As Filed with the Securities and Exchange Commission on December 9, 2005
Registration No. 333-126318
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DUKE ENERGY HOLDING CORP.
(Exact name of Registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
4931 (Primary Standard Industrial Classification Code Number) |
20-2777218 (IRS Employer Identification Number) |
526 South Church Street
Charlotte, North Carolina 28202
(704) 594-6200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
B. Keith Trent, Esq.
Group Vice PresidentGeneral Counsel and Secretary
Duke Energy Corporation
526 South Church Street
Charlotte, North Carolina 28202
(704) 382-0714
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies To:
Peter A. Atkins, Esq. Sheldon S. Adler, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 (212) 735-3000 |
Marc E. Manly, Esq. Cinergy Corp. 139 East Fourth Street Cincinnati, Ohio 45202 (513) 421-9500 |
Steven A. Rosenblum, Esq. Stephanie J. Seligman, Esq. Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 (212) 403-1000 |
Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary joint proxy statement/prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary joint proxy statement/prospectus is not an offer to sell and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY COPYSUBJECT TO COMPLETION, DATED DECEMBER 9, 2005
MERGERS PROPOSEDYOUR VOTE IS VERY IMPORTANT |
Dear Shareholders:
The boards of directors of Duke Energy Corporation and Cinergy Corp. have approved the merger of Duke Energy and Cinergy. A new company incorporated in Delaware, currently named Duke Energy Holding Corp., will hold what today are Duke Energy and Cinergy's independent businesses. Upon consummation of the merger, the new company will be renamed Duke Energy Corporation.
If the merger is completed, Duke Energy shareholders will receive one share of the new company's common stock for each share of Duke Energy common stock held, and Cinergy shareholders will receive 1.56 shares of the new company's common stock for each share of Cinergy common stock held.
Based on the number of shares of common stock of Duke Energy and Cinergy outstanding on May 6, 2005, the last trading day prior to the public announcement of the merger, former Duke Energy shareholders will own approximately 76% of the common stock of the new company and former Cinergy shareholders will own approximately 24% of the common stock of the new company.
Duke Energy and Cinergy will each hold a special meeting of their shareholders to consider and vote on the mergers. Every vote is important. Whether or not you plan to attend your company's special meeting, please take the time to vote by following the instructions on your proxy card.
The places, dates and times of the special meetings are as follows:
For Duke Energy shareholders: 10:00 a.m., [ ], [ ], 2006 O.J. Miller Auditorium in the Energy Center 526 South Church Street Charlotte, North Carolina 28202 |
For Cinergy shareholders: [] |
We enthusiastically support this combination of our companies and join with our boards in recommending that you vote FOR the approval of the agreement and plan of merger and the mergers.
Sincerely, | Sincerely, | |
Paul M. Anderson Chairman and Chief Executive Officer Duke Energy Corporation |
James E. Rogers Chairman, President and Chief Executive Officer Cinergy Corp. |
For a discussion of risk factors which you should consider in evaluating the mergers, see "RISK FACTORS" beginning on page 19.
Based on the number of Duke Energy and Cinergy shares outstanding on [ ], 200[ ], we expect that approximately [ ] shares of the new company's common stock, no par value per share, will be issued in connection with the mergers and that the new company's common stock will be listed on the New York Stock Exchange.
Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved the mergers and other transactions described in this joint proxy statement/prospectus nor have they approved or disapproved the issuance of the new company's common stock to be issued in connection with the mergers, or determined if this joint proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.
This joint proxy statement/prospectus is dated [ ], 200[ ], and is first being mailed to shareholders on or about [ ], 200[ ].
DUKE ENERGY CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [ ], 2006
To the Shareholders of Duke Energy Corporation:
We will hold a special meeting of the shareholders of Duke Energy Corporation, on [ ], [ ], 2006 at 10:00 a.m., local time, in the O.J. Miller Auditorium in the Energy Center located at 526 South Church Street in Charlotte, North Carolina, to consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of May 8, 2005, as amended, by and among Duke Energy Corporation, Cinergy Corp., Duke Energy Holding Corp., Deer Acquisition Corp., a wholly-owned subsidiary of Duke Energy Holding that will merge into Duke Energy, and Cougar Acquisition Corp., a wholly-owned subsidiary of Duke Energy Holding that will merge into Cinergy.
We will transact no other business at the special meeting, except for business properly brought before the special meeting or any adjournment or postponement of it by the Duke Energy board of directors.
Only holders of record of shares of Duke Energy common stock and Duke Energy preferred stock at the close of business on [ ], 200[ ], the record date for the special meeting, are entitled to notice of the special meeting, and only holders of record of shares of Duke Energy common stock at the close of business on the record date are entitled to vote at the special meeting and any adjournments or postponements of the special meeting.
We cannot complete the mergers described above unless holders of a majority of all shares of Duke Energy common stock outstanding that are entitled to vote at the Duke Energy special meeting vote to approve the agreement and plan of merger and thereby approve the mergers.
For more information about the mergers described above and the other transactions contemplated by the agreement and plan of merger, please review the accompanying joint proxy statement/prospectus and the agreement and plan of merger attached to it as Annex A.
Your vote is important. Whether or not you plan to attend the special meeting, please complete, sign and date the enclosed proxy and return it promptly in the enclosed postage-paid envelope. You may also cast your vote by telephone or electronically by following the instructions on your proxy card.
Please do not send any share certificates at this time. If the mergers are consummated, we will notify you of the procedures for exchanging Duke Energy share certificates for shares of Duke Energy Holding Corp.
By Order of the Board of Directors, | |||
Name: | B. Keith Trent, Esq. | ||
Title: | Group Vice PresidentGeneral Counsel and Secretary |
Charlotte, North Carolina
[ ], 200[ ]
CINERGY CORP.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [ ], 2006
To the Shareholders of Cinergy Corp.:
We will hold a special meeting of the shareholders of Cinergy Corp. on [ ], [ ], 2006 at 9:00 a.m., local time, at the [ ], to consider and vote upon a proposal to adopt the Agreement and Plan of Merger dated as of May 8, 2005, as amended, by and among Cinergy Corp., Duke Energy Corporation, Duke Energy Holding Corp., Deer Acquisition Corp., a wholly-owned subsidiary of Duke Energy Holding that will merge into Duke Energy, and Cougar Acquisition Corp., a wholly-owned subsidiary of Duke Energy Holding that will merge into Cinergy.
