Fresh from a deal annexing its first natural gas assets, Carolina Power & Light Co. (CP&L) plans to grow considerably by acquiring Florida Progress Corp., parent of Florida Power, for $5.3 billion.

The combined company would be worth about $17 billion and serve 2.7 million customers, nearly 200,000 of them gas. It also would be the nation’s ninth-largest energy utility based on generating capacity of more than 18,500 MW. Predictions are CP&L will be seeking other acquisitions once it finishes the Florida Progress deal.

Clearly, CP&L sees the writing on the wall and wants to get bigger in anticipation of electricity deregulation. The company announced its first gas assets acquisition in November, North Carolina Natural Gas (NCNG) for $354 million, with an eye toward significant additions of gas-fired generation over the next 10 years (see NGI Nov. 16, 1998). The deal was completed last month. Florida Progress has no gas assets other than gas-fired generation.

“The acquisition of Florida Progress represents a major step toward fulfilling our strategic plan of becoming a leading energy provider in the Southeast,” said CP&L CEO William Cavanaugh. “Like the Carolinas, Florida is one of the highest-growth areas in the country. The predominantly residential base of Florida Power is an excellent complement to our mix of more commercial and industrial customers. The complementary growth in both CP&L and Florida Power territories and the wholesale market in the Southeast will enhance our plans to add more gas-fired generating capacity and will increase our siting options as well as the markets for our product. With our recent acquisition of North Carolina Natural Gas Corp., this combination with Florida Progress will enhance our competitive position in the generation, power marketing and delivery of energy services in the best area of the country to be in the energy business.”

Deutsche Banc Alex. Brown analyst Edward Tirello said he likes the deal because it would bring two growth companies together. Florida Progress has one nuclear plant. Combining it with CP&L’s three nukes would create operating efficiencies. Tirello said CP&L’s management is “excellent,” and both companies have substantial and growing non-utility operations. The deal could be bad news for Scana and/or Teco Electric who may later fall prey to the bigger CP&L, which Tirello said still must grow even after it acquires Florida Progress. “I think Scana goes to them. I think not happily, but I think they will have to.”

PaineWebber analyst Barry Abramson said he thinks both Scana and Teco could become acquisition targets. He said CP&L in the past has told analysts it was interested in Scana but did not want to pursue a hostile deal. “Teco is different in they haven’t really said publicly that they don’t want to merge with anyone, at least not in the strong words that Scana has expressed its desire to stay independent. Teco is a small utility surrounded by companies that have become much bigger. It seems more likely they would be involved in merger activity in order to get bigger somehow.”

The CP&L-Florida Progress $17 billion enterprise value would fall out as $8.0 billion in equity and $9.1 billion in net debt and preferred stock. Revenues would be about $6.7 billion based on 1998 figures. The combination is expected to be accounted for as a purchase and is anticipated to be accretive in the first full year after closing. Thereafter, Raleigh, NC-based CP&L expects the combined company to have annual growth in earnings per share of 7 to 8%.

Under the terms of the agreement, Florida Progress shareholders will receive $54.00 per Florida Progress common share in a combination of cash and a new CP&L holding company’s common stock. The total value of the transaction is approximately $5.3 billion. Florida Progress shareholders will have the right to elect cash or stock subject to proration if the elections exceed 65% in cash or 35% in stock. The stock component of the consideration is subject to a collar if the average price of the new CP&L holding company’s stock for the 20-day period ending five days prior to closing is greater than $45.39 or less than $37.13. Both the cash and stock components will be taxable to Florida Progress shareholders.

“This transaction provides shareholders with a premium that recognizes the value inherent in our Florida franchise and our diversified operations,” said Richard Korpan, CEO of St. Petersburg, FL-based Florida Progress.

This summer, CP&L added 325 MW of electric generation — part of a planned 7,000 MW of generation additions over the next decade — to meet growing retail needs and increase sales in the competitive wholesale market. Last year, Florida Power made a ‘landmark’ alliance with Dynegy for the marketing of its excess power (see NGI May 18, 1998). The five-year deal is to run through 2002 and focuses on Florida. A Dynegy spokesman last week said the company would be discussing the future of the alliance with Florida Power and CP&L. “We’d like to continue the partnership with FPC.” Additionally, the alliance could be extended to include CP&L’s excess power.

The companies expect annual synergies in excess of $100 million pre-tax primarily from the elimination of duplicate corporate and administrative programs and operating efficiencies including integration of the Crystal River nuclear site with CP&L’s three existing nuclear sites. After the integration is completed, it is anticipated that the company will have a combined workforce of about 16,000 employees, reflecting a reduction of about 7%.

Cavanaugh will be chairman, president and chief executive officer of the combined company. Korpan will retire as chairman, president and chief executive officer of Florida Progress at the close of the transaction and join CP&L’s board of directors. The combined company will be headquartered in Raleigh with Florida Power headquarters in St. Petersburg.

The transaction is conditioned, among other things, upon the approvals of shareholders and regulators. “We think the merger won’t run into any FERC market power issues because the companies generally operate in separate geographic areas, so we don’t think that it’s going to change the concentration of generating capacities in one particular region,” Abramson said.

Joe Fisher, Houston

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