(As filed with the Securities and Exchange Commission July 28, 2000)
File No. 70-9643
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
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
B. Other Regulatory Filings........................................2
C. Overview of the Transaction.....................................3
D. Description of Parties to the Share Exchange....................4
1. CP&L Energy and its Subsidiaries...........................4
2. Florida Progress and its Subsidiaries......................8
E. Description of the Share Exchange..............................12
F. Operations of the Combined Company.............................14
G. Approval of CP&L Services as a Service Company.................15
H. Other Existing Affiliate Service Agreements....................16
I. Exemption of Florida Progress as a Holding Company.............17
ITEM 2. FEES, COMMISSIONS AND EXPENSES......................................17
ITEM 3. APPLICABLE STATUTORY PROVISIONS.....................................18
A. Share Exchange Analysis - Overview.............................19
B. Section 10(b)..................................................20
1. Section 10(b)(1)..........................................20
2. Section 10(b)(2)..........................................24
3. Section 10(b)(3)..........................................26
C. Section 10(c)...................................................29
1. Section 10(c)(1)..........................................30
(a) The Share Exchange will be lawful under
Section 8.......................................30
(b) The Share Exchange will not be detrimental
to carrying out the provisions of
Section 11......................................30
(i) Integration of Electric Operations....31
(a) Interconnection.......................32
(b) Coordination..........................37
(c) Single Area or Region.................40
(d) Size..................................41
(ii) Retention of NCNG's Gas System........42
(a) Loss of Economies.....................43
(b) Same State or Adjoining States........46
(c) Size..................................46
(iii) Retention of Other Businesses.....46
2. Section 10(c)(2)..........................................48
D. Section 10(f)...................................................50
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E. Intra-system Transactions.......................................50
1. CP&L Service..............................................50
2. Services, Goods, and Assets Involving the Utility
Operating Companies.......................................52
3. Electric Fuels............................................52
ITEM 4. REGULATORY APPROVAL.................................................52
A. Required Approvals for Share Exchange..........................52
1. Antitrust.................................................53
2. State Approvals...........................................53
3. Federal Power Act.........................................54
4. Atomic Energy Act.........................................54
5. Federal Communications Commission.........................55
B. Required Approvals for Affiliate Transactions..................55
1. The North Carolina Utilities Commission...................55
2. South Carolina Public Service Commission..................56
3. Florida Public Service Commission.........................57
ITEM 5. PROCEDURE...........................................................57
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS...................................58
A. Exhibits.......................................................58
B. Financial Statements...........................................63
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.............................64
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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;
(v) increased market capitalization, thereby improving access to
capital markets;
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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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(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 will be asked to approve the
proposed transaction at shareholder meetings to be 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
------------------------
Various aspects of the proposed transaction have been submitted for review
and/or approval 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 combination is subject to 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 are no formal approvals for this transaction required from either the
Florida Public Service Commission ("FPSC") or the South Carolina Public Service
------------------------
2/ Florida Progress has likewise filed a substantially similar definitive
proxy statement with the Commission.
3/ Although Florida Progress intends to dispose of its interest in
Mid-Continent Life Insurance Company ("Mid-Continent"), an insurance subsidiary,
should it not do so prior to closing of the Share Exchange, approvals from
insurance regulators in Oklahoma and Texas may be required for the indirect
change of control of Mid-Continent that would result from the transaction.
2
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Commission ("SCPSC"), the companies have been meeting with those state
regulators regarding their ongoing jurisdiction over Florida Power and CP&L.
It is expected that the proposed transaction will be consummated as soon as
practicable after all regulatory approvals are obtained. 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
---------------------------
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
CP&L and NCNG and will, as a result of the Share Exchange, indirectly acquire
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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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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
--------------------------------
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 30,000 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, 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 3.9 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 was 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.
------------------------
5/ See CP&L Energy, Inc., Holding Co. Act Release No. 27188 (June 15, 2000)
--- -----------------
(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
---
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 southcentral 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 is separated from CP&L's larger eastern system by a portion of the Duke
Power system, which serves most of central North Carolina. CP&L operates its
eastern and western systems as separate control areas within VACAR. The two
systems are interconnected by the transmission facilities of Duke Power 7/ and
American Electric Power Company, Inc. ("AEP"). CP&L also has interconnection
agreements with the Tennessee Valley Authority ("TVA"), Virginia Power, SCE&G,
and Santee Cooper.
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. In December 1998, CP&L entered into an agreement to purchase all of
the output of a 500 MW combustion turbine project that is under construction in
Duke Power's service area in South Carolina. The project is expected to go into
service in mid-2001. The purchase agreement has an initial term of 15 years and
provides CP&L with full rights to the output of the project, as well as control
over the scheduling of the units. CP&L has reserved transmission rights on the
Duke Power system which will enable it to schedule delivery of the output to
either its eastern or western control areas.
Although CP&L does not engage directly in any material non-utility business
activities, 8/ it owns all of the securities of five direct non-utility
subsidiaries: Caronet, Inc. ("Caronet"); Capitan Corporation ("Capitan");
------------------------
7/ 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 its eastern control area to its
western control area. 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 the eastern or western control areas. 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's eastern and western control areas could be met under
Duke Power's and/or AEP's open access tariff, both of which offer transmission
service between CP&L's eastern and western control areas. Accordingly, CP&L
terminated the existing firm transmission agreement with Duke Power coincident
with the expiration of the long-term power purchase agreement.
8/ 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.
5
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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").
o Caronet was organized to hold CP&L's interests in other companies that
own and operate fiber optic telecommunications facilities and provide
Internet-based services. 9/
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 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, a North Carolina limited liability, 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 a certificate of public convenience
and necessity to serve 14 counties in eastern North Carolina that are
not now served with natural gas. 10/
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. 11/ NCNG's
facilities include approximately 1,128 miles of transmission pipeline of two to
16 inches in diameter and approximately 2,865 miles of distribution mains. In
addition, NCNG provides propane gas service to more than 11,600 customers and
sells, installs, and services gas appliances. The estimated total population of
the territory served by NCNG is 2.6 million.
------------------------
9/ It is contemplated that Caronet will be qualified as an "exempt
telecommunications company" pursuant to Section 34 of the Act before the Share
Exchange is consummated.
10/ See Joint Application of Albemarle Pamlico Economic Development
--- -----------------------------------------------------------
Corporation et al., Order Granting Certificate, NCUC Docket No. G-44, Sub 0
------------------
(June 15, 2000). 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.
11/ 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.
6
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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. 12/ 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").
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.
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12/ This percentage is expected to rise as NCNG extends its distribution
system into areas that are already served by CP&L.
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o Monroe Power is an "exempt wholesale generator" within the meaning of
Section 32 of the Act 13/ 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 year ended December 31, 1999, CP&L's consolidated operating
revenues (pro forma to include the results of operations for NCNG in 1999) were
$3.5 billion, of which $3.14 billion (90.6%) were derived from electric utility
operations, $201 million (5.8%) from regulated natural gas operations, and $125
million (3.6%) from diversified non-utility activities. At December 31, 1999,
CP&L had consolidated assets of $9.5 billion, including net utility plant of
$6.8 billion. 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.
More detailed information concerning CP&L Energy and its subsidiaries is
contained in the Joint Proxy and in CP&L's Annual Report on Form 10-K for the
year ended December 31, 1998, and NCNG's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998, the Quarterly Reports on Form 10-Q of CP&L
and NCNG for 1999, and CP&L's Current Reports on Form 8-K, filed on August 23,
1999 and August 30, 1999, which are incorporated by reference as EXHIBTS I-1,
I-2, I-4, I-5, I-8, I-9, I-12, I-13, I-18 and I-19.
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. 14/
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
------------------------
13/ See Monroe Power Company, 87 FERC P. 61,238 (May 28, 1999).
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14/ 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.
8
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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. 15/
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").
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
------------------------
15/ 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.
9
<PAGE>
Allocation Agreement ("Interface Agreement"), dated May 14, 1990. 16/ 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.
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.
------------------------
16/ The Interface Agreement has been approved by FERC. See Florida Power &
--- ---------------
Light Company, et al., 52 FERC P. 61,105 (July 30, 1990).
---------------------
10
<PAGE>
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. 17/ 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 subsidiaries of Progress Capital are engaged in the wholesale
telecommunications business and the insurance business. Progress
Telecommunications Corporation 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. 18/ Progress Capital also holds all of the outstanding
voting securities of Mid-Continent Life Insurance Company ("Mid-Continent"), a
life insurance company that was placed in receivership in the spring of 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, and is
pursuing efforts to divest Mid-Continent.
For the year ended December 31, 1999, Progress Capital had consolidated
operating revenues (before inter-company eliminations) of $1.5 billion, of which
approximately 99% was attributable to Electric Fuels' operations, and income
from operations of $125.2 million.
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 year ended December 31, 1999, Florida Progress reported
consolidated operating revenues of $3.85 billion, of which nearly $2.64 billion
(68%) were derived from electric utility operations and $1.21 billion (32%) were
derived from non-utility activities. As of December 31, 1999, Florida Progress
------------------------
17/ 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.
18/ It is contemplated that Progress Telecommunications Corporation will be
qualified as an "exempt telecommunications company" pursuant to Section 34 of
the Act before the Share Exchange is consummated.
11
<PAGE>
had total assets of $6.5 billion, including net utility plant of $3.7 billion.
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.
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, 1998, the Quarterly Reports of Florida Progress and Florida Power
on Form 10-Q for the quarters ended March 31, June 30, and September 30, 1999,
and the Current Reports on Form 8-K of Florida Progress, dated August 22, 1999
and August 23, 1999, which are incorporated by reference as EXHIBITS I-3, I-6,
I-7, I-10, I-11, I-14, I-15, I-16, and I-17.
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
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
12
<PAGE>
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
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. Pushdown accounting will not be
applied to Florida Power, which has publicly-held debt and preferred stock.
13
<PAGE>
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
consideration, which is estimated not to exceed $3.5 billion, through unsecured
bank borrowings or unsecured borrowings from other institutional lenders having
maturities of up to 3 years.
F. Operations of the Combined Company
----------------------------------
As explained more fully in Item 3 below, the electric utility
properties of CP&L and Florida Power will constitute an integrated electric
utility system within the meaning of Section 2(a)(29)(A) of the Act. The
facilities of the two companies will be interconnected via a 50 MW firm
transmission path (the "Contract Path") over Southern Company and Duke Power
transmission systems which 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 a term of at least two additional one-year years 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. 19/ 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.
------------------------
19/ 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.
14
<PAGE>
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 clauses A-C of
Section 11(b)(1), 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. Based on the 1998 results for Florida Progress and CP&L,
the pro forma combined revenues for the two companies is approximately $6.8
billion. The combined company will serve approximately 2.5 million electricity
customers in a 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.
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. 20/ 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
------------------------
20/ Transition teams are still in the process of evaluating whether it would
be economical and efficient for CP&L Service to provide its associate companies
with all of the listed services and whether additional services may also be
provided by CP&L Service.
15
<PAGE>
companies in accordance with the methods of allocation included in Appendix A to
the Service Agreement.
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
the Service Agreements. CP&L Service will prepare and submit a policies and
procedures manual to the staff of the Division of Investment Management within
nine months following the date on which CP&L Energy registers under the Act.
