January 12, 2011
Duke Energy is vowing to buy Progress Energy in what would become the largest utility in the country. But would the mega-merger create excessive market power? Regulators will decide.
It's not a surprise that two contiguous power companies would want to unite. Any company with a solid financial and pot of cash has its eye on others. Simply, merging could potentially improve earnings and thereby help to bankroll future projects. The secret, though, is to make buys that are reasonably priced and that are synergistic - all to gain size and scope while increasing cost savings.
"Our industry is entering a building phase where we must invest in an array of new technologies to reduce our environmental footprints and become more efficient," says Jim Rogers, chief executive officer of Duke Energy, in a prepared statement. "By merging our companies, we can do that more economically for our customers, improve shareholder value and continue to grow."
According to Thompson Reuters, energy and power deals are helping fuel the economy and had accounted for a fifth of all transactions in 2010. The most notable to occur is that of Cleveland, Ohio-based FirstEnergy Corp. and Pennsylvania-based Allegheny Energy, which is a deal valued at $4.7 billion.
That's because the recession has eaten away at demand, which has not only put downward pressure on power prices but has also worked to erode the bottom line. In the last two years, many utilities said that they would delay their planned capital expenditure programs until things got better.
Now the economy is looking rosier. And that means the need for electricity will rise and necessitate the building of new generation plants and transmission lines. Charlotte, N.C.-based Duke and Raleigh, N.C.-based Progress are part of a growing region. If their merger is successful, the shared footprint would stretch from Florida to the Carolinas and into Indiana, Kentucky and Ohio - comprising 57,000 megawatts of generation.
Duke has agreed to pay $13.7 billion in stock for Progress, not including the assumption of about $12 billion in debt. That represents a modest premium over that of Progress, or 6.4 percent. According to news reports, Duke is estimating a cost savings of $600 million to $800 million over five years from combining overlapping operations.
No Champaign Yet
The Charlotte Observer reports that job cuts could be first up, noting that Duke eliminated 1,500 jobs after it merged with Cinergy in 2006. The newspaper also says that state regulators - if they agree to the merger - can be expected to extract concessions. When Duke and Cinergy aligned, commissioners awarded Duke's customers with nearly $160 million in rates reductions.
"It provides an opportunity for consumer advocates to get concessions that they might not otherwise be able to accomplish," says Edward Finley Jr., chairman of the North Carolina commission, in the Charlotte Observer story.
The wedding party should not be breaking out the Champaign just yet. While the two companies are hoping to complete their deal by year end, they must subject themselves to a multitude of regulatory approvals. Among them: The Federal Energy Regulatory Commission, the Nuclear Regulatory Commission and state regulatory commissions in North and South Carolina.
If the past is any indication, the federal agencies will scrutinize the deals but in the end, they will give their blessings. The state commissions, by contrast, will present the tougher sell. Consider: Exelon's proposed buyout of PSEG and FPL's foray toward Constellation, both of which were denied by state regulators in 2006. Concerns over market dominance were key factors in those cases.
"Customers across the political spectrum in the South will vigorously resist more corporate welfare for giant power companies," says Jim Warren, executive director of Waste Awareness & Reduction Network in North Carolina. "We will not allow big utilities to ruin our economies with annual rate hikes to build power plants that aren't even needed."
Warren adds that the primary reason the two would like to combine is because they need the financial muscle to grow their respective nuclear energy bases. But he says that they have no plans to risk their internal resources on such ventures; rather, they would access federal loans guarantees - monies that he says would put taxpayers on the hook if the treasury could not be repaid, or the projects became cost prohibitive.
Both Duke and Progress have made no secret of their plans to expand their nuclear energy presence. Together, they have applied for licenses to build six reactors. The paradox, of course, is that these companies believe nuclear power will become essential but that the power source can't flourish without adequate financing.
To that end, those utilities with proven cash flows are better positioned to pay back federal loan guarantees for nuclear plants estimated to cost $10 billion a piece. Both Duke and Progress have a suite of plants that work around the clock. But will the deal fly?
"The combined utilities will need to pay careful attention to state regulators who will have to approve the merger and who will be trying to ensure that anticipated savings from the tie-up will be shared generously with ratepayers in each jurisdiction," says Clinton Vince, Washington-based chair of the energy practice at law firm SNR Denton.
Utilities are now coping with the aftermath of a harsh recession and the expectation of a future build out. The Duke-Progress deal is representative of that. If approved, it could facilitate similar, but smaller, attempts to combine.
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Ken Silverstein
EnergyBiz Insider
Follow Ken on www.twitter.com/freehand1200
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