Progress Energy, Inc.

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Progress Energy, Inc.

410 West Wilmington Street
Raleigh, North Carolina 27601-1748
U.S.A.
Telephone: (919) 546-6111
Fax: (919) 546-2920
Web site: http://www.progress-energy.com

Public Company
Incorporated: 1908 as Carolina Power & Light Company
Employees: 15,700
Sales: $9.8 billion (2004)
Stock Exchanges: New York
Ticker Symbol: PGN
NAIC: 221121 Electric Bulk Power Transmission and Control

Progress Energy, Inc., is a regional utility holding company formed in 1999 to combine the assets of Carolina Power & Light and Florida Power. The Raleigh, North Carolina-based company uses both nuclear and fossil-fueled power plants, capable of generating more than 24,000 megawatts of electricity, to serve nearly three million customers in North Carolina, South Carolina, and Florida. In addition, the company is involved in such nonregulated businesses as energy marketing, broadband capacity, and natural gas production. Progress Energy is a public company listed on the New York Stock Exchange.

Electricity Comes to the Carolinas in the 1880s

In the 15 years following the destruction visited upon the South during the Civil War, North and South Carolina rapidly rebuilt their economies, proving especially successful in the textile, tobacco, and furniture industries. An increasing amount of capital from the North flowed into the area. Although tobacco processing would become king of the local economy, textile production was also a major industry in the region, one in need of new power sources. Hence, textile factories played a key role in bringing electricity to the Carolinas. In 1879, Thomas Edison patented his first incandescent lamp, and three years later opened the United States's first electric lighting plant, the Pearl Street Station, in New York City. Although more remotely located, the Carolinas were receptive to the new technology. The first electric lights in the region were installed in a Salem, North Carolina, factory in 1881. The first North Carolina city to receive electric service was Raleigh in 1885. Although electricity spread to most of the area's larger cities by the turn of the 20th century, it was a far from a prosperous enterprise.

In the early 1890s, electric service was provided to the Carolinas by a number of small, independently operated systems with poor voltage regulation, leading to frequent outages. Three of these companies merged in 1908 to form Carolina Power & Light Company. The largest was Raleigh Electric Company, organized in 1881 as the Raleigh Street Railway Company to operate electric streetcars in the city. It was reorganized in 1894 as the Raleigh Electric Company, but it was unable to find customers beyond street lights, streetcars, and nearby textile mills. Ownership of the struggling business passed to General Electric (GE) when Raleigh Electric could not pay for its equipment. In 1905, controlling interest was acquired by Electric Bond and Share Company of New York, a GE-controlled holding company formed that year to provide financing to small utilities, which in many cases, like Raleigh Electric, had used securities as part payments for electrical equipment. In 1906, the holding company picked up Cape Fear Power Company and Consumers Lights and Power of Sanford-Jonesboro. The three small utilities served just 1,100 customers in Raleigh, Sanford, and Jonesboro, plus a few Fayetteville textile mills. It required little insight to conclude that the companies should be consolidated, which they were on February 19, 1908.

Under new management, led by Col. Charles E. Johnson and backed by the deep pockets of Electric Bond and Share, Carolina Power & Light began to pursue the growth that had eluded its founding companies. At the time, the company mostly powered streetcars and provided street lighting, and even then the streets were turned off in the middle of the night, when people were presumed asleep, then turned back on shortly before dawn. Household electrical use was virtually nonexistent, and attracting residential customers was made more difficult by consistent breakdowns in the system. However, as Carolina Power & Light improved service and expanded its operations, small municipal electric companies took notice and asked the company to take over the job of supplying power to their communities. In this way, Carolina Power & Light added towns like Henderson, Oxford, and Goldboro to its service area. For the time being, the company's principal business remained lighting, illuminating streets and the interiors of businesses and a few well-to-do homes. Electric power's chief competitors for the lighting market were the local gas companies, the two sides waging war through advertisements in the local press. In Raleigh, Carolina Power & Light won out and acquired Standard Gas & Electric Company in 1911, consolidating the city's gas and electric service. A year later, the company grew further through acquisitions by acquiring Asheville Power & Light Company and a competing power system operating in Goldsboro.