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. 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 to Florida Power for 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 or water, (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.
The price Electric Fuels charges Florida Power under the two contracts is
based on Electric Fuels' cost of coal, as described above, and a market-based
component for water borne transportation under a methodology approved by the
FPSC. The rail transportation component is also based on market rates plus a
16
<PAGE>
return allowed by the FPSC on equity utilized in transporting coal to Florida
Power. 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 $39.9 million. A detailed breakdown of these fees, commissions and
expenses will be supplied by amendment.
Commission filing fee for Registration Statement on Form S-4...................*
Accountants' fees..............................................................*
Legal fees and expenses relating to the Act....................................*
Other legal fees and expenses..................................................*
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Shareholder communications and proxy solicitation..............................*
NYSE listing fee...............................................................*
Exchanging, printing and engraving of stock certificates.......................*
Investment bankers' fees and expenses:
Salomon Smith Barney......................................................*
Merrill Lynch.............................................................*
Consulting fees related to the Share Exchange..................................*
Miscellaneous..................................................................*
TOTAL..........................................................................*
*To be filed by amendment.
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:
----------------------------------------
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
and CVOs in exchange for 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) Retention by CP&L Energy of the retail
gas utility operations of NCNG;
retention of other businesses of CP&L
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
services to be provided by CP&L Service
to the direct and indirect non-utility
subsidiaries of CP&L Energy in
18
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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.
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed to be applicable to the Share Exchange, such sections and
rules should be considered to be set forth in this Item 3.
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;
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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
20
<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. 21/
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. 22/ 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) ("AEP"). 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 combine the
------------------------
21/ 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 . . ..").
22/ 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.
21
<PAGE>
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 September 30, 1999, CP&L Energy will have consolidated assets of about $19.0
billion, including net utility plant of approximately $10.3 billion. For the
year ended December 31, 1998, pro forma combined operating revenues totaled
approximately $6.8 billion. The combined companies will own or control about
18,500 MW of generating capacity.
The following table shows the CP&L Holdings system's relative size as
compared to other registered systems in terms of assets, operating revenues and
customers: 23/
System Total Assets Operating Revenues Electric Customers
($ Millions) ($ Millions) (Thousands)
------------ ------------ -----------
Southern 36,192 11,403 3,794
Entergy 22,848 11,495 2,495
AEP 19,483 6,346 3,022
CP&L 19,020 6,812 2,500
Energy
GPU 16,288 4,249 2,041
CSW 13,744 5,482 1,752
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 Entergy, both of which compete
with CP&L and Florida Power in the southeastern U.S. power market, and about the
same size as AEP in terms of total assets and operating revenues. Moreover, 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); TUC Holding Company,
-------------------
Holding Co. Act Release No. 26749 (Aug. 1, 1997) (combination of Texas Utilities
Company and ENSERCH Corporation; combined assets at time of acquisition of $24.0
billion); and Dominion Resources, Inc., Holding Co. Act Release No. 27113 (Dec.
------------------------
------------------------
23/ Source: U.S. Securities and Exchange Commission, Financial and Corporate
Report, Holding Companies Registered under the Public Utility Holding Company
Act of 1935 as of July 1, 1999 (data provided is as of December 31, 1998).
22
<PAGE>
15, 1999) ("Dominion Resources") (acquisition of Consolidated Natural Gas
------------------
Company; combined assets at time of acquisition of $29.0 billion). Furthermore,
at a time of rapid consolidation in the utility industry, the CP&L Energy system
will be substantially smaller than the systems resulting from the recent merger
of AEP and Central and South West Corp. (more than $33 billion in combined total
assets at December 31, 1998) and proposed mergers of Consolidated Edison of New
York and Northeast Utilities (combined total assets of $24.7 billion at December
31, 1998) and Unicom Corp. and PECO Energy Company (combined total assets of
$37.8 billion at December 31, 1998).
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 AEP 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." AEP, 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
-------------------
AEP, 46 S.E.C. at 1324 - 25). In this case, CP&L Energy and Florida Progress
---
will file 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 and it is a condition to
the consummation of the Share Exchange that the applicable waiting period under
the HSR Act shall have expired or been terminated.
The competitive impact of the Share Exchange on wholesale power markets
will also be considered by FERC. As summarized in the testimony of Dr. Peter
Fox-Penner and Dr. J. Stephen Henderson submitted in support of the FERC
application (filed as Exhibit D-1 hereto), there is no adverse impact on
wholesale competition resulting from the proposed merger. Numerous factors
contribute to this conclusion, including the availability of transmission
capacity to all potential competitors pursuant to FERC's open access
transmission policies, the presence of several large, low-cost electric
generators in the markets in which the Applicants compete (e.g., Southern
Company, Florida Power & Light Company, Duke Power, Entergy Corp. and AEP), and
certain commitments made by the Applicants to ensure that the merger will not
have the potential to increase market concentrations materially. In fact, the
Applicants believe that the merger will have a positive effect on wholesale
competition by introducing a stronger competitor into the Southeast energy
23
<PAGE>
market to compete with the larger wholesale suppliers that already operate in
that market.
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, supra 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. As recognized by the
Commission in Ohio Power Co., 44 S.E.C. 340, 346 (1970), prices arrived at
--------------
through arms-length negotiations are particularly persuasive evidence that
Section 10(b)(2) is satisfied.
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
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
24
<PAGE>
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 is subject to approval by 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 $39.9 million in fees, commissions and expenses
in connection with the Share Exchange. (See Item 2 - Fees, Commissions and
Expenses). By contrast, American Electric Power and Central and South West
Corporation have represented that they expect to incur total transaction fees
and regulatory processing fees of approximately $53 million in connection with
their proposed merger. Dominion Resources, Inc. and Consolidated Natural Gas
Company estimated fees and other merger expenses aggregating $55.5 million in
their recent merger; Cincinnati Gas and Electric Company and PSI Resources
incurred $47.12 million in fees in connection with their combination as
subsidiaries of CINergy; Northeast Utilities alone incurred $46.5 million in
fees and expenses in connection with its acquisition of Public Service of New
Hampshire; and Entergy alone incurred $38 million in fees in connection with its
acquisition of Gulf States Utilities -- which amounts all were approved as
reasonable by the Commission. See Dominion Resources, supra); CINergy, Holding
--- ------------------ ----- -------
Co. Act Release No. 26146 (Oct. 21, 1994); Northeast Utilities, Holding Co. Act
-------------------
Release No. 25548 (June 3, 1992); and Entergy Corp., 51 S.E.C. at 881, n. 63.
-------------
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
25
<PAGE>
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 third fiscal quarter of 1999 (the period for
which pro forma financial information is available), which was $36.278, CP&L
would issue approximately 50,113,000 shares of common stock in the transaction
for thirty-five percent of the Florida Progress common stock outstanding on
September 30, 1999. The Share Exchange would be valued at approximately $5.274
billion, based on these assumptions, and ignoring the value of the CVOs. The
total estimated fees and expenses of approximately $39.9 million represent
approximately .76% of the value of the consideration (other than the CVOs) to be
paid. This is consistent with (and in fact generally lower than) percentages
previously approved by the Commission. See, e.g., Entergy Corp., supra (fees and
--- ---- ------------- -----
expenses represented approximately 1.7% of the value of the consideration paid
to the shareholders of Gulf States Utilities); Dominion Resources, supra (fees
------------------ -----
and expenses represented approximately .87% of the estimated total consideration
to be paid to shareholders of Consolidated Natural Gas Co.).
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 capital structures approved by the Commission in other orders. See,
---
e.g., Ameren Corporation, Holding Co. Act Release No. 26809 (Dec. 30, 1997);
---- ------------------
CINergy Corp; Holding Co. Act Release No. 26934 (Nov. 2, 1998); and Centerior
------------
Energy Corp., 49 S.E.C. 472 (1986). CP&L Energy's capital structure will also be
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
in the same holding company system is somewhat unusual but, given the facts and
circumstances of the case, will not unduly complicate CP&L Energy's capital
structure. In this regard, the Commission has permitted the continued existence
of a secondary holding company where it appeared that the overall benefits of an
acquisition would outweigh any historical preference for a single holding
company structure. See Dominion Resources, supra. As was true in Dominion
--- ------------------ ----- --------
Resources, 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
26
<PAGE>
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, the Commission recently authorized American Electric Power
Company, Inc. ("AEP") to retain Central and South West Corp. ("CSW") as a
subsidiary holding company for a period of up to eight years following their
merger. See American Electric Power Company, Inc., et al., Holding Co. Act
--- ------------------------------------- ------
Release No. 27186 (June 14, 2000). The record in that proceeding indicates that
AEP's principal reason for maintaining CSW as a subsidiary was to obtain a tax
basis in CSW equal to the aggregate tax basis of the CSW shareholders in CSW
prior to the merger, which would allow AEP to realize significant tax savings in
the event that AEP were to divest CSW assets in a future taxable transaction.
Likewise, CP&L Energy has determined that it is in the best interests of its
shareholders to retain Florida Progress as a secondary holding company in order
to realize 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 $5.3 billion, which could be several billion
dollars more than Florida Progress's income tax basis in its subsidiaries. CP&L
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 will be addressed in detail in a
separate application, 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 assets. The Commission has
previously authorized registered holding companies to issue debt to finance an
acquisition under similar circumstances. See Dominion Resources, supra; and
--- ------------------ -----
SCANA Corporation, Holding Co. Act Release No. 27133 (Feb. 9, 2000).
-----------------
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.
27
<PAGE>
Set forth below are summaries of the capital structures of CP&L and Florida
Progress as of March 31, 2000, and the pro forma consolidated capital structure
of CP&L Energy (assuming the Share Exchange had been consummated on March 31,
2000):
CP&L and Florida Progress Historical Consolidated Capital Structures
(dollars in millions)
CP&L Florida Progress
---- ----------------
Common stock equity $3,429.8 51.2 % $2,037.0 41.4%
Preferred securities */ 59.4 0.9 333.5 6.8
-
Long-term debt, incl. 2,334.4 34.8 1,833.7 37.2
current portion
Short-term debt **/ 874.5 13.1 718.5 14.6
-- -------- ------ -------- ------
Total $6,698.1 100.0% $4,922.7 100.0%
CP&L Energy Pro Forma Consolidated Capital Structure
(dollars in millions) (unaudited)
Common stock equity $4,945.1 34.0%
Preferred securities */ 392.9 2.7
-
Long-term debt, incl. current 7,629.4 52.4
portion
Short-term debt **/ 1,593.0 10.9
-- --------- -----
Total $14,560.4 100.0%
*/ Includes preferred stock and company-obligated mandatorily redeemable
preferred securities.
**/ Includes amounts 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.
28
<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%.
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, consummation of the Share Exchange is conditional upon receipt of
numerous regulatory approvals. These regulatory approvals will assure that the
interests of customers are adequately protected. FERC's approval will further
assure that there is 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.
29
<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
Report"). Indeed, with specific reference to the integration requirements of the
Act, the 1995 Report explains:
------------------------
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.
----------------------- ----- -------------- ---
30
<PAGE>
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), 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"
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 AEP, supra (noting that the state
--- --- -----
------------------------
29/ 1995 Report at 71.
30/ AEP, 46 S.E.C. at 1306.
