passive investment in affordable Same 5
Place Apartments housing.
LLC (99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
8
<PAGE>
------------------ --------------- ---------------------------------------- ------------------ --------------
West Cary North Carolina Passive investment in affordable Same 5
Apartments LLC housing.
(99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Westridge Woods North Carolina Passive investment in affordable Same 5
LLC (99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
Wilrik Hotel North Carolina Passive investment in historic Same 5
Apartments LLC building renovation project.
(99.9%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Asheville- North Carolina Passive investment in affordable Same 5
Woodridge LP* housing.
(99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Knightdale Apts. North Carolina Passive investment in affordable Same 5
LLC (99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
Savannah Place North Carolina Passive investment in affordable Same 5
Apartments, LLC housing.
(99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Wind Ridge, LLC North Carolina Passive investment in affordable Same 5
(99.99%) housing.
------------------ --------------- ---------------------------------------- ------------------ --------------
Baker House North Carolina Passive investment in affordable Same 5
Apartments LLC housing.
(99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Mount Olive North Carolina Passive investment in affordable Same 5
School housing.
Apartments LLC
(99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Enston Home LP* South Carolina Passive investment in historic Jurisdiction 5, 6
(99%) building renovation project. (Outside reserved
of service territory).
------------------ --------------- ---------------------------------------- ------------------ --------------
Willow Run, LLC North Carolina Passive investment in affordable Jurisdiction 5, 6
(99.99%) housing. (Outside of service reserved
territory).
------------------ --------------- ---------------------------------------- ------------------ --------------
HGA Development, North Carolina Historic building renovation project. Jurisdiction 5, 6
LLC (99.99%) (Active development role). reserved
------------------ --------------- ---------------------------------------- ------------------ --------------
9
<PAGE>
------------------ --------------- ---------------------------------------- ------------------ --------------
Grove Arcade North Carolina Historic building renovation project. Jurisdiction 5, 6
Restoration, LLC (Active development role). reserved
(99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Historic North Carolina Historic building renovation project. Jurisdiction 6
Property (Active development role). reserved
Management LLC
(51%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Raleigh - North Carolina Affordable housing. (Active Jurisdiction 6
CaroHome/WCK, development role). reserved
LLC (99.99%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Trinity Ridge North Carolina Affordable housing. (Active Jurisdiction 6
LLC (99.99%) development role). reserved
------------------ --------------- ---------------------------------------- ------------------ --------------
*Projects in which CaroFund, Inc. holds limited partnership interests.
10. Subsidiaries of NCNG (percentage ownership indicated).
------------------ --------------- ---------------------------------------- ------------------ --------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
ORGANIZATION EXHIBIT L
------------------ --------------- ---------------------------------------- ------------------ --------------
Cape Fear Energy North Carolina Previously engaged in purchasing Inactive. 1, 9
Corporation natural gas for NCNG's system supply
(100%) and for resale to large industrial
users and the municipalities served by NCNG,
as well as the business of providing energy
management services.
------------------ --------------- ---------------------------------------- ------------------ --------------
NCNG Cardinal North Carolina Organized to hold minority interest in Non-Utility 1, 9
Pipeline intrastate pipeline company. Holding Company
Investment
Corporation
(100%)
------------------ --------------- ---------------------------------------- ------------------ --------------
Cardinal North Carolina Formed to acquire an existing New Century 9
Pipeline intrastate pipeline and to extend such ------------
Company, LLC pipeline in North Carolina. Energies, Inc.,
(5%) -------------
HCAR No. 26748
(Aug. 1, 1997)
------------------ --------------- ---------------------------------------- ------------------ --------------
NCNG Pine Needle North Carolina Formed to hold minority interest Non-Utility 1, 9
Investment company owning a liquefied natural gas Holding Company
Corporation project in North Carolina.
