Duke Energy (NYSE:DUK) announced its plans to merge with Progress Energy in January 2011, but the merger has been pending on account of certain conditions imposed by the Federal Energy Regulatory Commission (FERC). The $26 billion all-stock merger will make the combined entity the largest utility company in the U.S. The companies have planned to complete the merger by July 1, 2012.  However, they are required to seek approval from the regulators in North Carolina and South Carolina and meet certain FERC conditions before completing the merger.
We have a price estimate of $25 for Duke’s stock, which is about 10% above the current market price.
Progress Energy will add nearly 23 GW of power generation capacity and more than 3 million customers to Duke. The combined company will serve around 7 million customers across 6 states – North Carolina, South Carolina, Florida, Indiana, Kentucky and Ohio. As a result, Duke will have a market leading position as a utility provider in some states, such as Carolinas.
The FERC, in its attempt to protect competition in the wholesale electricity markets in the Carolinas, imposed a condition prohibiting Duke from selling the most-expensive energy to new customers only. The companies devised a plan that included dedicated sales to wholesale power marketing companies and construction of new transmission lines, which the FERC has agreed to. These additions will increase expenses by $230 million for the merging companies and can impact Duke’s EBITDA margin for the U.S. Franchised Electric & Gas division adversely, should it fail to recover these costs via tariff hikes. Recently, Duke filed for an electric rate increase with the Public Utilities Commission of Ohio (PUCO). 
The FERC has also asked Duke to lay down a plan detailing how the two companies will share cost savings. While the costs may outweigh the savings in the short term, we believe Duke’s expanded customer base through the merger will bring long-term benefits to the company.
The Duke stock has remained silent for a while, awaiting approval for the long pending merger. We believe that once the merger completes and its revised strategies become more visible, the stock will start rolling toward its fair value.Notes: