(Release No. 35-27728; 70-10130)
Progress Energy, Inc., et. al.
Order Authorizing Various Financing Transactions Through September 30, 2006 and Reservation of Jurisdiction
September 29, 2003
Progress Energy, Inc. ("Progress Energy"), a registered holding company; Progress Energy's utility subsidiaries: Carolina Power & Light Company ("CP&L"), Florida Power Corporation ("FPC"), and North Carolina Natural Gas Corporation ("NCNG"); and Progress Energy's nonutility subsidiaries: Florida Progress Corporation ("Florida Progress"), Progress Energy Service Company, LLC ("Progress Service"), PV Holdings, Inc. ("PV Holdings"), Progress Ventures, Inc. ("Progress Ventures"), Strategic Resource Solutions Corp. ("SRS"), Progress Energy Solutions, Inc. ("Progress Solutions"), Progress Real Estate Holdings, Inc. ("Progress Real Estate"), CaroFund, Inc., CaroHome, LLC, Capitan Corporation, Caronet, Inc. ("Caronet"), CaroFinancial, Inc., NCNG Cardinal Pipeline Investment Corporation, NCNG Pine Needle Investment Corporation, Cape Fear Energy Corp., Progress Capital Holdings, Inc. ("Progress Capital"), Progress Fuels Corporation ("Progress Fuels"), Progress Telecommunications Corporation ("Progress Telecommunications"), FPC Del, Inc. ("FPC Del"), and Florida Progress Funding Corporation ("Progress Funding") each located in Raleigh, North Carolina, except for FPC, Florida Progress, Progress Capital, FPC Del, and Progress Funding, which are located in St. Petersburg, Florida, have filed with the Securities and Exchange Commission ("Commission") an application-declaration, as amended ("Application"), under sections 6(a), 7, 9(a), 10, and 12(b) and (c) of the Public Utility Holding Company Act of 1935, as amended (the "Act") and rules 26(c), 42, 43, 45, 46, 53, and 54 under the Act. CP&L, FPC and NCNG are referred to collectively as the "Utility Subsidiaries." The term "Nonutility Subsidiaries" includes the nonutility subsidiaries named above and their respective subsidiaries, as well as any other nonutility company later acquired or formed, directly or indirectly, by Progress Energy under rule 58 or in accordance with an order of the Commission. The Utility Subsidiaries and Nonutility Subsidiaries are referred to collectively as the "Subsidiaries." Progress Energy and the Subsidiaries are referred to collectively as the "Applicants."
Applicants request authority to engage in various financing transactions, credit support arrangements, and other related proposals, as more fully discussed below, commencing on the effective date of an order issued in this proceeding and ending September 30, 2006 ("Authorization Period"). The Commission issued a notice of the filing of the Application on August 22, 2003 (Holding Company Act Release No. 27716). No request for hearing was received.
In a separate proceeding, Progress Energy has received Commission authorization to sell all of the issued and outstanding common stock of NCNG, and NCNG's interest in Eastern North Carolina Natural Gas Company ("Eastern NCNG") (Holding Company Act Release No. 27718) to Piedmont Natural Gas Company. Applicants state that closing on the sale of NCNG and Eastern NCNG is expected to occur on or about September 30, 2003. The order issued in this proceeding shall apply to NCNG only for so long as NCNG is a subsidiary of Progress Energy.
By order dated December 12, 2000 in File No. 70-9659 (Holding Co. Act Release No. 27297), as supplemented and modified by orders dated September 20, 2001 (Holding Co. Act Release No. 27440), March 15, 2002 (Holding Co. Act Release No. 27500), April 18, 2002 (Holding Co. Act Release No. 27522), and May 5, 2003 (Holding Co. Act Release No. 27673) (collectively, the "December 2000 Order"), the Commission authorized Progress Energy and its Subsidiaries to engage in a program of external financing, intrasystem financing, and other related transactions from time to time through September 30, 2003.
Under the December 2000 Order, the Commission authorized, among other things:
In addition to the financing and investment activities authorized above, the Applicants are also authorized under to the December 2000 Order to engage in the following transactions for a period of time that is not limited by the authorization period under the December 2000 Order:
Finally, in accordance with an order dated July 17, 2002 (Holding Co. Act Release No. 27551) the Commission authorized Progress Energy to increase its "aggregate investment" as defined under rule 53(a) in exempt wholesale generators ("EWGs") to $4 billion using the proceeds of financings and guarantees previously authorized, or authorized in the future. The Commission reserved jurisdiction over the use of the proceeds of authorized financings to invest in foreign utility companies ("FUCOs").
Applicants state that the authority sought in the current Application will supersede and replace the current authorization of the Applicants under the December 2000 Order to engage in the financing activities and related transaction described above in subsections (i) through and including (xv). The authorizations for the transactions described in paragraphs (xvi) through and including (xix) will remain unchanged. Progress Energy and NCNG are requesting a modification of their authority to pay dividends out of capital and unearned surplus (as set forth in paragraph (xx) above) in order to reflect changes to purchase accounting rules that became effective after the December 2000 Order.
