SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27718; 70-10035 and 70-10115)
Progress Energy, Inc. and Piedmont Natural Gas Company, Inc.
Order Authorizing Acquisition and Sale of Gas Utility Companies and Granting Exemption
September 2, 2003
Progress Energy, Inc. ("Progress Energy"), a registered holding company, Raleigh, NC, has filed an application-declaration ("Acquisition Application") under sections 9(a) and 10 of the Public Utility Holding Company Act of 1935, as amended ("Act") and rule 54 under the Act. Progress Energy and Piedmont Natural Gas Company, Inc. ("Piedmont"), a gas utility company, Charlotte, NC, have filed a related joint application-declaration ("Sale Application") under sections 3(a)(2) and 12(d) of the Act and rules 44 and 54 under the Act.
On May 24, 2002, the Securities and Exchange Commission ("Commission") issued a notice of the Acquisition Application on May 24, 2002 1 and a notice of the Sale Application on March 28, 2003.2 The Commission did not receive any request for a hearing. The two applications have been consolidated for purposes of the requested order.
A. Summary of Proposals
In the Acquisition Application, filed on January 15, 2002, Progress Energy requests authorization to acquire Eastern North Carolina Natural Gas Company ("Eastern NCNG") as an additional public-utility company, among other related requests.3 As explained below, on October 16, 2002, Progress Energy entered into an agreement to sell the stock that it owns in Eastern NCNG to a nonassociate company, Piedmont, and on January 29, 2003, Progress Energy filed a separate application-declaration in SEC File No. 70-10115 (Sale Application) to request approval for such sale. Accordingly, Progress Energy no longer seeks to retain Eastern NCNG as an additional public-utility subsidiary.
Generally, Applicants request authorization for: (1) Progress Energy to acquire the common stock of Eastern NCNG solely for the purpose of facilitating the sale of Eastern NCNG to Piedmont; (2) Progress Energy to sell to Piedmont all of the issued and outstanding common stock of North Carolina Natural Gas Corporation ("NCNG") and its 50% share of the common stock of Eastern NCNG and preferred stock and other rights and interests in Eastern NCNG; and (3) Piedmont requests an order under section 3(a)(2) of the Act exempting it and its subsidiaries from all provisions of the Act, except section 9(a)(2).
B. The Progress Energy System
Progress Energy directly or indirectly owns all of the issued and outstanding common stock of two electric utility subsidiary companies, Carolina Power & Light Company ("CP&L") and Florida Power Corporation ("Florida Power"). CP&L generates, transmits, purchases and sells electricity in parts of North Carolina and South Carolina. Florida Power generates, transmits, purchases and sells electricity in parts of Florida. Together, CP&L and Florida Power provide electric utility service to approximately 2.7 million retail, commercial and industrial customers in an area having a population of more than 9 million people.
Progress Energy also owns all of the issued and outstanding common stock of NCNG, a gas utility company that serves approximately 176,000 residential, commercial, industrial and municipal customers primarily in eastern and south central North Carolina. NCNG's facilities include more than 1,000 miles of transmission pipeline and more than 2,900 miles of distribution mains.
NCNG has three direct, wholly-owned, non-utility subsidiaries: Cape Fear Energy Corporation ("Cape Fear"), which 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, but is now inactive; NCNG Cardinal Pipeline Investment Corporation, which holds a 5% membership interest in Cardinal Pipeline Company, LLC, an intrastate pipeline; and NCNG Pine Needle Investment Corporation, which holds a 5% membership interest in Pine Needle LNG Company, LLC, which owns a liquefied natural gas project in North Carolina.4
Progress Energy also owns 50% of the issued and outstanding common stock and 100% of the Series A preferred stock of Eastern NCNG, a North Carolina company that was formed in 2001 to construct a new natural gas distribution system in 14 counties in eastern North Carolina that were previously not being served with natural gas.5 Albermarle Pamlico Economic Development Corporation ("APEC"), a North Carolina nonprofit corporation created to encourage infrastructure and economic development in eastern North Carolina, owns the remaining 50% of Eastern NCNG's issued and outstanding common stock.6 Eastern NCNG is currently engaged in constructing a "greenfield" natural gas transmission and distribution system in eastern North Carolina.
Eastern NCNG commenced deliveries of gas to customers in July 2002. Eastern NCNG became a "gas utility company" within the meaning of section 2(a)(4) of the Act at such time as it commenced deliveries of natural gas.
The current estimated cost of constructing the Eastern NCNG gas transmission and distribution system is $210.2 million. The principal source of funds required for construction of the Eastern NCNG gas transmission and distribution system will be the state bond package. Progress Energy funded 100% of the economic portion of each phase of the project (i.e., the portion not funded through the state bond package) through the purchase of 500 shares of common stock of Eastern NCNG at a price of $1.00 per share, for a total of $500, and 500 shares of Series A Preferred Stock of Eastern NCNG at a price of $44,200 per share in cash for a total of $22,100,000. Progress Energy's equity investment was required to be made on a phase-by-phase basis after the state bond funds had been exhausted. Progress Energy had invested a total of $7.676 million in the Series A preferred stock of Eastern NCNG as of March 31, 2003. Progress Energy has also provided additional funding to Eastern NCNG in the form of non-interest bearing open account cash advances.
Through its other direct and indirect non-utility subsidiaries, Progress Energy is engaged in development, construction, ownership and operation of "exempt wholesale generators" ("EWGs"), coal mining and coal transportation and handling, synthetic fuels production from coal, natural gas exploration, production, gathering and processing, energy management services, and other energy-related or exempt activities.
For the twelve months ended December 31, 2002, Progress Energy had total operating revenues of $7,945,120,000, of which $6,600,689,000 (83.08%) were derived from electric utility operations and $1,344,431,000 (16.92%) from other, unregulated, businesses, including sales of electricity by Progress Energy's exempt wholesale generator subsidiaries. At December 31, 2002, Progress Energy had total consolidated assets of $21,352,704,000, including net utility plant of $10,656,234,000. (As of December 31, 2002, NCNG's results of operations and assets and liabilities were reported as "discontinued operations" and, therefore, are not included in Progress Energy's year-end consolidated operating revenues and utility plant accounts.)
C. The Piedmont System
Piedmont, a North Carolina corporation, is a gas utility company that is engaged in the distribution of natural gas to 740,000 residential, commercial and industrial customers in parts of North Carolina, South Carolina and Tennessee.
Piedmont's utility properties include approximately 670 miles of lateral pipelines that connect Piedmont's distribution systems with the transmission systems of its pipeline suppliers, and approximately 20,500 miles of distribution mains. Piedmont holds firm transportation capacity on the Transco system, which delivers most of the gas Piedmont requires, as well as on the Columbia Gas, Tennessee Gas Pipeline Co., Texas Eastern Transmission Corp., and Columbia Gulf Transmission systems. Piedmont is subject to regulation as to rates, service and safety standards, accounting and other matters by the North Carolina Utilities Commission ("NCUC"), the Public Service Commission of South Carolina and the Tennessee Regulatory Authority.
Piedmont has three direct, wholly-owned, non-utility subsidiaries: Tennessee Gas Company, which is inactive; Piedmont Greenbrier Pipeline Company, LLC, a 33% member of Greenbrier Pipeline Company, LLC, which is currently seeking approval from the Federal Energy Regulatory Commission ("FERC") to construct and operate a 280-mile interstate pipeline linking multiple gas supply basins and storage facilities in the Southeast; and Piedmont Energy Partners, Inc. ("Piedmont Partners"), a non-utility holding company for several other non-utility subsidiaries of Piedmont. Piedmont Partners has four direct wholly-owned subsidiaries: Piedmont Intrastate Pipeline Company, which is a 16.45% member of Cardinal Pipeline Company, L.L.C., an intrastate pipeline that is regulated by the NCUC; Piedmont Interstate Pipeline Company, which is a 35% member of Pine Needle LNG Company, an interstate pipeline company that is regulated by the FERC; Piedmont Energy Company, which is a 30% member of SouthStar Energy Services LLC, a non-regulated retail gas marketer in the Southeast; and Piedmont Propane Company, which is a 20.69% member of US Propane, L.P., the sole general partner and a 26% limited partner of Heritage Propane Partners, L.P., the nation's fourth largest propane distribution company. Piedmont Partners also owns several other subsidiaries that are inactive.
For the fiscal year ended October 31, 2002, Piedmont reported on a consolidated basis total operating revenues of $832,028,000, net operating revenues (operating revenues less cost of gas) of $335,794,000, operating income of $90,127,000, and net income of $62,217,000 (including net income, reported on an equity basis, from non-utility businesses). At October 31, 2002, Piedmont had $1,445,088,000 in total consolidated assets, including net utility plant of $1,158,523,000.