---
31
<PAGE>
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.") 46 S.E.C at 1310.
(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, 32/ and, more recently, the issuance of Order No.
2000, which establishes the framework for the formation of regional transmission
organizations ("RTOs") and provides economic incentives for utilities to
participate in the timely formation of qualified RTOs. 33/
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
------------------------
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/ "Promoting Wholesale Competition Through Open Access Non-Discriminatory
----------------------------------------------------------------------
Transmission Service by Public Utilities; Recovery of Stranded Costs by Public
------------------------------------------------------------------------------
Utilities and Transmitting Utilities," FERC Stats. & Regs., Regulations
-------------------------------------
Preambles, P. 31,036 (1996) ("Order No. 888"), order on rehearing, FERC Stats. &
------------------
Regs., Regulations Preambles, P. 31,048 (1997) ("Order 888-A"), order on
--------
rehearing, 81 FERC P. 61,248 (1997) ("Order 888-B"), order on rehearing, 82
--------- ------------------
FERC P. 61,046 (1998) ("Order 888-C").
33/ See "Regional Transmission Organizations," (Final Rule), 89 FERC P.
--- ------------------------------------
61,285 (Dec. 20, 1999), order on rehearing 90 FERC P. 61,201 (Feb. 25, 2000)
------------------
("Order 2000-A"). Order 2000 requires all regulated utilities (other than those
already participating in an approved RTO) 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.
32
<PAGE>
transmission. To enforce that principle, Order No. 888 mandates that all public
utilities provide non-discriminatory access to their transmission systems
pursuant to an open access transmission tariff. In Order No. 2000, FERC went a
step further by establishing certain ground rules, and a timetable, for the
development of RTOs. RTOs are required to carry forward the concepts of
comparability and open access. They are expected to 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 may in fact be comprised of multiple physical transmission lines
(tielines) connecting the transmission facilities. Notes 1, 2 and 3 of the
Contract Path map list the names of the substations or generating plants at
either end of each transmission tieline that forms the interconnection between
individual utilities.
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 a separate reservation of transmission
capacity across the Duke Power transmission system.
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 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.
33
<PAGE>
The Contract Path, in and of itself, satisfies the physical interconnection
requirement of Section 2(a)(29)(A). The Commission in the past has found the
interconnection requirement met where the parties had a firm contract path.
See, e.g., Centerior Corp., 49 S.E.C. at 478 ("The physical interconnection
--- ---- --------------
requirements of Section 2(a)(29)(A) are met if the two service areas are
connected by power transmission lines that the companies have the right to use
whenever needed"). The Commission has stated in a series of decisions that
contract rights cannot be relied on to integrate two "distant" systems.
See, e.g., WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14,
--- ---- ------------------
1998), n. 39, citing Northeast Utilities, supra, n. 75, and UNITIL Corp., supra,
------ ------------------- ----- ------------ -----
n. 30. However, a careful reading of those decisions indicates that the
Commission was less concerned with the length of a contract path, per se, in
terms of whether two distant utilities can satisfy the "physical
interconnection" requirement of Section 2(a)(29)(A), than with 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. The Commission did not hold in any of these cases that the
length of a firm contract path was relevant in determining whether the
"physically interconnected or capable of physical interconnection" requirement
of Section 2(a)(29)(A) was met. Such a holding would be contrary to the literal
language of Section 2(a)(29)(A). Furthermore, 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. 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 run
counter to the purposes and objectives of Order No. 888.
Under Order No. 888, 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 No. 888
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.
As indicated, 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. Hence, the companies will have 50 MW of firm capacity
available at all times, and this will provide the interconnection required by
the Act. Of course, there may be times when the companies will want to exchange
34
<PAGE>
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. 34/
The total transmission capacity of these paths is significant. For example,
using data as of February 24, 2000, the OASIS postings of the relevant
transmission providers can be used to show as available over the next 12 months
relatively large amounts of monthly non-firm transmission that could be used by
CP&L and Florida Power to transmit power in a northerly direction. 35/ 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 is 263 MW during June, July, and
August of 2000. The reduction in available transmission capacity during the
summer 2000 months is 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 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 shows available (i.e., remaining) non-firm transmission
---
capacity, taking into consideration the confirmed reservations made by third
parties, in addition to those made by CP&L and Florida Power, for the next
twelve months. Although there can be no assurance that capacity posted as
------------------------
34/ An additional transmission path is available through Southern Company
and TVA into CP&L's western control area.
35/ OASIS is the FERC-mandated electronic bulletin board on which
transmission operators post the amount 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 for 2001 and
beyond is not available.
35
<PAGE>
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 which
would allow for 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.
Planning to obtain some future transmission on an as-needed basis is not
only efficient, it is the most pro-competitive approach to interconnecting the
Applicants' systems. Making large, long-term transmission reservations could
constrain parts of the grid unnecessarily, to the detriment of other potential
transmission users. Therefore, consistent with FERC's open access policies, part
of CP&L's and Florida Power's plan to interconnect and integrate their systems
will be through use of their rights to available transmission capacity under
Order No. 888. 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 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 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. 36/
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.
------------------------
36/ See Prepared Direct Testimony of Dr. J. Stephen Henderson, Exhibit No.
---
CF-1300 to FERC Application (Exhibit D-1 hereto), p. 18.
36
<PAGE>
(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,
--- ---- --------
supra, 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." Id. (citations omitted). Applicants submit that the need for
--
"joint economic dispatch" that the Commission has historically focused on
reflects an outdated structure of the industry and regulatory requirements.
So-called "single" dispatch and committed bilateral power exchanges are not
required by the explicit terms of the statute and, indeed, may be inconsistent
with regulatory requirements and the economical and efficient operation of large
systems. Accordingly, Applicants further submit that in today's environment, the
coordination requirement should be deemed satisfied if utilities are able to
achieve efficiencies through such measures as coordinated generating plant
operations; coordinated marketing efforts, both as a buyer and seller of
electricity; joint purchasing and inventory management; the integration of
administrative and general services and programs; and gas/electric convergence
measures, which will lead to lower costs for gas as a fuel for the generation of
electricity.
This is not a matter of first impression. Nearly a decade ago, the
Commission found, and the courts agreed, that the coordination requirement could
be satisfied even if power never flowed between two parts of the system.
Environmental Action, Inc. v. SEC, 895 F.2d 1255 (9th Cir. 1990). Environmental
--------------------------------- -------------
Action involved the acquisition by a holding company of voting securities of a
------
new generating company. The intervenors argued that the acquisition did not
satisfy the standards of the Act in that, among other things, the system's
existing electric utility company had represented only that it might purchase up
-----
to twenty percent of the generating company's capacity if, and only if, the
price of such power was competitive in the market. The Court of Appeals noted
that the utility company might not purchase any of the generating company's
output but, nonetheless, concluded that the Commission had correctly found that
the utility company and generating company could be operated as part of a
coordinated system within the meaning of the Act. Id. at 1264-65, citing
--
Electric Energy, Inc., 38 S.E.C. 658 (1958) (finding that the acquisition of the
---------------------
stock of a new generating company would satisfy the integration standards even
though the companies sponsoring the construction of the generating plant only
pledged to buy any surplus energy remaining after the plant had supplied the
needs of the major purchaser, a federal government agency). More recently, the
Commission found similar types of coordinated operational and administrative
functions to constitute "de facto" integration. Sierra Pacific Resources,
------------------------
Holding Co. Act Release No. 27054 (July 26,1999). Moreover, the coordination of
administrative functions and joint marketing activities were crucial factors in
the Commission's determination that the coordination requirement was satisfied
in Sempra Energy and NIPSCO.
------------- ------
In applying the integration standard, the Commission also looks beyond
simply the coordination of the generation and transmission facilities within a
37
<PAGE>
system to the coordination of other activities. See, e.g., General Public
--- ---- --------------
Utilities Corp., 37 S.E.C. 28 (1956) (integration accomplished through power
---------------
dispatching by a central load dispatcher as well as through coordination of
maintenance and construction requirements); Middle South Utilities, Inc., 35
----------------------------
S.E.C. 1 (1953), petition to reopen denied, 36 S.E.C. 383 (1955), rev'd sub nom.
------------------------- -------------
Louisiana Public Service Comm'n v. SEC, 23 5 F.2d 167 (5th Cir. 1956), rev'd,
------------------------------- --- ------
353 U.S. 368 (1957), reh'g denied, 354 U.S. 928 (1957) (integration accomplished
------------
through an operating committee which coordinates not only the scheduling of
generation and system dispatch, but also makes and keeps records and necessary
reports, coordinates construction programs and provides for all other
interrelated operations involved in the coordination of generation and
transmission); North American Company, 32 S.E.C. 169 (1950) (economic
----------------------
integration is demonstrated by the exchange of power, the coordination of future
power demand, the sharing of extensive experience with regard to engineering and
other operating problems, and the furnishing of financial aid to the company
being acquired). See also NIPSCO, supra (functional merger of Bay States and
--- ---- ------ -----
NIPSCO gas supply departments through NIPSCO Services, "a service company
subsidiary of NIPSCO that provides financial, accounting, tax, purchasing,
natural gas portfolio management, and other administrative services to associate
companies.").
The Applicants will satisfy the coordination requirement in several
important ways: First, under the Integration Agreement, CP&L will coordinate the
planning, operation and maintenance of generating capacity resources and the
dispatch of electricity throughout the combined system of CP&L and Florida
Power. 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 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.
Second, CP&L and Florida Power will coordinate through joint marketing
efforts, 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 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
38
<PAGE>
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.
Third, 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.
Fourth, the combined system in this matter will be coordinated in a variety
of ways beyond simply the coordination of the generation and marketing functions
within the system. 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.
In the near term, the Applicants do not intend to implement an automated
economic dispatch capability 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 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
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.
39
<PAGE>
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." 37/ The Commission has specifically found that the combining systems
need not be contiguous in order for the requirement to be met. 38/ Rather, the
Commission has found 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." NIPSCO, supra (applying the single area or region requirement with
------ -----
respect to gas utility system); accord, Sempra Energy, supra. 39/
------ ------------- -----
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. Such
--
advances and developments are breaking down traditional boundaries and concepts
of regions. The Commission has confirmed its support for the 1995 Report,
citing, in particular, the Division's recommendation that the Commission
"continue to interpret the `single area or region' requirement of [the 1935 Act]
to take into account technological advances." NIPSCO, supra; accord, Sempra
------ ----- ------ ------
Energy, supra.
------ -----
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
------------------------
37/ 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).
38/ 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) (integration test was met where entities planned to build a 300-mile
transmission line to interconnect the systems which operated in noncontiguous
territories).
39/ In Gaz Metropolitain, Inc., the Commission agreed that a single area or
--------------------------
region could include areas across international borders. Holding Co. Act Release
No. 26170 (Nov. 23, 1994).
40
<PAGE>
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 stated in Sempra Energy, supra, "The Act is directed
------------- -----
against the growth and extension of holding companies [that] bear no relation to
economy of management and operation or the integration and coordination of
related operating properties." 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. (AEP, 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." AEP, 46 S.E.C. at 1312.
---
The Commission also evaluates localized 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 --
41
<PAGE>
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. 40/ 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
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:
------------------------
40/ 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.