II. Financing Conditions
Applicants request authority to engage in various financing transactions during the Authorization Period. Applicants state that the following general terms will be applicable, where appropriate, to the proposed financing activities requested by the Applicants:
A. Effective Cost of Money
The effective cost of capital on unsecured notes and debentures and other forms of unsecured long-term debt securities ("Long-term Debt"), preferred stock or other types of preferred securities (including specifically trust preferred securities or monthly income preferred securities) (together, "Preferred Securities"), equity-linked securities ("Equity-Linked Securities), and commercial paper, unsecured promissory notes and other forms of unsecured indebtedness having maturities of less than one year ("Short-term Debt") will not exceed competitive market rates available at the time of issuance for securities having the same or reasonably similar terms and conditions issued by similar companies of reasonably comparable credit quality; provided that in no event will the effective cost of capital (1) on any series of Long-term Debt exceed 500 basis points over a U.S. Treasury security having a remaining term equal to the term of the series, (2) on any series of Preferred Securities or Equity-Linked Securities exceed 600 basis points over a U.S. Treasury security having a remaining term equal to the term of the series, and (3) on Short-term Debt exceed 500 basis points over the London Interbank Offered Rate for maturities of less than one year.
The maturity date of any Long-term Debt will not exceed 50 years after issuance. Preferred Securities and Equity-Linked Securities will be redeemed no later than 50 years after the issuance, unless converted into shares of Common Stock, except that Preferred Stock issued directly by Progress Energy may be perpetual in duration.
C. Issuance Expenses
The underwriting fees, commissions or other similar remuneration paid in connection with the non-competitive issue, sale or distribution of securities under the Application will not exceed the greater of (1) 5% of the principal or total amount of the securities being issued or (2) issuance expenses that are generally paid at the time of the pricing for sales of the particular issuance, having the same or reasonably similar terms and conditions issued by similar companies of reasonably comparable credit quality.
D. Common Equity Ratio
At all times during the Authorization Period, Progress Energy and each Utility Subsidiary will maintain common equity of at least 30% of its consolidated capitalization (common equity, preferred stock, long-term debt and short-term debt); provided that Progress Energy will in any event be authorized to issue Common Stock (including under the Stock Plans) to the extent authorized by Commission order.
E. Investment Grade Ratings
Applicants further represent that, except for securities issued for the purpose of funding Money Pool operations and Common Stock, no guarantees or other securities, may be issued in reliance upon the authorization that may be granted by the Commission in accordance with the Application, unless (1) the security to be issued, if rated, is rated investment grade; (2) all outstanding securities of the issuer that are rated are rated investment grade; and (3) all outstanding securities of Progress Energy that are rated are rated investment grade (collectively, the "Investment Grade Ratings Criteria"). For purposes of this provision, a security will be deemed to be rated "investment grade" if it is rated investment grade by at least one nationally recognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of rule 15c3-1 under the Securities Exchange Act of 1934 ("Recognized Rating Agency"). Applicants request that the Commission reserve jurisdiction over the issuance of any securities that are rated below investment grade. Applicants further request that the Commission reserve jurisdiction over the issuance of any guarantee or other securities at any time that the Investment Grade Ratings Criteria are not satisfied.
F. Use of Proceeds
The proceeds from the sale of securities in external financing transactions will be used for general corporate purposes including (1) financing, in part, of the capital expenditures of Subsidiaries, (2) financing working capital requirements of Progress Energy and its Subsidiaries, (3) the acquisition, retirement or redemption under rule 42 of securities previously issued by Progress Energy or its Subsidiaries or as otherwise authorized by Commission, (4) direct or indirect investments in companies authorized under the Act or by rule, including investments in EWGs and "energy-related companies" under rule 58, and (5) other lawful purposes. The Applicants represent that no financing proceeds will be used to acquire the securities of a new subsidiary unless the acquisition is consummated in accordance with an order of the Commission or an available exemption under the Act.
III. Progress Energy External Financing
Progress Energy requests authority to increase its capitalization by issuing and selling from time to time during the Authorization Period, directly or indirectly through one or more Financing Subsidiaries: (1) additional shares of Common Stock and/or options, warrants, forward equity purchase contracts, or other rights that are exercisable or exchangeable for or convertible into Common Stock, (2) Preferred Securities and Equity-Linked Securities, and (3) Long-term Debt, in an aggregate amount not to exceed $2.8 billion (excluding securities issued for purposes of refunding or replacing other outstanding long-term securities where Progress Energy's capitalization is not increased as a result) ("External Financing Limit"). In addition, Progress Energy requests authorization to issue and sell Short-term Debt in an aggregate principal amount at any time outstanding not to exceed $1.5 billion.
Progress Energy may issue and sell Common Stock (and/or options, warrants, forward equity purchase contracts, or other rights that are exercisable or exchangeable for or convertible into Common Stock), Preferred Securities, Equity-Linked Securities and Long-term Debt: (1) through underwriters, initial purchasers or dealers, (2) through agents, (3) directly to a limited number of purchasers or a single purchaser, or (4) directly to employees of Progress Energy or its Subsidiaries (or to trusts established for their benefit), shareholders, officers and directors under the Stock Plans. If underwriters are used, the securities will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The securities may be offered to the public either through underwriting syndicates (which may be represented by a managing underwriter or underwriters designated by Progress Energy) or directly by one or more underwriters acting alone, or may be sold directly by Progress Energy or through agents designated by Progress Energy from time to time. If dealers are utilized, Progress Energy will sell the securities to the dealers, as principals. Any dealer may then resell the securities to the public at varying prices to be determined by the dealer at the time of resale. If Common Stock is being sold in an underwritten offering, Progress Energy may grant the underwriters a "green shoe" option permitting the purchase from Progress Energy at the same price additional shares then being offered solely for the purpose of covering over-allotments.
