Merger of Duke Energy and Progress Energy would create largest U.S. utility

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Washington Post Staff Writer
Monday, January 10, 2011; 9:59 PM

As chief executive of the Charlotte-based Duke Energy, James F. Rogers has become a familiar face in Washington over the past three years, playing his part in the futile effort to forge a cap-and-trade scheme to limit greenhouse gas emissions.

But with climate legislation moribund, Rogers has turned to breathing more life into his own company. On Monday, Duke Energy announced a $13.7 billion merger deal with Raleigh, N.C.-based Progress Energy, forging the largest utility in the United States with 7.1 million customers and 57,000 megawatts of power generation capacity.

If the deal is approved by regulators, the heft of the combined company would make it easier to borrow money to undertake large-scale projects such as new nuclear power plants, for which each company has separate plans on the drawing boards. Moreover, Duke Energy, where business has been relatively stagnant, will add a company whose earnings are growing faster.

"Duke on a stand-alone basis, while deploying significant capital investment . . . was pretty much running to a standstill," said Marc de Croisset, an analyst at FBR Capital Markets. "One of the reasons this deal was consummated was to improve earnings growth for Duke."

Along with customers and power plants, Duke Energy will acquire William Johnson, chief executive of Progress, who will be chief executive of the new combined company. That will free Rogers to pursue his principal interest, U.S. policy and strategy.

Rogers, who will have the title "executive chairman," and Johnson will both sit on an 18-member board of directors, 11 of whom will be designated by Duke's current board and seven by Progress's directors.

Rogers was once a lawyer at the Federal Energy Regulatory Commission and later became a partner at Akin, Gump, Strauss, Hauer & Feld. As chief executive at Duke Energy, he has chaired a national council on energy efficiency, traveled to China in search of partners and joint research projects on carbon capture and storage, and met and dined with senior lawmakers and White House officials.

Rogers enjoys the policy game and threw himself into the intricate negotiations over a cap-and-trade approach to climate legislation, an idea that passed the House but failed to gain support in the Senate.

He played a key role in the Climate Action Partnership, a group of big companies and environmental groups, but many environmentalists remained skeptical about his commitment because of a battle Duke waged against the Environmental Protection Agency on matters relating to some of Duke's coal plants.

When prospects for an economy-wide cap-and-trade program began to dim, Rogers raised the possibility of crafting one that would apply to the utility industry. The system would set limits and issue permits for emissions, which could be traded among companies.

Even without climate legislation, Rogers said on Monday that "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." One of the Duke two coal plants currently under construction is a costly integrated gasification combined cycle (IGCC) plant that Duke says will be one of the world's most efficient.

Most of the business management side of the combined company will likely fall to Johnson, who de Croisset called "one of the best assets Duke has acquired." He credits Johnson with diversifying coal supplies so that the utility wouldn't have to rely on high-priced central Appalachian coal.

In addition, Johnson has decided that some of the aging coal-fired power plants in the Progress fleet weren't worth upgrading, and instead has moved to replace them with natural gas-fired plants.

Consolidation has been a trend in the utility industry, especially since legislation in 2005 essentially dismantled a regulatory system that had been in place since the Public Utility Holding Company Act of 1935. But combinations of some of the largest companies have still foundered as a result of concerns raised by state public utility commissions. Mergers between Exelon and Public Service Enterprise Group and between FPL and Constellation Energy were announced with fanfare but never came to fruition.

Duke Energy and Progress Energy hope for a better result, but they still need approval from FERC and a host of regulators in the six states where they provide electricity. North Carolina regulators could focus on job losses, the type of savings the companies hope to achieve in their head offices by merging.

Investors greeted the merger announcement with little enthusiasm. Duke Energy shares fell 1.2 percent to $17.58 a share. Progress Energy fell 1.6 percent to $43.99 a share.

The merger "may make more sense for rate payers than shareholders," de Croisset said.

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