We will transact no other business at the special meeting, except for business properly brought before the special meeting or any adjournment or postponement of it by the Cinergy board of directors.
Only holders of record of shares of Cinergy common stock at the close of business on [ ], 200[ ], the record date for the special meeting, are entitled to notice of, and to vote at, the special meeting and any adjournments or postponements of the special meeting.
We cannot complete the mergers described above unless holders of a majority of all shares of Cinergy common stock outstanding and entitled to vote at the Cinergy special meeting vote to adopt the agreement and plan of merger and thereby approve the mergers.
For more information about the mergers described above and the other transactions contemplated by the agreement and plan of merger, please review the accompanying joint proxy statement/prospectus and the agreement and plan of merger attached to it as Annex A.
Your vote is important. Whether or not you plan to attend the special meeting, please complete, sign and date the enclosed proxy and return it promptly in the enclosed postage-paid envelope. You may also cast your vote by telephone or electronically by following the instructions on your proxy card.
Please do not send any share certificates at this time. If the mergers are consummated, we will notify you of the procedures for exchanging Cinergy share certificates for shares of Duke Energy Holding Corp.
By Order of the Board of Directors, | |||
Name: | Julia S. Janson | ||
Title: | Corporate Secretary and Chief Compliance Officer |
Cincinnati, Ohio
[ ], 200[ ]
REFERENCES TO ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important business and financial information about Duke Energy and Cinergy from other documents that are not included in or delivered with this joint proxy statement/prospectus. This information is available for you to review at the Securities and Exchange Commission's public reference room located at 100 F Street, N.E., Room 1580, Washington, DC 20549, and through the SEC's website, www.sec.gov. You can also obtain those documents incorporated by reference in this joint proxy statement/prospectus by requesting them in writing or by telephone from the appropriate company at the following addresses and telephone numbers:
Duke Energy Corporation 526 South Church Street Charlotte, North Carolina 28202 (800) 488-3853 Attention: Investor Relations www.duke-energy.com/investors |
Cinergy Corp. 139 East Fourth Street Cincinnati, Ohio 45202 (800) 262-3000 Ext. 1235 Attention: Investor Relations www.cinergy.com/investors |
If you would like to request documents, please do so by [ ], 2006 in order to receive them before the special meetings.
See "Where You Can Find More Information" beginning on page 180.
VOTING BY INTERNET, TELEPHONE OR MAIL
Duke Energy shareholders of record may submit their proxies by:
Internet. You can vote over the Internet by accessing the website at www.proxyvote.com and following the instructions on the website. Internet voting is available 24 hours a day. If you vote over the Internet, do not return your proxy card(s) or voting instruction card(s).
Telephone. You can vote by telephone by calling the toll-free number (800) 690-6903 in the United States, Canada or Puerto Rico on a touch-tone phone. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Telephone voting is available 24 hours a day. If you vote by telephone, do not return your proxy card(s) or voting instruction card(s).
Mail. You can vote by mail by simply completing, signing, dating and mailing your proxy card(s) or voting instruction card(s) in the postage-paid envelope included with this joint proxy statement/prospectus.
Cinergy shareholders of record may submit their proxies by:
Internet. You can vote over the Internet by accessing the website at www.cesvote.com and following the instructions on the website. Internet voting is available 24 hours a day. If you vote over the Internet, do not return your proxy card(s) or voting instruction card(s).
Telephone. You can vote by telephone by calling the toll-free number (888) 693-8683 in the United States, Canada or Puerto Rico on a touch-tone phone. You will then be prompted to enter the control number printed on your proxy card and to follow subsequent instructions. Telephone voting is available 24 hours a day. If you vote by telephone, do not return your proxy card(s) or voting instruction card(s).
Mail. You can vote by mail by simply completing, signing, dating and mailing your proxy card(s) or voting instruction card(s) in the postage-paid envelope included with this joint proxy statement/prospectus.
If you hold your shares through a bank, broker, custodian or other recordholder, please refer to your proxy card or voting instruction form or the information forwarded by your bank, broker, custodian or other recordholder to see which options are available to you.
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PAGE |
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---|---|---|---|---|
SUMMARY | 1 | |||
Questions and Answers About the Mergers | 1 | |||
Other Information Regarding the Mergers | 7 | |||
Recommendations by the Boards | 7 | |||
Fairness Opinions Presented to the Boards of Directors | 7 | |||
Interests of Directors and Executive Officers in the Mergers | 8 | |||
The Mergers | 8 | |||
Conditions to the Completion of the Mergers | 8 | |||
Termination of the Merger Agreement | 9 | |||
Termination Fees; Reimbursement of Expenses | 9 | |||
No Solicitation | 10 | |||
Legal Proceedings Related to the Mergers | 10 | |||
Accounting Treatment | 10 | |||
Material U.S. Federal Income Tax Consequences of the Duke Energy Reorganization and the Cinergy Merger | 11 | |||
Regulatory Matters | 11 | |||
The Companies | 12 | |||
Comparative Stock Prices and Dividends | 14 | |||
Selected Historical Financial Data | 15 | |||
Selected Historical Consolidated Financial Data of Duke Energy | 15 | |||
Selected Historical Consolidated Financial Data of Cinergy | 16 | |||
Selected Unaudited Pro Forma Condensed Combined Financial Data | 17 | |||
Unaudited Comparative Per Share Data | 17 | |||
RISK FACTORS | 19 | |||
Risks Relating to the Mergers | 19 | |||
Risks Relating to the Businesses of the Combined Company | 22 | |||
Risks Related to the Industry | 31 | |||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | 35 | |||
RECENT DEVELOPMENTS | 37 | |||
THE DUKE ENERGY SPECIAL MEETING | 38 | |||
General | 38 | |||
Date, Time and Place of the Duke Energy Special Meeting | 38 | |||
Purpose of the Duke Energy Special Meeting | 38 | |||
Duke Energy Record Date; Shares Entitled to Vote | 38 | |||
Quorum | 38 | |||
Vote Required | 39 | |||
Recommendation of the Board of Directors | 39 | |||
Voting by Duke Energy's Directors and Executive Officers | 39 | |||
Voting of Proxies | 39 | |||
How to Vote | 40 | |||
Duke Energy 401(k) Plan Participants | 41 | |||
Revoking Your Proxy | 41 | |||
Other Voting Matters | 41 | |||
Proxy Solicitations | 42 | |||
Other Business; Adjournment | 42 | |||
Representatives of Deloitte & Touche LLP | 42 | |||
Assistance | 42 | |||
THE CINERGY SPECIAL MEETING | 43 | |||
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General | 43 | |||
Date, Time and Place of the Cinergy Special Meeting | 43 | |||