A. Common Stock
Progress Energy proposes to issue and sell Common Stock (and/or options, warrants, forward equity purchase contracts or other rights exercisable or exchangeable for or convertible into Common Stock) in accordance with underwriting agreements of a type generally standard in the industry. Public distributions may be made through private negotiation with underwriters, dealers or agents or effected through competitive bidding among underwriters. In addition, sales may be made through private placements or other non-public offerings to one or more persons. All sales will be at rates or prices and under conditions negotiated or based upon, or otherwise determined by, competitive capital markets.
Progress Energy also proposes to issue Common Stock in public or privately-negotiated transactions as consideration for the equity securities or assets of other companies, provided that the acquisition of any equity securities or assets has been authorized by the Commission or is exempt under the Act or the rules issued under the Act. Progress Energy may use original issue shares of Common Stock in transactions or use Common Stock purchased on the open market for that purpose.
The ability to offer Common Stock as consideration in connection with an acquisition may make the transaction more economical for Progress Energy as well as for the seller of the business being acquired. If original issue shares of Common Stock are used in that manner, the value of the shares would be based upon the closing price on the day prior to the date of issuance (or, if appropriate, the date of a binding contract providing for the issuance of the Common Stock) or based upon average high and low prices for a period as negotiated by the parties and counted against the proposed External Financing Limit.
B. Preferred Securities
Applicants request authorization to issue Preferred Securities in one or more series with rights, preferences and priorities as may be designated in the document creating each series, as determined by Progress Energy's Board of Directors. Dividends or distributions on the securities will be made periodically and to the extent funds are legally available for that purpose, but may be made subject to terms which allow the issuer to defer dividend payments for specified periods. Progress Energy may also issue and sell Equity-Linked Securities, typically in the form of stock purchase units, which combine a security with a fixed obligation (e.g., preferred stock or debt) with a stock purchase contract that is exercisable (either mandatorily or at the option of the holder) within a relatively short period (e.g., three to six years after issuance).C. Long-Term Debt
Applicants request authority to issue Long-term Debt directly by Progress Energy or indirectly through one or more Financing Subsidiaries in the form of notes, medium-term notes or debentures under one or more indentures, or long-term indebtedness under agreements with banks or other institutional lenders. Each series of Long-term Debt would have a designation, aggregate principal amount, maturity, interest rate(s) or methods of determining the same, terms of payment of interest, redemption provisions, sinking fund terms and other terms and conditions as Progress Energy may determine at the time of issuance. Any Long-term Debt (1) may be convertible into any other securities of Progress Energy, (2) will have maturities ranging from one to 50 years, (3) may be subject to optional and/or mandatory redemption, in whole or in part, at par or at various premiums above the principal amount, (4) may be entitled to mandatory or optional sinking fund provisions, (5) may provide for reset of the coupon under a remarketing arrangement, (6) may be subject to tender or the obligation of the issuer to repurchase at the election of the holder or upon the occurrence of a specified event, (7) may be called from existing investors by a third party, and (8) may be entitled to the benefit of affirmative or negative financial or other covenants.
D. Short-Term Debt
Progress Energy proposes to issue and sell from time to time Short-term Debt in an aggregate principal amount at any time outstanding not to exceed $1.5 billion. Specifically, Progress Energy may sell commercial paper, from time to time, in established domestic or European commercial paper markets. Such commercial paper would typically be sold to dealers at the discount rate per annum prevailing at the date of issuance for commercial paper of comparable quality and maturities sold to commercial paper dealers generally. It is expected that the dealers acquiring commercial paper from Progress Energy will reoffer the paper at a discount to corporate, institutional and, with respect to European commercial paper, individual investors. It is anticipated that Progress Energy's commercial paper will be reoffered to investors, including commercial banks, insurance companies, pension funds, investment trusts, foundations, colleges and universities, finance companies and nonfinancial corporations. Progress Energy also proposes to maintain and renew from time to time committed bank lines of credit, provided that only the principal amount of any actual borrowings under the lines of credit will be counted against the proposed limit on Short-term Debt set forth above. Progress Energy may also engage in other types of short-term financing, including borrowings under uncommitted lines, generally available to borrowers with comparable credit ratings as it may deem appropriate in light of its needs and market conditions at the time of issuance.
E. Stock Plans
Progress Energy requests authorization to issue shares of its Common Stock, and/or options, warrants, stock appreciation rights, units, hypothetical shares and similar securities for purposes of delivery under its Stock Plans, as they may be amended or extended, or similar plans or plan funding arrangements that may be adopted in the future. The net proceeds of any new issuances of shares of Common Stock by Progress Energy will be counted toward the external Financing Limit. Progress Energy also requests authorization to purchase or cause to be purchased on the open market up to 11 million shares of Common Stock for purposes of delivery under its Stock Plans.