Industrial Sales Grow in 1910s

Early on, Carolina Power & Light set its sights on the textile mills that were opening in the Piedmont and Coast Plains area, and it funded the completion of a hydroelectric power plant located in Blewett Falls that had been forced into receivership in 1909. The plant became operational in June 1912, and the company extended lines to the mills as well as nearby towns, such as Rockingham, Hamlet, and Wadesboro. Within the year, lines were strung across the South Carolina border to serve the town of Cheraw. Unfortunately, the business from area textile mills that Carolina Power & Light so coveted was not forthcoming. Two separate sales efforts in the two years leading up to the plant coming on line failed to land any mills or other large industries as customers. A Macon, Georgia, General Electric sales manager named Clinton N. Rackliffe was hired to tackle the problem of selling industrial power. Using the railroads and horse-drawn transportation, he scoured the countryside, visiting with owners of cotton mills and other large factories, struggling to convince them that a small electric motor could furnish the same amount of power to their equipment as the complicated network of steam engines, water turbines, belts, and drive shafts that they had long relied upon. Rackliffe's first customer was Wadesboro Cotton Mill; after that success, sales began to grow.

With the advent of World War I in August 1914, Carolina Power & Light was forced to cut back on its expansion because certain materials were not available. As a result, the company added no generating capacity and few additional transmission lines. Nevertheless, it did benefit because business picked up in the textile industry, leading to the construction of new mills, which now preferred to buy electric power and invest the money they would have spent on steam plants into textile machinery that could make more products. Moreover, coal was rationed and rose in price, prompting mills to turn to the power companies to supply their needs.

After a recession that immediately followed World War I ended in November 1918, the U.S. economy experienced a major boom. Carolina Power & Light steadily added generating capacity and customers, while its corporate parent, Electric Bond and Share, continued to accumulate utility assets. In 1926, Carolina Power & Light was reincorporated to add three operating companies and a construction firm owned by Electric Bond and Share: Yadkin River Power Company, Asheville Power & Light Company, Pigeon River Power Company, and Carolina Power Company. The consolidated company provided retail service to 100 communities and wholesale power to another 29. Over the next ten years, Carolina Power & Light added another 142 communities to its service area, but during that time the company would have to weather the worst of the Great Depression that was ushered in by the stock crash of 1929 and lingered throughout the 1930s. The challenges of this period were not fully overcome until the jolt the economy received from World War II military spending. During the tough times, textile mills cut back on production and their use of electricity while residential customers decided against purchasing the new household electrical appliances that were just beginning to become popular before the crash. In addition, many people let their electric wiring go dead and reverted to kerosene lamps. Anticipating industrial expansion in the Carolinas during the 1930s, the company had invested in a major expansion of its production capacity only to see much of it unused. As a result of all these factors, revenues fell, the company paid no dividends from 1933 to 1936, and salaries were cut across the board.

Carolina Power & Light's excess capacity would soon be needed, however. By 1940, it was becoming clear, at least to the government, that the United States would eventually be drawn into the war raging in Europe. The country took steps to put itself on a war footing, and Carolina Power & Light took steps to add even more generating capacity to meet the increasing need for electricity in the Carolinas. Wartime spending revived the U.S. economy and reawakened consumer confidence, leading to a postwar boom. To meet increasing demand for power, and to catch up on building the system curtailed by wartime shortages of materials, the company grew on all fronts, expanding capacity, laying new transmission lines, and adding radio communications to improve repair and maintenance services. During the postwar years, the company was especially successful in signing up rural customers, which for the past 20 years had resisted the change but now embraced electricity. In 1948 alone, Carolina Power & Light added 3,000 miles of rural lines and 19,253 new rural customers. The company also underwent an ownership change during this period. For a number of years, all of the company's stock had been held by a Electric Bond and Share subsidiary, National Power & Light Company. In 1940, acting in accord with the Public Utility Holding Company Act, the Securities and Exchange Commission initiated dissolution proceedings on National Power & Light. There was a possibility that Carolina Power & Light might be divided up into smaller parts, but in the end the company was broken off as a whole. In August 1946, the company's shares were distributed to National Power & Light shareholders, half of which went to Electric Bond and Share. In December of that year, the newly independent company gained a listing on the New York Stock Exchange. Within two years, Electric Bond and Share sold off all of its shares.

Company Perspectives:

Progress Energy, headquartered in Raleigh, N.C., is a Fortune 250 diversified energy company with more than 24,000 megawatts of generation capacity and $9 billion in annual revenues.

