Duke and Progress merger to ease financing for replacing coal

13 January 2011
The merger of Duke Energy and Progress Energy will create the largest utility in the US, a super-utility that will be in a better position to finance the replacement of its ageing coal fleet than the companies could separately.


The combined company, to be named Duke Energy, will have an enterprise value of about $65 billion and a $37 billion market capitalisation. Under the merger agreement, Progress Energy’s shareholders will receive 2.6125 shares of Duke Energy common stock in exchange for each Progress share, for a value of $46.48 per share, or $13.7 billion in total equity value based on Duke Energy’s closing share price on 7 January. Duke Energy also will assume about $12.2 billion in Progress Energy net debt.

The proposed merger presents opportunities for synergies, including the ability to operate under a single open access transmission tariff, which reduces transmission costs for inter-utility transactions, said William Booth, a partner with law firm SNR Denton who advises electric utility companies. It would also likely improve the ability of the combined company to finance projects, because of its huge rate base and an improved debt rating, Booth said, “which makes the cost of borrowing money less expensive".

The domestic generation capacity of the combined company would be about 57GW, with 42% from coal-fired units, 35% fuelled by gas and oil, 16% nuclear power and 7% from wind and hydropower resources. But both companies are pursuing significant fleet modernisation strategies, retiring about 3400MW of older coal-fired units and replacing them with natural gas facilities or highly-efficient coal plants.

Due to these modernisation efforts, the combined company is “well positioned” to meet the new hazardous air pollutants MACT (HAPS MACT) rule to be unveiled by the Environmental Protection Agency this year, said Bill Johnson, chairman, president and chief executive officer of Progress Energy, who will lead the new company. “We’re further down the road of compliance than many other companies with large coal fleets,” he said.

But significant capital investments and additional plant closures could be required as the combined company will still own 3500MW of older coal facilities once the merger is complete, Johnson noted, and the combination of the two companies eases the financing of more efficient power projects and smart grid infrastructure.

“The cost of financing will be less because generally we can get more favourable loan rates,” said Duke Energy spokesman Dave Scanzoni.

The boards of directors of both companies unanimously approved the transaction, but it will take about a year to secure all mandatory state and federal regulatory approvals, including a federal review for antitrust implications. The companies must seek approval from the Federal Energy Regulatory Commission (FERC), the Nuclear Regulatory Commission, the North Carolina Utilities Commission and the South Carolina Public Service Commission.

"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," said Clinton Vince, chairman of the energy, transport and infrastructure practice at SNR Denton.

Meanwhile, FERC will “no doubt take a close look at combined market power issues regarding the dominant position the combined utilities will present, especially in the Carolinas and Central region”, he said, but added: "I expect that FERC, overall, will look favourably on the merger."

Gloria Gonzalez