IV. Utility Subsidiary Financing
CP&L and NCNG request authorization to issue and sell the following securities during the Authorization Period:
A. Short-term Debt of CP&L
CP&L requests authorization to issue and sell from time to time during the Authorization Period Short-term Debt in an aggregate principal amount outstanding at any one time not to exceed $1 billion. Subject to this limitation, CP&L would engage in short-term financing as it may deem appropriate in light of its needs and market conditions at the time of issuance. Short-term financing could include, without limitation, commercial paper sold in established domestic or European commercial paper markets in a manner similar to Progress Energy, bank lines and debt securities issued under its indentures and note programs.
B. Long-term Debt of NCNG
NCNG requests authorization (for so long as it shall remain a subsidiary of Progress Energy) to make direct borrowings from Progress Energy in an amount which, when added to borrowings by NCNG under the Utility Money Pool shall not exceed $750 million. The interest rate and maturity on any note evidencing direct borrowings from Progress Energy will be designed to parallel the effective cost of capital of Progress Energy. The maturity on any note issued to Progress Energy will not exceed 50 years from the date of issuance.
V. Financing by Nonutility Subsidiaries
If a Nonutility Subsidiary that is not wholly-owned engages in activities related to the development and expansion of energy, transportation, telecommunications or other functionally-related, nonutility businesses, authority is requested for Progress Energy or a Nonutility Subsidiary, as the case may be, to make loans to the non-wholly owned subsidiaries at interest rates and maturities designed to provide a return to the lendor of not less than its effective cost of capital. The borrower will not sell any services to any associate Nonutility Subsidiary unless the associate Nonutility Subsidiary falls within one of the categories of companies to which goods and services may be sold on a basis other than "at cost" under the terms of the December 2000 Order. Furthermore, if any loans are made, Progress Energy will include in the next certificate filed under rule 24 in this proceeding substantially the same information as that required on Form U-6B-2 with respect to the transaction.
A. Progress Energy Guarantees
Progress Energy requests authorization to enter into guarantees, obtain letters of credit, enter into expense agreements or otherwise provide credit support (collectively, "Progress Guarantees") with respect to the obligations of any Subsidiary as may be appropriate to enable the Subsidiary to carry on in the ordinary course of its business, in an aggregate principal amount not to exceed $3 billion outstanding at any one time; provided however, that the amount of any Progress Guarantees in respect of obligations of any Subsidiaries shall also be subject to the limitations of rule 53(a)(1) or rule 58(a)(1), as applicable.
Progress Energy proposes to charge each Subsidiary a fee for each guarantee provided on its behalf that is not greater than the cost, if any, of obtaining the liquidity necessary to perform the guarantee (for example, bank line commitment fees or letter of credit fees, plus other transactional expenses) for the period of time the guarantee remains outstanding.
The debt of a Financing Subsidiary guaranteed by Progress Energy will comply with the External Financing Limit. However, in order to avoid double counting, the amount of any Progress Guarantee issued with respect to securities issued by a Financing Subsidiary will not be counted against the proposed limit on Progress Guarantees.
Progress Guarantees may, in some cases, be provided to support obligations of Subsidiaries that are not readily susceptible of exact quantification or that may be subject to varying quantification. In that event, Progress Energy will determine the exposure under the guarantee for purposes of measuring compliance with the proposed limit on Progress Guarantees set forth above by appropriate means, including estimation of exposure based on loss experience or projected potential payment amounts. Any estimates will be made in accordance with generally accepted accounting principles, and will be reevaluated periodically.
B. Nonutility Subsidiary Guarantees
In addition to guarantees that may be provided by Progress Energy, Nonutility Subsidiaries request authority to provide to other Nonutility Subsidiaries guarantees and other forms of credit support ("Nonutility Guarantees") in an aggregate principal amount not to exceed $500 million outstanding at any one time, in addition to any guarantees and other forms of credit support that are exempt under rule 45(b) and rule 52(b); provided however, that the amount of Nonutility Guarantees in respect of obligations of any Subsidiary that is an "energy-related company" as that term is defined under rule 58 shall remain subject to the limitations of rule 58(a)(1). The Nonutility Subsidiary providing any credit support may charge its associate company a fee for each guarantee provided on its behalf determined in the same manner as specified above.
C. Guarantees Issued by Florida Progress and Its Nonutility Subsidiaries
Florida Progress has in the past provided guarantees with respect to certain long-term and short-term indebtedness of Progress Capital and preferred securities issued by Progress Funding (via a special purpose trust), the proceeds of which are used to provide financing for Florida Progress's other subsidiaries. In addition, Florida Progress and its Nonutility Subsidiaries have provided guarantees and/or other forms of credit support to third parties on behalf of Florida Progress's Nonutility Subsidiaries in the form of standby letters of credit, surety bonds, and guarantees of performance under leases and other agreements. Florida Progress and its Nonutility Subsidiaries request authorization to maintain in effect all of the outstanding guarantees and other forms of credit support described above, and to amend, renew, extend or replace the guarantees, as necessary. The aggregate amount of guarantees issued by Florida Progress and its Nonutility Subsidiaries as of June 30, 2003 is approximatley $630.1 million. Further, the Applicants request that the guarantees and other forms of credit support not count against the $500 million limit proposed above on future Nonutility Subsidiary Guarantees.