(100%)
------------------ --------------- ---------------------------------------- ------------------ --------------
10
<PAGE>
------------------ --------------- ---------------------------------------- ------------------ --------------
Pine Needle LNG North Carolina Owns and operates a liquefied natural New Century 9
Company, LLC (5%) gas project in North Carolina. ------------
Energies, Inc.,
-------------
HCAR No. 26748
(Aug. 1, 1997)
------------------ --------------- ---------------------------------------- ------------------ --------------
NCNG Energy North Carolina Previously held certain energy-related Inactive 2, 9
Corporation investments of NCNG and sold natural
(100%) gas to resellers.
------------------ --------------- ---------------------------------------- ------------------ --------------
</TABLE>
11
<PAGE>
ANNEX D (REVISED)
NON-UTILITY SUBSIDIARIES AND INVESTMENTS OF FLORIDA PROGRESS
1. Wholly-owned subsidiaries of Florida Progress:
<TABLE>
<CAPTION>
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Progress Capital Florida Intermediate holding company. New Century 11
Holdings, Inc. ------------
Energies, Inc.,
--------------
HCAR 27000 (April
7, 1999)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
FPC Del, Inc. Delaware Temporary holder of accounts CSW, HCAR 23578 11
receivable for tax purposes ---
(Jan. 22, 1985)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Florida Progress Delaware Special-purpose financing entity The Southern 11
Funding Corporation -------------
Company, HCAR
-------
27134 (Feb.9,
2000); New
---
Century Energies,
-----------------
Inc., HCAR 26748
----
(August 1, 1997);
Exelon
------
Corporation, HCAR
27256 (October
19, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
2. Passive Investment of Florida Progress (percentage interest
indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Tampa Bay Devil Florida Limited partnership that owns an Proposed 17
Rays, Ltd. (5.8%) interest in the Tampa Bay Devil divestiture.
Rays Major League Baseball team
--------------------- ----------------- ----------------------------------- ------------------- ---------------
3. Wholly owned subsidiary of Florida Power Corporation:
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Energy Solutions, Florida Markets Centrus L.L.P's Inactive during 18
Inc. telecommunications products Centrus L.L.P's
(Centrus L.L.P. is in dissolution) dissolution
--------------------- ----------------- ----------------------------------- ------------------- ---------------
4. Wholly owned subsidiary of Florida Progress Funding Corporation:
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
FPC Capital I Delaware Financing entity The Southern 11
-------------
Company, HCAR
-------
27134 (Feb.9,
2000); New
---
Century Energies,
-----------------
Inc., HCAR 26748
----
(August 1, 1997);
Exelon
------
Corporation, HCAR
27256 (October
19, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
<PAGE>
--------------------- ----------------- ----------------------------------- ------------------- ---------------
FPC Capital II Delaware Inactive Inactive 11
--------------------- ----------------- ----------------------------------- ------------------- ---------------
5. Wholly owned subsidiaries of Progress Capital Holdings, Inc.:
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Mid-Continent Life Oklahoma Provider of life insurance Proposed 11
Insurance Company services in Alabama, Arizona, divestiture
Arkansas, California, Colorado,
Florida, Georgia, Idaho, Illinois,
Indiana, Iowa, Kansas, Kentucky,
Louisiana, Michigan, Minnesota,
Mississippi, Missouri, Montana,
Nebraska, Nevada, New Mexico, North
Carolina, North Dakota, Ohio,
Oklahoma, Oregon, South Carolina,
South Dakota, Tennessee, Texas, Utah,
Virginia, Washington, West Virginia,
Wisconsin, and Wyoming.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
PIH, Inc. Florida Intermediate holding company for New Century 11
non-utility interests -----------
Energies, Inc.,
--------------
HCAR 27000 (April
7, 1999)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress British West A captive insurance company. Conectiv, HCAR 11
Reinsurance Indies --------
Company, Ltd. 27135 (Feb. 10,
2000), GPU, Inc.,
---------
HCAR 27196 (July
6, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Florida Provider of wholesale Section 34 12
Telecommunications telecommunications capacity.
