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Duke-Progress Deal to Produce Synergies, Lay-Offs

By Monday morning, there may be a new utility dotting the horizon -- one that combines Duke Energy and Progress Energy, which together would own about 57,000 megawatts. The mega-deal could represent a potential trend whereby the larger utilities are producing more synergies and savings.

Companies merge for a variety of reasons but the more traditional ones are to achieve greater productivity and efficiencies, all to increase leverage in the market. As those synergies start to escalate, the hope is that the savings would flow back to both ratepayers and shareholders, who benefit in the form of greater dividends. At the same time, any combined entity would be better positioned to invest in new technologies so that it could become cleaner.

“Looking ahead, our bullish outlook for the company is supported by higher rates, its strong balance sheet, ongoing capital expansion projects and an above-average dividend yield for the industry,” says Zacks Investment Research. Duke-Progress would become the nation’s biggest utility, replacing the just-completed merger between Exelon and Constellation Energy.

Earlier in June, the Federal Energy Regulatory Commission granted its permission for the two to merge. To meet those conditions, they will have to build new transmission to allow competing energy sources to flow into the Carolina’s where they will be based. Now, the North Carolina Utilities Commission must give its blessing, which is expected by Sunday, completing the checklist of regulatory requirements. There, commissioners have insisted that the combined merger would produce more benefits for customers.

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. Merging could potentially improve earnings and thereby help to bankroll future projects.

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 ones to occur are that of Cleveland, Ohio-based FirstEnergy Corp. and Pennsylvania-based Allegheny Energy, which is a deal valued at $4.7 billion, as well as that of Exelon and Constellation, which will have 19,000 megawatts.

More Leverage

The limited number of all-out mergers is because of the recession, which has eaten away at demand. That 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.

“The challenges in front of us are the rising price environment as we comply with new regulation, rebuild infrastructure and modernize,” says Bill Johnson, who will become the new chief executive of the utility, in an interview with EnergyBiz.  “Being able to raise capital on the most effective terms and being able to operate most efficiently would lead one to logically conclude that more combinations would happen.”

He goes on to say that the combined utility would have earnings growth of 4-6 percent a year, in addition to a “good dividend.” Duke, which will pay roughly $25 billion for Progress, says that it expects 1,800-1,900 job cuts. That’s out of an employee base of 30,000. Several hundred of those positions are now vacant and just won’t be filled.

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.

Time will tell how the most recent spate of all-out mergers will fare. But if they are deemed successful, it would lead to more such buy-outs.

That’s because bigger, stronger utilities are better able to deal with the greater environmental costs, coming at all levels of government. State regulators, which have generally been skeptical of bigger-is-better, may change their tune given that larger enterprises would be better positioned to buy clean generation and spread the cost of compliance.



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