VII. Hedging Transactions
A. Interest Rate Hedges
Progress Energy, and to the extent not exempt under rule 52, the Subsidiaries, request authorization to enter into interest rate hedging transactions with respect to existing indebtedness ("Interest Rate Hedges"), subject to certain limitations and restrictions, in order to reduce or manage interest rate cost. Interest Rate Hedges would only be entered into with counterparties whose senior debt ratings, or the senior debt ratings of the parent companies of the counterparties, as published by Standard and Poor's Ratings Services, are equal to or greater than BBB, or an equivalent rating from a Recognized Rating Agency ("Approved Counterparties").
Interest Rate Hedges will involve the use of financial instruments commonly used in today's capital markets, such as interest rate swaps, caps, collars, floors, and structured notes (i.e., a debt instrument in which the principal and/or interest payments are indirectly linked to the value of an underlying asset or index), or transactions involving the purchase or sale, including short sales, of U.S. Treasury obligations. The transactions would be for fixed periods and stated notional amounts. In no case will the notional principal amount of any interest rate swap exceed that of the underlying debt instrument and related interest rate exposure. Thus the Applicants will not engage in speculative transactions. Fees, commissions and other amounts payable to the counterparty or exchange (excluding, however, the swap or option payments) in connection with an Interest Rate Hedge will not exceed those generally obtainable in competitive markets for parties of comparable credit quality.
B. Anticipatory Hedges
Progress Energy and the Subsidiaries request authorization to enter into interest rate hedging transactions with respect to anticipated debt offerings (the "Anticipatory Hedges"), subject to certain limitations and restrictions. Anticipatory Hedges would only be entered into with Approved Counterparties, and would be utilized to fix and/or limit the interest rate risk associated with any new issuance through (1) a forward sale of exchange-traded U.S. Treasury futures contracts, U.S. Treasury obligations and/or a forward swap (each a "Forward Sale"), (2) the purchase of put options on U.S. Treasury obligations (a "Put Options Purchase"), (3) a Put Options Purchase in combination with the sale of call options on U.S. Treasury obligations (a "Zero Cost Collar"), (4) transactions involving the purchase or sale, including short sales, of U.S. Treasury obligations, or (5) some combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or other derivative or cash transactions, including, but not limited to structured notes, caps and collars, appropriate for the Anticipatory Hedges.
Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades") with brokers through the opening of futures and/or options positions traded on the Chicago Board of Trade, the opening of over-the-counter positions with one or more counterparties ("Off-Exchange Trades"), or a combination of On-Exchange Trades and Off-Exchange Trades. Progress Energy or a Subsidiary will determine the optimal structure of each Anticipatory Hedge transaction at the time of execution. Progress Energy or a Subsidiary may decide to lock in interest rates and/or limit its exposure to interest rate increases.
The Applicants will comply with Statement of Financial Accounting Standard ("SFAS") 133 (Accounting for Derivative Instruments and Hedging Activities) and SFAS 138 (Accounting for Certain Derivative Instruments and Certain Hedging Activities) or other standards relating to accounting for derivative transactions as are adopted and implemented by the Financial Accounting Standards Board ("FASB"). The Applicants represent that each Interest Rate Hedge and each Anticipatory Hedge will qualify for hedge accounting treatment under the current FASB standards in effect and as determined as of the date the Interest Rate Hedge or Anticipatory Hedge is entered into. The Applicants will also comply with any future FASB financial disclosure requirements associated with hedging transactions.
VIII. Money Pools
Progress Energy and the Utility Subsidiaries request authorization to continue to maintain and fund the Utility Money Pool, and CP&L and NCNG also request authorization to make unsecured short-term borrowings from the Utility Money Pool. The Utility Subsidiaries request authorization to contribute surplus funds to the Utility Money Pool, and to lend and extend credit to (and acquire promissory notes from) one another through the Utility Money Pool. In addition, Progress Energy and the Nonutility Subsidiaries request authorization to continue to operate and fund the Nonutility Money Pool. The Nonutility Money Pool activities of all of the Nonutility Subsidiaries are exempt from the prior approval requirements of the Act under rule 52 to the extent not exempt by rule 45(b) and 52 (d), as applicable. Progress Energy is requesting authorization to contribute surplus funds and/or to lend and extend credit to the Utility Subsidiaries through the Utility Money Pool.
A. Utility Money Pool
Under the Utility Money Pool agreement, short-term funds are available from the following sources for short-term loans to the Utility Subsidiaries from time to time: (1) surplus funds in the treasuries of Utility Money Pool participants other than Progress Energy; (2) surplus funds in the treasury of Progress Energy (funds in clauses (1) and (2) being referred to as "Internal Funds"); and (3) proceeds from bank borrowings by Utility Money Pool participants or the sale of commercial paper by Progress Energy or the Utility Subsidiaries for loan to the Utility Money Pool (the "External Funds").
