SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27673; 70-9659)
Progress Energy, Inc., et al.
Supplemental Order Authorizing Increased Investment in Energy-Related Assets
May 5, 2003
Progress Energy, Inc. ("Progress Energy"), a registered holding company, and its indirect wholly-owned nonutility subsidiaries, Progress Ventures, Inc. ("Progress Ventures") and Progress Fuels Corporation (f/k/a Electric Fuels Corporation) (collectively, "Applicants"), of Raleigh, NC, have filed a post-effective amendment with the Securities and Exchange Commission ("Commission") under sections 9(a) and 10 of the Public Utility Holding Company Act of 1935, as amended ("Act") and rule 54 under the Act. On September 13, 2002, the Commission issued a notice of the filing of the post-effective amendment.1
By order dated November 27, 2000, the Commission authorized Progress Energy (formerly CP&L Energy, Inc.), a North Carolina corporation, to acquire all of the issued and outstanding common stock of Florida Progress Corporation, an exempt holding company, in exchange for a combination of cash, common stock and other securities ("Share Exchange").2 Progress Energy owns directly all of the issued and outstanding common stock of Carolina Power & Light Company ("CP&L"), which generates, transmits, purchases and sells electricity in parts of North Carolina and South Carolina and North Carolina Natural Gas Corporation ("NCNG"), which distributes gas at retail in parts of eastern and south central North Carolina; and owns indirectly all of the issued and outstanding common stock of Florida Power Corporation ("Florida Power"), a Florida corporation, which generates, transmits, purchases and sells electricity in parts of Florida (collectively, CP&L, Florida Power and NCNG are referred to as the "Utility Subsidiaries"). Together, the Utility Subsidiaries provide electric service and natural gas or gas transportation service to approximately 2.9 million wholesale and retail customers in parts of three states.3
Progress Ventures, an indirect wholly owned nonutility subsidiary of Progress Energy, is an intermediate nonutility holding company that holds interests in several "exempt wholesale generators" ("EWGs"), as defined in section 32 of the Act, and energy-related companies within the meaning of rule 58 that are engaged in synthetic fuels production. Through Progress Fuels Corporation ("Progress Fuels"), also an indirect wholly owned nonutility subsidiary of Progress Energy, Progress Energy holds interests in, among other nonutility businesses, natural gas exploration and production and other gas "midstream" operations.
At the time of the Share Exchange, Progress Fuels (then named Electric Fuels Corporation) owned all of the outstanding common stock of Mesa Hydrocarbons, Inc. ("Mesa"), which owns natural gas reserves and operates gas producing wells in Colorado. Mesa currently owns approximately 21,500 gross acres with net proved reserves of 95 billion cubic feet ("Bcf"). In 2002, Mesa's gas operations generated net income of $2.1 million. Mesa produced 6.1 Bcf of gas in 2002.
II. Current Authority
By order dated December 12, 2000, in this filing ("December 2000 Order"),4 the Commission authorized Progress Energy, the Utility Subsidiaries and Progress Energy's direct and indirect nonutility subsidiaries, among other things, to engage in a program of external and intrasystem financing and to organize and acquire the equity securities of specified types of new subsidiaries through September 30, 2003 ("Authorization Period"). Among other specific authorizations granted by the December 2000 Order, the Commission authorized Progress Energy, through its nonutility subsidiaries, to invest up to $500 million ("Investment Limitation") in connection with the acquisition or construction of certain types of nonutility energy-related assets in the United States that are incidental to their energy marketing activities, but which do not constitute permitted investments by an "energy-related company" under Rule 58(b)(1) ("Energy-Related Assets") or in the equity securities of existing or new companies substantially all of whose physical properties consist or will consist of Energy-Related Assets.5
On April 26, 2002, Progress Fuels completed the acquisition of Westchester Gas Company ("Westchester Gas"), which included approximately 215 natural gas producing wells, 52 miles of intrastate pipeline and 170 miles of gas gathering lines located in Texas and Louisiana. The aggregate purchase price of approximately $153 million consisted of cash consideration of approximately $22 million and the issuance of 2.5 million shares of Progress Energy's common stock valued at approximately $129 million. The acquired assets are located within a 25-mile radius of Jonesville, Texas, on the Texas-Louisiana border. The transaction added approximately 140 Bcf of gas reserves to Progress Fuels' energy portfolio. Westchester Gas produced 5.8 Bcf of gas in 2002.
In February 2003, Progress Fuels completed the acquisition of approximately 162 natural gas producing wells with proven reserves of 195 Bcf. These transactions were with Republic Energy, Inc. ("Republic") and two other privately held companies. The properties acquired from Republic are located north of Fort Worth, Texas, in the Barnett Shale, a geological formation known for its abundance of natural gas reserves. The other properties, representing a smaller portion of the reserves acquired, are located in east Texas, adjacent to the gas reserves owned by Westchester Gas. The total purchase price for the acquired assets was $148 million. These properties added about 11 Bcf of annual gas production to Progress Fuels' portfolio.
With the recent acquisitions, Progress Fuels has the ability to produce approximately 25 Bcf of gas in 2003. Mesa and Westchester together generated net income of $9.6 million in 2002. Applicants state that the recently completed transaction is also expected to be accretive to Progress Energy's earnings in 2003.
