POWER June 2011 - 44

MERGERS & ACQUISITIONS
The Urge to Merge
Utility mergers and acquisitions are on the upswing again. When faced with
flat load growth, pervasive regulatory uncertainty, and the rising cost of
doing business, larger companies are better able to afford expensive new
plants while maintaining shareholder dividends.
By Kennedy Maize
N
o one ever accused Jim Rogers of
thinking small. Over his years in the
energy business, the Duke Energy
CEO has frequently looked around his neighborhood
and seen places he wanted to go-
and companies he wanted to acquire.
During his 23 years as a CEO in the electricity
business, Rogers has used mergers to grow
his companies, his clout, and his reputation,
both in industry and in the world of public policy
and politics. When Rogers became PSI Energy
(Public Service of Indiana) CEO in 1988, his
gaze soon fixed on Cincinnati Gas and Electric.
It was a troubled utility that nearly foundered
on an ill-fated venture into nuclear power. The
resulting marriage created a company called
Cinergy. Rogers led the merged company for 11
years. In 2006 he orchestrated a deal in which
powerhouse Duke acquired little Cinergy; after
a suitable cooling-off period, Rogers ended up
in the catbird seat.
Rogers' latest move is to use the muscle
of his Charlotte, N.C., utility to acquire his
Raleigh-based neighbor, Progress Energy,
producing what would be the largest investorowned
utility (IOU) in the nation. In the deal
announced in January, Duke will buy Progress
for $13.7 billion in stock (at a modest
7% premium for Progress shareholders) and
assume $12.2 billion in Progress debt, creating
a behemoth with a market capitalization
(the total value of the combined companies'
outstanding shares) of $37 billion.
The new company, to be headquartered in
Charlotte, will own assets worth over $90 billion,
serve some 7.1 million customers in six
states (North Carolina, South Carolina, Florida,
Ohio, Indiana, and Kentucky), and have
57 GW of generating capacity, including
what the companies claim will be the largest
regulated fleet of nuclear plants in the U.S.
(Figure 1). Duke currently has seven nuclear
units at three sites with a total nameplate capacity
of 6,816 MW. Progress has five nuclear
units at four sites, totaling 4,345 MW.
An Unlikely Marriage
The Duke-Progress merger caught many by
surprise, in part because of the personalities
involved. Often, mergers result when a young,
44
aggressive executive takes over from an older,
less-assertive leader looking for an easy path
to the first tee. In the case of Duke and Progress,
two very strong personalities-Rogers
and Progress Chairman, President, and CEO
Bill Johnson-are involved. Both can suck
the oxygen out of a room just by entering.
Johnson is well over six feet tall and fit. He
is a former big-time college football player
(he matriculated at Penn State under legendary
football coach Joe Paterno but transferred
to Duke University). Both he and Rogers are
lawyers. Unlike the peripatetic and flashy
Rogers, Johnson has spent his entire career
as an electric utility executive at Progress.
According to the merger announcement,
Rogers will become a company éminence
grise, thinking big thoughts and working on
the national and international stage. That's
a role that fits his personality. Rogers led
the electricity industry's failed endeavor
to get Congress to enact a cap-and-trade
program to control carbon dioxide emissions.
He also has been a leading advocate
of utility energy efficiency programs and
renewable generation. A rare Democrat
swimming in the sea of Republicans inhabiting
industry executive suites, Rogers
was successful in persuading his party
to schedule its 2012 national convention,
where President Obama will be renominated,
in Charlotte.
Johnson will become the day-to-day chess
master, moving the pieces around the utility's
broad territory. He has a reputation as
a conventional but very effective manager.
But the Zen master vs. chess master distinction
may not hold, according to one veteran
industry observer, who told POWER, " The
border is pretty blurry. It's hard to tell where
public policy and company direction begin
and end. "
A utility lobbyist told the environmental
news service Greenwire, " Bill Johnson is
a deep strategic thinker who is much less
likely than Rogers to throw around flavor-ofthe-month
ideas in an effort to appease some
regulators and legislators. "
What drives the Duke-Progress merger?
Nuclear power plays an important role, acwww.powermag.com
1.
Mega-merger pending. Approval
of the Duke Energy-Progress Energy merger
will form a utility with over $90 billion in assets
and annual revenues exceeding $22 billion. The
generating capacity of the new Duke Energy
Corp. will exceed 57,200 MW, and its service
territory will cover more than 100,000 square
miles. Source: Duke Energy, Progress Energy
Duke Energy
Progress Energy
cording to several analysts. Barclays Capital
investment banker James K. Asselstine, a former
member of the Nuclear Regulatory Commission
(NRC), made that point recently at a
Platts nuclear conference in Maryland. He
noted that at $10 billion a pop, new nuclear
plants can sink a company.
NRG Energy, for example, was, until recently,
heavily involved in the South Texas
Project (STP) nuclear expansion, to the tune
of more than $5 billion for its share. The company
has a market capitalization of $5 billion,
so failure in Texas could mean goodnight for
NRG. On April 19, NRG announced it was
writing down its investment in the development
of STP Units 3 and 4, at least partially
in response to the nuclear disaster in Japan.
A combined market cap of $37 billion
for the new Duke-Progress utility would
make investments in new nuclear more
palatable, Asselstine concluded. Barclays
Capital is advising Progress in the merger.
POWER | June 2011
http://www.powermag.com
POWER June 2011

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