Purpose of Cinergy Special Meeting | 43 | |||
Cinergy Record Date; Outstanding Shares; Shares Entitled to Vote | 43 | |||
Quorum | 43 | |||
Vote Required | 44 | |||
Recommendation of the Board of Directors | 44 | |||
Voting by Cinergy's Directors and Executive Officers | 44 | |||
Voting of Proxies | 44 | |||
How to Vote | 44 | |||
Cinergy 401(k) Plan Participants | 45 | |||
Revoking Your Proxy | 46 | |||
Other Voting Matters | 46 | |||
Proxy Solicitations | 46 | |||
Other Business; Adjournment | 46 | |||
Representatives of Deloitte & Touche LLP | 47 | |||
Assistance | 47 | |||
THE MERGERS | 48 | |||
General Description of the Mergers | 48 | |||
Background of the Mergers | 48 | |||
Duke Energy's Reasons for the Mergers and Recommendation of Duke Energy's Board of Directors | 58 | |||
Fairness Opinions Presented to the Duke Energy Board of Directors | 64 | |||
Interests of Duke Energy's Directors and Executive Officers in the Mergers | 83 | |||
Cinergy's Reasons for the Mergers and Recommendation of Cinergy's Board of Directors | 84 | |||
Opinion of Cinergy's Financial Advisor | 88 | |||
Interests of Cinergy's Directors and Executive Officers in the Mergers | 100 | |||
Continuing Board and Management Positions | 105 | |||
Indemnification and Insurance | 106 | |||
Listing of Duke Energy Holding Common Stock | 107 | |||
Deregistration and Delisting of Duke Energy and Cinergy Common Stock | 107 | |||
Dividends | 108 | |||
Material U.S. Federal Income Tax Consequences of the Duke Energy Reorganization and the Cinergy Merger | 108 | |||
Accounting Treatment | 111 | |||
Dissenters' or Appraisal Rights | 111 | |||
Principal Corporate Offices | 114 | |||
Workforce and Employee Benefit Matters | 114 | |||
Effect on Awards Outstanding Under Stock Plans | 115 | |||
Resale of Duke Energy Holding Common Stock | 116 | |||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE OFFICERS | 117 | |||
Security Ownership of Certain Beneficial Owners and Management of Duke Energy | 117 | |||
Security Ownership of Certain Beneficial Owners and Management of Cinergy | 118 | |||
REGULATORY MATTERS | 119 | |||
Hart-Scott-Rodino Act | 119 | |||
Federal Power Act | 119 | |||
Nuclear Regulatory Commission | 120 | |||
State Regulatory Approvals | 121 | |||
Federal Communications Commission | 122 | |||
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Securities and Exchange Commission | 123 | |||
Canadian Competition Act | 123 | |||
Other International Approvals | 123 | |||
THE MERGER AGREEMENT | 124 | |||
The Mergers and the Restructuring Transactions | 124 | |||
Timing of Closing | 125 | |||
Merger Consideration | 125 | |||
Procedures for Exchange of Share Certificates; Fractional Shares | 126 | |||
Conditions to the Completion of the Mergers | 127 | |||
Termination of the Merger Agreement | 128 | |||
Termination Fees; Reimbursement of Expenses | 130 | |||
No Solicitation | 131 | |||
Legal Proceedings | 132 | |||
Other Expenses | 133 | |||
Transition Committee | 133 | |||
Name of the New Company | 133 | |||
Charitable Contributions | 133 | |||
Amendment; Extension and Waiver | 134 | |||
Representations and Warranties | 134 | |||
Covenants of Duke Energy and Cinergy | 136 | |||
COMPARATIVE STOCK PRICES AND DIVIDENDS | 141 | |||
DUKE ENERGY CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION | 143 | |||
DUKE ENERGY CORPORATION Unaudited Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 2005 | 144 | |||
DUKE ENERGY CORPORATION Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2004 | 145 | |||
Duke Energy Corporation Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations | 146 | |||
DUKE ENERGY HOLDING CORP. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION | 148 | |||
DUKE ENERGY HOLDING CORP. Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine Months Ended September 30, 2005 | 151 | |||
DUKE ENERGY HOLDING CORP. Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 2004 | 152 | |||
Duke Energy Holding Corp. Notes to Unaudited Pro Forma Condensed Combined Statements of Operations | 153 | |||
DUKE ENERGY HOLDING CORP. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET SEPTEMBER 30, 2005 | 155 | |||
Duke Energy Holding Corp. Notes to Unaudited Pro Forma Condensed Combined Balance Sheet | 156 | |||
DESCRIPTION OF DUKE ENERGY HOLDING CAPITAL STOCK | 159 | |||
General | 159 | |||
Common Stock | 159 | |||
Preferred Stock | 159 | |||
Provisions that Have or May Have the Effect of Delaying or Prohibiting a Change in Control | 160 | |||
COMPARISON OF SHAREHOLDER RIGHTS | 161 | |||
Authorized Capital Stock; Authority to Issue Capital Stock | 161 | |||
Shareholders Rights Plan | 162 | |||
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Number of Directors; Classification of Board of Directors | 162 | |||
Vacancies on the Board and Newly Created Directorships | 163 | |||
Removal of Directors | 164 | |||
Quorum for Meetings of Shareholders | 165 | |||
Voting Rights and Required Vote Generally | 166 | |||
Votes on Mergers, Consolidations, Sales or Leases of Assets and Certain Other Transactions. | 167 | |||
Business Combination Statutes | 168 | |||
Shareholder Action by Written Consent | 168 | |||
Special Meetings of Shareholders | 169 | |||
Amendments to Governing Documents | 169 | |||
Indemnification of Directors and Officers | 171 | |||
Limitation on Personal Liability of Directors | 172 | |||
Preemptive Rights | 173 | |||
Cumulative Voting Rights | 173 | |||
Dividends and Stock Repurchases | 173 | |||
Dissenters' or Appraisal Rights | 174 | |||
Record Date for Determining Shareholders Entitled to Vote | 175 | |||
Notice of Shareholder Meetings | 175 | |||
Advance Notice of Shareholder Nominations for Directors and Shareholder Proposals | 176 | |||
Shareholder Inspection of Corporate Records | 178 | |||
Interested Director Transactions | 178 | |||
LEGAL MATTERS | 179 | |||
EXPERTS | 179 | |||
SHAREHOLDER PROPOSALS | 180 | |||
Duke Energy | 180 | |||
Cinergy | 180 | |||
OTHER MATTERS | 180 | |||
WHERE YOU CAN FIND MORE INFORMATION | 180 |
ANNEXES |
||||
Annex A | Agreement and Plan of Merger | |||
Exhibit A | Form of Certificate of Incorporation of the Company as of the Effective Time of the Mergers | |||
Exhibit B | Form of By-laws of the Company as of the Effective Time of the Mergers | |||
Exhibit C | Corporate Governance of the Company Following the Effective Time of the Mergers | |||
Exhibit D | Employment Agreement Term Sheet of James E. Rogers | |||
Annex B | Opinion of UBS Securities LLC | |||
Annex C | Opinion of Lazard Frères & Co. LLC | |||
Annex D | Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated | |||
Annex E | Article 13 of the North Carolina Business Corporation Act |
iv
This summary highlights selected information from this joint proxy statement/prospectus and may not contain all of the information that is important to you. To understand the agreement and plan of merger and the mergers fully and for a more complete description of the legal terms of the agreement and plan of merger and the mergers, you should carefully read this entire joint proxy statement/prospectus and the other documents to which we have referred you. See "Where You Can Find More Information" beginning on page 180. We have included page references parenthetically to direct you to a more complete description of the topics presented in this summary.