Corporation
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress-Centrus, Florida Inactive Inactive 18
Inc.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Energy Florida Inactive Inactive 12
Corporation
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Holdings, Florida Participates in marketing Section 34 12
Inc. alliance to multi-site electric
customers.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Florida Leases an apartment used for UNITIL Corp., 12
Provisional temporary lodging by senior -------------
Holdings, Inc. management of Florida Progress HCAR 25524 (April
and its subsidiaries in 24, 1992); WPL
connection with company business ---
in order to minimize lodging Holdings, Inc.,
expenses ---------------
HCAR 26856 (April
14, 1998), New
---
Century Energies,
-----------------
Inc., et al.
-----------
HCAR 27212
(August 16, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Electric Fuels Florida Coal procurement and Rule 58(b)(1)(ix) 12-13
Corporation transportation and intermediate
holding company for non-utility
interests
--------------------- ----------------- ----------------------------------- ------------------- ---------------
<PAGE>
6. Passive Investments of PIH, Inc. (percentage interest indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
American Tax Credit Delaware Passive interest in affordable Exelon 17
Corporate Fund III, housing -------
L.P. (18.8%) Corporation, HCAR
-----------
27256 (October
19, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Boston Capital Massachusetts Passive interest in affordable Exelon 17
Corporate Tax housing -------
Credit Fund VII Corporation, HCAR
(19%) -----------
27256 (October
19, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Boston Capital Massachusetts Passive interest in affordable Exelon 17
Corporate Tax housing -------
Credit Fund, VIII Corporation, HCAR
(8.4%) -----------
27256 (October
19, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
KeyCorp Investment Ohio Passive interest in affordable Exelon 17
Limited Partnership housing -------
II (7.6%) Corporation, HCAR
-----------
27256 (October
19, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Lehman Housing Tax New York Passive interest in affordable Exelon 17
Credit Fund, L.P. housing -------
(11%) Corporation, HCAR
-----------
27256 (October
19, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
McDonald Corporate Delaware Passive interest in affordable Exelon 17
Tax Credit Fund housing -------
1996 Limited Corporation, HCAR
Partnership (9%) -----------
27256 (October
19, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
National Corporate California Passive interest in affordable Excelon 17
Tax Credit Fund VI housing --------
(14.6%) Corporation, HCAR
-----------
27256 (October
19, 2000)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
7. Wholly owned subsidiaries of Progress Energy Corporation:
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
PEC Fort Drum, Inc. Florida Intermediate holding company New Century 12
------------
Energies, Inc.,
--------------
HCAR 27000 (April
7, 1999)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Desal, Inc. Florida Inactive Inactive 12
--------------------- ----------------- ----------------------------------- ------------------- ---------------
<PAGE>
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Power Florida Inactive Inactive 12
Marketing, Inc.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
8. Subsidiary of PEC Fort Drum, Inc. (percentage interest indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Westmoreland -Ft. Delaware Intermediate holding company New Century 12
Drum, L.P. (88.9%) ------------
Energies, Inc.,
--------------
HCAR 27000 (April
7, 1999)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
9. Subsidiary of Westmoreland-Ft. Drum, L.P. (percentage interest
indicated) :
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Westpower-Ft. Drum Virginia Intermediate holding company New Century 12
(75%) ------------
Energies, Inc.,
--------------
HCAR 27000 (April
7, 1999)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
10. Subsidiary of Westpower-Ft. Drum, L.P. (percentage interest
indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Black River Limited Delaware EWG operator 91 FERC paragraph 12
Partnership (15%) 62,038 (April 18,
2000)1
--------------------- ----------------- ----------------------------------- ------------------- ---------------
11. Subsidiary of Progress Holdings, Inc. (percentage interest indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Cadence Network, Delaware Marketing alliance for Section 34 12
Inc. (15%) multi-state electric accounts.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
12. Subsidiaries of Electric Fuels Corporation (percentage interest
indicated):
------------------------
1 Black River Limited Partnership sold the facility on February 29, 2000 and
simultaneously leased the facility back for a term of five years. In conjunction
with this transaction, Black River Limited Partnership transferred operational
control of the facility to a limited liability company owned by the former
managing general partner of the partnership.
