Mergers & Acquisitions and Duke Energy and Electric and Energy & Environment and Utilities

Duke Energy plans acquisition, new CEO

January 10, 2011
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Duke Energy Corp. plans to buy Progress Energy Inc. for $13.7 billion, creating a company that would surpass Southern Co. as the largest U.S. utility.

Holders of Progress Energy will get 2.6125 shares of Duke for each of their shares, the companies said Monday in a statement. The purchase values Raleigh, N.C.-based Progress at $46.48 a share, 3.9 percent more than its Jan. 7 closing price, the companies said.

Duke, based in Charlotte, N.C., will assume about $12.2 billion in Progress Energy’s debt. The purchase would add units that operate near Duke’s service territories in North Carolina and South Carolina, as well as Progress’s electric distribution unit in Florida. The combined company would serve 7 million customers in six states.

“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," Jim Rogers, CEO of Duke Energy, said in the statement. "By merging our companies, we can do that more economically for our customers, improve shareholder value and continue to grow.”

Progress CEO William Johnson, 57, will lead the utility, replacing Rogers, 63, who will become the executive chairman of the new organization, advising Johnson and serving as the company’s lead spokesman on energy policy.

Rogers, who once worked in Plainfield as head of the former PSI Energy, has been a leading voice for the power sector in the U.S. climate legislation debate, supporting efforts last year for a federal cap-and-trade law that would also protect the financial interests of utilities.

Johnson joined Progress Energy in 1992 and rose to the position of chief executive in October 2007, according to the company’s website. He serves on the executive committees of the Edison Electric Institute and the Nuclear Energy Institute.

Both Rogers and Johnson will be on the 18-member board, which will include 11 people designated by Duke Energy’s board of directors and seven designated by Progress Energy’s board of directors.

Acquisitions in the U.S. power industry have picked up as companies seek to add customers to counter falling prices. Utilities expanding through mergers can also spread the cost of complying with environmental regulations or building new power plants across more customers. Regulators generally allow utilities to bill consumers for reimbursement of those costs.

This is the largest acquisition by Duke, which bought Cinergy, a Midwestern utility, for $10.5 billion in 2006. Duke will expand its regulated utility business after losing a bidding contest last year for E.ON AG’s Kentucky electricity distributors to PPL Corp.

“There should be substantial cost savings with the companies being so close to each other,” Paul Patterson, an analyst at Glenrock Associates LLC in New York, said in a telephone interview yesterday.

The 3.9 percent premium is less than the 17 percent average premium paid for U.S. electric utilities during the last two years, according to data compiled by Bloomberg. Duke is paying 8.6 times earnings before interest, taxes, depreciation and amortization, which is the average for utility purchases.

The merger requires shareholder approval and the Federal Trade Commission’s antitrust review. Additionally, the companies need permission from the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the North Carolina Utilities Commission and the South Carolina Public Service Commission.

The companies also will report on the merger to regulators in Florida, Indiana, Kentucky and Ohio.

The companies expect to complete the transaction by the end of the year, and it’s expected to add to Duke’s earnings in the first year after closing.

Duke supplies energy to about 4 million utility customers in North Carolina, South Carolina, Indiana, Ohio and Kentucky, according to its website. It has about 35,000 megawatts of electric generation capacity. Progress has about 3.1 million utility customers, according to its website.

Progress Energy was created from the merger of Carolina Power & Light and Florida Power in November 2000. It owns more than 22,000 megawatts of power generation capacity, according to its website.

J.P. Morgan served as lead financial adviser to Duke, and both it and Bank of America Merrill Lynch provided a fairness opinion. Lazard Freres served as lead financial adviser to Progress Energy and provided a fairness opinion with Barclays Capital Plc.

Wachtell, Lipton, Rosen & Katz served as legal counsel for Duke Energy. Hunton & Williams LLP served as legal counsel for Progress Energy.

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