- The Washington Times - Monday, May 9, 2005

CINCINNATI (AP) — Duke Energy Corp. said yesterday it would buy rival power company Cinergy Corp. in a stock deal worth $9 billion that would create one of the nation’s largest power generators.

The deal, announced after being unanimously approved by both companies’ boards, would create an energy company with 5.4 million retail customers, more than $70 billion in assets and about $1.9 billion in annual profit on $27 billion in annual revenue.

Analysts said it could mean further consolidation in the industry.

Based on market capitalization, the combined company’s electric operations would be in the top five in the United States, and the natural gas operations would be the largest in North America, said Paul Anderson, Duke Energy’s chairman and chief executive officer.

The proposed purchase, which requires shareholder and regulatory approval, would allow Duke to complement its gas-fired operations in the Midwest with Cinergy’s coal-fired plants.

“Down the road — long term — that will give us a lot more portfolio flexibility than we have had to date,” Mr. Anderson said. Analysts questioned, however, whether such flexibility would boost profitability enough to justify the deal.

James Rogers, Cinergy chairman and chief executive officer, said the deal puts Cinergy in a better position to meet its power-generating needs in the Midwest.

The combined company would own or operate 54,000 megawatts of electric generation with operations in two-thirds of the United States, Canada and internationally — primarily in Latin America.

The company would have 3.7 million retail electric customers and 1.7 million retail gas customers in Ohio, Kentucky, Indiana, North Carolina, South Carolina and Ontario, Canada.

Duke Energy, based in Charlotte, N.C., is a diversified energy company with natural gas and electric businesses and a real estate portfolio. Cinergy, based in Cincinnati, operates Cincinnati Gas & Electric Co., Union Light, Heat & Power and PSI Energy.

Analyst Mike Heim of A.G. Edwards & Sons said the deal will prompt rivals to reconsider the need to get bigger. But he doubts the industry is on the verge of a new wave of consolidation, as happened in the late 1990s when utilities, as a result of deregulation, were forced to shed generation or distribution assets. That left them significant cash with which they could make an acquisition.

In the wake of Enron’s collapse and the economic downturn, however, the power industry went through a slump, deregulation stalled and companies that tried to expand too quickly into new businesses or countries were left with high levels of debt.

Now, as this highly fragmented industry returns to a more conservative approach to making and selling power, some analysts say the revival of merger activity is inexorable.

“Consolidation will continue because shareholders demand growth in revenue and profitability,” said Vance Scott, who heads consultant A.T. Kearney’s utilities practice in Chicago.

Duke and Cinergy say it will take at least a year for regulators to approve the merger.

Cinergy and Duke Energy expect to cut 1,500 jobs, primarily through attrition, early retirement and other severance programs. The companies have 29,350 workers.

Cincinnati Mayor Charlie Luken and the Ohio Consumers’ Counsel said they will intervene to be sure consumers aren’t hurt by higher rates.

Under the agreement, each Cinergy common share would be converted into 1.56 shares of Duke Energy. At Friday’s closing prices, that would represent a 13.4 percent premium over Cinergy’s closing price of $40.38.

Cinergy shares rose $1.94 to $42.32 in trading on the New York Stock Exchange while Duke shares fell 54 cents to $28.82.

Mr. Anderson would become chairman, and Mr. Rogers would become president and CEO.

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