II. Requested Authority
A. Acquisition of Eastern NCNG
Progress Energy requests authorization to acquire the common stock of Eastern NCNG solely for the purpose of facilitating the sale of Eastern NCNG to Piedmont.
B. Sale of NCNG and Eastern NCNG
Progress Energy and Piedmont entered into a Stock Purchase Agreement, dated October 16, 2002, under which Progress Energy agreed to sell and Piedmont agreed to purchase all of the issued and outstanding common stock of NCNG, $0.10 par value per share ("NCNG Shares"), and all of the shares of common stock and Series A preferred stock of Eastern NCNG that are held by Progress Energy, representing, respectively, 50% and 100% of the total number of shares of common stock and Series A preferred stock that are issued and outstanding (together, "ENCNG Shares"). In addition, Piedmont will assume all of Progress Energy's rights and obligations under a subscription letter, dated January 5, 2001, under which Progress Energy is committed to purchase from Eastern NCNG the remaining authorized but unissued shares of Series A preferred stock, and a shareholders' agreement, dated as of January 5, 2001, by and among Eastern NCNG, Progress Energy and APEC ("ENCNG Rights and Obligations"). Progress Energy requests approval under section 12(d) of the Act for the sale and transfer of the NCNG Shares, the ENCNG Shares and the ENCNG Rights and Obligations to Piedmont ("Transaction").
Under the Stock Purchase Agreement, Piedmont has agreed to pay $417,500,000 in cash for the NCNG Shares, plus or minus the working capital on the balance sheet of NCNG for the end of the most recent month immediately preceding the closing of the Transaction. In addition, Piedmont has agreed to pay $7,500,000 for the ENCNG Shares and the ENCNG Rights and Obligations.
Progress Energy states the sale of NCNG and Eastern NCNG will enable Progress Energy to strengthen its balance sheet and focus on its core electric utility business. Progress Energy states that the net proceeds of the Transaction will be used by Progress Energy to pay down debt. Assuming for balance sheet purposes that the Transaction had closed on December 31, 2002, the net proceeds of the Transaction on a pro forma basis (i.e., the aggregate purchase price less working capital adjustment, current income taxes and Transaction expenses) are estimated at $373.3 million. After application of the net proceeds to retire debt, Progress Energy's common equity as a percentage of consolidated capitalization would have increased from 38.2% to 39.0%.
C. Piedmont's Exemption
Piedmont states that, immediately following the purchase of the NCNG Shares; it will cause NCNG to be merged with and into Piedmont, with Piedmont as the surviving corporation. Piedmont will acquire and hold Eastern NCNG as a 50%-owned subsidiary company and will therefore become a holding company within the meaning of section 2(a)(7)(A) of the Act with respect to Eastern NCNG. Accordingly, Piedmont requests that the Commission issue an order under section 3(a)(2) of the Act exempting Piedmont and its subsidiary companies as such from all provisions of the Act, except section 9(a)(2). Piedmont states that, following the Transaction, Piedmont will remain predominantly a public-utility company whose operations will be confined to North Carolina, its state of incorporation, and South Carolina and Tennessee, which are contiguous to North Carolina.
Sections 9(a) and 10 of the Act are applicable to Progress Energy's acquisition of Eastern NCNG. Section 12(d) and rule 44 are applicable to Progress Energy's sale of NCNG and Eastern NCNG. Section 3(a)(2) is applicable to Piedmont's request for an exemption. Rule 54 is also applicable to the proposed transactions.
A. Progress Energy's Acquisition of Eastern NCNG
The acquisition of securities of Eastern NCNG by Progress Energy is subject to prior approval under sections 9(a) and 10 of the Act.7 Inasmuch as Progress Energy has agreed to sell its interest in Eastern NCNG to Piedmont, Progress Energy submits that it is unnecessary for the Commission to make any findings under section 10(b) or section 10(c) (including by reference section 11(b)(1)) of the Act.
B. Progress Energy's Sale of NCNG and Eastern NCNG
Section 12(d) of the Act makes it unlawful for a registered holding company:
Rule 44 requires the filing of a declaration in connection with a sale of utility securities or assets by a registered holding company.