Funds are made available from sources, and in the order, as Progress Service, as administrator for the Utility Money Pool, may determine would result in a lower cost of borrowing, consistent with the individual borrowing needs and financial standing of the companies providing funds to the pool. The determination of whether a Utility Money Pool participant at any time has surplus funds to lend to the Utility Money Pool is made by the participant's chief financial officer or treasurer, or their designee, on the basis of cash flow projections and other relevant factors, and in the participant's sole discretion.
The cost of compensating balances, if any, and fees paid to banks to maintain credit lines and accounts by Utility Money Pool participants lending External Funds to the Utility Money Pool are initially paid by the participant maintaining the line. A portion of the costs--or all of the costs if a Utility Money Pool participant establishes a line of credit solely for purposes of lending any External Funds obtained into the Utility Money Pool-are retroactively allocated every month to companies borrowing the External Funds in proportion to each participant's estimated peak short-term borrowing requirement.
Borrowings by Utility Money Pool participants are made pro rata from each participant that lends funds to the Utility Money Pool, in the proportion that the total amount loaned by each lending company bears to the total amount then loaned through the Utility Money Pool. On any day when more than one fund source (e.g., if there are External Funds as well as Internal Funds), with different rates of interest, is used to fund loans through the Utility Money Pool, each borrower would borrow pro rata from each fund source in the Utility Money Pool in the same proportion that the amount of funds provided by that fund source bears to the total amount of short-term funds available to the Utility Money Pool. CP&L and NCNG (for so long as it remains a subsidiary of Progress Energy) each request authorization to borrow up to $400 million at any time outstanding under the Utility Money Pool. No loans through the Utility Money Pool may be made to, and no borrowings through the Utility Money Pool may be made by, Progress Energy.
If only Internal Funds make up the funds available in the Utility Money Pool, the interest rate applicable and payable to or by Utility Subsidiaries for all loans of Internal Funds would be equal to the rate for high-grade unsecured 30-day commercial paper sold through dealers by major corporations as quoted in The Wall Street Journal.
If only External Funds comprise the funds available in the Utility Money Pool, the interest rate applicable to loans of External Funds would be equal to the lending company's cost for the External Funds (or, if more than one Utility Money Pool participant had made available External Funds on that day, the applicable interest rate would be a composite rate equal to the weighted average of the cost incurred by the respective Utility Money Pool participants for the External Funds).
In cases where both Internal Funds and External Funds are concurrently borrowed through the Utility Money Pool, the rate applicable to all loans comprised of the "blended" funds would be a composite rate equal to the weighted average of (1) the cost of all Internal Funds contributed by Utility Money Pool participants (determined as set forth in the second-preceding paragraph above) and (2) the cost of all External Funds (determined as set forth in the immediately preceding paragraph above). In circumstances where Internal Funds and External Funds are available for loans through the Utility Money Pool, loans may be made exclusively from Internal Funds or External Funds, rather than from a "blend" of the funds, to the extent it is expected that the loans would result in a lower cost of borrowing.
Funds not required by the Utility Money Pool to make loans (with the exception of funds required to satisfy the Utility Money Pool's liquidity requirements) would ordinarily be invested in one or more short-term investments, including: (1) interest-bearing accounts with banks; (2) obligations issued or guaranteed by the U.S. government and/or its agencies and instrumentalities, including obligations under repurchase agreements; (3) obligations issued or guaranteed by any state or political subdivision thereof, provided that the obligations are rated not less than "A" by a Recognized Rating Agency; (4) commercial paper rated not less than "A-1" or "P-1" or their equivalent by a Recognized Rating Agency; (5) money market funds; (6) bank certificates of deposit; (7) Eurodollar funds; and (8) other investments as are permitted by section 9(c) of the Act and rule 40.
The interest and investment income earned on loans and investments of surplus funds is allocated among the participants in the Utility Money Pool in accordance with the proportion each participant's contribution bears to the total amount of funds in the Utility Money Pool and the cost of funds contributed to the Utility Money Pool by the participant. Each Applicant receiving a loan through the Utility Money Pool is required to repay the principal amount, together with interest accrued, on demand and in any event no later than one year after the date of the loan. All loans made through the Utility Money Pool may be prepaid by the borrower without premium or penalty.
B. Nonutility Money Pool
The Nonutility Money Pool is operated and funded in substantially the same manner as the Utility Money Pool, except that funds contributed by Progress Energy to the Money Pools are made available to the Utility Money Pool first and then to the Nonutility Money Pool. The manner of calculating interest on funds contributed to, and borrowings from, the Nonutility Money Pool is as described above under Utility Money Pools. No loans through the Nonutility Money Pool may be made to, and no borrowings through the Nonutility Money Pool may be made by, Progress Energy.
The current participants in the Nonutility Money Pool are Progress Energy, Progress Service, SRS, PV Holdings, Progress Ventures, and Progress Capital. It is proposed that the following additional Nonutility Subsidiaries be permitted to participate in the Nonutility Money Pool: Progress Real Estate, Progress Fuels, Progress Solutions, Progress Telecommunications, and Caronet. The Applicants request that the Commission reserve jurisdiction over the addition of any other existing or future Nonutility Subsidiaries as participants in the Nonutility Money Pool.