Except where indicated otherwise, as used in this joint proxy statement/prospectus "Duke Energy" refers to Duke Energy Corporation and its consolidated subsidiaries, and "Cinergy" refers to Cinergy Corp. and its consolidated subsidiaries.
References to "we" or "our" and other first person references and to "Duke Energy Holding" in this joint proxy statement/prospectus refer to Duke Energy Holding Corp. (formerly named Deer Holding Corp.) and are intended, unless otherwise indicated by the context, to refer to Duke Energy Holding Corp. and its consolidated subsidiaries following consummation of the mergers (as described more fully herein).
In this joint proxy statement/prospectus, we refer to the Agreement and Plan of Merger, dated as of May 8, 2005, as amended as of July 11, 2005 and October 3, 2005, including all exhibits and schedules thereto, by and among Duke Energy, Cinergy, Duke Energy Holding Corp. (formerly named Deer Holding Corp.), Deer Acquisition Corp. and Cougar Acquisition Corp. as the "merger agreement."
Questions and Answers About the Mergers
Q: Why am I receiving this document?
Q: When and where are the meetings of the shareholders?
The special meeting of Cinergy shareholders will take place at 9:00 a.m., local time, on [ ], 2006, in [ ].
Additional information relating to the Duke Energy and Cinergy special meetings is set forth on pages 38 and 43, respectively.
Q: What will happen in the proposed transaction?
Deer Acquisition Corp. with and into Duke Energy is referred to in this joint proxy statement/prospectus as the "Duke Energy merger" and the merger of Cougar Acquisition Corp. with and into Cinergy is referred to in this joint proxy statement/prospectus as the "Cinergy merger."
Immediately following the Duke Energy merger, Duke Energy intends to transfer ownership of Duke Capital LLC to Duke Energy Holding and in connection with such transfer intends to convert to a limited liability company named Duke Power Company LLC (which we refer to as Duke Power). The conversion of Duke Energy to a limited liability company is referred to in this joint proxy statement/prospectus as the "Duke Energy conversion." The Duke Energy merger and the Duke Energy conversion taken together are referred to in this joint proxy statement/prospectus as the "Duke Energy reorganization." After the mergers, the current shareholders of Duke Energy and Cinergy will be the shareholders of Duke Energy Holding. Following the mergers, the structure of the combined company is expected to look like this:
Additional information on the mergers is located beginning on page 48.
Q: What will I receive for my shares?
2
mergers, former Duke Energy shareholders will own approximately 76% of Duke Energy Holding's common stock and former Cinergy shareholders will own approximately 24% of Duke Energy Holding's common stock.
Additional information on the consideration to be received in the mergers is located beginning on page 124.
Q: Why have Duke Energy and Cinergy decided to merge?
Additional information on the reasons for the mergers is located beginning on page 58 for Duke Energy and on page 84 for Cinergy.
Q: What vote is required to approve the mergers?
At the close of business on [ ], 200[ ], the record date for the Duke Energy special meeting, directors and executive officers of Duke Energy beneficially owned less than 1% of the then outstanding shares of Duke Energy common stock. Each Duke Energy director and executive officer has indicated his or her present intention to vote, or cause to be voted, the shares of Duke Energy common stock owned by him or her for the approval of the merger agreement and the mergers.
At the close of business on [ ], 200[ ], the record date for the Cinergy special meeting, directors and executive officers of Cinergy beneficially owned approximately [ ]% of the then outstanding shares of Cinergy common stock. Each Cinergy director and executive officer has indicated his or her present intention to vote, or cause to be voted, the shares of Cinergy common stock owned by him or her for the adoption of the merger agreement and approval of the mergers.
3
Additional information on the vote required to approve the transactions is located on page 39 for Duke Energy and on page 44 for Cinergy.
Q: What will happen to my future dividends?
Cinergy may continue to pay its regular quarterly cash dividend not to exceed $0.48 per share of common stock and does not currently anticipate making any changes to its dividend policies prior to the consummation of the mergers. Pursuant to the merger agreement, Cinergy is not permitted to increase its dividend absent the consent of Duke Energy.
After the mergers, it is currently expected that Duke Energy Holding will continue the dividend policy of Duke Energy in effect at the time of the mergers.
Additional information on Duke Energy Holding's expected dividend policy is located on page 108.
Q: Will Duke Energy Holding's shares be traded on an exchange?
Q: What do I need to do now?
Additional information on voting procedures is located beginning on page 40 for Duke Energy and on page 44 for Cinergy.
Q: How will my proxy be voted?
Additional information on voting procedures is located beginning on page 40 for Duke Energy and on page 44 for Cinergy.
Q: May I vote in person?
4
Q: What must I bring to attend my special meeting?
Q: What does it mean if I receive more than one set of materials?
Q: What do I do if I want to change my vote?
Additional information on changing your vote is located on page 41 for Duke Energy and on page 46 for Cinergy.
Q: If my broker holds my shares in "street name," will my broker vote my shares?
If you do not give voting instructions to your broker, your shares will be counted towards a quorum at your respective special meeting, but will be treated as voting against the merger agreement and the mergers unless you appear and vote in person at your special meeting. If your broker holds your shares and you plan to attend and vote at your special meeting, please bring a letter from your broker identifying you as the beneficial owner of the shares and authorizing you to vote.
