Duke Swallows up Cinergy

So we had a little merger in the wonderful world of electricity today as Duke Energy moved north of the Mason-Dixon line to snag Ohio-based Cinergy for a mere nine billion dollars. The deal really makes perfect sense for Duke which was sitting on a bloated currency that was just screaming to be used for an acquisition. After all, if you have a currency that is trading at almost 19x earnings, it is a no brainer to buy similar assets that are trading at only 15x 2005 estimates. And lets be frank here – there are no huge differences in the underlying assets of these two companies. Sure Cinergy has some environmental costs coming down the pike (more coal fired plants then Duke) and they operate in a state (Ohio) with a less favorable regulatory and economic environment then North Carolina, but at the end of the day, we are talking about two basic power producers. Now the one aspect of the deal that is appealing is Duke has a bunch of natural gas units in the Midwest that are currently underutilized because their fuel costs are too high to be competitive. It is possible that some of this excess capacity could be soaked up and perhaps used to offset some of the capacity constraints that Cinergy will soon face under both existing and new pollution control requirements. I am not sure Ohio regulators will bless this plan, but it is possible that the Newco will be able to fold those gas plants into the company’s rate base and have Ohio consumers pick up the tab for higher electricity costs. We’ll have to see if that flies. Regardless, of whether it does or not, you can’t fault Duke for pursuing this move. They had a valuable currency and they used it as a weapon to secure valuable assets. However, as with all utility merges, this one may have trouble getting approved. I am sure Duke is touting it as a done deal, but FPL-ETR fell apart and EXC-PEG doesn’t exactly look clean at this point. As such, I don’t think you can take this one to the bank.