42
<PAGE>
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 (excluding federal income taxes), gross income and net income before
federal income taxes. (See, e.g. WPL Holdings, Inc., Holding Co. Act Release No.
--- --- ------------------
26856 (April 14, 1998); and New England Electric System, 41 S.E.C. 886, 893 -
---------------------------
899 (1964).
In a number of early cases, 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 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.
Many regulated utilities are in the midst of, or have completed,
restructurings or major transactions designed to permit them to become 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. Recently, the Commission has
approved a number of transactions involving the combination of gas companies and
electric companies serving overlapping areas. 41/ All of those transactions
demonstrate that market forces are pushing for the convergence of electric and
gas operations in one corporate entity; namely, a full service energy utility
company.
------------------------
41/ See e.g., TUC Holdings Company, et al., Holding Co. Act Release No.
--- ---- ----------------------------
26749 (Aug. 1, 1997); BL Holding Corp., Holding Co. Act Release No. 26875 (May
----------------
15, 1998); and Sempra Energy, Holding Co. Act Release No. 26890 (June 26, 1998);
-------------
and Northeast Utilities, Holding Co. Act Release No. 27127 (Jan. 31, 2000).
-------------------
43
<PAGE>
Thus, the traditional model of a vertically integrated gas or electric
utility company is becoming, in various regions of the country, obsolete and
evidence continues to mount that the model utility company of the near future
will be the one-stop energy company. The Commission has recognized this trend
and has followed the Division's recommendation made in the 1995 Report to
"liberalize its interpretation of the `ABC' clauses." 1995 Report at 74-76.
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 explained that,
as a result of the convergence of the gas and electric industries now underway,
separation of gas and electric businesses may cause the separated entities to be
weaker competitors than they would be together. 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 New England Electric System, 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) ("Northeast/Yankee"), 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.
In the present case, following consummation of the Share Exchange, the
entire CP&L Energy system will be operated as a single coordinated system in
that there will be a significant degree of centralized services in CP&L Service,
as well as sharing of existing resources and capabilities of CP&L, Florida Power
and NCNG. Thus, following consummation of the Share Exchange, the CP&L Energy
system will consist of a large integrated electric utility system operating in
three states and a smaller integrated gas utility system which will operate on a
coordinated basis offering services to customers in parts of North Carolina that
overlap CP&L's service territory to a significant extent.
Permitting CP&L Energy to retain NCNG will 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 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.
44
<PAGE>
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). 42/ The same sort of merger and acquisition activity
involving combinations of electric companies and gas companies is also taking
place in Pennsylvania, Connecticut, Massachusetts, Ohio, Maryland, and West
Virginia.
In the 1995 Report, the Division noted that "it does not appear that the
SEC's precedent concerning additional systems precludes the SEC from relaxing
its interpretation of Section 11(b)(1)(A)" and "that the utility industry is
evolving toward the creation of one-source energy companies that will provide
their customers with whatever type of energy supply they want, whether
electricity or gas." The Division recommended that the Commission interpret
Section 11(b)(1) of the Act to allow registered holding companies to hold both
gas and electric operations as long as each affected state utility regulatory
commission approves of the existence of such a company.
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. 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
------------------------
42/ See SCANA Corporation, Holding Co. Act Release No. 27133 (Feb. 9, 2000).
--- -----------------
45
<PAGE>
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
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 Other Businesses
With one exception, the non-utility interests of CP&L Energy and Florida
Progress are fully 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).
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
46
<PAGE>
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, 43/ 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
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 which will be
------------------------
43/ "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").
47
<PAGE>
retained after the Share Exchange should not be counted in the calculation of
the 15% investment limitation. 44/
The Applicants acknowledge that Florida Progress's interest in
Mid-Continent, a life insurance company, is not retainable under the standards
of Section 11(b)(1) of the Act. On April 14, 1997, the Insurance Commissioner of
the State of Oklahoma received court authority to place Mid-Continent in
receivership. Pursuant to a letter of intent with the Insurance Commissioner,
who is the Receiver of Mid-Continent, Florida Progress and its subsidiary,
Progress Capital, have agreed to (i) turn over the Mid-Continent stock held by
Progress Capital and (ii) pay $10 million to the Receiver to be used in the
rehabilitation of Mid-Continent provided that, among other things, Florida
Progress, Progress Capital and their officers and directors are provided full
release from liability relating to Mid-Continent. The divestiture of the stock
of Mid-Continent by Progress Capital is an integral part of the rehabilitation
plan for Mid-Continent, which requires court approval. A hearing on that plan is
currently scheduled to begin on September 18, 2000. In the event that
Mid-Continent has not been divested by Progress Capital before the effective
date of the Share Exchange, Florida Progress will endeavor to divest
Mid-Continent within three years. CP&L Energy requests the Commission to reserve
jurisdiction over its retention of Mid-Continent during such three-year period.
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 AEP, 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 at least $100 million (net of costs to achieve)
annually beginning with the first full year after closing. The Share Exchange is
expected to yield several types of presently quantifiable benefits and savings
in the following areas:45
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 by 2003.
------------------------
44/ See, e.g., New Century Energies, Inc., supra n. 38; and SCANA
--- ---- -------------------------- ----- - -----
Corporation, supra n. 44.
----------- ----- -
45/ All amounts are before transaction expenses (estimated at approximately
$39.9 million) and certain transition costs, e.g., severance costs, relocation
----
expenses, etc. (estimated at $109 million).
48
<PAGE>
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 by 2003.
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 by 2003 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.
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 by 2003.
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
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,
49
<PAGE>
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, Inc., et al., Holding Co. Act Release No. 27113 (Dec. 15, 1999)
-----------------------
(estimated quantifiable benefits of $700 million over the first ten years
following merger); NIPSCO Industries, Inc., Holding Co. Act Release No. 26975
----------------------
(Feb. 10, 1999) (estimated expected savings of $57.45 million over ten years);
LG&E Energy Corp., Holding Co. Act Release No. 26866 (April 20, 1998) (estimated
-----------------
expected savings of $687.3 million over ten years); WPL Holdings, Holding Co.
------------
Act Release No. 26856 (April 14, 1998) (estimated expected savings of $680
million over ten years); Conectiv, Holding Co. Act Release No. 26856 (Feb. 25,
--------
1998) (estimated expected 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
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
50
<PAGE>
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
51
<PAGE>
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
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
business, operations, properties, assets, condition (financial or otherwise),
results of operations or prospects of CP&L Energy or Florida Progress.
52
<PAGE>
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 is subject to approval by the
NCUC. On February 3, 2000, CP&L filed an application with the NCUC requesting
such approval. The NCUC Application is filed as EXHIBIT D-1 hereto. 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 states of Oklahoma and Texas. Florida
Progress has announced its intention to divest Mid-Continent. However, if
Florida Progress does not divest Mid-Continent prior to the closing of the Share
Exchange, the applicable insurance regulatory authorities in Oklahoma and Texas
would be required to approve the indirect change of control of Mid-Continent
caused by the Share Exchange.
53
<PAGE>
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 a FERC-approved RTO 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,
2000, and is included as EXHIBIT D-5 hereto, and the NRC order, dated May 22,
2000, is filed as EXHIBIT D-6 hereto.
54
<PAGE>
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 will seek 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 Application will be filed
by amendment as EXHIBIT D-7.
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). 46/
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
Commission approving the creation of CP&L Energy and the acquisition of CP&L and
NCNG: 47/
------------------------
46/ 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.
47/ 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.
55
<PAGE>
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). 48/ The SCPSC order contains
substantially similar Regulatory Conditions as were established by the NCUC,
including conditions related to agreements and transactions with affiliates.
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
------------------------
48/ 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.
56
<PAGE>
in any order issued by the Commission approving the creation of CP&L Energy and
the acquisition of CP&L: 49/
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 Share Exchange is anticipated to be implemented as soon as practicable.
To facilitate this schedule, Applicants respectfully request the Commission to
issue and publish promptly the requisite notice under Rule 23 with respect to
the filing of this application-declaration to provide for the filing of comments
in a time frame that permits the Commission to enter an order granting and
permitting this application to become effective by September 15, 2000. A form of
------------------------
49/ As indicated in n. 47, 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.
57
<PAGE>
notice suitable for publication in the Federal Register is included herewith as
EXHIBIT H.
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 of Incorporated by reference to
Incorporation of CP&L Energy Exhibit B to Registration
Statement on Form S-4 in
File No. 333-86243
A-2 Amended and Restated By-Laws of Incorporated by reference to
CP&L Energy 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 to
amended on May 10, 1996 Exhibit 3(i) to Quarterly
Report on Form 10-Q for the
period ended June 30, 1997
in File No. 1-3382
A-4 By-Laws of CP&L, as amended on Incorporated by reference to
March 17, 1999 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 Incorporation Incorporated by reference to
of Florida Progress, as amended Exhibit 3(a) to the Annual
November 25, 1991. Report on Form 10-K for the
year ended December 31, 1991
in File No. 1-8349
A-6 Bylaws of Florida Progress, as To be filed by amendment
amended July 10, 2000.
A-7 Amended Articles of Incorporation Incorporated by reference to
of Florida Power, as amended Exhibit 3(a) to the Annual
September 24, 1987. Report on Form 10-K for the
year ended December 31, 1991
in File No. 1-3274
58
<PAGE>
A-8 Bylaws of Florida Power, as Incorporated by reference to
amended January 21, 1988 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 Agreement Included as "Annex A" to
and the Plan of Exchange, dated Joint Proxy (included in
as of August 22, 1999, as amended EXHIBIT C-1 hereto)
and restated March 3, 2000, by and -----------
among CP&L, Florida Progress and CP&L
Energy
B-2 Form of Service Agreement To be filed by amendment
(Revised) between CP&L Service and
Utility Company Affiliates
B-3 Form of Service Agreement To be filed by amendment
(Revised) between CP&L Service and
Non-Utility Company Affiliates
B-4 Form of Service Agreement To be filed by amendment
(Revised) between Utility Company
and Associate Companies in the
CP&L Energy System
B-5 Credit Agreement for Acquisition To be filed by amendment
Debt
B-6 System Integration Agreement Previously filed
B-7 Contingent Value Obligation Included as "Annex D" to the
Agreement Joint Proxy (included in
EXHIBIT C-1 hereto)
-----------
B-8 Policies and Procedures of CP&L Filed herewith
Service
C-1 Registration Statement of CP&L Incorporated by reference to
Energy on Form S-4 (including the File No. 333-40836.