In the early 1950s, Carolina Power & Light looked to expand eastward and took steps to build a new power plant in the eastern fringe of its service area. Then, in 1952, it solidified its position in the region by acquiring Tide Water Power Company. It would be the last acquisition for nearly 50 years. The company was satisfied with building its business within the area it had already staked out. It launched an atomic energy program and opened a nuclear power plant, but because it was a state-regulated utility with guaranteed rates of return, management tended to be conservative, and Carolina Power & Light turned into a sleepy little utility barely noticed by Wall Street, content to grow in line with its territory's increasing population and economic development.

Late 1980s Bring Changing Business Landscape

Conditions for utilities began to change in the late 1980s, when the U.S. Congress passed laws to make possible wholesale power sales and energy trading as utilities began to share grids and buy and sell electricity from one another. In 1992, Carolina Power & Light brought in a new president and chief operating officer, William Cavanaugh, a 23-year veteran of New Orleans-based Entergy, to help chief executive officer and chairman Sherwood Smith, but the company remained cautious about embracing the new opportunities presented to utilities. Carolina Power & Light was financially sound and located in one of the fastest growing parts of the country. As Cavanaugh told Business North Carolina in 2003, "Why would we want to go off overseas or anywhere else where we didn't know the landscape." Meanwhile, Charlotte-based Duke Energy, founded around the same time as Carolina Power & Light, took a different approach, spending millions on trading floors and power plants in California, where deregulation was in full bloom. Even after Cavanaugh succeeded Smith as CEO and chairman, Carolina Power & Light opposed deregulation in North Carolina, crossing swords with Duke's more aggressive board of directors, which viewed Enron as a role model. Cavanaugh was suspicious of Enron, however, and its attempts to lure away customers, telling Business North Carolina, "They were saying things like, 'We'll sell you a 10-year contract, but I want all the profits recorded in the first year because that's how I make my bonus.' I sat in this boardroom with the directors and tried to figure out how they were doing all this marketing and trading. You could see their volume, but you couldn't see where they were making anything."

Anticipating that deregulation would occur in North Carolina, Carolina Power & Light began to look for ways to diversify. It acquired North Carolina Natural Gas for $354 million, thereby moving into an area in which management believed the company needed to become involved if deregulation took place. It also entered the hot telecommunications field. However, North Carolina ultimately held off on deregulation, in large part because of California's experience and the demise of Enron, leading the company to divest North Carolina Natural Gas and to write down more than $200 million in its telecommunications subsidiaries. One deal completed during this time did pan out—the $5.3 billion acquisition in 1999 of Florida Progress, the holding company for Florida Power, the second largest utility in Florida.

A New Name for a New Century

Florida Progress was founded in the 1890s as St. Petersburg Electric Light & Power Company and took the name Florida Power in 1927. During the 1980s, it veered away from its traditional business, becoming involved in such areas as equipment leasing, life insurance, railroads, barge lines, and coal mines. The strategy did not pay off, and in the late 1990s Florida Progress put itself on the block. It engaged in talks with a British utility company, Scottish Power, but they fell apart in April 1999, leading to the sale to Carolina Power & Light later in the year. Carolina Power & Light, which had 1.2 million customers in North Carolina and South Carolina, added Florida Progress's 1.3 million customers in the west and central sections of Florida, transforming Carolina Power & Light into a regional utility, one of the ten largest generators of electricity in the United States. The acquisition provided entry into a coveted market and supplied the kind of increased revenues the company was looking for without leaving the Southeast.

In December 2000, Carolina Power & Light changed its name to Progress Energy, Inc., although it continued to do business in the Carolinas under its old name and as Florida Power in Florida. That would change a year later when the company began operating in both the Carolinas and Florida under the Progress Energy brand. While customers may have been comfortable with the old names, it was easier to sell the company to investors by telling them Progress Energy had operations in the South, rather than explaining that it did business under one name in one market and a second name in another. Aside from name changes, the company also began selling off some of the non-core assets inherited from Florida Progress, many of which proved difficult to unload as the economy soured in the early 2000s. The company also had to contend with a drop in business caused by the recession, as well as low wholesale prices and a heavy debt load.

In 2004, Cavanaugh retired, a move he had planned to make two years earlier. However, in light of the Enron scandal taking place at the time, which led to industry turmoil, he was persuaded to remain at his post until conditions improved. He was replaced by Robert McGehee, who joined the company as general counsel in 1997 and was promoted to president and chief operating officer in 2002. McGehee took over a company that faced a number of challenges but also one that possessed the potential to enjoy strong growth in the future.