III. Requested Authority
Applicants request a supplemental order of the Commission to increase the Investment Limitation from $500 million to $1 billion. As described above, Progress Energy has utilized about $300 million of the $500 million investment authority in connection with the Westchester Gas and Republic acquisitions. In addition, expenditures of about $30 million were made in 2002 for drilling in the Westchester reserves, and Progress Fuels has budgeted about $50 - 60 million for drilling expenses in 2003. A portion of these ongoing drilling expenses will be self-funded by cash from operations of Progress Fuels' gas production subsidiaries.
Progress Energy states that, through Progress Fuels, it is actively considering several other investments in Energy-Related Assets similar to the Westchester Gas and Republic assets. Applicants state that investments in gas exploration and production and other "midstream" gas assets (i.e., gas gathering processing, pipeline and storage) represents an important component of Progress Energy's overall strategy to diversify its portfolio of assets and earnings, and to provide a physical fuel hedge for Progress Ventures' merchant generation plants.6
Applicants further state that, although Progress Ventures has not committed to any additional investments in Energy-Related Assets at this time, its current business plan contemplates additional investments of this type that would, in the aggregate, exceed the remaining authorized amount under the Investment Limitation. Applicants assert that the proposed increase is reasonable and would represent a prudent use of capital for a company the size of Progress Energy. Applicants note that the proposed limitation is within the range of the investment limits that the Commission has previously approved for other registered holding companies.7
All other terms, conditions and limitations contained in the December 2000 Order, as modified by the September 20, 2001 and March 15, 2002 orders, shall remain the same.
IV. Rule 54
Progress Energy states, for purposes of rule 54, that it meets all of the conditions specified in rule 53(a), except for rule 53(a)(1), and that none of the adverse conditions specified in rule 53(b) exist. At December 31, 2002, Progress Energy's aggregate investment in EWGs is $1.268 billion, or about 61.1% of Progress Energy's consolidated retained earnings for the four quarters ended September 30, 2002 ($2.075 billion).8 This amount exceeds the 50% "safe harbor" limitation contained in the rule. However, by order dated July 17, 2002 ("July 2002 Order"), the Commission authorized Progress Energy to increase its aggregate investment in EWGs to $4 billion.9 Therefore, although Progress Energy's aggregate investment in EWGs currently exceeds the 50% "safe harbor" limitation, this investment level is permitted under the July 2002 Order.
Since the date of the July 2002 Order, Progress Energy's common equity, as a percentage of consolidated capitalization, is higher than at June 30, 2002, the end of the quarter immediately preceding the issuance of the July Order.10 With regard to earnings from EWGs, certificates filed under rule 24 in this file indicate that Progress Energy's EWG investments continue to contribute positively to consolidated earnings.
In addition, Progress Energy is in compliance and will continue to comply with the other provisions of rule 53(a) and (b).
The Commission has examined the application under the applicable standards of the Act, and has concluded that the proposed transactions are consistent with those standards. The Commission has reached these conclusions on the basis of the complete record before us.
No federal or state commission other than this Commission has jurisdiction over the proposed transactions. Applicants state that fees and expenses in connection with the post-effective amendment will be approximately $5,000.
Due notice of the filing of the post-effective amendment has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the act and rules under the Act, that the post-effective amendment, as amended, be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
1 Holding Co. Act Release No. 27568.
2 See Holding Co. Act Release No. 27284.
3 Progress Energy also owns a 50% equity interest in Eastern North Carolina Gas Company ("ENCNG"), a new gas utility company that is constructing a gas distribution system in 14 eastern North Carolina counties. See S.E.C. File No. 70-10035. In a separate proceeding (S.E.C. File No. 70-10115), Progress Energy is seeking authorization for the sale of NCNG and its 50% stake in ENCNG to Piedmont Natural Gas Company.
4 See Progress Energy, Inc. et al., Holding Co. Act Release No. 27297. The December 2000 order was modified by orders dated September 20, 2001 and March 15, 2002, Holding Co. Act Release Nos. 27440 and 27500, respectively.
5 Energy-Related Assets are defined under the December 2000 Order to include natural gas production, gathering, processing, storage and transportation facilities and equipment, liquid oil reserves and storage facilities, and associated facilities.
6 Progress Ventures currently has approximately 3,100 MW of gas and oil fired merchant generation in operation or under construction. At normal capacity factors, these plants could utilize as much as 60 Bcf of gas per year. As indicated, Progress Fuels has the ability to produce about 25 Bcf of gas in 2003, meaning that its current production is about 35 Bcf short of what is needed to hedge the merchant generating plants' requirements.
7 See e.g., Alliant Energy Corporation, Holding Co. Act Release No. 27448 (Oct. 3, 2001); Entergy Corp, Holding Co. Act Release No. 27334 (Jan. 5, 2001); and American Electric Power Co, Inc., Holding Co. Act Release No. 27313 (Dec. 21, 2000).
8 Progress Energy currently does not hold any interest in a foreign utility company ("FUCO").
9 Under the July 2002 Order, the Commission reserved jurisdiction over the use of financing proceeds by Progress Energy to acquire any securities of or other interest in any FUCO.
10 At December 31, 2002, Progress Energy's consolidated capitalization consisted of 38.2% common equity, .5% preferred stock, 57.3% long-term debt, and 4% short-term debt (including current maturities of long-term debt), versus 35.3% common equity, .5% preferred stock, 58.7% long-term debt, and 5.5% short-term debt (including current maturities of long-term debt) at June 30, 2002 (the end of the quarter immediately preceding the issuance of the July 2002 Order).