SOURCE: Global Energy Decisions

May 09, 2005 18:30 ET

Duke Acquisition of Cinergy Puts Industry Firmly on Consolidation Path

Least Cost-Best Fit Approach to Growth is First Wave in Industry Consolidation Map of Combined Companies Available at

BOULDER, CO -- (MARKET WIRE) -- May 9, 2005 -- Duke's announced acquisition of Cinergy, following on the heels of Exelon's acquisition of PSEG, is a key signpost that the electric power industry is firmly on the road to recovery and that the process of rationalizing the industry for the next stage of growth in the power business cycle is underway.

"Duke's acquisition of Cinergy will likely speed the industry consolidation at the utility level and among merchant energy companies and their major suppliers, where you could see consolidation of as much as 50% of the players," said Gary Hunt, president, Global Energy Advisors, a Global Energy Decisions, Inc. business unit.

Hunt cited five trends that will "significantly influence the continued consolidation of the North American electric power marketplace and shape the value creation equation for the Duke-Cinergy merger":

1. Diversified energy companies are a business model that seems to work. The Duke-Cinergy merger represents the emerging diversified energy company participating in both regulated and deregulated markets that is becoming the dominant business model for the U.S. electric power and gas industry. The key to success is to combine the right capabilities and assets to mitigate significant operating environment risk and to participate in growth opportunities such as in fuel supply.

2. Challenging economics of the power industry impede rationalization, but there is no turning back. The power industry has unique qualities that have made the development of competitive markets frustratingly difficult. These complex technical and institutional realities and industry restructuring will continue to be a slow incremental process, but technology is facilitating competition and there is a relentless demand for lower cost power.

3. A diverse fuel future with plenty of volatility and growth opportunities. Clean fuel supply for power generation is what keeps many executives and regulators up at night, but it's this part of the energy value chain where profitable investment opportunities are to be found in consolidation. Today's higher natural gas prices and the higher costs for tomorrow's cleaner coal solutions should provide a boost to renewable energy of all sorts, and maybe even new nuclear power plants.

4. Growth imperatives will trump today's dividend and share buy back trend. A clear sign of the industry's financial recovery is the growing number of companies that are returning money to shareholders rather than handing it over to creditors, or plowing it into potentially value-destroying investments. Unfortunately for shareholders, this phase is likely to be short lived as companies recover, gain confidence, and pursue perceived growth opportunities.

5. Active investors will continue to play a decisive role in industry restructuring. At the peak of the liquidity and credit crisis with capital markets closed to speculative energy firms, one of the few places for financially battered companies to turn was non-traditional sources such as private equity and hedge firms. The capital and disciplined governance private capital brings are likely to play an increasingly important restructuring role in parts of the industry where internally generated funds outstrip growth opportunities.

Duke's acquisition of Cinergy underscores these trends and the process of consolidation that is accelerating in the electric power industry, changing the industry in both predictable and unpredictable ways. "Many changes will be incremental. Others, like the mergers and acquisitions announced by Duke, bring both risks and opportunities for growth. These conditions place an even greater premium on management's ability to identify, communicate, and manage risks," said Hunt.

A map highlighting Duke and Cinergy plant assets, pipelines and service territories is available for download at:

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