Duke Energy’s acquisition of crosstown Piedmont Natural Gas links the nation’s largest electric utility to the resource that fuels a growing amount of its energy.
Duke will buy Piedmont for $4.9 billion in cash and assume $1.8 billion in debt, the companies announced Monday.
The acquisition is expected to close by the end of 2016 if state regulators and Piedmont’s stockholders approve and the deal passes antitrust review by the Federal Trade Commission and the Justice Department.
The corporate marriage advances a growing reliance on natural gas by an electric utility long rooted in coal. Gas is attractive because it burns cleaner and its price has dropped sharply in recent years.
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Piedmont, formed in 1951, already pipes natural gas to most of Duke’s gas-fired power plants in the Carolinas. Duke Energy Carolinas, the utility that serves Charlotte, expects natural gas to fuel nearly half of its new generation over the next 15 years.
The two companies also have major stakes in a proposed $5 billion natural gas pipeline into Eastern North Carolina. Piedmont holds stakes in five other joint ventures, including pipelines, storage and marketing, which Duke would assume.
“We believe natural gas is going to be the backbone of energy generation going forward,” Duke President and CEO Lynn Good said.
Together the companies would serve 8.8 million electric and gas customers in seven states.
Analysts on Monday said the two companies were a good fit and that the deal would give Duke new expertise in the natural gas industry. Some green-energy advocates, however, said the company was doubling down on fossil fuels that can damage the environment.
Some analysts said Duke was overpaying – $60 a share, 40 percent higher than Piedmont traded at Friday. But Duke expects Piedmont’s healthy customer growth and low-risk business model will boost long-term earnings that are challenged by flat demand for electricity.
Duke already has about 500,000 natural gas customers in Ohio and Kentucky. Piedmont serves about 1 million customers in the Carolinas and Tennessee.
Duke and Piedmont said their union will benefit customers, but it’s too soon to know whether regulators will see it that way.
“Our standard is that the benefits to consumers have to outweigh the costs and risks,” said Christopher Ayers, executive director of the North Carolina Utilities Commission’s Public Staff, which represents consumer interests. “Once the filings are made, we will do a deep dive on all their numbers to make sure consumers are not harmed in this process.”
The acquisition would make Duke a 50 percent owner in the $5 billion Atlantic Coast Pipeline, a 564-mile natural gas pipeline that will be the first of its kind to serve Eastern North Carolina. Piedmont now has a 10 percent stake and Duke 40 percent.
In May, Duke said it will spend $225 million for a 7.5 percent stake in a 500-mile natural gas pipeline through Alabama, Georgia and Florida. The Sabal Trail pipeline is scheduled to open in 2017.
Piedmont is not Duke’s first foray into natural gas. Duke spun off Spectra Energy, which operates pipelines and other natural gas infrastructure, in January 2007 after its 2006 merger with Cinergy.
The deal would become the latest in a flow of energy mergers and acquisitions. Low interest rates are helping companies finance these deals.
Atlanta-based electric utility Southern Co. acquired natural gas giant AGL Resources last month for $12 billion. The deal created what they called “America’s leading U.S. electric and gas utility company” with 9 million customers in nine states, only slightly larger than the combined Duke and Piedmont. Southern paid AGL shareholders a 36 percent premium.
Piedmont will keep its name as a Duke subsidiary and its headquarters in southeast Charlotte. Piedmont employs 1,900 people, including about 700 in the Charlotte area.
Duke spokesman Tom Williams said Piedmont’s SouthPark office “will continue to be a significant presence in Charlotte.” Other details will be worked out over the next year, he said, but there is little staffing overlap between Duke and Piedmont. He contrasted Monday’s deal with the Duke-Progress Energy merger, in which cost cutting was key.
“If Piedmont is being sold (to Duke), you have to presume there were others who were interested,” said David Dollar, president of E4 Carolinas, a regional energy trade association. “With literally any other acquirer, the Carolinas would not realize the great benefits we will realize from this transaction.”
Among those benefits, says Dollar, who has more than 30 years’ experience in natural gas: no headquarters to close and sensitivity to local rates that an out-of-state buyer might not have.
Charlotte Chamber President Bob Morgan predicted little impact on the companies’ local staffing because they run such different enterprises.
“I’m glad that two very well-run companies are going to combine,” Morgan said. “Piedmont could have been acquired by someone else. For them to come together, as marriages go it’s hard to do much better.”
In a meeting with employees on Monday morning, Piedmont CEO Tom Skains acknowledged workers were likely feeling anxiety about the deal but pledged to keep them updated on the merger.
Skains’ own role is undecided. The companies said only that “an existing member of Piedmont’s management team” will lead Duke’s natural gas operations in five states and report to Good. One Piedmont board member will join Duke’s board.
Skains said the deal wasn’t predicated on a continued role for him.
“I made it clear and the board made clear we did not want to bring an individual into the discussion,” he said. “I would look forward to having a discussion with Lynn.”
Critics weigh in
Green-energy advocates who have challenged Duke before regulators and in court charged that the acquisition deepens what they call Duke’s risky investments in fossil fuels. Oil, gas and coal are linked to climate change and air pollution.
“We are keenly interested in this announcement, and quite surprised that Duke would put so many corporate eggs into a fracked basket,” said NC WARN Executive Director Jim Warren, referring to hydraulic fracturing for natural gas.
Greenpeace, another longtime Duke critic, charged that the deal “would further consolidate its stranglehold on where our energy comes from.”
Duke’s most recent merger, the $32 billion acquisition of Raleigh-based Progress Energy in 2012, lingered 18 months before winning regulators’ approval.
Duke’s directors then fired the Progress CEO hours after closing the deal, prompting a state investigation and public apology by Duke. In March, Duke settled a shareholder lawsuit over that merger for $146 million.
Duke will finance the deal with a combination of debt, between $500 million and $750 million of newly issued equity and other cash sources.
The agreement was signed Saturday, according to Piedmont’s securities filings Monday.
It allows Piedmont to back out of the acquisition by paying Duke a $125 million breakup fee. If it does not get regulators’ approval, Duke could pay Piedmont $250 million to back out.
Analysts said the deal makes sense because of the overlapping service territories of the companies, their previous business ties and Piedmont’s brisk 1.6 to 2 percent annual customer growth.
But “all these benefits come at a steep price for Duke shareholders” and favor Piedmont stock owners, Morningstar analyst Andrew Bischof wrote.
The acquisition gets Duke people who have deep experience in the natural gas industry, said Dollar, of E4 Carolinas. “What you’ll have there is a group of strategic thinkers that will be valuable to Duke Energy on the power side,” he said.
As markets evolve, he said, that infusion of expertise could lead to future pairings of electricity and natural gas in products such as transportation fuels or energy-management systems.
The $60 a share Duke will pay Piedmont shareholders is twice Morningstar’s fair value estimate, Bischof wrote. The $6.7 billion total cost, including debt, is 3.5 times Piedmont’s book value and 31 times its estimated earnings per share.
Morningstar lowered its fair-value estimate for Duke from $83 to $81 a share, while upping Piedmont’s estimate from $30 to $53 a share.
Duke’s stock closed Monday at $72.24, down $1.50. Piedmont’s soared to $57.82, up $15.52.