Will that be cash or stock?

CP&L Energy Inc.'s acquisition of Florida Power parent Florida Progress Corp. is nearly complete, and one question for Florida Progress shareholders remains:

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times, published October 8, 2000

Raymond H. Lytle is faced with a choice he would rather not make. Like thousands of other Florida Progress Corp. investors, the St. Petersburg retiree soon must decide what he wants for his stock: cash, shares of CP&L Energy Inc. or some combination of the two. No matter which option he chooses, he will have to pay capital gains tax on his profits, and it's that last part that has him grumbling.

"That doesn't seem fair to me," said Lytle, 81. "I thought I was going to get out of paying taxes by trading even, stock for stock." Some deals work that way, but not this one.

Whether he likes it or not, Florida Progress Corp. is on its way out of business. Shareholders approved the company's acquisition by North Carolina-based CP&L in August and the deal is likely to close in November or December. The companies are waiting for one final stamp of approval, from the Securities and Exchange Commission.

Although the deal has been pending for more than a year, the reality of what it means for investors is just now sinking in. For many of them, the wake-up call came last week when a CP&L mailing arrived asking them to send in their stock certificates and select their preferred method of payment.

This is the choice: $54 in cash or the near equivalent in CP&L shares for each Florida Progress share they own. The share exchange ratio will be based on the price of CP&L stock during a 20-day period before the deal closes. Investors who want both can get cash for part of their shares and stock for the rest.

In addition to the cash or shares, investors will receive contingent value obligations entitling them to future payments, if any, from four synthetic fuel plants. (See Q&A.)

So what's an investor to do?

Tampa financial planner Brian K. Hershberger recommends a review of all investment holdings before making that decision.

"You want to see how your portfolio is diversified," said Hershberger, president of Outlook Financial Advisors. "If there's overweighting in any one asset category, now is a good time to be changing. If you're going to pay the tax anyhow, what better time to do it?"

Many Florida Progress investors probably are overweighted in utility stocks, especially those who have been reinvesting their dividends for years. As a general rule, stock in a single company should not represent more than 10 percent of the total market value of an investor's portfolio. It's the old theory about not having too many eggs in one basket. A well-diversified portfolio includes at least 10 stocks across a variety of industries. Mutual funds are another way to diversify.

Overconcentration is particularly a concern in the utility industry because utilities are no longer the safe, conservative investment they traditionally were considered to be. Thanks to the growing trend toward deregulation, utilities are facing new forms of competition and venturing into new areas.

"This is a time to be very careful and not to take more risk than the investor needs to take," Hershberger said.

Utility stocks also have had a big surge in prices this year, which means stocks in some other sectors may offer more value.

"Our view is that utility stock prices aren't going to go up much more before they go down," said David Parker, a Tampa-based utility analyst for Robert W. Baird & Co. "There's not a lot of upside in general. Some people are deciding just to cash out and wait and see how this sector shakes out as far as restructuring. You may actually be better off investing in cash."

But Parker said that for people who want to stick with utility stocks, CP&L is a good choice.

"The outlook for the company is very strong," he said. "Those hanging onto shares in the longer run will be well-rewarded. These days we like companies that are focused on strong growth areas in the U.S., and the Southeast is obviously just that."

Parker said CP&L stock is a relative value compared with other utilities. It is up 37 percent this year, while the Standard & Poor's Utility Index has had a 43 percent gain. "Some of these other companies are trading at nosebleed levels," he said.

Standard & Poor's utility analyst Justin McCann agrees that CP&L is a good choice for people who still want to own utility stocks.

"CP&L is a good company to have your shares in," he said. "Florida and the Carolinas are two of the faster-growing areas of the country. Plus they're planning to build generation plants to meet the growing demand. The dividend is probably going to increase at around a 3 percent annual rate."

He says investors who want to stick with utilities but not have all their shares in one company might consider buying shares of FPL Group Inc., Duke Energy Corp., Dominion, Reliant Energy Inc. or Southern Co. But he also cautions that this year's surge in prices means utilities are no bargain.

Even investors who prefer shares might want to get partial payment in cash they can use to pay the capital gains tax on their profits. Although some share-for-share exchanges are not taxable, the CP&L acquisition did not meet IRS requirements because most of the purchase price is being paid in cash.

While CP&L is asking investors to choose the form of payment they want, the company is not guaranteeing it will honor their selections. CP&L plans to pay cash for 65 percent of the Florida Progress shares and stock for the remaining 35 percent. If investors do not send in a selection form by the deadline, the company will choose for them. Because many shareholders do not respond to mailings, the company may be able to achieve the 65-35 balance while honoring all requests. If that does not happen, the company will adjust payments to investors who sent in requests.

"We strongly encourage shareholders to read the material and make their election based on what's best for them," CP&L spokesman Keith Poston said. "If you don't vote, you definitely don't have a choice."

Shareholders who do not send in their shares and election forms by the deadline will not have a choice in the form of payment, but they still will get paid whenever they do get around to mailing in their stock certificates.

There is no reason to hold onto a certificate except as a souvenir or potential collectible. Once the deal closes, Florida Progress stock will stop trading and stop paying dividends.