<PAGE>
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Awayland Coal Kentucky Partner in Powell Mountain Joint Jurisdiction 13
Company, Inc. (100%) Venture in Kentucky and Virginia, reserved.
a coal mining operation.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Dixie Fuels Limited Texas Owner and operator of oceangoing Jurisdiction 13
(65%) barges and tugs. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Dixie Fuels II, Texas Owner and operator of marine Jurisdiction 13
Limited (50%) transportation equipment, reserved.
terminalling and transporting of
bulk cargoes.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
EFC Synfuel L.L.C. Delaware Intermediate holding company of New Century 13
(100%) interest in synthetic fuel plants ------------
Energies, Inc.,
--------------
HCAR 27000 (April
7, 1999)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Homeland Coal Kentucky Partner in the coal mining Jurisdiction 13
Company, Inc. (100%) operation of Powell Mountain reserved.
Joint Venture in Kentucky and
Virginia.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Kentucky May Coal Virginia Engages in the mining and Jurisdiction 13
Company, Inc. (100%) operation of coal facilities in reserved.
Kentucky.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Little Black Kentucky Partner in the Dulcimer Land Jurisdiction 14
Mountain Coal Company in Kentucky and Virginia. reserved.
Reserves, Inc.
(100%)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Little Black Kentucky Owner of interest in coal Jurisdiction 14
Mountain Land reserves. reserved.
Company (100%)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
MEMCO Barge Line, Delaware Owner, manager and broker of Jurisdiction 14
Inc. (100%) river barges and towboats in reserved.
Missouri and Louisiana.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Mesa Hydrocarbons, Florida Owns natural gas reserves and WPL Holdings, 15
Inc. (100%) wells in Colorado. --------------
Inc., HCAR 26856
---
(April 14, 1998)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Powell Mountain, Virginia Has an interest in coal mining Jurisdiction 15
Inc. (100%) operations in Virginia. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Land Florida Ownership and management of coal Jurisdiction 15
Corporation (100%) reserves in Kentucky. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Materials, Florida Commercialization and manufacture Rule 58(b)(1)(x) 15
Inc. (100%) of ash management technologies.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Metal Kentucky Railcar scrapping and repair, and Jurisdiction 15
Reclamation Company metal recycling in Kentucky, Ohio reserved.
(100%) and West Virginia.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
<PAGE>
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Rail Alabama Full-service provider to the Jurisdiction 16
Services railcar industry in Alabama, reserved.
Corporation (100%) Arkansas, California, Colorado,
Delaware, Georgia, Florida,
Illinois, Indiana, Iowa,
Kentucky, Louisiana, Michigan,
Nebraska, Mississippi, Missouri,
New Jersey, Pennsylvania, South
Carolina, Tennessee, Texas,
Virginia, Wisconsin, Wyoming, and
Alberta, Ontario, and Quebec
Canada.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Progress Synfuel Delaware Intermediate holding company of New Century 17
Holdings, Inc. interest in synthetic fuel plants ------------
(100%) Energies, Inc.,
--------------
HCAR 27000 (April
7, 1999)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
13. Subsidiary of Awayland Coal Company, Inc (percentage interest
indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Powell Mountain Virginia Coal mining in Kentucky and Jurisdiction 13
Joint Venture (50%) Virginia. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
14. Subsidiary of EFC Synfuel L.L.C. (percentage interest indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Ceredo Synfuel Delaware Owner of secondary coal recovery Rule 58(b)(1)(vi) 13
L.L.C. (99%) system facilities and (x)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Sandy River Synfuel Delaware Owner of secondary coal recovery Rule 58(b)(1)(vi) 13
L.L.C. (9%) system facilities and (x)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Solid Energy L.L.C. Delaware Owner of secondary coal recovery Rule 58(b)(1)(vi) 13
(99%) system facilities and (x)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Solid Fuel L.L.C. Delaware Owner of secondary coal recovery Rule 58(b)(1)(vi) 13
(9%) system facilities and (x)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
15. Subsidiary of Homeland Coal Company, Inc. (percentage interest
indicated):
<PAGE>
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Powell Mountain Virginia Coal mining in Kentucky and Jurisdiction 13
Joint Venture (50%) Virginia. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
16. Wholly owned subsidiaries of Kentucky May Coal Company, Inc.:
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Diamond May Coal Kentucky The mining and operation of coal Jurisdiction 13
Company facilities in Kentucky. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Cincinnati Bulk Delaware The sale and terminalling of coal Jurisdiction 14
Terminals, Inc. and other bulk commodities in reserved.