Definitive Joint Proxy Statement
of CP&L Energy and Florida
Progress)
59
<PAGE>
C-2 Joint Preliminary Proxy of CP&L Incorporated by reference to
Energy and Florida Progress on File No. 1-3382 (CP&L) and
Schedule 14A File No. 1-8349 (Florida
Progress)
D-1 NCUC Application Previously filed
D-2 NCUC Order To be filed by amendment
D-3 FERC Application under Section 203 Previously filed (Paper
of the Federal Power Act format filing - Form SE)
D-4 FERC Order of Approval Filed herewith
D-5 NRC Application under Atomic Previously filed
Energy Act
D-6 NRC Order Filed herewith (Paper format
filing on Form SE pursuant
to permanent hardship
exemption)
D-7 FCC Application for Transfer of To be filed by amendment
Licenses
D-8 FCC Order To be filed by amendment
E-1 Map of Combined Service Areas of Previously filed (Paper
CP&L, Florida Power and NCNG format filing - Form SE)
E-2 Transmission Map of Southeast Previously filed (Paper
format filing - Form SE)
E-3 CP&L Energy corporate chart Filed herewith (Paper format
(Revised) filing - Form SE)
E-4 Florida Progress corporate chart Filed herewith (Paper format
(Revised) filing - Form SE)
E-5 CP&L Energy combined company Filed herewith (Paper format
corporate chart (Revised) filing - Form SE)
E-6 Contract Path Map Filed herewith (Paper format
filing - Form SE)
60
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G-1 Opinion of Salomon Smith Barney Included as "Annex B" to the
Inc. Joint Proxy (included in
EXHIBIT C-1 hereto)
-----------
G-2 Opinion of Merrill Lynch, Pierce, Included as "Annex C" to the
Fenner & Smith Incorporated Joint Proxy (included in
EXHIBIT C-1 hereto)
-----------
H Form of Federal Register Notice Previously filed
I-1 Annual Report of CP&L on Form Incorporated by reference
10-K for the year ended December to File No. 1-3382
31, 1998
I-2 Annual Report of NCNG on Form 10-K Incorporated by reference to
for the fiscal year ended File 0-82
September 30, 1998
I-3 Combined Annual Report of Florida Incorporated by reference to
Progress and Florida Power on Form File Nos. 1-8349 and 1-3274
10-K for the year ended December
31, 1998
I-4 Quarterly Report of CP&L on Form Incorporated by reference to
10-Q for the quarter ended March File No. 1-3382
31, 1999
I-5 Quarterly Report of NCNG on Form Incorporated by reference to
10-Q for the quarter ended File No. 0-82
December 31, 1998
I-6 Quarterly Report of Florida Incorporated by reference to
Progress on Form 10-Q for the File No. 1-8349
quarter ended March 31, 1999
I-7 Quarterly Report of Florida Power Incorporated by reference to
on Form 10-Q for the quarter ended File No. 1-3274
March 31, 1999
I-8 Quarterly Report of CP&L on Form Incorporated by reference to
10-Q for the quarter ended June File No. 1-3382
30, 1999
I-9 Quarterly Report of NCNG on Form Incorporated by reference to
10-Q for the quarter ended March File No. 0-82
31, 1999
61
<PAGE>
I-10 Quarterly Report of Florida Incorporated by reference to
Progress on Form 10-Q for the File No. 1-8349
quarter ended June 30, 1999
I-11 Quarterly Report of Florida Power Incorporated by reference to
on Form 10-Q for the quarter ended File No. 1-3274
June 30, 1999
I-12 Quarterly Report of CP&L on Form Incorporated by reference to
10-Q for the quarter ended File No. 1-3382
September 30, 1999
I-13 Quarterly Report of NCNG on Form Incorporated by reference to
10-Q for the quarter ended June File No. 0-82
30, 1999
I-14 Quarterly Report of Florida Incorporated by reference to
Progress on Form 10-Q for the File No. 1-8349
quarter ended September 30, 1999
I-15 Quarterly Report of Florida Power Incorporated by reference to
on Form 10-Q for the quarter ended File No. 1-3274
September 30, 1999
I-16 Current Report of Florida Progress Incorporated by reference to
on Form 8-K, dated August 22, 1999 File No. 1-8349
I-17 Current Report of Florida Progress Incorporated by reference to
on Form 8-K, dated August 23, 1999 File No. 1-8349
I-18 Current Report of CP&L on Form Incorporated by reference to
8-K, dated August 23, 1999 File No. 1-3382
I-19 Current Report of CP&L on Form Incorporated by reference to
8-K, dated August 30, 1999 File No. 1-3382
I-20 Statement by CP&L on Form U-3A-2 Incorporated by reference to
for year ended December 31, 1999 File No. 69-477
I-21 Statement by Florida Progress on Incorporated by reference to
Form U-3A-2 for the year ended File No. 69-267
December 31, 1999
62
<PAGE>
I-22 Initial Statement by CP&L Energy Incorporated by reference to
on Form U-3A-2 for year ended File No. 69-487
December 31, 1999
B. FINANCIAL STATEMENTS:
--------------------
FS-1 CP&L Consolidated Statements of See Annual Report of CP&L on
Income for last three fiscal years Form 10-K for the year
ended ended December 31, 1998 December 31, 1998 in File
No. 1-3382 (EXHIBIT I-1
-----------
hereto)
FS-2 CP&L Consolidated Balance Sheets See Annual Report of CP&L on
as of December 31, 1998 Form 10-K for the year ended
December 31, 1998 in File
No. 1-3382 (EXHIBIT I-1
-----------
hereto)
FS-3 NCNG Consolidated Statements of See Annual Report of NCNG on
Income for the last three fiscal Form 10-K for the fiscal
years ended September 30, 1998 year ended September 30,
1998 in File No. 0-82
(EXHIBIT I-2 hereto)
-----------
FS-4 NCNG Consolidated Balance Sheet as See Annual Report of Florida
of September 30, 1998 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 Florida
Statements of Income for the last Progress on Form 10-K for
three fiscal years ended December the year ended December 31,
31, 1998 File No. 1-8349 (EXHIBIT I-3
-----------
1998 in hereto)
FS-6 Florida Progress Consolidated See Annual Report of Florida
Balance Sheet as of December 31, Progress on Form 10-K for
1998 the year ended December 31,
1998 in File No. 1-8349
(EXHIBIT I-3 hereto)
-----------
FS-7 Florida Power Statements of See Annual Report of Florida
Income for the last three fiscal Power on Form 10-K for the
years ended December 31, 1998 year ended December 31, 1998
in File No. 1-3274 (EXHIBIT
--------
I-3 hereto)
---
63
<PAGE>
FS-8 Florida Power Balance Sheet as of See Annual Report of Florida
December 31, 1998 Power on Form 10-K for the
year ended December 31, 1998
in File No. 1-3274 (EXHIBIT
-------
I-3 hereto)
---
FS-9 Unaudited Pro Forma Combined See Registration Statement
Condensed Statement of Income for of CP&L Energy on Form S-4
the three months ended March 31, in File No. 333-40836
2000 (EXHIBIT C-1 hereto)
-----------
FS-10 Unaudited Pro Forma Combined See Registration Statement
Balance Sheet as of March 31, 2000 of CP&L Energy on Form S-4
in File No. 333-40836
(EXHIBIT C-1 hereto)
-----------
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.
SIGNATURE
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: July 28, 2000
64
<PAGE>
ANNEX C (REVISED)
CP&L ENERGY'S NON-UTILITY SUBSIDIARIES AND INVESTMENTS
<TABLE>
<CAPTION>
1. Wholly owned subsidiaries of CP&L Energy, Inc.:
----------------------- --------------- -------------------------------------- -----------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
----------------------- --------------- -------------------------------------- -----------------
<S> <C> <C> <C>
Strategic Resource North Carolina An energy services company which, Cinergy Corp.,
Solutions Corp. directly and through subsidiaries, ------------
designs, develops, installs, and HCAR 26662
provides energy and facilities (Feb. 7, 1997);
management software systems and Conectiv, Inc.,
other services for educational, -------------
commercial, industrial and HCAR 26832
governmental markets nationwide. (Feb. 25, 1998);
(For subsidiaries, see part 4, Rule 58(b)(1)(i)
below)
----------------------- --------------- -------------------------------------- -----------------
CP&L Service North Carolina Organized to provide various Section 13(b);
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 Intermediate
Ventures, Inc. investments in synthetic fuel Subsidiary
operations and other non-regulated
energy businesses, including exempt
wholesale generators. (For
subsidiaries, see part 7, below)
----------------------- --------------- -------------------------------------- -----------------
Monroe Power North Carolina Owns and operates a 160 MW Section 32 - EWG
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
ORGANIZATION
----------------------- --------------- -------------------------------------- -----------------
Capitan Corporation Tennessee Organized to hold title to certain UNITIL Corp.,
(100%) land and water rights used in CP&L's ------------
operations. HCAR 25524
(Apr. 24, 1992).
----------------------- --------------- -------------------------------------- -----------------
<PAGE>
----------------------- --------------- -------------------------------------- -----------------
CaroFinancial, Inc. Delaware Formed to hold certain passive Inactive
(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,
(100%) CaroHome, LLC and participates as a -------------
limited partner in certain CaroHome Inc., HCAR
affordable housing projects for ----
low-income individuals in North and 26856 (Apr. 14,
South Carolina. (See note to part 1998) and
9, below). Ameren Corp.,
------------
HCAR 26809
(Dec. 30, 1997).
----------------------- --------------- -------------------------------------- -----------------
CaroHome, LLC North Carolina Promotes CP&L's investments in Same
(100%)*/ affordable housing for low-income
- individuals. (For investments held,
see part 9, below).
----------------------- --------------- -------------------------------------- -----------------
Caronet, Inc. (100%) North Carolina Organized to hold and operate Section 34 -
and Virginia certain fiber optic will seek ETC
telecommunications assets and to status
hold minority investments in
telecommunications/information
services companies. (For
subsidiaries, see part 5, below)
----------------------- --------------- -------------------------------------- -----------------
Eastern North North Carolina Organized to construct and operate Will become a
Carolina Natural gas pipeline and distribution system "gas utility
Gas, LLC (50%) in 14 eastern counties of North company."
Carolina. (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
ORGANIZATION
----------------------- --------------- -------------------------------------- -----------------
Absolut Limited North Carolina Participates in affordable housing WPL Holdings;
Partnership LP projects ------------
(99%) Ameren Corp.
-----------
----------------------- --------------- -------------------------------------- -----------------
Better Homes for North Carolina Participates in affordable housing Same
Garner (99%) projects
----------------------- --------------- -------------------------------------- -----------------
2
<PAGE>
----------------------- --------------- -------------------------------------- -----------------
Capital City Low North Carolina Participates in affordable housing Same
Income Housing LP projects
(99%)
----------------------- --------------- -------------------------------------- -----------------
Walnut Street LP North Carolina Participates in affordable housing Same
(99%) projects
----------------------- --------------- -------------------------------------- -----------------
WNC Institutional California Participates in affordable housing Same
Tax Credit Fund, LP projects
(99%)
----------------------- --------------- -------------------------------------- -----------------
Maxey Flats, LLC Virginia Organized to handle environmental Rule 58(b)(vii)
(3%) clean up. Contributions go towards
the clean up and transportation of
hazardous waste.
----------------------- --------------- -------------------------------------- -----------------
Powerhouse Square, North Carolina Organized to facilitate the Same
LLC (99.9%) renovation of several historic
buildings in North Carolina
----------------------- --------------- -------------------------------------- -----------------
Utech Venture Delaware Provides venture capital for new General Public
Capital Corporation technology to benefit electric --------------
(9.76%) utilities, augment research and Utilities Corp.,
development, provide investors --------------
with a window on technical HCAR 26230
developments, and provide (Feb. 8, 1995);
partnering opportunities to new Rule 58(b)(1)(ii)
start-up companies that offer new
products and services to the utility
industry.
----------------------- --------------- -------------------------------------- -----------------
Utech Climate Delaware Established to make investments in Same
Challenge Fund LP entrepreneurial companies that offer
(9.8%) products or services that will
generate greenhouse gas emission
reductions for submission to the
Department of Energy as Climate
Challenge Credits.
