LOS ANGELES, May 10 (UPI) -- The merger of Duke Energy and Cinergy will better position the two merchant-power giants for a future in which tightening environmental regulations and a return to competitive electricity markets will play a significant role.
By joining forces with Duke, Ohio-based Cinergy has essentially dodged a bullet that had been barreling down the pike for some time in the form of stricter emissions regulations that would require big capital investments for aging coal-fired power plants that probably aren't worth the upgrades.
"This combination gives us an option that we didn't have before," Cinergy Chairman Jim Rogers told reporters on a conference call Monday to announce the $9 billion stock transaction. "There is going to be more pressure coming down on the older coal plants that are 40 years or older."
Rogers and his counterpart at Duke, Paul Anderson, spent Monday touting the deal as one of those win-win situations that most major mergers and acquisitions are painted as; however, the combination of the two energy firms makes good sense in terms of more than simply getting bigger and lopping off a layer or two of middle management.
The plan gives each company something they were lacking as the United States transitions to an energy future in which emissions of greenhouse gases and mercury from coal are reined in, and the price of natural gas as overhead becomes potentially more onerous.
While natural gas is far friendlier to the environment than coal, its higher and more-volatile prices prevent it from being a perfect fuel.
Rogers and Anderson pointed out that Cinergy's assets are heavy in coal-powered generation, but that Duke comes in with a fleet of power plants in the Midwest that are fueled almost exclusively by natural gas and therefore subject to the ups and downs of prices in a market where demand nationwide is increasing at a steady rate.
The Energy Department's Energy Information Administration has predicted gas demand from the electricity sector alone would grow from 5 trillion cubic feet in 2003 to 9.4 trillion cubic feet in 2025.
The Bush administration is pushing development of so-called clean-coal technology that will eliminate unwanted emissions and allow the United States to lean more heavily on lower-cost coal rather than increasingly pricey gas for power generation.
In the meantime, new federal limits on greenhouse gases and mercury are warming up in the bullpen, and the future holds the definite possibility that even stricter regulations will be coming.
At the same time, the notion of competition in the power market following a lull in the wake of Enron's collapse leaves Cinergy in the uncomfortable position of being forced to make expensive upgrades to plants that are too old and too small to produce power at competitive rates. The alternative would be to shut the plants down and pay other power producers a premium price to make up the shortfall, and then passing the increases on to already beleaguered consumers.
"We needed additional capacity in the Midwest over time, and as environmental regulations become more stringent, we would need to modernize our existing plants," Rogers said on the Wall Street conference call. "Some of those plants are 30 to 50 years old; they're plants where it doesn't make sense to attach a new scrubber to the back of it."
Duke brought to the table a far more diverse mix of fuels that will be able to tide Cinergy over and allow it to hang on to its share of the major Midwest market while it makes environmental upgrades to its plants over the next several years.
In return, Duke gets itself a greater presence in the Midwest market around Cincinnati and Indianapolis, where Cinergy currently is strong -- along with some attractive coal-powered generating assets that will help shield its bottom line from spikes in natural gas prices.
"The combination adds fuel and geographic diversity to Duke merchant fleet," Fitch, Inc., said in a statement reaffirming its ratings on Duke securities. "In addition, Duke's mid-merit assets are a good fit with Cinergy's base load facilities. About one-third of Duke's merchant capacity is located in the Midwest region where Cinergy's regulated entities are in a short generating position."
Duke operates coal plants along with three nuclear plants in the Carolinas; however, its strength so far as the merger goes lies in its natural gas plants, which include the Hanging Eock plant in Lawrence County, Ohio, that can churn out 1,240 megawatts of power and began operating just two years ago.
"Duke will add 1.5 million electric customers to its current 2.2 million and 500,000 gas customers to its current 1.2 million," Merrill Lynch noted in a report Monday that was quoted by The New York Times. "It also more than doubles the territory it services to 47,000 square miles."
Anderson told financial analysts on the conference call Monday the dove-tailing of fuel resources and the opening of the Midwest put Cinergy on the top of the list when Duke began looking around for a merger.
"We limited our search to players that could make Duke more profitable right away," he noted. "Cinergy came to mind early because they are very concentrated in coal and we are very concentrated in gas."
Hil Anderson is UPI's Chief Energy Correspondent. E-mail: firstname.lastname@example.org