Because approval or adoption of the merger agreement and approval of the mergers require the affirmative vote of a majority of the shares outstanding and entitled to vote of each of Duke Energy and Cinergy as of the respective record dates, if you abstain or fail to vote your shares in favor of approval or adoption of the merger agreement and approval of the mergers, this will have the same effect as voting your shares against approval or adoption of the merger agreement and approval of the mergers.
Additional information on changing how to vote if your shares are held in street name is located on page 41 for Duke Energy and on page 46 for Cinergy.
5
Q: As a participant in the Duke Energy Retirement Savings Plan, how do I vote shares held in my plan account?
Q: As a participant in Cinergy's 401(k) plan, how do I vote shares held in my plan account?
Q: Should I send in my share certificates now?
Q: When do you expect to complete the mergers?
Additional information on completing the mergers is located beginning on page 124.
Q: Do I have dissenters' or appraisal rights?
6
Additional information on the Duke Energy shareholders dissenters' rights is located beginning on page 111.
Q: How important is my vote?
Q: Who can answer any questions I may have about the special meeting or the mergers?
Cinergy shareholders may call Georgeson Shareholder Communications Inc. toll-free at (866) 729-6803 with any questions they may have. Banks and brokers may call collect at (212) 440-9800.
Other Information Regarding the Mergers
Recommendations by the Boards
Duke Energy
At its meeting on May 7, 2005, after due consideration, the Duke Energy board of directors:
Cinergy
At its meeting on May 8, 2005, after due consideration, the Cinergy board of directors:
To review the background and reasons for the mergers in greater detail see page 48, to review the risks related to the mergers, see page 19.
Fairness Opinions Presented to the Boards of Directors
In connection with the mergers, the Duke Energy board of directors received the opinion of each of UBS Securities LLC, or UBS, its financial advisor, and of Lazard Freres & Co., or Lazard, who was engaged by Duke Energy to provide a fairness opinion with respect to the proposed mergers, as to the fairness, from a financial point of view to Duke Energy of the Cinergy exchange ratio in the mergers as of the date of each opinion. The Cinergy board of directors received the opinion of its financial
7
advisor, Merrill Lynch, Pierce, Fenner & Smith, Incorporated, or Merrill Lynch, as to the fairness from a financial point of view to the holders of Cinergy common stock of the Cinergy exchange ratio as of the date of the opinion. The opinions of UBS and Lazard were provided to the Duke Energy board of directors in connection with its evaluation of the Cinergy exchange ratio, and the opinion of Merrill Lynch was provided to the Cinergy board of directors in connection with its evaluation of the Cinergy exchange ratio, and the opinions do not address any other aspect of the merger agreement or the mergers and do not constitute a recommendation to any shareholder as to how to vote or act with respect to any matter relating to the merger agreement or the mergers. Each holder of Duke Energy common stock should read the complete opinions of UBS and Lazard carefully and in their entirety, and each holder of Cinergy common stock should read the complete opinion of Merrill Lynch carefully and in its entirety, to understand the assumptions made, procedures followed, matters considered and limitations on the review undertaken, with regard to each of the opinions. Copies of the written UBS, Lazard and Merrill Lynch opinions are attached to this joint proxy statement/prospectus as Annexes B, C and D, respectively.
Interests of Directors and Executive Officers in the Mergers
Shareholders should note that some Duke Energy directors and executive officers and some Cinergy directors and executive officers have interests in the mergers as directors or officers that are different from, or in addition to, the interests of other Duke Energy shareholders or Cinergy shareholders, respectively.
Information relating to the interests of Duke Energy's directors and executive officers in the mergers is located on page 83 and information relating to the interests of Cinergy's directors and executive officers in the mergers is located beginning on page 100.
The merger agreement is attached as Annex A to this joint proxy statement/prospectus. We encourage you to read the merger agreement in its entirety. It is the principal document governing the mergers and the other related transactions.
Conditions to the Completion of the Mergers
The merger agreement contains customary closing conditions, including the following conditions that apply to both Duke Energy and Cinergy:
8
See "Conditions to Completion of the Mergers" on page 127.
Termination of the Merger Agreement
The merger agreement may be terminated at any time prior to the completion of the mergers by the mutual written consent of Duke Energy and Cinergy. It can also be terminated by either Duke Energy or Cinergy under certain specified circumstances, including if:
Furthermore, subject to specified conditions, the merger agreement can be terminated by either Duke Energy or Cinergy if the board of directors of the other party:
See "Termination of the Merger Agreement" beginning on page 128.
Termination Fees; Reimbursement of Expenses
Under certain circumstances involving a third-party acquisition proposal or a change in a board of directors' recommendation of the merger agreement and the mergers, Duke Energy or Cinergy, as applicable, may be required, subject to certain conditions, to (i) reimburse the other party for its fees and expenses in an amount not to exceed $35 million and/or (ii) pay a termination fee of $300 million, in the case of a termination fee payable by Cinergy to Duke Energy, and a termination fee of $500 million, in the case of a termination fee payable by Duke Energy to Cinergy, provided that any
9
termination fee payable will be reduced by any amount of any fees and expenses previously reimbursed by such party.
See "Termination Fees, Reimbursement of Expenses" on page 130.
No Solicitation
The merger agreement restricts the ability of each of Duke Energy and Cinergy to solicit or engage in discussions or negotiations with a third-party regarding a proposal to acquire a significant interest in Duke Energy or Cinergy, respectively. If, however, either party receives an unsolicited takeover proposal from a third-party that the party's board of directors determines in good faith, after consultation with its legal and financial advisors, constitutes a superior proposal or would reasonably be expected to lead to a superior proposal, that party may furnish information to the third-party and engage in negotiations regarding a takeover proposal with the third-party, subject to specified conditions. In circumstances other than in connection with a takeover proposal, at any time prior to receipt of a party's shareholder approval, the board of directors of either Duke Energy or Cinergy may withdraw its approval or recommendation of the merger agreement, subject to certain conditions, if such board first determines in good faith, after consulting with outside counsel, that the failure to take such action would be reasonably likely to result in a breach of the board of directors' fiduciary obligations under applicable law.
See "No Solicitation" on page 131.