What to do with your Florida Progress stock certificates

Q. How should I mail in my stock certificates?

A. Regular mail or overnight delivery can be used. Registered mail is recommended, with insurance for 2 percent of the stock's market value. Your certificates should not be signed, but the election form should be. If your shares are held by a brokerage firm, call your broker for instructions. If you hold your own stock certificates and didn't get the election form, or if you need help filling out the form, call the company handling the exchange at (877) 453-1504.

Q. When is the deadline?

A. Right now it's set for 5 p.m. Oct. 30. But that will be extended if the deal's closing is delayed. Shareholders who do not send in their certificates and election forms by the deadline will not have a choice in the form of payment, but they will get paid whenever they mail in their stock certificates.

Q. If I ask for cash, how likely is it that I will get it?

A. That depends on what your fellow shareholders request. If no more than 65 percent ask for cash, your request will be honored in full. If a higher percentage ask for cash, CP&L will send you part of your payment in shares.

Q. When will I receive my check or shares?

A. About two weeks after the deal closes.

Q. What do I do if I have lost my stock certificates?

A. You will have to pay a $1-per-share premium to buy a surety bond. The check can be sent in with your signed forms.

Q. Does it matter if my certificate says Florida Power instead of Florida Progress?

A. No. Florida Power changed its name to Florida Progress but older certificates are still valid.

Q. How much capital gains tax will I owe?

A. You will be taxed on the difference between your cost basis and the value of everything you receive in exchange, including cash, CP&L shares and CP&L contingent value obligations. Your cost basis is the price you paid, including any dividends you reinvested, as well as any brokerage commissions you paid. Depending on your tax bracket, you will owe a tax of 10 percent or 20 percent of the amount of your long-term capital gain.

Q. What are these contingent value obligations?

A. Each contingent value obligation, or CVO, represents the right to receive payments based on the performance of four synthetic fuel plants that Florida Progress bought last October after the deal with CP&L was announced. The payments, which would begin in 2007 at the earliest, will only kick in if the plants generate after-tax cash flow of more than $80-million a year for 2001 to 2007. There is no guarantee that will happen, especially since tax credits for synfuel plants are being challenged. Shareholders will get one CVO for every Florida Progress share they own, including any fractional shares.

Q. How much are these CVOs worth?

A. For tax purposes, the value of a CVO will be the difference between the closing price of Florida Progress stock on its last day of trading and the value of the cash and/or CP&L stock received in exchange. For example, if Florida Progress stock is trading for $53 and an investor receives $54, the CVO will be valued at $1. This will be the investor's tax basis for the CVO, used to determine the gain or loss when the security is eventually sold.

Q. Will I be able to sell my CVO?

A. Probably. The CVOs are trading on the over-the-counter bulletin board under the ticker symbol CPLVV.OB on a "when issued" basis, a fairly common practice for new securities. A New York brokerage firm, Oscar Gruss and Son Inc., is making a market in the CVOs, which means it will be buying and selling from its own holdings. The CVOs have been trading for about 40 to 50 cents a share. Of course, there are no guarantees that an active market in the security will continue to exist.

Q. What do I do if I don't know how much I paid for my shares?

A. Unless you want to pay tax on the entire proceeds, make a good-faith effort to reconstruct your cost basis. If you hold your own stock certificates or participate in the dividend reinvestment program, you can get help from Florida Progress at (800) 937-2640, or after the deal closes, from CP&L at (800) 662-7232.

If you hold your stock in a brokerage firm account, ask your broker for help.

Even if you don't know what you paid, if you know when you bought the stock, you can find out what it was trading for at that time through the Internet (http://www.siliconinvestor.com), brokers, the company or newspaper microfilm available in public libraries. A tax preparer also may be able to assist.

Q. Do I need to make an extra estimated tax payment on my gain?

A. Not if your estimated tax payments and withholding for 2000 will be equal to at least 106 percent of your 1999 tax liability.

Q. Can I avoid the capital gains tax by giving my Florida Progress shares to charity?

A. You could have if you had acted sooner, but now it might be too late. In one case last year, the IRS took the position that tax still would be due if a merger was effectively completed at the time of the gift, even though the deal had not yet closed. Talk to your tax adviser before taking action.

Q. What will happen to the old Florida Progress certificates?

A. The transfer agent, EquiServe Trust Co., will store them for at least six years to comply with Securities and Exchange Commission rules.

Q. Will my dividend payments be affected?

A. Yes. The two companies' dividends and the dividend payment schedules are different. The quarterly dividend is 55.5 cents per share at Florida Progress and 51.5 cents per share at CP&L. Although it has not yet been approved by the company's board, the next scheduled dividend payment at Florida Progress would go to those who own the stock on Dec. 10. "If we're still existing as an independent company, it will pay a dividend," company spokeswoman Melanie Forbrick said. If the deal closes before then, there would be no dividend. The first CP&L dividend Florida Progress shareholders collect probably will be the one scheduled to be paid Feb. 1 to those who own stock on Jan. 10. A closing in late December would allow Florida Progress share holders to collect both dividends, assuming the dividends are declared by the companies' boards of directors.

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