----------------------- --------------- -------------------------------------- -----------------
Carousel Capital North Carolina Venture capital fund that focuses Georgia Power Co.,
Partners, LP (3.1%) on investments in established, -----------------
strategically positioned, mid-sized HCAR 25949;
companies located primarily in the Section 9(c)(3)
Southeast.
----------------------- --------------- -------------------------------------- -----------------
NC Enterprise Fund, North Carolina This partnership was established to Same
LP(5%)*/ assist new business ventures in the
- State of North Carolina.
----------------------- --------------- -------------------------------------- -----------------
3
<PAGE>
----------------------- --------------- -------------------------------------- -----------------
I-40 Enterprises, North Carolina Organized to build and to sell or Same
LLC (49%) lease an industrial building in the
Northchase Industrial Park located
on Interstate 40 in New Hanover
County.
----------------------- --------------- -------------------------------------- -----------------
Southeast Regional North Carolina Organized to build and to sell or Section 9(c)(3);
Park Development lease an industrial building in the Rule 40(a)(5)
Company, LLC Southeast Regional Park located in
(33.33%) Columbus County.
----------------------- --------------- -------------------------------------- -----------------
South Atlantic Private Florida Provides equity funds to Georgia Power Co.,
Equity Fund privately-owned emerging growth ----------------
IV, LP (8.9%) companies in both technology and HCAR 25949;
non-technology related markets, Section 9(c)(3)
with an emphasis on investments
located in Florida, the southeastern
United States and Texas.
----------------------- --------------- -------------------------------------- -----------------
Palmetto Seed South Carolina This partnership was established to Same
Capital Challenge assist new business ventures in the
Fund LP (3.7%) State of South Carolina.
----------------------- --------------- -------------------------------------- -----------------
Pantellos Delaware Provides telecommunications and Section 34
Corporation (1%) information services, including
supply chain management services
through Internet-based exchange that
enables electric and gas utilities to
purchase and sell goods and services.
----------------------- --------------- -------------------------------------- -----------------
Utility Competitive Delaware Seeks long-term capital General Public
Advantage Fund, appreciation through venture capital --------------
LLC (11.1%) investments in entrepreneurial Utilities Corp.,
ventures that assist utilities in --------------
retaining and building their HCAR 26230
customer base, improving cost (Feb. 8, 1995);
efficiencies, and/or generating new Rule 58(b)(1)(ii)
revenue opportunities.
----------------------- --------------- -------------------------------------- -----------------
*/ 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
ORGANIZATION
----------------------- --------------- -------------------------------------- -----------------
Applied Computer Delaware Develops and sells energy and See SRS Corp.,
Technologies Corp. facilities software systems for part 1, above
educational institutions.
----------------------- --------------- -------------------------------------- -----------------
4
<PAGE>
----------------------- --------------- -------------------------------------- -----------------
ACT Controls, Inc. North Carolina Develops and installs energy and Same
facilities management systems for
educational institutions.
----------------------- --------------- -------------------------------------- -----------------
Spectrum Controls, North Carolina Develops, installs and services Same
Inc. energy 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
Corp. engineering license in North
Carolina.
----------------------- --------------- -------------------------------------- -----------------
5. Subsidiaries of Caronet, Incorporated (percentage ownership indicated):
----------------------- --------------- -------------------------------------- -----------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
----------------------- --------------- -------------------------------------- -----------------
Interpath Delaware Organized as an application service Section 34
Communications, provider offering a full range of
Inc. (35%) managed application services,
Internet-protocol based applications
and Internet consulting to
businesses. Pursuant to a transaction
with Bain Capital effective June 28,
2000, Caronet owns 35% of the common
stock in Interpath, and Bain Capital
owns 65% (For subsidiar, see part 6,
below)
----------------------- --------------- -------------------------------------- -----------------
CFN FiberNet, LLC North Carolina Organized to market wholesale Same
(20%) capacity to network carriers for its
five members in Virginia, North
Carolina and South Carolina.
----------------------- --------------- -------------------------------------- -----------------
BellSouth Carolinas Delaware Organized to provide high-quality Same
PCS, LP (10%) mobile communications to subscribers
in North Carolina, South Carolina and
a small portion of Georgia, pursuant
to a license issued by the Federal
Communications Commission.
----------------------- --------------- -------------------------------------- -----------------
5
<PAGE>
6. Subsidiary of Interpath Communications, Incorporated (percentage
ownership indicated):
----------------------- --------------- -------------------------------------- -----------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
----------------------- --------------- -------------------------------------- -----------------
Autonomous Delaware Organized as a national IP network Section 34
Networks, LLC with points of presence in four
(33-1/3%%) major 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, Incorporated:
----------------------- --------------- -------------------------------------- -----------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
----------------------- --------------- -------------------------------------- -----------------
CPL Synfuels, LLC North Carolina Organized to hold membership Intermediate
interests in two synthetic fuels Subsidiary
projects. (For subsidiaries, see part
8, below).
----------------------- --------------- -------------------------------------- -----------------
8. Subsidiaries of CPL Synfuels, LLC (percentage ownership indicated):
----------------------- --------------- -------------------------------------- -----------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
----------------------- --------------- -------------------------------------- -----------------
Solid Fuel, LLC Delaware Owns facility that produces a Rule
(90%) synthetic fuel from coal fines and 58(b)(1)(vi);
other byproducts of coal Rule 58(b)(1)(x)
----------------------- --------------- -------------------------------------- -----------------
Sandy River Delaware Owns facility that produces a Same
Synfuel, LLC (90%) synthetic 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
ORGANIZATION
----------------------- --------------- -------------------------------------- -----------------
Affordable Housing North Carolina Participates in affordable housing See CaroHome,
Developers, LLC projects. LLC, part 2
(51%) above
----------------------- --------------- -------------------------------------- -----------------
6
<PAGE>
----------------------- --------------- -------------------------------------- -----------------
Anaheim California Participates in affordable housing Same
Affordable, LP projects.
(19.8%)
----------------------- --------------- -------------------------------------- -----------------
ARV Troy Villa, LP Ohio Participates in affordable housing Same
(19.8%) projects.
----------------------- --------------- -------------------------------------- -----------------
Bradford Place of North Carolina Participates in affordable housing Same
Fuquay-Varina LP projects.
(99%)
----------------------- --------------- -------------------------------------- -----------------
Siler City (99.99%) North Carolina Participates in affordable housing Same
projects.
----------------------- --------------- -------------------------------------- -----------------
Cedar Tree Washington Participates in affordable housing Same
Properties, LP (25%) projects.
----------------------- --------------- -------------------------------------- -----------------
Lumberton-Chestnut North Carolina Participates in affordable housing Same
Place LLC (99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Dillon Apartments South Carolina Participates in affordable housing Same
of South Carolina* projects.
(99%)
----------------------- --------------- -------------------------------------- -----------------
Enston Home LP* South Carolina Participates in affordable housing Same
(99%0 projects.
----------------------- --------------- -------------------------------------- -----------------
Excelsior North Carolina Participates in affordable housing Same
Apartments LP* projects.
(99%)
----------------------- --------------- -------------------------------------- -----------------
First Partners II, LP Massachusetts Participates in affordable housing Same
(15.8%) projects.
----------------------- --------------- -------------------------------------- -----------------
Garden Spring North Carolina Participates in affordable housing Same
Housing projects.
Association, LLC
(99%)
----------------------- --------------- -------------------------------------- -----------------
The Garner School North Carolina Participates in affordable housing Same
Apartments LP projects.
(99%)
----------------------- --------------- -------------------------------------- -----------------
Wilmington-Hooper North Carolina Participates in affordable housing Same
School Apts, LLC projects.
(99.99%)
----------------------- --------------- -------------------------------------- -----------------
Mountainside LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Meadow Spring North Carolina Participates in affordable housing Same
Housing Assoc. LLC projects.
(99.99%)
----------------------- --------------- -------------------------------------- -----------------
Hartsville South Carolina Participates in affordable housing Same
Apartments LP* projects.
(99%)
----------------------- --------------- -------------------------------------- -----------------
Manor Associates South Carolina Participates in affordable housing Same
LP* (99%) projects.
----------------------- --------------- -------------------------------------- -----------------
7
<PAGE>
----------------------- --------------- -------------------------------------- -----------------
Asheboro-North North Carolina Participates in affordable housing Same
Forest LLC (99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Northgate II LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Knightdale North Carolina Participates in affordable housing Same
Development LLC projects.
(99.99%)
----------------------- --------------- -------------------------------------- -----------------
Parkview Housing North Carolina Participates in affordable housing Same
Associate LP (99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Prarie Limited North Carolina Participates in affordable housing Same
Liability Company projects.
(99.99%)
----------------------- --------------- -------------------------------------- -----------------
Ridgewood Housing North Carolina Participates in affordable housing Same
Assoc LLC (99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Arden-River Glen North Carolina Participates in affordable housing Same
LLC (99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Rockwood North North Carolina Participates in affordable housing Same
LLC (99.99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Rockwood AH-1 North Carolina Participates in affordable housing Same
LP* (99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Marion Apartments South Carolina Participates in affordable housing Same
LP* (99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Spring Forest North Carolina Participates in affordable housing Same
Housing Assoc, LLC projects.
(99.99%)
----------------------- --------------- -------------------------------------- -----------------
Bishopville South Carolina Participates in affordable housing Same
Apartments LP* projects.
(99%)
----------------------- --------------- -------------------------------------- -----------------
Trinity Ridge LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Havelock-Tyler North Carolina Participates in affordable housing Same
Place Apartments LLC projects.
(99%)
----------------------- --------------- -------------------------------------- -----------------
West Cary North Carolina Participates in affordable housing Same
Apartments LLC projects.
(99.99%)
----------------------- --------------- -------------------------------------- -----------------
Westridge Woods North Carolina Participates in affordable housing Same
LLC (99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Wilrik Hotel North Carolina Participates in affordable housing Same
Apartments LLC projects.
(99.9%)
----------------------- --------------- -------------------------------------- -----------------
8
<PAGE>
----------------------- --------------- -------------------------------------- -----------------
Asheville- North Carolina Participates in affordable housing Same
Woodridge LP* projects.
(99.99%)
----------------------- --------------- -------------------------------------- -----------------
Knightdale Apts. North Carolina Participates in affordable housing Same
LLC (99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Savannah Place North Carolina Participates in affordable housing Same
Apartments, LLC projects.
(99.99%)
----------------------- --------------- -------------------------------------- -----------------
Willow Run, LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
----------------------- --------------- -------------------------------------- -----------------
Wind Ridge, LLC North Carolina Participates in affordable housing Same
(99.99%) projects.
----------------------- --------------- -------------------------------------- -----------------
HGA Development, North Carolina Organized to facilitate the Same
LLC (99.99%) renovation of historic building in
North Carolina
----------------------- --------------- -------------------------------------- -----------------
GAR, LLC (99.99%) North Carolina Organized to facilitate the Same
renovation of historic building in
North Carolina
----------------------- --------------- -------------------------------------- -----------------
Raleigh - North Carolina Participates in affordable housing Same
CaroHome/WCK, projects.