Ohio and Kentucky.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Kentucky May Mining Florida Coal mining in Kentucky. Jurisdiction 14
Company reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
17. Wholly owned subsidiaries of Cincinnati Bulk Terminals, Inc.:
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Kanawha River Florida The sale and terminalling of coal Jurisdiction 14
Terminals, Inc. in West Virginia and Kentucky. reserved.
Also an intermediate holding company
for interests in synthetic fuel
plants.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Marigold Dock, Inc. Alabama Owns a coal loading facility in Jurisdiction 14
Kentucky. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
18. Subsidiary of Kanawha River Terminals, Inc. (percentage interest
indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Colona Sub No. 2, Indiana General partner in Colona SynFuel Rule 58(b)(1)(vi) 14
LLC (100%) Limited Partnership, L.L.L.P., a
producer and seller of solid
synthetic fuel.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Black Hawk Synfuel Delaware Ownership interest in New River Rule 58(b)(1)(vi) 14
L.L.C. (100%) Synfuel L.L.C., producer of
synthetic fuels; marketing
services
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Coal Recovery V, Missouri Research and Development of Rule 58(b)(1)(vi) 14
L.L.C. (25%) Synthetic Fuels
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Colona Newco, Delaware Partner in Colona SynFuel Limited Rule 58(b)(1)(vi) 14
L.L.C. (100%) Partnership, L.L.L.P., producer
and seller of solid synthetic fuel
--------------------- ----------------- ----------------------------------- ------------------- ---------------
<PAGE>
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Ceredo Liquid Florida Operation of a terminal for the Rule 58(b)(1)(vi) 14
Terminal, Inc. storage, production, and
(100%) processing of an emulsion product
that is the chemical change agent
used with coal fines to produce
the synthetic fuel
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Colona Synfuel Delaware A producer and seller of solid Rule 58(b)(1)(vi) 3
Limited synthetic fuel
Partnership,
L.L.L.P. (61.9%)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
19. Subsidiary of Colona Sub No. 2, L.L.C. (percentage interest
indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Colona Synfuel Delaware A producer and seller of solid Rule 58(b)(1)(vi) 14
Limited synthetic fuel
Partnership,
L.L.L.P. (1%)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
20. Subsidiary of Black Hawk Synfuel L.L.C. (percentage interest
indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
New River Synfuel, Colorado A producer of synthetic fuels; Rule 58(b)(1)(vi) 14
L.L.C. (10%) marketing services
--------------------- ----------------- ----------------------------------- ------------------- ---------------
21. Subsidiary of Colona Newco, L.L.C. (percentage interest indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Colona Synfuel Delaware A producer and seller of solid Rule 58(b)(1)(vi) 14
Limited synthetic fuel
Partnership,
L.L.L.P. (20.1%)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
22. Wholly owned subsidiary of Diamond May Coal Company:
<PAGE>
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Diamond May Mining Florida Coal mining in Kentucky. Jurisdiction 13
Company reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
23. Subsidiary of Little Black Mountain Coal Reserves, Inc. (percentage
interest indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Dulcimer Land Kentucky Manages coal reserves in Kentucky Jurisdiction 14
Company (80%) and Virginia. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
24. Wholly owned subsidiary of MEMCO Barge Line, Inc.:
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Elmwood Marine Louisiana Engages in the fleeting, washing Jurisdiction 15
Services, Inc. and repair of barges in reserved.