IX. Other Transactions
A. Financing Subsidiaries
The Applicants request authority to acquire, directly or indirectly, the equity securities of one or more Financing Subsidiaries created specifically for the purpose of facilitating the financing of the authorized and exempt activities (including exempt and authorized acquisitions) of Progress Energy and the Subsidiaries through the issuance of Long-term Debt or Preferred Securities to third parties. Any Financing Subsidiary organized in accordance with the authority granted by the Commission in this proceeding shall be organized only if, in management's opinion, the creation and utilization of the Financing Subsidiary will likely result in tax savings, increased access to capital markets and/or lower cost of capital to the parent company of the Financing Subsidiary.
Authorization also is requested for any Financing Subsidiary to dividend, loan or otherwise transfer the proceeds of a financing to, or as directed by, the Financing Subsidiary's parent company; provided however, that a Financing Subsidiary of a Utility Subsidiary will dividend, loan or otherwise transfer proceeds of a financing only to a Utility Subsidiary.
Progress Energy and its Subsidiaries request authorization to guarantee or enter into expense agreements in respect of the obligations of any Financing Subsidiaries that they organize, to the extent not otherwise exempt under rules 45(b)(7) and 52. The amount of any equity or long-term debt securities issued by any Financing Subsidiary shall be counted against any limitation on the amounts of similar types of securities that may be issued directly by the parent company of a Financing Subsidiary, as set forth in the Application or in any other application/declaration that may be filed in the future, to the extent that the securities are guaranteed by the parent company. In that case, however, the guaranty by the parent company would not also be counted against the limitations on Progress Guarantees or Nonutility Guarantees, as the case may be.
Progress Energy and, to the extent not exempt under rule 52, Subsidiaries also request authorization to issue their subordinated unsecured notes ("Subordinated Notes") to any Financing Subsidiary to evidence the loan of financing proceeds by a Financing Subsidiary to its parent company. The principal amount, maturity and interest rate on any Subordinated Notes will be designed to parallel the amount, maturity and interest or distribution rate on the securities issued by a Financing Subsidiary in respect of which the Subordinated Note is issued.
B. Investments in Energy-Related Assets
Progress Energy currently has authority to acquire or construct in one or more transactions from time to time nonutility energy assets in the United States, including, without limitation, natural gas production, gathering, processing, storage and transportation facilities and equipment, liquid oil reserves and storage facilities, and associated facilities (collectively, "Energy-Related Assets"), that are incidental to the energy marketing, brokering and trading operations of Progress Energy's subsidiaries and/or the equity securities of companies substantially all of whose physical properties consist of Energy-Related Assets, subject to an investment limitation of $1 billion ("Investment Limitation").
Progress Energy seeks to extend its authorization to invest in Energy-Related Assets (or in the equity securities of companies substantially all of whose assets consist of Energy-Related Assets), subject to the Investment Limitation. Such Energy-Related Assets (or equity securities of companies substantially all of whose assets consist of Energy-Related Assets) may be acquired for cash or in exchange for Common Stock or other securities of Progress Energy or a Nonutility Subsidiary of Progress Energy, or any combination of the foregoing.1 If Common Stock of Progress Energy is used as consideration in connection with any acquisition, its market value on the date of issuance will be counted against the proposed Investment Limitation. The stated amount or principal amount of any other securities issued as consideration in any transaction will also be counted against the Investment Limitation. Under no circumstances will any Nonutility Subsidiary acquire, directly or indirectly, any assets or properties the ownership or operation of which would cause the company to be considered an "electric utility company" or "gas utility company" as defined under the Act.
With reference to Section 10(f) of the Act, while Progress Energy does not anticipate that any state commission would have jurisdiction over a proposed acquisition of Energy-Related Assets, Progres Energy cannot provide definitive assurance to that effect. Accordingly, with a view to potential circumstances where a state commission may have jurisdiction over a proposed acquisition of Energy-Related Assets ("State-Jurisdictional Acquisitions"), Progress Energy requests that the Commission reserve jurisdiction over a proposed transaction solely in respect of any such State-Jurisdictional Acquisition, pending in each case: (1) receipt of the required state commission authorization and the filing of a copy as a supplement to the record in this proceeding, and (2) issuance of a supplemental order of the Commission authorizing the State-Jurisdictional Acquisition.
C. Payment of Dividends
1. By Progress Energy and NCNG
Progress Energy seeks authorization to declare and pay dividends on Common Stock and/or redeem or repurchase outstanding shares of Common Stock from time to time out of capital and unearned surplus, to the extent permitted under applicable corporate law and the terms of any applicable covenants in their respective financing documents, in an amount equal to (A) the sum of (1) CP&L's consolidated retained earnings prior to formation of Progress Energy as a holding company over CP&L in 2000, (2) Florida Progress's retained earnings prior to its acquisition in 2000 by Progress Energy, and (3) NCNG's retained earnings prior to the acquisition of NCNG by CP&L in 1999, plus (B) the amount, if any, recorded as an impairment to goodwill in accordance with SFAS No. 142. NCNG seeks authorization to pay dividends out of capital and unearned surplus in an amount equal to NCNG's retained earnings prior to the acquisition of NCNG by CP&L in 1999. Progress Energy and NCNG request that the Commission reserve jurisdiction over the preceeding proposals pending completion of the record.