LLC (99.99%)
----------------------- --------------- -------------------------------------- -----------------
*Projects in which CaroFund, Inc. holds limited partnership interests.
10. Subsidiaries of NCNG (percentage ownership indicated).
----------------------- --------------- -------------------------------------- -----------------
SUBSIDIARY NAME STATE OF DESCRIPTION OF BUSINESS AUTHORITY
ORGANIZATION
----------------------- --------------- -------------------------------------- -----------------
Cape Fear Energy North Carolina Previously engaged in purchasing Rule
Corporation (100%) natural gas for NCNG's system supply 58(b)(1)(v);
and for resale to large industrial Rule
users and the municipalities served 58(b)(1)(i).
by NCNG, as well as the business of Currently
providing energy management inactive.
services.
----------------------- --------------- -------------------------------------- -----------------
NCNG Cardinal North Carolina Organized to hold minority interest Intermediate
Pipeline Investment in intrastate pipeline company. Subsidiary
Corporation (100%)
----------------------- --------------- -------------------------------------- -----------------
Cardinal Pipeline North Carolina Formed to acquire an existing New Century
Company, LLC (5%) intrastate pipeline and to extend -----------
such pipeline in North Carolina. Energies, Inc.,
--------------
HCAR 26748
(Aug. 1, 1997)
----------------------- --------------- -------------------------------------- -----------------
NCNG Pine Needle North Carolina Formed to hold minority interest Intermediate
Investment company owning a liquefied natural Subsidiary
Corporation (100%) gas project in North Carolina.
----------------------- --------------- -------------------------------------- -----------------
9
<PAGE>
----------------------- --------------- -------------------------------------- -----------------
Pine Needle LNG North Carolina Owns and operates a liquefied New Century
Company, LLC (5%) natural gas project in North -----------
Carolina. Energies, Inc.,
-------------
HCAR 26748
(Aug. 1, 1997)
----------------------- --------------- -------------------------------------- -----------------
NCNG Energy North Carolina Previously held certain Currently
Corporation (100%) energy-related investments of NCNG inactive
and sold natural gas to resellers.
----------------------- --------------- -------------------------------------- -----------------
</TABLE>
10
<PAGE>
ANNEX D (REVISED)
NON-UTILITY SUBSIDIARIES AND INVESTMENTS OF FLORIDA PROGRESS
<TABLE>
<CAPTION>
1. Wholly-owned subsidiaries of Florida Progress:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
<S> <C> <C> <C>
Progress Capital Florida Intermediate holding company. Intermediate
Holdings, Inc. Holding
Company
----------------------- --------------- ------------------------------------ --------------
FPC Del, Inc. Delaware Temporary holder of accounts CSW, HCAR
receivable. ---
23578 (Jan.
22, 1985)
----------------------- --------------- ------------------------------------ --------------
Florida Progress Delaware Financing entity Part of
Funding Corporation financing
arrangements
----------------------- --------------- ------------------------------------ --------------
2. Passive Investment of Florida Progress:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Tampa Bay Devil Rays, Florida Class B limited partnership in Rule 40 or
Ltd. local Major League Baseball team precedent
under
ss.9(c)(3)
----------------------- --------------- ------------------------------------ --------------
3. Subsidiary of Florida Power Corporation:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Energy Solutions, Inc. Florida Markets Centrus L.L.P's Inactive
telecommunications products during
(Centrus L.L.P. is in dissolution) Centrus
L.L.P's
dissolution
----------------------- --------------- ------------------------------------ --------------
4. Subsidiary of Florida Progress Funding Corporation:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
FPC Capital I Delaware Financing entity Part of
financing
arrangements
----------------------- --------------- ------------------------------------ --------------
FPC Capital II Delaware Inactive Inactive
----------------------- --------------- ------------------------------------ --------------
5. Subsidiaries of Progress Capital Holdings, Inc.:
<PAGE>
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Mid-Continent Life Oklahoma Provider of life insurance services Proposed
Insurance Company in Alabama, Arizona, Arkansas, Divestiture
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 Intermediate
non-utility interests Holding
Company
----------------------- --------------- ------------------------------------ --------------
Progress Reinsurance Cayman Islands A captive insurance company. Conectiv,
Company, Ltd. --------
HCAR 27135
(Feb. 10,
2000)
----------------------- --------------- ------------------------------------ --------------
Progress Florida Provider of wholesale Will seek
Telecommunications telecommunications capacity. ETC status.
Corporation
----------------------- --------------- ------------------------------------ --------------
Progress-Centrus, Inc. Florida Inactive Inactive
----------------------- --------------- ------------------------------------ --------------
Progress Energy Florida Develops independent and AEP, HCAR
Corporation cogeneration power projects. ---
26962 (Dec.
30, 1998)
----------------------- --------------- ------------------------------------ --------------
Progress Holdings, Florida Participates in marketing alliance Rule
Inc. to multi-site electric customers. 58(b)(1)(vii),
will seek
ETC status
----------------------- --------------- ------------------------------------ --------------
Progress Provisional Florida Investment in real estate UNITIL
Holdings, Inc. supporting utility business. ------
Corp., HCAR
-----
25524 (April
24, 1992)
----------------------- --------------- ------------------------------------ --------------
Electric Fuels Florida Coal procurement and transportation Rule
Corporation and intermediate holding company 58(b)(1)(ix)
for non-utility interests
----------------------- --------------- ------------------------------------ --------------
6. Passive Investments of PIH, Inc.:
<PAGE>
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
American Tax Credit Delaware Passive interest in affordable CSW, HCAR
Corporate Fund III, housing ---
L.P. 23578 (Jan.
22, 1985)
----------------------- --------------- ------------------------------------ --------------
Boston Capital Massachusetts Passive interest in affordable CSW, HCAR
Corporate Tax Credit housing ---
Fund VII 23578 (Jan.
22, 1985)
----------------------- --------------- ------------------------------------ --------------
Boston Capital Massachusetts Passive interest in affordable CSW, HCAR
Corporate Tax Credit housing ---
Fund, VIII 23578 (Jan.
22, 1985)
----------------------- --------------- ------------------------------------ --------------
KeyCorp Investment Ohio Passive interest in affordable CSW, HCAR
Limited Partnership II housing ---
23578 (Jan.
22, 1985)
----------------------- --------------- ------------------------------------ --------------
Lehman Housing Tax New York Passive interest in affordable CSW, HCAR
Credit Fund, L.P. housing ---
23578 (Jan.
22, 1985)
----------------------- --------------- ------------------------------------ --------------
McDonald Corporate Delaware Passive interest in affordable CSW, HCAR
Tax Credit Fund 1996 housing ---
Limited Partnership 23578 (Jan.
22, 1985)
----------------------- --------------- ------------------------------------ --------------
National Corporate California Passive interest in affordable CSW, HCAR
Tax Credit Fund VI housing ---
23578 (Jan.
22, 1985)
----------------------- --------------- ------------------------------------ --------------
7. Subsidiaries of Progress Energy Corporation
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
PEC Fort Drum, Inc. Florida Intermediate holding company Intermediate
Holding
Company
----------------------- --------------- ------------------------------------ --------------
Progress Desal, Inc. Florida Business Development Business
Development
----------------------- --------------- ------------------------------------ --------------
Progress Power Florida Inactive Inactive
Marketing, Inc.
----------------------- --------------- ------------------------------------ --------------
8. Subsidiary of PEC Fort Drum, Inc.
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Westmoreland -Ft. Drum, Delaware Intermediate holding company Intermediate
L.P. Holding
Company
----------------------- --------------- ------------------------------------ --------------
<PAGE>
9. Subsidiary of Westmoreland-Ft. Drum, L.P.
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Westpower-Ft. Drum Virginia Intermediate holding company Intermediate
Holding
Company
----------------------- --------------- ------------------------------------ --------------
10. Subsidiary of Westpower-Ft. Drum, L.P.
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Black River Limited Delaware EWG operator pending acceptance of Has applied
Partnership application for EWG
status.1
----------------------- --------------- ------------------------------------ --------------
11. Subsidiary of Progress Holdings, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Cadence Network, Inc. Delaware Marketing alliance for multi-state Rule
electric accounts. 58(b)(1)(vii)
----------------------- --------------- ------------------------------------ --------------
12. Subsidiaries of Electric Fuels Corporation:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Awayland Coal Company, Kentucky Partner in Powell Mountain Joint Rule
Inc. Venture in Kentucky and Virginia, 58(b)(1)(ix)
a coal mining operation.
----------------------- --------------- ------------------------------------ --------------
Dixie Fuels Limited Texas Owner and operator of oceangoing Rule
barges and tugs. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
Dixie Fuels II, Texas Owner and operator of marine Rule
Limited transportation equipment, 58(b)(1)(ix)
terminalling and transporting of
bulk cargoes.
----------------------- --------------- ------------------------------------ --------------
------------------------
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>
----------------------- --------------- ------------------------------------ --------------
EFC Synfuel L.L.C. Delaware Intermediate holding company of Intermediate
interest in synthetic fuel plants Holding
Company
----------------------- --------------- ------------------------------------ --------------
Homeland Coal Company, Kentucky Partner in the coal mining Rule
Inc. operation of Powell Mountain Joint 58(b)(1)(ix)
Venture in Kentucky and Virginia.
----------------------- --------------- ------------------------------------ --------------
Kentucky May Coal Virginia Engages in the mining and operation Rule
Company, Inc. of coal facilities in Kentucky and 58(b)(1)(ix)
Ohio.
----------------------- --------------- ------------------------------------ --------------
Little Black Mountain Kentucky Partner in the Dulcimer Land Rule
Coal Reserves, Inc. Company in Kentucky and Virginia. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
Little Black Mountain Kentucky Owner of interest in coal reserves. Rule
Land Company 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
MEMCO Barge Line, Delaware Owner, manager and broker of river Rule
Inc. barges and towboats in Missouri and 58(b)(1)(ix)
Louisiana.
----------------------- --------------- ------------------------------------ --------------
Mesa Hydrocarbons, Florida Owns natural gas reserves and wells Rule
Inc. in Colorado. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
Powell Mountain, Inc. Virginia Has an interest in coal mining Rule
operations in Virginia. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
Progress Land Florida Ownership and management of coal Rule
Corporation reserves in Kentucky. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
Progress Materials, Florida Commercialization and manufacture Rule
Inc. of ash management technologies. 58(b)(1)(x)
----------------------- --------------- ------------------------------------ --------------
Progress Metal Kentucky Railcar scrapping and repair, and Jersey
Reclamation metal recycling in Kentucky, Ohio ------
Company and West Virginia. Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
Progress Rail Services Alabama Full-service provider to the Jersey
Corporation railcar industry in Alabama, ------
Arkansas, California, Colorado, Central,
Delaware, Georgia, Florida, -------
Illinois, Indiana, Iowa, Kentucky, HCAR 24348
Louisiana, Michigan, Nebraska, (March 18,
Mississippi, Missouri, New Jersey, 1987)
Pennsylvania, South Carolina,
Tennessee, Texas, Virginia,
Wisconsin, Wyoming, and Alberta,
Ontario, and Quebec Canada.
