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Progress Energy Merger With Southern Company Makes Sense, Analyst Says

Posted October 2, 2006

— A merger between Progress Energy and Southern Company makes dollars and cents, but that doesn't necessarily mean the two energy providers are going to merge, according to a Wall Street analyst who closely follows Progress Energy.

Rumors have been rampant since SparkSpread, an online newsletter focused on energy companies, reported on Sept. 28 that Progress and Southern were discussing a deal.

The talk has helped drive up the stock price of Progress (NYSE: PGN) to a 52-week high of $46.22. As of Monday afternoon, the price was $45.80. Southern (NYSE: SO) shares traded at $34.91.

"The fact that Southern operates in the same region and Progress has some assets that are not fully valued in the stock price" are factors that make a merger finically appealing, said David Parker, an analyst with Robert W. Baird. "Both companies are position in states where growth is strong."

A series of recent mergers in the energy industry is helping fuel the Progress-Southern rumor mill, he added.

"Progress doesn't have a dance partner," Parker said. "Other mergers are the reason why the speculation continues to abound."

However, Parker also said that Progress is burdened by long-term debt, which is one reason for the sale of recent assets. As of Dec. 31, 2005, Progress reported $10.4 billion in long-term debt. Its total income in 2005 was $10.1 billion.

"They have a little bit too much debt" which is a hindrance to Progress plans to add power capacity, he added. To build additional nuclear power or coal-fired plants would be very expensive, Parker said.

Citing Progress' recent efforts to sell off assets, such as two power plants purchased earlier this year by Southern and a telecommunications subsidiary as one reason, Parker has set a target price of $49 for Progress stock. In his latest report on Aug. 29 he rated Progress as an "outperform" stock and reiterated the target stock price. The Southern rumors have not changed his thinking, he added.

The price of Progress stock could enable a suitor such as Southern to offer a "premium", or higher dollar amount, to Progress stockholders, Parker added.

A possible impediment to a merger might be the Federal Energy Regulatory Commission, which would have to approve a Progress-Southern merger. Dow Jones News Service quoted GimmeCredit, an independent credit analyst, as saying the commission might question a deal given Southern's "dominant market position in the region already."

Progress operates in the Carolinas and Florida. Southern has operations in Georgia, Alabama, Mississippi and the panhandle of Florida.

Mike Hughes, a spokesman for Progress Energy in Raleigh, declined comment when contacted on Monday. "We just don'y comment on any market speculation," he said.

Should a deal occur, the combined firm would be dominated by larger Southern, Parker said. Southern has 4.3 million customers, 41,000 megawatts of generating power, and annual revenues of more than $13.5 billion. Southern ranks 165th on the Fortune 500 list.

Progress has 3 million customers, 23 megawatts of generating power, and annual revenues of $10.1 billion. Progress is 222nd on the Fortune 500 list.

Both companies are profitable. In 2005, Southern reported profits of $1.59 billion, and Progress had profits of $697 million.

No one should fear that a merger would trigger massive layoffs or the closure of Progress' headquarters in Raleigh, however.

"Southern operates with several divisions which function with some autonomy and their own presidents," Parker explained. "That leads me to believe that there would be a major presence in Raleigh."

As structured now, Southern operates divisions for Georgia, Alabama, Mississippi and Florida.

Progress has also trimmed its employee headcount with recent asset sales and other moves, Parker added.

Meanwhile, the newsletter that first broke the Progress story has not reported anything further but could do so soon.

Will Ainger, the London-based co-editor of SparkSpread, said the newsletter "absolutely" stood behind last week's report. SparkSpread reported that the two firms were "in advanced merger negotiations". Asked if SparkSpread had further news to report, Ainger said "Not at the moment. Hopefully, we'll have something later this week."

SparkSpread seldom reports on rumors of mergers, Ainger added. "We very, very rarely report a story like this," he said, "and we do so only when we're comfortable."

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