Duke Energy Corp. is buying Progress Energy Inc. for more than $13 billion in stock in a deal that would create the utility with the most customers in the U.S.
The new company's size will allow it to better afford replacing aging transmission infrastructure and old power plants that are struggling to keep up with tightening environmental regulations.
"We have a tsunami of capital we are going to have to raise and deploy," said Duke Chief Executive Jim Rogers in an interview.
The transaction announced Monday by the two North Carolina companies would create a business with about 7.1 million electric customers in North Carolina, South Carolina, Florida, Indiana, Kentucky and Ohio.
Rogers also said the combined company will be able to run power plants more efficiently. This, he said, will save $600 to $800 million in fuel costs over the five years after the combination is completed.
While much of those savings will be passed along to customers, electric bills aren't expected to fall. The cost of building new plants, erecting new wires, and upgrading existing plants to meet clean air and clean water regulations are going to increase the cost of power.
Rogers said the larger firm will have lower borrowing costs, making those capital projects less expensive, which would benefit customers.
The companies would not provide details about job cuts, but said they plan to rely heavily on attrition and retirements to reduce the workforce. Both say they have a large number of workers eligible for retirement.
Rogers and other U.S. utility executives have long complained that their relatively small size put them at a disadvantage compared with European utilities and made it more difficult to embark on large projects like building new nuclear plants.
In recent years state regulators have scuttled proposed deals that would have created utility giants. Constellation Energy and FPL Group, now known as NextEra Energy, abandoned merger plans in 2006. That same year, Exelon and PSEG also failed to complete a deal.
If this deal is approved, the combined company would have the third largest fleet of nuclear power plants in the country. They have applications with the Nuclear Regulatory Commission to build three new power plants, though the companies have no plans to begin construction.
The agreement is the latest in a string of utility deals. In November, PPL Corp. bought Louisville Gas and Electric and Kentucky Utilities from Germany's E.On. In December, Dynegy Inc. agreed to be acquired by Icahn Enterprises. Also last year, First Energy Corp. agreed to acquire Allegheny Energy Inc. while Northeast Utilities agreed to buy NStar, though those deals have yet to be completed.
Progress shareholders will receive 2.6125 common shares of Duke Energy in exchange for each common share of Progress.
Based on Duke's closing share price on Friday, Progress shareholders would get stock worth about $46.48 per share, or $13.7 billion. That represents a 7.1 percent premium to Progress' closing price last Wednesday.
Progress Energy shares fell 76 cents to $43.76, while Duke dropped 31 cents to $17.48.
Duke Energy, based in Charlotte, North Carolina, also will assume approximately $12.2 billion in Progress net debt.
Standard & Poors affirmed Duke's A- credit rating Monday and said the company's outlook was stable. Moody's affirmed its Baa2 rating and stable outlook for the company.
When the deal is completed, Rogers will become an executive chairman of the new company and advise it on strategic matters while serving as lead spokesperson on energy policy.
Progress' top executive, Bill Johnson, will become president and chief executive of the new company.
The companies aim to close the deal by the end of the year. It's expected to boost Duke's adjusted earnings within a year after that.
Progress Energy is based in Raleigh, North Carolina. The combined company will be based in Charlotte.
Samantha Bomkamp in New York contributed to this report.