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Duke, Cinergy Pass Antitrust Review, Await Multiple Other Approvals

Duke Energy and Cinergy received antitrust clearance from the Federal Trade Commission and U.S. Department of Justice for their $9 billion merger. The agencies granted early termination of the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

The combination, which was announced May 9 (see Daily GPI, May 10), remains subject to other closing requirements, including approvals from various state and federal regulatory agencies, and shareholders of both companies. Duke and Cinergy anticipate receiving all necessary approvals by the first half of 2006.

Duke said previously that repeal of the Public Utility Holding Company Act (PUHCA) by the new energy law should speed up merger approval by a month or two. The repeal eliminates the need for Duke, which is the purchaser in the transaction, to register as a holding company. It also increases the range of options regarding Duke's real estate subsidiary, Crescent, specifically eliminating the need to potentially exit the business after closing the merger.

However, the companies still must obtain merger approvals from five states and several other federal agencies.

There also was some concern about the potential impact on the merger of Cinergy's announcement in its second quarter financial results that its wholesale gas trading operation had a division loss of 13 cents per share, which contributed to a 14% drop in Cinergy's second quarter net income. Net income from Cinergy's commercial operations, including gas and power, fell by nearly $28 million.

CEO James Rogers called it a "major disappointment." The gas division had the wrong market bias in the first half of the year, betting that gas prices would fall or remain flat, but instead they rose sharply. Rogers said the company now is evaluating what to do with its gas trading operation.

Duke indicated it was watching Cinergy's gas trading activities very carefully, but it also emphasized that it was committed to the merger because of its long-term benefits.

Merrill Lynch analyst Steven Fleishman said the projected valuation on Duke shares is becoming more compelling. "DUK currently trades at 16.6x our 2006 [estimated earnings per share], a premium of 11% versus integrated electric peers. Including first year synergies from the Cinergy merger and accretion on the initial deal, however, we would see adjusted 2006 [estimates] in the $1.85 [area], rising to $1.90 by year three (2009). On these first year numbers, DUK trades at 15.1x, which is only a modest premium of about 2% versus the peer group." Fleishman also noted that the projected dividend of the combined company also would be above its peer group.

"Current levels of P/E premium are more than justified in our view given a core portfolio of high quality businesses, the strong cash position (currently more than $2 billion) and the longer term opportunities such as the potential separation of gas and electric businesses."

Other actions Duke Energy is contemplating include formation of a Canadian income trust with assets currently under Duke Energy Gas Transmission, and a master limited partnership with assets at Duke Energy Field Services.

The Duke Energy-Cinergy combination will have approximately $27 billion in annual revenues and $1.9 billion in annual net income, and will -- on a combined basis -- own or operate 54,000 MW of electric generation domestically and internationally (35,000 MW from Duke Energy, and 19,000 MW from Cinergy).

The transaction will form a utility business with 3.7 million retail electric customers and 1.7 million retail gas customers in Ohio, Kentucky, Indiana, North Carolina, South Carolina and Ontario, Canada. The retail electric businesses will have more than 25,000 MW of generation capacity.

The combined company also will include Duke Energy's major natural gas pipeline assets (Texas Eastern Transmission, Algonquin Gas Transmission, East Tennessee Natural Gas, BC Pipeline, Maritimes & Northeast and Gulfstream), along with storage assets, about 57,000 miles of natural gas gathering pipeline and processing facilities.

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