Louisiana, Kentucky and West
Virginia and maintains an
ownership interest in
International Marine Terminals
Partnership
--------------------- ----------------- ----------------------------------- ------------------- ---------------
25. Subsidiaries of Elmwood Marine Services, Inc. (percentage interest
indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Conlease, Inc. Louisiana Owner of batture leases in Jurisdiction 15
(100%) Louisiana. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
International Louisiana Owner and operator of a bulk Jurisdiction 15
Marine Terminals materials terminal in Louisiana. reserved.
Partnership
(partnership)
(33.3%)
--------------------- ----------------- ----------------------------------- ------------------- ---------------
26. Wholly owned subsidiary of International Marine Terminals Partnership
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
I.M.T. Land Corp. Louisiana Owner of Terminal land in Jurisdiction 15
Louisiana. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
<PAGE>
27. Wholly owned subsidiaries of Powell Mountain, Inc.:
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
PMCC, Inc. Virginia Interest in a coal mine operation Jurisdiction 15
in Virginia. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Powell Mountain Virginia Interest in coal mine operations Jurisdiction 15
Coal Company, Inc. in Virginia and Kentucky. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
28. Wholly owned subsidiary of Powell Mountain Coal Company, Inc.:
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Murphy Land Virginia Partner in the Dulcimer Land Jurisdiction 14
Company, Inc. Company and the owner of coal reserved.
property in Kentucky and Virginia.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
29. Subsidiary of Murphy Land Company, Inc. (percentage interest
indicated):
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
Dulcimer Land Kentucky Manages coal reserves in Kentucky Jurisdiction 14
Company (20%) and Virginia. reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
30. Wholly owned subsidiary of Progress Metal Reclamation Company:
--------------------- ----------------- ----------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ----------------- ----------------------------------- ------------------- ---------------
West Virginia Auto West Virginia Scrap and recycling Jurisdiction 15
Shredding reserved.
--------------------- ----------------- ----------------------------------- ------------------- ---------------
31. Subsidiaries of Progress Rail Services Corporation (percentage
interest indicated):
--------------------- ------------------ ---------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Chemetron-Railway Delaware Engages in rail welding services Jurisdiction 16
Products, Inc. and manufacturing, sale and reserved.
(100%) lease of welding and rail
--------------------- ------------------ ---------------------------------- ------------------- ---------------
<PAGE>
--------------------- ------------------ ---------------------------------- ------------------- ---------------
handling equipment in Colorado,
Delaware, Georgia, Iowa,
Illinois, Kentucky, Missouri,
Montana, New Jersey, Ohio,
Pennsylvania, Wyoming, and, in
Canada, British Columbia, and
Manitoba.
--------------------- ------------------ ---------------------------------- ------------------- ---------------
FM Industries, Inc. Texas Manufacture and repair of Jurisdiction 16
(100%) railcar parts in Texas. reserved.
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Kentuckiana Railcar Indiana Railcar repair facility in Jurisdiction 16
Repair and Storage Indiana. reserved.
Facility, LLC (21%)
--------------------- ------------------ ---------------------------------- ------------------- ---------------
PRS International Virgin Islands Foreign sales corporation agent Jurisdiction 16
Sales Company, Inc. in Virgin Islands. reserved.
(100%)
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Progress Rail Mexico Marketing, leasing, and selling Jurisdiction 16
Services de Mexico, railcars and railcar parts. reserved.
S.A. de C.V. (18%)
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Progress Rail Canada Railcar repair and leasing; Jurisdiction 16
Canada Corp. (100%) supplier of rail and railcar reserved.
parts and maintenance-of-way
equipment.
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Progress Rail Alabama Intermediate holding company Jurisdiction 16
Holdings, Inc. reserved.
(100%)
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Progress Vanguard Delaware Railcar repair and leasing; Jurisdiction 16
Corp. (100%) supplier of rail and railcar reserved.
parts and maintenance-of-way
equipment in California, Idaho,
Kansas, Kentucky, Nebraska, and
Tennessee.
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Railcar, Ltd. (100%) Georgia Lease and sale of railcar Jurisdiction 16
equipment and the management of reserved.
railcar rolling stock in Georgia.
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Southern Machine Georgia Machine shop design and Jurisdiction 17
and Tool Company fabrication, manufacture of reserved.
(100%) equipment and railcar wheelshop
in Georgia.
--------------------- ------------------ ---------------------------------- ------------------- ---------------
United Industries, Kentucky Railcar repair facility in Jurisdiction 17
Inc. (100%) Kentucky. reserved.
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Servicios Mexico A Mexican holding and operating Jurisdiction 17
Ferroviarios limited liability company that reserved.
Progress, S. de performs railcar repair services.
R.L. de C.V. (.1%)
--------------------- ------------------ ---------------------------------- ------------------- ---------------
<PAGE>
--------------------- ------------------ ---------------------------------- ------------------- ---------------
DAPCO Rail Alabama Ultrasonic scanning, inspecting Jurisdiction 17
Services, LLC (60%) and testing of railway rails reserved.
--------------------- ------------------ ---------------------------------- ------------------- ---------------
32. Subsidiary of United Industries, Inc. (percentage interest indicated):
--------------------- ------------------ ---------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Kentuckiana Railcar Indiana Railcar repair facility in Jurisdiction 16
Repair & Storage Indiana. reserved.
Facility, LLC (79%)
--------------------- ------------------ ---------------------------------- ------------------- ---------------
33. Subsidiaries of Railcar, Ltd. (percentage interest indicated):
--------------------- ------------------ ---------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Progress Rail Mexico Markets, leases and sells Jurisdiction 16
Services de Mexico, railcars in Mexico. reserved.
S.A. de C.V. (82%)
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Servicios Mexico A Mexican holding and operating Jurisdiction 17
Ferroviarios limited liability company that reserved.
Progress, S. de performs railcar repair services.
R.L. de C.V. (99.9%)
--------------------- ------------------ ---------------------------------- ------------------- ---------------
34. Subsidiary of Progress Rail Services de Mexico, S.A. de C.V.
(percentage interest indicated):
--------------------- ------------------ ---------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Servicios Mexico A L.L.C. providing personnel and Jurisdiction 16-17
Administrativos administrative services for reserved.
Progress, S. de Servicios Ferroviarios Progress
R.L. de C.V. (.1%) in Mexico.
--------------------- ------------------ ---------------------------------- ------------------- ---------------
35. Subsidiary of Servicios Ferroviarios Progress, S.de R.L. de C.V.
(percentage interest indicated):
<PAGE>
--------------------- ------------------ ---------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Servicios Mexico A L.L.C. providing personnel and Jurisdiction 16-17
Administrativos administrative services for reserved.
Progress, S. de Servicios Ferroviarios Progress
R.L. de C.V. (99.9%) in Mexico.
--------------------- ------------------ ---------------------------------- ------------------- ---------------
36. Wholly owned subsidiary of Progress Rail Holdings, Inc.:
--------------------- ------------------ ---------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Progress Rail Nova Scotia Own and operate facility for the Jurisdiction 16
Transcanada repair, manufacture and supply reserved.
Corporation of railway equipment
--------------------- ------------------ ---------------------------------- ------------------- ---------------
37. Subsidiaries of Progress Synfuel Holdings, Inc. (percentage interest
indicated):
--------------------- ------------------ ---------------------------------- ------------------- ---------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY PAGE REF. TO
INCORPORATION EXHIBIT L
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Ceredo Synfuel Delaware Owner of secondary coal recovery Rule 58(b)(1)(vi) 17
L.L.C. (1%) system facilities
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Sandy River Synfuel Delaware Owner of secondary coal recovery Rule 58(b)(1)(vi) 17
L.L.C. (1%) system facilities
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Solid Energy L.L.C. Delaware Owner of secondary coal recovery Rule 58(b)(1)(vi) 17
(1%) system facilities
--------------------- ------------------ ---------------------------------- ------------------- ---------------
Solid Fuel L.L.C. Delaware Owner of secondary coal recovery Rule 58(b)(1)(vi) 17
(1%) system facilities
--------------------- ------------------ ---------------------------------- ------------------- ---------------
</TABLE>