Legal Proceedings Related to the Mergers
As of the date of this joint proxy statement/prospectus, Duke Energy and Cinergy are aware of one purported class action lawsuit that had been filed against Cinergy and each member of Cinergy's board of directors in connection with the mergers. Among other things, the lawsuit seeks injunctive relief that would prevent the consummation of the Cinergy merger in accordance with the terms of the merger agreement. Cinergy and the individual defendants filed a motion to dismiss this lawsuit in July 2005 which the court granted in November 2005. The plaintiffs have not yet appealed that decision. Both Duke Energy and Cinergy believe that the lawsuit is without merit.
Additional information on legal proceedings is located on page 132.
Accounting Treatment
The Cinergy merger will be accounted for as a purchase by Duke Energy Holding under accounting principles generally accepted in the United States of America. Under the purchase method of accounting, the assets and liabilities of Cinergy will be recorded, as of completion of the Cinergy merger, at their respective fair values and added to those of Duke Energy Holding. The reported financial condition and results of operations of Duke Energy Holding issued after completion of the Cinergy merger will reflect Cinergy's balances and results after completion of the Cinergy merger, but will not be restated retroactively to reflect the historical financial position or results of operations of Cinergy. Following completion of the Cinergy merger, the earnings of the combined company will reflect purchase accounting adjustments, including increased amortization and depreciation expense for acquired assets.
Additional information relating to accounting treatment is located on page 111.
10
Material U.S. Federal Income Tax Consequences of the Duke Energy Reorganization and the Cinergy Merger
Assuming the Duke Energy reorganization and the Cinergy merger qualify as reorganizations under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code") for U.S. federal income tax purposes, as Duke Energy and Cinergy anticipate, holders of Duke Energy common stock whose shares of Duke Energy common stock are exchanged in the Duke Energy reorganization for shares of Duke Energy Holding common stock will not recognize gain or loss, except to the extent of cash, if any, received in lieu of a fractional share of Duke Energy Holding common stock, and holders of Cinergy common stock whose shares of Cinergy common stock are exchanged in the Cinergy merger for shares of Duke Energy Holding common stock will not recognize gain or loss, except to the extent of cash, if any, received in lieu of a fractional share of Duke Energy Holding common stock.
The discussion of material U.S. federal income tax consequences of the Duke Energy reorganization and the Cinergy merger contained in this joint proxy statement/prospectus is intended to provide only a general summary and is not a complete analysis or description of all potential U.S. federal income tax consequences of the Duke Energy reorganization and the Cinergy merger. The discussion does not address tax consequences that may vary with, or are contingent on, individual circumstances. In addition, it does not address the effects of any foreign, state or local tax laws.
Duke Energy and Cinergy shareholders are strongly urged to consult with their tax advisors regarding the tax consequences of the Duke Energy reorganization and the Cinergy merger to them, as applicable, including the effects of U.S. federal, state, local, foreign and other tax laws.
Additional information relating to the material U.S. federal income tax consequences of the Duke Energy reorganization and the Cinergy merger is located beginning on page 108.
Regulatory Matters
The approval of, among others, the following U.S. federal, state and local regulatory authorities must be obtained before the mergers can be completed:
In addition, prior to completing the mergers, the applicable waiting period under the U.S. federal antitrust law, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or HSR Act, must expire or terminate and certain information must be filed with the Canadian Competition Bureau and the applicable waiting period under the Canadian Competition Act must expire or terminate. On October 3, 2005, the Canadian Competition Bureau determined that it would not oppose, or take other action regarding, the mergers. The Federal Trade Commission, or FTC, and the Department of Justice granted early termination of this waiting period on August 11, 2005. In addition, approvals from the Kentucky and South Carolina public service commissions have been obtained and the FCC has approved six of the seven applications that have been filed as of the date of this joint proxy statement/prospectus.
As of the date of this joint proxy statement/prospectus, each of Duke Energy, Cinergy and Duke Energy Holding was in the process of obtaining such remaining approvals as are required by applicable law or regulations.
On August 8, 2005, President Bush signed the Energy Policy Act of 2005 which, among other things, repealed the Public Utility Holding Company Act of 1935, which we refer to as PUHCA of 1935. The repeal of PUHCA of 1935 takes effect six months from the date of enactment of the Energy Policy Act of 2005, or February 8, 2006. Although the mergers would require approval under PUHCA of 1935 if they were consummated prior to that date, because the mergers are not expected to close until after that date, Securities and Exchange Commission approval under PUHCA of 1935 is not being sought and will not be required.
Additional information relating to regulatory matters is located beginning on page 119.
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Duke Energy Holding Corp.
526 South Church Street
Charlotte, North Carolina 28202
(704) 594-6200
Duke Energy Holding (formerly named Deer Holding Corp.) is a Delaware corporation formed on May 3, 2005 for the purpose of holding both Duke Energy and Cinergy as wholly-owned subsidiaries following completion of the mergers. Following the mergers, it will own Duke Energy and Cinergy as wholly-owned subsidiaries and will have no significant assets other than the stock or other voting securities of its subsidiaries. Upon consummation of the mergers, Duke Energy Holding will change its name to Duke Energy Corporation.
Duke Energy Corporation
526 South Church Street
Charlotte, North Carolina 28202
(704) 594-6200
Duke Energy Corporation is a diversified energy company with a portfolio of natural gas and electric businesses, both regulated and non-regulated, and an affiliated real estate company. Duke Energy supplies, delivers and processes energy for customers in the United States and selected international markets.
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master limited partnership, DCP Midstream Partners, LP, began trading on the New York Stock Exchange on December 2, 2005, under the symbol "DPM."
Duke Energy is headquartered in Charlotte, North Carolina, and, as of September 30, 2005, had approximately 20,750 employees.
Cinergy Corp.
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500
Cinergy Corp. is a Delaware corporation and a registered holding company under PUHCA of 1935. Cinergy is the parent company of:
Cinergy has other subsidiaries, formed for a variety of purposes, including holding Cinergy's interests in international businesses, new technology initiatives and investment opportunities in the telecommunications industry and in energy and power generation. Cinergy's regulated public utilities in Ohio, Indiana, and Kentucky serve approximately 1.5 million electric customers and 500,000 gas customers. Cinergy is headquartered in Cincinnati, Ohio and as of May 31, 2005, had approximately 7,400 employees.
Deer Acquisition Corp.
526 South Church Street
Charlotte, North Carolina 28202
(704) 594-6200
Deer Acquisition Corp. is a wholly-owned subsidiary of Duke Energy. Deer Acquisition Corp. was formed on May 5, 2005, solely for the purpose of engaging in the Duke Energy merger and the other transactions contemplated by the merger agreement. Deer Acquisition Corp. has not conducted any business operations other than incidental to its formation and in connection with the transactions contemplated by the merger agreement.