2. By Nonutility Subsidiaries
Progress Energy also proposes, on behalf of itself and each of its current and future non-exempt Nonutility Subsidiaries, that its non-exempt Nonutility Subsidiaries be permitted to pay dividends with respect to their securities and/or acquire, retire or redeem any of their securities that are held by any associate company or affiliate from time to time, out of capital and unearned surplus to the extent permitted under applicable corporate law. Progress Energy, on behalf of each current and future non-exempt Nonutility Subsidiary, represents that it will not declare or pay any dividend out of caital or unearned surplus in contravention of any law restricting the payment of dividends. Progress Energy also states that its subsidiaries will comply with the terms of any credit agreement and indenture that restricts the amount and timing of distributions to shareholders.
D. Expenditures in Connection with Development Activities
Progress Energy, through its Nonutility Subsidiaries (including Intermediate Subsidiaries) requests a continuation of its current authority to make expenditures in connection with certain preliminary development activities relating to exempt or authorized nonutility businesses in an amount at any time outstanding not to exceed $250 million. Progress Energy proposes a "revolving fund" concept for permitted expenditures on the development activities. Thus, to the extent a Nonutility Subsidiary in respect of which expenditures for development activities were made subsequently becomes an EWG or FUCO or qualifies as an "energy-related company" under rule 58, the amount so expended will cease to be considered an expenditure for development activities, but will instead be considered as part of the "aggregate investment" in the entity under rule 53 or 58, as applicable.
E. Tax Allocation Agreement
The Applicants are authorized to file consolidated income tax returns and allocate the consolidated income tax liability of the group in accordance with a Tax Allocation agreement that does not satisfy all of the requirements of rule 45(c). Under the Tax Allocation agreement, Progress Energy is permitted to retain the benefit (i.e., the tax savings) in consolidated tax liability that is attributable to the interest expense on the debt incurred to acquire Florida Progress, subject to certain limitations and restrictions.
The Applicants request authorization to continue to file consolidated income tax returns for tax years ending during the Authorization Period under the previously approved Tax Allocation agreement.
Applicants state, for purposes of rule 54, that the conditions specified in rule 53(a) are satisfied, with the exception of 53(a)(1). However, by order dated July 17, 2002 (Holding Company Act Release No. 27551), the Commission authorized Progress Energy to increase its "aggregate investment," as defined in rule 53 in EWG's to $4 billion, reserving jurisdiction over the use of financing proceeds by Progress Energy to acquire any securities of or other interest in any FUCO pending completion of the record. At June 30, 2003, Progress Energy's aggregate investment in EWG's was $ 1.326 billion. Applicants state that none of the adverse conditions specified in rule 53(b) exist.
Applicants state that the issue and sale of any debt securities by NCNG having a maturity of more than two years requires approval by the North Carolina Utilities Commission ("NCUC"). NCNG will file an application with the NCUC at the appropriate time in connection with any issuance to Progress Energy of debt securities having a maturity of more than two years, and if at the time of the filing NCNG is still a subsidiary of Progress Energy, NCNG will file with the Commission a copy of the order or orders of the NCUC by post-effective amendment.
With reference to section 10(f) of the Act, although Progress Energy does not anticipate that any state commission would have jurisdiction over a proposed acquisition of Energy-Related Assets, Progress Energy cannot provide definitive assurance to that effect. If an acquisition of Energy-Related Assets would require authorization from the Federal Energy Regulatory Commission under the Natural Gas Act of 1938, as amended (the "Gas Act") (i.e., if structured as an asset purchase rather than a stock or equity purchase), Progress Energy would not proceed with the acquisition in the absence of any required authorization, or without complying with the terms and conditions of the Gas Act.
Applicants state that no other state commission or federal commission has jurisdiction over any of the other transactions for which authorization is sought in the Application.
Applicants state that fees and expenses incurred or to be incurred in connection with the preparation and filing of the Application will not exceed $30,000, and that fees, commissions and expenses paid in connection with any specific financing transaction will be within the limits stated above.
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, except as to those matters over which jurisdiction is reserved, 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, except as to matters as to which jurisdiction has been reserved, the Application is granted and permitted to become effectively immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED, that Progress Energy will continue to file certificates under rule 24 with the Commission within 60 days after the end of each of the first three calendar quarters of its fiscal year, and 90 days after the end of the last calendar quarter of its fiscal year, in which transactions occur. The rule 24 certificates will contain the following information for the reporting period:
In addition, Progress Energy shall file a report with the Commission within two business days after the occurrence of any of the following:
The report shall describe all material circumstances giving rise to the event.
Margaret H. McFarland
1 In some instances, companies substantially all of whose assets consist of Energy-Related Assets may also be engaged in nonutility activities that would be permitted by rule 58 (e.g., energy marketing, ownership, operation and servicing of fuel procurement, transportation, handling and storage facilities).
2 Any information described in items (a) through (x) that is provided under the Securities Act of 1933 or the Securities Exchange Act of 1934 may be incorporated into the rule 24 certificate by reference.