Progress Energy engaged Salomon Smith Barney ("SSB") to act as its financial advisor in connection with the sale of NCNG and Eastern NCNG. The purchase price for the NCNG Shares ($417,500,000 before adjustment) is approximately 107% of NCNG's net utility plant and is deemed by Progress Energy's management to be adequate in light of current market conditions in the utility industry, the all-cash nature of the transaction, and other factors. As additional support for the adequacy of the purchase price, Progress Energy's board of directors obtained a fairness opinion from SSB to the effect that, based on certain information described therein (including NCNG's financial condition and historical and projected earnings, analysis of financial, stock market and other publicly-available information relating to other companies whose operations SSB considered relevant in evaluating those of NCNG, and consideration of the financial terms of other recent transactions, to the extent publicly available, considered by SSB to be relevant in evaluating the Transaction), the cash consideration to be received by Progress Energy for the NCNG Shares "is fair, from a financial point of view, to Progress."
The purchase price for the ENCNG Shares and the ENCNG Rights and Obligations is approximately equal to Progress Energy's current investment in Eastern NCNG. Eastern NCNG, as described above, is developing and constructing a new gas distribution system. At the time the Transaction was announced, Eastern NCNG had just recently commenced operations. Thus, unlike NCNG, it had virtually no operating history on which to base estimates of fair price. Moreover, in a physical sense, the Eastern NCNG system is simply an expansion of the much larger NCNG system. Given these factors, it is unlikely that there would be active price competition for Eastern NCNG if offered on a stand-alone basis.
Progress Energy estimates that fees, commissions and expenses paid in connection with the proposed Transaction will not exceed $4,500,000, or approximately 1% of the total consideration to be received. Progress Energy submits that there is no basis for the Commission to find that such fees, commissions and expenses are unreasonable given the size and complexity of the Transaction and the multiple regulatory filings in connection with the transaction.
Accordingly, based on the complete record before it, the Commission finds that the sale of Eastern NCNG and NCNG is permissible under section 12(d) of the Act and that no adverse findings are necessary.
C. Piedmont's Exemption
Section 3(a) of the Act, in pertinent part, provides that the Commission:
Piedmont is a gas utility company that operates through divisions in three states. Following the Transaction, Piedmont's sole public-utility subsidiary will be Eastern NCNG. Taking into account its 50% common stock interest in Eastern NCNG, Piedmont and its subsidiary companies, will be entitled to an exemption under Section 3(a)(2) of the Act because Piedmont will remain "predominantly" a public-utility company whose operations as such will be confined to North Carolina, its state of incorporation, and South Carolina and Tennessee, which are contiguous to North Carolina.
By its terms section 3(a)(2) has no specific numerical test to determine when a company is "predominantly" a utility rather than a holding company. However, in making a determination whether an applicant for exemption under section 3(a)(2) is "predominantly" an operating utility, the Commission has historically compared the size of utility operations of the holding company, as a separate entity, to the size of the utility operations of its subsidiaries, with the greatest emphasis being placed on the relative gross revenues of the companies in question.8 Other indicators of relative size have also been considered (i.e., operating income and utility assets).9
The Eastern NCNG system is being constructed in seven phases, with completion expected in late 2004. Most of the funds required to construct the Eastern NCNG system were obtained from the State of North Carolina pursuant to a bond fund established for development of natural gas infrastructure in North Carolina. Eastern NCNG projects that, by 2005 (the first full year of operation after completion of construction), it will have gross operating revenues of $7,825,000, based upon the projected customer numbers and volumetric deliveries that were included in Eastern NCNG's application to the NCUC for the state bond funds, and assumed gas cost of $4.75 per decatherm in the summer and $5.50 per decatherm in the winter. Based on these projections, Eastern NCNG's projected gross operating revenues in 2005 will represent about 0.7% of the combined gross operating revenues of Piedmont and NCNG ($1,133,148,000) for their respective 2002 fiscal years.10 This gross-to-gross revenues percentage is well within the range that the Commission has found acceptable in Houston Industries and earlier cases.11
Moreover, Applicants assert, there is no basis for the Commission to conclude that granting Piedmont an exemption under section 3(a)(2) of the Act would be "detrimental to the public interest or interest of investors and consumers." Applicants note that Piedmont and Eastern NCNG will both be subject to extensive regulation by the NCUC with respect to rates, service and safety standards, securities issuances, accounting and other matters. Thus, the grant of an exemption to Piedmont will not create any gap in effective regulation of Piedmont and Eastern NCNG.
Accordingly, the Commission finds that the standards of section 3(a)(2) are satisfied with respect to Piedmont and that the requested exemption should be granted.