Cougar Acquisition Corp.
526 South Church Street
Charlotte, North Carolina 28202
(704) 594-6200
Cougar Acquisition Corp. is a wholly-owned subsidiary of Duke Energy. Cougar Acquisition Corp. was formed on May 4, 2005, solely for the purpose of engaging in the Cinergy merger and the other transactions contemplated by the merger agreement. Cougar Acquisition Corp. has not conducted any business operations other than incidental to its formation and in connection with the transactions contemplated by the merger agreement.
13
Comparative Stock Prices and Dividends
Shares of Duke Energy common stock and Cinergy common stock are listed on the New York Stock Exchange. The following table presents the last reported closing sale price per share of Duke Energy common stock and Cinergy common stock, as reported on the New York Stock Exchange Composite Transaction reporting system on May 6, 2005, the last full trading day prior to the public announcement of the mergers, and on December 8, 2005, the last trading day for which this information could be calculated prior to the filing of this joint proxy statement/prospectus.
|
Duke Energy Common Stock |
Cinergy Common Stock |
Cinergy Common Stock Equivalent Per Share(1) |
||||||
---|---|---|---|---|---|---|---|---|---|
May 6, 2005 | $ | 29.36 | $ | 40.38 | $ | 45.80 | |||
December 8, 2005 | $ | 26.37 | $ | 40.48 | $ | 41.14 |
The most recent quarterly dividend declared by Duke Energy was $0.31 per share paid on September 16, 2005. Duke Energy's current dividend is $1.24 per share of common stock on an annual basis. The most recent quarterly dividend declared by Cinergy was $0.48 per share paid on November 15, 2005. Cinergy's current dividend is $1.92 per share of common stock on an annual basis.
14
Selected Historical Financial Data
Duke Energy and Cinergy are providing the following financial information to aid you in your analysis of the financial aspects of the mergers. This information is
only a summary, and you should read it in conjunction with the historical consolidated financial statements of Duke Energy and Cinergy and the related notes contained in the annual reports and other
information that each of Duke Energy and Cinergy has previously filed with the Securities and Exchange Commission and which is incorporated herein by reference. See "Where You Can Find More
Information" beginning on
page 180.
Selected Historical Consolidated Financial Data of Duke Energy
|
At or for the nine months ended September 30, |
At or for the year ended December 31,(a) |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2005 |
2004 |
2004 |
2003(c) |
2002 |
2001 |
2000 |
||||||||||||||||
|
(Millions, except per share amounts) |
||||||||||||||||||||||
Operating revenues | $ | 13,630 | $ | 15,007 | $ | 20,549 | $ | 18,021 | $ | 14,752 | $ | 15,383 | $ | 14,190 | |||||||||
Income before discontinued operations and cumulative effect of changes in accounting principles | $ | 2,112 | $ | 949 | $ | 1,252 | $ | 71 | $ | 1,145 | $ | 1,226 | $ | 1,869 | |||||||||
Discontinued operations, net of tax | $ | (894 | ) | $ | 183 | $ | 238 | $ | (1,232 | ) | $ | (111 | ) | $ | 768 | $ | (93 | ) | |||||
Cumulative effect of changes in accounting principles net of tax | | | | $ | (162 | ) | | $ | (96 | ) | | ||||||||||||
Net income | $ | 1,218 | $ | 1,132 | $ | 1,490 | $ | (1,323 | ) | $ | 1,034 | $ | 1,898 | $ | 1,776 | ||||||||
Earnings per common share (EPS) basic(b): |
|||||||||||||||||||||||
Income before discontinued operations and cumulative effect of changes in accounting principles | $ | 2.25 | $ | 1.02 | $ | 1.33 | $ | .06 | $ | 1.35 | $ | 1.58 | $ | 2.51 | |||||||||
Discontinued operations, net of tax | (.96 | ) | $ | .20 | $ | .26 | $ | (1.36 | ) | $ | (.13 | ) | $ | 1.00 | $ | (.12 | ) | ||||||
Before cumulative effect of changes in accounting principles, net of tax | $ | 1.29 | $ | 1.22 | $ | 1.59 | $ | (1.30 | ) | $ | 1.22 | $ | 2.58 | $ | 2.39 | ||||||||
Net income | $ | 1.29 | $ | 1.22 | $ | 1.59 | $ | (1.48 | ) | $ | 1.22 | $ | 2.45 | $ | 2.39 | ||||||||
EPSdiluted(b): |
|||||||||||||||||||||||
Income before discontinued operations and cumulative effect of changes in accounting principles | $ | 2.17 | $ | .99 | $ | 1.29 | $ | .06 | $ | 1.35 | $ | 1.57 | $ | 2.50 | |||||||||
Discontinued operations, net of tax | (.92 | ) | $ | .19 | $ | .25 | $ | (1.36 | ) | $ | (.13 | ) | $ | .99 | $ | (.12 | ) | ||||||
Before cumulative effect of changes in accounting principles, net of tax | $ | 1.25 | $ | 1.18 | $ | 1.54 | $ | (1.30 | ) | $ | 1.22 | $ | 2.56 | $ | 2.38 | ||||||||
Net income | $ | 1.25 | $ | 1.18 | $ | 1.54 | $ | (1.48 | ) | $ | 1.22 | $ | 2.44 | $ | 2.38 | ||||||||
Dividends declared per share of common stock(b) | $ | .86 | $ | .825 | $ | 1.10 | $ | 1.10 | $ | 1.10 | $ | 1.10 | $ | 1.10 | |||||||||
Total assets | $ | 53,333 | $ | 54,739 | $ | 55,470 | $ | 57,225 | $ | 60,122 | $ | 49,624 | $ | 59,276 | |||||||||
Long-term debt(d) | $ | 16,045 | $ | 20,428 | $ | 18,764 | $ | 21,822 | $ | 21,552 | $ | 12,595 | $ | 11,187 |
15
Selected Historical Consolidated Financial Data of Cinergy
|
At or for the nine months ended September 30, |
At or for the year ended December 31, |
|||||||||||||||||||||
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|
2005 |
2004 |
2004 |
2003 |
2002 |
2001 |
2000 |
||||||||||||||||
|
(Millions, except per share amounts) |
||||||||||||||||||||||
Operating revenues | $ | 3,824 | $ | 3,471 | $ | 4,688 | $ | 4,416 | $ | 4,059 | $ | 3,950 | $ | 3,752 | |||||||||
Income before discontinued operations and cumulative effect of changes in accounting principles | $ | 300 | $ | 254 | $ | 401 | $ | 435 | $ | 397 | $ | 457 | $ | 400 | |||||||||
Discontinued operations, net of tax(1) | | | | $ | 9 | $ | (25 | ) | $ | (15 | ) | $ | (1 | ) | |||||||||