----------------------- --------------- ------------------------------------ --------------
Progress Synfuel Delaware Intermediate holding company of Intermediate
Holdings, Inc interest in synthetic fuel plants Holding
Company
----------------------- --------------- ------------------------------------ --------------
13. Subsidiary of Awayland Coal Company, Inc:
<PAGE>
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Powell Mountain Virginia Coal mining in Kentucky and Rule
Joint Venture Virginia. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
14. Subsidiary of EFC Synfuel L.L.C.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Ceredo Synfuel Delaware Owner of secondary coal recovery Rule
L.L.C. system facilities 58(b)(1)(vi)
----------------------- --------------- ------------------------------------ --------------
Sandy River Synfuel Delaware Owner of secondary coal recovery Rule
L.L.C. system facilities 58(b)(1)(vi)
----------------------- --------------- ------------------------------------ --------------
Solid Energy L.L.C. Delaware Owner of secondary coal recovery Rule
system facilities 58(b)(1)(vi)
----------------------- --------------- ------------------------------------ --------------
Solid Fuel L.L.C. Delaware Owner of secondary coal recovery Rule
system facilities 58(b)(1)(vi)
----------------------- --------------- ------------------------------------ --------------
15. Subsidiary of Homeland Coal Company, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Powell Mountain Joint Virginia Coal mining in Kentucky and Rule
Venture Virginia. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
16. Subsidiaries of Kentucky May Coal Company, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Diamond May Coal Kentucky The mining and operation of coal Rule
Company facilities in Kentucky. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
Cincinnati Bulk Delaware The sale and terminalling of coal WPL, HCAR
Terminals, Inc. and other bulk commodities in Ohio ---
and Kentucky. 26856 (April
14, 1998)
----------------------- --------------- ------------------------------------ --------------
Kentucky May Florida Coal mining in Kentucky. Rule
Mining Company 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
17. Subsidiaries of Cincinnati Bulk Terminals, Inc.:
<PAGE>
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Kanawha River Florida The sale and terminalling of coal Rule
Terminals, Inc. in West Virginia and Kentucky. Also 58(b)(1)(ix)
an intermediate holding company for
interests in synthetic fuel plants.
----------------------- --------------- ------------------------------------ --------------
Marigold Dock, Inc. Alabama Owns a coal loading facility in Rule
Kentucky. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
18. Subsidiary of Kanawha River Terminals, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Colona Sub No. 2, Indiana General partner in Colona SynFuel Rule
LLC Limited Partnership, L.L.L.P., a 58(b)(1)(vi)
producer and seller of solid
synthetic fuel.
----------------------- --------------- ------------------------------------ --------------
Black Hawk Synfuel Delaware Ownership interest in New River Rule
L.L.C. Synfuel L.L.C., producer of 58(b)(1)(vi)
synthetic fuels; marketing services
----------------------- --------------- ------------------------------------ --------------
Coal Recovery V, Missouri Research and Development of Rule
L.L.C. Synthetic Fuels 58(b)(1)(vi)
----------------------- --------------- ------------------------------------ --------------
Colona Newco, Delaware Partner in Colona SynFuel Limited Rule
L.L.C. Partnership, L.L.L.P., producer and 58(b)(1)(vi)
seller of solid synthetic fuel
----------------------- --------------- ------------------------------------ --------------
Ceredo Liquid Florida Operation of a terminal for the Rule
Terminal, Inc. storage and processing of emulsion 58(b)(1)(vi)
products
----------------------- --------------- ------------------------------------ --------------
Colona Synfuel Delaware A producer and seller of solid Rule
Limited Partnership, synthetic fuel 58(b)(1)(vi)
L.L.L.P.
----------------------- --------------- ------------------------------------ --------------
19. Subsidiary of Colona Sub No. 2, L.L.C.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Colona Synfuel Delaware A producer and seller of solid Rule
Limited Partnership, synthetic fuel 58(b)(1)(vi)
L.L.L.P.
----------------------- --------------- ------------------------------------ --------------
20. Subsidiary of Black Hawk Synfuel L.L.C.:
<PAGE>
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
New River Synfuel, Colorado A producer of synthetic fuels; Rule
L.L.C. marketing services 58(b)(1)(vi)
----------------------- --------------- ------------------------------------ --------------
21. Subsidiary of Colona Newco, L.L.C.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Colona Synfuel Delaware A producer and seller of solid Rule
Limited Partnership, synthetic fuel 58(b)(1)(vi)
L.L.L.P.
----------------------- --------------- ------------------------------------ --------------
22. Subsidiary of Diamond May Coal Company:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Diamond May Mining Florida Coal mining in Kentucky. Rule
Company 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
23. Subsidiary of Little Black Mountain Coal Reserves, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Dulcimer Land Kentucky Manages coal reserves in Kentucky Rule
Company and Virginia. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
24. Subsidiary of MEMCO Barge Line, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Elmwood Marine Louisiana Engages in the fleeting, washing WPL, HCAR
Services, Inc. and repair of barges in Louisiana, ---
Kentucky and West Virginia and 26856 (April
maintains an ownership interest in 14, 1998)
International Marine Terminals
Partnership
----------------------- --------------- ------------------------------------ --------------
25. Subsidiaries of Elmwood Marine Services, Inc.:
<PAGE>
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Conlease, Inc. Louisiana Owner of batture leases in WPL, HCAR
Louisiana. ---
26856 (April
14, 1998)
----------------------- --------------- ------------------------------------ --------------
International Marine Louisiana Owner and operator of a bulk WPL, HCAR
Terminals Partnership materials terminal in Louisiana. ---
(partnership) 26856 (April
14, 1998)
----------------------- --------------- ------------------------------------ --------------
26. Subsidiary of International Marine Terminals Partnership
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
I.M.T. Land Corp. Louisiana Owner of Terminal land in WPL, HCAR
Louisiana. ---
26856 (April
14, 1998)
----------------------- --------------- ------------------------------------ --------------
27. Subsidiaries of Powell Mountain, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
PMCC, Inc. Virginia Interest in a coal mine operation Rule
in Virginia. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
Powell Mountain Coal Virginia Interest in coal mine operations in Rule
Company, Inc. Virginia and Kentucky. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
28. Subsidiary of Powell Mountain Coal Company, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Murphy Land Virginia Partner in the Dulcimer Land Rule
Company, Inc. Company and the owner of coal 58(b)(1)(ix)
property in Kentucky and Virginia.
----------------------- --------------- ------------------------------------ --------------
29. Subsidiary of Murphy Land Company, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Dulcimer Land Kentucky Manages coal reserves in Kentucky Rule
Company and Virginia. 58(b)(1)(ix)
----------------------- --------------- ------------------------------------ --------------
<PAGE>
30. Subsidiary of Progress Metal Reclamation Company:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
West Virginia Auto West Virginia Scrap and recycling Jersey
Shredding ------
Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
31. Subsidiaries of Progress Rail Services Corporation:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Chemetron-Railway Delaware Engages in rail welding services Jersey
Products, Inc. and manufacturing, sale and lease of ------
welding and rail handling equipment Central,
in Colorado, Delaware, Georgia, -------
Iowa, Illinois, Kentucky, Missouri, HCAR 24348
Montana, New Jersey, Ohio, (March 18,
Pennsylvania, Wyoming, and, in 1987)
Canada, British Columbia, and
Manitoba.
----------------------- --------------- ------------------------------------ --------------
FM Industries, Inc. Texas Manufacture and repair of railcar Jersey
parts in Texas. ------
Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
Kentuckiana Railcar Indiana Railcar repair facility in Indiana. Jersey
Repair and Storage ------
Facility, LLC Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
PRS International Virgin Islands Foreign sales corporation agent in Jersey
Sales Company, Inc. Virgin Islands. ------
Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
Progress Rail Services Mexico Marketing, leasing, and selling Jersey
de Mexico, S.A. de railcars and railcar parts. ------
C.V. Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
<PAGE>
----------------------- --------------- ------------------------------------ --------------
Progress Rail Canada Canada Railcar repair and leasing; Jersey
Corp. supplier of rail and railcar parts ------
and maintenance-of-way equipment. Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
Progress Rail Alabama Intermediate holding company Jersey
Holdings, Inc. ------
Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
Progress Vanguard Delaware Railcar repair and leasing; Jersey
Corp. supplier of rail and railcar parts ------
and maintenance-of-way equipment in Central,
California, Idaho, Kansas, Kentucky, -------
Nebraska, and Tennessee. HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
Railcar, Ltd. Georgia Lease and sale of railcar equipment Jersey
and the management of railcar ------
rolling stock in Georgia. Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
Southern Machine and Georgia Machine shop design and Jersey
Tool Company fabrication, manufacture of ------
equipment and railcar wheelshop in Central,
Georgia and California. -------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
United Industries, Inc. Kentucky Railcar repair facility in Kentucky. Jersey
------
Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
Servicios Ferroviarios Mexico A Mexican holding and operating Jersey
Progress, S. de R.L. de limited liability company that ------
C.V. performs railcar repair services. Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
32. Subsidiary of United Industries, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Kentuckiana Railcar Indiana Railcar repair facility in Indiana. Jersey
Repair & Storage ------
Facility, LLC Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
<PAGE>
33. Subsidiaries of Railcar, Ltd.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Progress Rail Services Mexico Markets, leases and sells railcars Jersey
de Mexico, S.A. de in Mexico. ------
C.V. Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
Servicios Ferroviarios Mexico A Mexican holding and operating Jersey
Progress, S. de R.L. limited liability company that ------
de C.V. performs railcar repair services. Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
34. Subsidiary of Progress Rail Services de Mexico, S.A. de C.V.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Servicios Mexico A L.L.C. providing personnel and Jersey
Administrativos administrative services for ------
Progress, S. de R.L. Servicios Ferroviarios Progress in Central,
de C.V. Mexico. -------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
35. Subsidiary of Servicios Ferroviarios Progress, S.de R.L. de C.V.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Servicios Mexico A L.L.C. providing personnel and Jersey
Administrativos administrative services for ------
Progress, S. de R.L. Servicios Ferroviarios Progress in Central,
de C.V. Mexico. -------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
36. Subsidiary of Progress Rail Holdings, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Progress Rail Nova Scotia Own and operate facility for the Jersey
Transcanada repair, manufacture and supply of ------
Corporation railway equipment Central,
-------
HCAR 24348
(March 18,
1987)
----------------------- --------------- ------------------------------------ --------------
<PAGE>
37. Subsidiaries of Progress Synfuel Holdings, Inc.:
----------------------- --------------- ------------------------------------ --------------
SUBSIDIARY NAME LOCATION OF DESCRIPTION OF BUSINESS AUTHORITY
INCORPORATION
----------------------- --------------- ------------------------------------ --------------
Ceredo Synfuel Delaware Owner of secondary coal recovery Rule
L.L.C. system facilities 58(b)(1)(vi)
----------------------- --------------- ------------------------------------ --------------
Sandy River Synfuel Delaware Owner of secondary coal recovery Rule
L.L.C. system facilities 58(b)(1)(vi)
----------------------- --------------- ------------------------------------ --------------
Solid Energy L.L.C. Delaware Owner of secondary coal recovery Rule
system facilities 58(b)(1)(vi)
----------------------- --------------- ------------------------------------ --------------
Solid Fuel L.L.C. Delaware Owner of secondary coal recovery Rule
system facilities 58(b)(1)(vi)
----------------------- --------------- ------------------------------------ --------------
</TABLE>