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 March 31, 2003, Progress Energy's aggregate investment in EWGs is $1.283 billion, or about 61.1% of Progress Energy's consolidated retained earnings for the four quarters ended March 31, 2003 ($2.102 billion).12 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.13 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 has increased.14 With regard to earnings from EWGs, certificates filed under rule 24 indicate that Progress Energy's EWG investments continue to contribute positively to consolidated earnings. Moreover, the proposed Transaction will enable Progress Energy to retire debt and improve common equity as a percentage of consolidated capitalization.
In addition, Progress Energy states that it is in compliance and will continue to comply with the other provisions of rule 53(a) and (b).
The Commission has examined the Acquisition and Sale Applications 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 based on the complete record before us.
Applicants state that the NCUC has authorized the acquisition by Progress Energy of stock in Eastern NCNG and related transactions. In addition, Applicants state that the Transaction (as well as the merger of NCNG into Piedmont) has been approved by the NCUC. Progress Energy and Piedmont have also filed pre-merger notification statements with the Department of Justice and the Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the statutory waiting period has expired. Applicants state that no other state commission and no other federal commission, other than this commission, has jurisdiction over the proposed transactions.
Applicants state that fees and expenses in connection with the Acquisition Application will be approximately $25,000. In addition the fees, commissions and expenses paid or incurred by Progress Energy in connection with the Sale Application and Transaction are estimated at not more than $4,500,000, including approximately $3,500,000 in investment banking fees and $1,000,000 in outside legal fees.
Due notice of the filing of the application 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 Acquisition and Sale Applications, as amended, be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
By the Commission.
1 Holding Co. Act Release No. 27531.
2 Holding Co. Act Release No. 27661.
3 As originally filed, the Application also sought authority for Progress Energy to provide services and certain financing to Eastern NCNG. Because Progress Energy no longer seeks to retain Eastern NCNG, those requests have been withdrawn.
4 Prior to the proposed sale of NCNG to Piedmont, the common stock of Cape Fear will be transferred by NCNG to Progress Energy or another non-utility subsidiary of Progress Energy. The other two companies will remain as subsidiaries of NCNG.
5 The 14 counties are Dare, Currituck, Camden, Pasquotank, Perquimans, Chowan, Gates, Washington, Hyde, Tyrrell, Pamlico, Jones, Carteret and Pender. These counties historically have not been able to obtain gas service because of the small population and the resulting economic infeasibility of providing service. The North Carolina General Assembly enacted the Clean Water and Natural Gas Critical Needs Act of 1998, which provides for the issuance of $200 million of general obligation bonds of the state for the purpose of providing grants, loans or other financing for the cost of constructing natural gas facilities into unserved areas of the state.
6 APEC was organized by the 14 North Carolina counties under the North Carolina Nonprofit Corporation Act, N.C. Gen. Stat. §55A-1-01, et seq. (2000).
7 Section 9(a)(1) in pertinent part requires prior approval under the standards of section 10 for (1) a direct or indirect acquisition of securities or utility assets by a registered holding company and (2) for the direct or indirect acquisition by any person of any public-utility company if such person is an affiliate or such company and of any other public-utility company, or will by virtue of such acquisition become such an affiliate. Section 2(a)(11)(A) defines an "affiliate" to mean "any person that directly or indirectly owns, control, or holds with power to vote, 5 per centum or more of the outstanding voting securities of such specified company." Progress Energy is in violation of section 9(a) of the Act due to the failure to secure authorization for the acquisition prior to the commencement of operations by Eastern NCNG. However, such violation is not a bar to the Commission's approval going forward. See Public Service Company of Oklahoma, 45 S.E.C. 878 (1975), and cases cited therein in n.14.
8 See Houston Industries, Incorporated, et al., 65 S.E.C. 83 (1997), and cases cited therein in n.18.
10 Gross operating revenues of Piedmont for the fiscal year ended October 31, 2002 were $832,028,000 and gross operating revenues of NCNG for the fiscal year ended December 31, 2002 were $301,120,000.
11 In Houston Industries, the gross revenues of the acquiring entity, Houston Industries, Inc., was approximately twice as large as the entity being acquired, NorAm Energy Corp.
12 Progress Energy currently does not hold any interest in a foreign utility company ("FUCO").
13 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. See Holding Co. Act Release No. 27551.
14 At March 31, 2003, Progress Energy's consolidated capitalization consisted of 38.2% common equity, .5% preferred stock, 58.5% long-term debt, and 2.8% short-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).