* Offer at $46.48/shr in stock, premium of 4 pct
* Duke to assume $12.2 bln in debt
* Deal to create biggest U.S. power company
* Shares fall in afternoon trading
(Adds detail about Dominion)
By Matt Daily
NEW YORK, Jan 10 Duke Energy's (DUK.N) planned
$13.7 billion purchase of Progress Energy Inc PGN.N is the
biggest test yet of whether regulators will allow utilities to
merge and fortify their finances for huge new investments.
The deal, announced on Monday, would create the largest
U.S. power company, if it wins approval from regulators, with
7.1 million electricity customers in North Carolina, South
Carolina, Florida, Indiana, Kentucky and Ohio, and 57,000
megawatts of generating capacity.
Duke Energy Chief Executive and Chairman Jim Rogers said
the combined company would be financially stronger and better
able to cope with the huge costs facing the industry, from
upgrading the power grid and adding new environmental controls
to building a new generation of power plants, including new
In North and South Carolina, where regulatory approval is
needed, the new company would pass along to customers savings
of $600 million to $800 million over five years from combining
the two companies' fuel costs and delivery systems.
"That's very unique in this day and age to be able to
capture these types of savings," Rogers told Reuters. "I think
that gives us a leg up in the (regulatory) process."
Analysts said even though the merged company would be
dominant in both states, it stood a strong chance of winning
"As long as there is assurance and protections in place
that will both prove the financial strength of the company and
benefit the consumers, then regulators will approve it," said
Nathan Judge, an analyst with Atlantic Equities in London.
Edward Finley, Jr, the chairman of the Carolina Utilities
Commission, said the regulator was briefed on the proposed
buyout earlier on Monday.
"Our primary objective ... is to look at this from the
consumers' perspective," he told Reuters, especially since both
companies were "sufficiently profitable."
The companies are hoping to close the sale by the end of
the year, although Finley said there was no time line on when
the commission would rule.
A combined company would likely be able to increase its
dividend, a key factor in attracting investors to the regulated
"It really enhances our ability to grow the dividend going
forward," Rogers said. "Our plans are to grow the dividend at
slightly less than the growth in our earnings."
The companies would target earnings-per-share growth of 4
percent to 6 percent annually, the companies said during a
Rogers, who joined Duke when the company bought Cinergy for
$9 billion in 2006, said the industry could be set for a new
wave of consolidation as companies seek growth in their balance
sheets to finance increasing costs expected in the coming
Power mergers in the past year include FirstEnergy's (FE.N)
$4.7 billion deal for Allegheny Energy AYE.N; E.ON's $6.7
billion sale of its U.S. unit to PPL Corp (PPL.N); and Carl
Icahn's recent bid to buy power producer Dynegy (DYN.N).
And according to CNBC, Dominion Resources Inc (D.N) sent
both companies a letter on Friday offering to buy each at a
premium of 10 percent to 15 percent, in a bid to break up the
Citing people familiar with the situation, CNBC said
Dominion wrote in the letters it would not make its offers
public and Duke decided its letter was not actionable because
the offer lacked specific details about the offer.
Dominion, Duke and Progress declined to comment on the
State regulators have sought drastic concessions from
companies planning to merge, such as rate reductions. The deal
could increase chances that new U.S. nuclear plants could be
built. (Please see BREAKINGVIEWS: [IDnN1097575])
In a previous spate of mergers in the middle of the last
decade, planned mergers of FPL Group (FPL.N) and Constellation
Energy Group CEG.N, as well as Exelon (EXC.N) and Public
Service Enterprise Group (PEG.N) fell apart after regulatory
Even mergers that do succeed can drag on for long periods
before closing. FirstEnergy has yet to complete its transaction
for Allegheny, which was agreed upon 11 months ago.
Duke last year lost out on a bid for the U.S. assets of
German utility E.ON (EONGn.DE).
Duke said Progress Energy shareholders would receive 2.6125
shares of common stock of Duke Energy for each share held, or
$46.48 per share, representing a 4 percent premium to the
stock's Friday close on the New York Stock Exchange.
Duke Energy said it will assume about $12.2 billion in
Progress Energy's debt. The company also expects to effect a
reverse stock split immediately prior to closing.
After the merger is completed, Rogers will become executive
chairman of the new company, while Bill Johnson, the chairman
and CEO of Progress, will become president and chief executive
officer, the companies said.
J.P. Morgan was Duke's lead financial adviser, with Bank of
America Merrill Lynch providing a fairness opinion. Lazard
served as lead financial adviser to Progress Energy, which also
was advised by Barclays Capital.
Duke Energy shares closed down 1.18 percent to $17.58 on
the New York Stock Exchange, while Progress Energy finished
down 1.63 percent at $43.99.
(Reporting by Matt Daily, additional reporting by Michael
Erman, Diane Bartz in Washington, and Thyagaraju Adinarayan in
Bangalore; editing by Maureen Bavdek, Carol Bishopric and Andre