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Duke-Progress Deal May Boost Obama's Nuclear Reactor Plans
2011-01-11 05:00:02.2 GMT
By Simon Lomax and Mark Chediak
Jan. 11 (Bloomberg) -- Duke Energy Corp.'s plan to buy
Progress Energy Inc., creating the largest U.S. utility, may
help President Barack Obama's effort to revive construction of
nuclear reactors.
The two companies, which announced the $13.7 billion all-
stock deal yesterday, have been considering as many as six new
reactors in North Carolina, South Carolina and Florida. They are
more likely to move ahead with those projects if the deal goes
through, according to Progress Energy's Chief Executive Officer
Bill Johnson, who would lead the new company.
"The size and scope of this transaction positions us well
to consider the potential for new nuclear generation," Johnson
said on a conference call with investors and analysts.
The U.S. hasn't approved a new construction license for a
nuclear plant in more than 30 years. Obama is trying to spur
reactor projects with federal loan guarantees that cut borrowing
costs. A group led by Atlanta-based Southern Co., currently the
largest U.S. utility, has won a nuclear loan guarantee, the only
one issued so far, for a project in Georgia.
Some power companies have questioned whether building
reactors makes economic sense amid historically low prices for
natural gas, a competing power-plant fuel, and last year's
defeat of climate-change legislation that would have made
burning coal to generate electricity more expensive. In October,
Baltimore-based Constellation Energy Group Inc. turned down a
federal loan guarantee to build a reactor and backed out of the
project.
Charlotte, North Carolina-based Duke Energy and Raleigh,
North Carolina-based Progress Energy have a combined enterprise
value of $64 billion, according to data compiled by Bloomberg,
eclipsing Southern.
Big Projects, Companies
With a bigger balance sheet, the combined companies are
more likely to take on a multibillion-dollar nuclear project
than they would alone, said Paul Franzen, an analyst at Edward
Jones in St. Louis who has a "hold" rating on Duke and
Progress shares and owns none.
"Big projects require big companies," Franzen said. The
new company will be "well-positioned to execute on these
projects to secure attractive rates of financing and then to get
all the parts lined up and actually construct," he said.
It's hard for Constellation and other so-called merchant
generators, such as Exelon Corp. and NRG Energy Inc., to
profitably build new nuclear plants because they sell their
electricity in open markets where prices can fall below the cost
of generation, John Reed, CEO of Concentric Energy Advisors in
Marlborough, Massachusetts, said in a telephone interview.
Southern was able to take part in a $14 billion reactor
project, which won an $8.3 billion loan guarantee, because its
electricity rates are determined by state regulators and set
high enough to recover the company's costs, he said.
Now 'Big Enough'
Duke Energy and Progress Energy can follow Southern's model
because "they now are big enough to move forward without having
to secure other partners" and are also planning reactors in
states where rates are regulated, Reed said.
Obama has endorsed nuclear power as a clean-energy source
and wants the federal government to guarantee as much as $54.5
billion in construction loans, up from $18.5 billion allowed
under current law.
Johnson said during the investor call yesterday that the
companies will not "move forward with new nuclear generation
until we have the appropriate regulatory cost-recovery
mechanisms and support in place."
Progress Energy has delayed its plans for four new nuclear
reactors, Jessica Lambert, a spokeswoman for the company, said
in a telephone interview today. The cost of two nuclear reactors
at a site in Florida's Levy County is estimated at $17.2 billion
to $22.5 billion, she said. The company hasn't provided a cost
estimate for its proposed reactors in North Carolina.
Approvals Needed
Duke Energy's takeover of Progress Energy requires
shareholder approval and will be reviewed by the Federal Trade
Commission. Additionally, the companies need permission from the
Federal Energy Regulatory Commission, the U.S. Nuclear
Regulatory Commission, the North Carolina Utilities Commission
and the South Carolina Public Service Commission.
The companies expect to clear federal and state regulatory
hurdles without being forced to divest any assets, said James
Rogers, Chairman and CEO of Duke Energy, who would serve as
executive chairman of the combined company.
While the companies might have to sell some assets or build
new power transmission lines to win federal regulatory approval
for the takeover, the deal isn't likely to be blocked, Nora Mead
Brownell, a former FERC commissioner who served at the agency
from 2001 to 2006, said in a telephone interview.
State Hurdles
The utility companies may have a tougher time winning over
state-level regulators, said Brownell, who is now a partner at
ESPY Energy Solutions LLC in Alexandria, Virginia. Merging
utilities often face "lots of political pressures," such as
the economic impacts of the companies combining headquarters in
one city, she said.
"Both Duke and Progress have pretty good relationships
with their regulators, but states are more of challenge than the
federal level," Brownell said.
Rogers, who supported Obama's failed effort to pass
legislation capping U.S. greenhouse gases from industrial
sources including power plants, said carbon-dioxide limits are
still coming. While cap-and-trade legislation, in which
companies buy and sell a declining number of pollution rights,
may not pass Congress in the next two years, the Environmental
Protection Agency is moving ahead with its own greenhouse-gas
rules, he said.
Regulation of Carbon
As executive chairman, Rogers said he will help shape the
new company's stance on environmental regulation. He told
reporters on a conference call he is "totally in sync" with
Johnson on "the need to prepare our companies for the
regulation of carbon."
Rogers was "the most outspoken and engaged CEO on the
climate issue through the last year or two," Eileen Claussen,
president of the Arlington, Virginia-based Pew Center on Global
Climate Change, said in a telephone interview. Rogers is likely
to "maintain his role" if the takeover is approved, she said.
For Related News and Information:
Top energy news: ETOP <GO>
Duke earnings profile: DUK US <Equity> ERN <GO>
Mergers and acquisitions data: MA <GO>
--With assistance from Jessica Resnick-Ault in New York and
Edward Klump in Houston. Editors: Charles Siler, Larry Liebert
To contact the reporters on this story:
Simon Lomax in Washington at +1-202-654-4305 or
slomax@bloomberg.net;
Mark Chediak in San Francisco at +1-415-617-7233 or
mchediak@bloomberg.net.
To contact the editors responsible for this story:
Larry Liebert at +1-202-624-1936 or
LLiebert@bloomberg.net;
Susan Warren at +1-214-954-9455 or
susanwarren@bloomberg.net.