Cumulative effect of changes in accounting principles, net of tax(2) | | | | $ | 26 | $ | (11 | ) | | | |||||||||||||
Net income | $ | 300 | $ | 254 | $ | 401 | $ | 470 | $ | 361 | $ | 442 | $ | 399 | |||||||||
Earnings per common share | |||||||||||||||||||||||
(EPS)basic: | |||||||||||||||||||||||
Income before discontinued operations and cumulative effect of changes in accounting principles | $ | 1.52 | $ | 1.41 | $ | 2.22 | $ | 2.46 | $ | 2.37 | $ | 2.87 | $ | 2.52 | |||||||||
Discontinued operations, net of tax(1) | | | | $ | 0.05 | $ | (0.15 | ) | $ | (0.09 | ) | $ | (0.01 | ) | |||||||||
Cumulative effect of changes in accounting principles, net of tax(2) | | | | $ | 0.15 | $ | (0.06 | ) | | | |||||||||||||
Net income | $ | 1.52 | $ | 1.41 | $ | 2.22 | $ | 2.66 | $ | 2.16 | $ | 2.78 | $ | 2.51 | |||||||||
EPSdiluted: |
|||||||||||||||||||||||
Income before discontinued operations and cumulative effect of changes in accounting principles | $ | 1.51 | $ | 1.39 | $ | 2.18 | $ | 2.43 | $ | 2.34 | $ | 2.84 | $ | 2.51 | |||||||||
Discontinued operations, net of tax(1) | | | | $ | 0.05 | $ | (0.15 | ) | $ | (0.09 | ) | $ | (0.01 | ) | |||||||||
Cumulative effect of changes in accounting principles, net of tax(2) | | | | $ | 0.15 | $ | (0.06 | ) | | | |||||||||||||
Net income | $ | 1.51 | $ | 1.39 | $ | 2.18 | $ | 2.63 | $ | 2.13 | $ | 2.75 | $ | 2.50 | |||||||||
Dividends declared per share of common stock | $ | 1.92 | $ | 1.41 | $ | 1.88 | $ | 1.84 | $ | 1.80 | $ | 1.80 | $ | 1.80 | |||||||||
Total assets | $ | 17,466 | $ | 14,243 | $ | 14,982 | $ | 14,119 | $ | 13,832 | $ | 12,792 | $ | 12,801 | |||||||||
Long-term debt(3) | $ | 4,371 | $ | 4,156 | $ | 4,448 | $ | 4,971 | $ | 4,188 | $ | 3,656 | $ | 2,868 |
16
Selected Unaudited Pro Forma Condensed Combined Financial Data
The following selected unaudited pro forma condensed combined financial data give effect to the mergers. The information presented below is based on the assumption that the mergers occurred at the beginning of each of the periods presented and reflect only adjustments directly related to the mergers. The pro forma adjustments are based upon available information and assumptions that each company's management believes are reasonable and in accordance with SEC requirements. The selected unaudited pro forma condensed combined financial data are presented for illustrative purposes only and should not be read for any other purpose. The companies may have performed differently had they always been combined. You should not rely on this information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience after the mergers. The selected unaudited pro forma condensed combined financial data (i) have been derived from and should be read in conjunction with the "Unaudited Pro Forma Condensed Combined Financial Information" and the related notes beginning on page 148 in this joint proxy statement/prospectus and (ii) should be read in conjunction with the historical consolidated financial statements of Duke Energy and Cinergy incorporated by reference in this joint proxy statement/prospectus and the Duke Energy Unaudited Pro Forma Condensed Consolidated Financial Information beginning on page 143 in this joint proxy statement/prospectus.
|
At or for the nine months ended September 30, 2005 |
At or for the year ended December 31, 2004 |
||||
---|---|---|---|---|---|---|
|
(Millions, except per share amounts) |
|||||
Pro Forma Income Statement Data | ||||||
Operating revenues | 12,337 | 15,866 | ||||
Income from continuing operations | 1,458 | 1,643 | ||||
Earnings per share from continuing operations: | ||||||
Basic | 1.17 | 1.35 | ||||
Diluted | 1.14 | 1.32 | ||||
Pro Forma Balance Sheet Data | ||||||
Total assets | 76,814 | | ||||
Long-term debt (includes current maturities of $1,332) | 20,511 | |
Unaudited Comparative Per Share Data
The December 31, 2004 selected comparative per share information of Duke Energy and Cinergy, set forth below, was derived from audited financial statements. The September 30, 2005 selected comparative per share information of Duke Energy and Cinergy set forth below was derived from unaudited financial statements and, in the opinion of the management of Duke Energy and Cinergy, includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation for such periods. Due to the effect of seasonal fluctuations and other factors on the operations of Duke Energy and Cinergy, financial results for the nine-month period ended September 30, 2005, are not necessarily indicative of results for the year ending December 31, 2005.
You should read the information in this section along with Duke Energy's and Cinergy's historical consolidated financial statements and accompanying notes for the periods referred to above included in the documents described under "Where You Can Find More Information" beginning on page 180. You should also read the unaudited pro forma condensed financial information and accompanying discussions and notes included in this joint proxy statement/prospectus on pages 143 through 159.
17
|
At or for the nine months ended September 30, 2005 |
At or for the year ended December 31, 2004 |
||||||
---|---|---|---|---|---|---|---|---|
|
(Millions, except per share amounts) |
|||||||
Duke EnergyHistorical | ||||||||
Earnings per share (from continuing operations): | ||||||||
Basic | $ | 2.25 | $ | 1.33 | ||||
Diluted | $ | 2.17 | $ | 1.29 | ||||
Dividends declared per share of common stock | $ | .86 | $ | 1.10 | ||||
Book value per share of common stock | $ | 17.19 | $ | 17.18 | ||||
CinergyHistorical | ||||||||
Earnings per share (from continuing operations): | ||||||||
Basic | $ | 1.52 | $ | 2.22 | ||||
Diluted | $ | 1.51 | $ | 2.18 | ||||
Dividends declared per share of common stock | $ | 1.92 | $ | 1.88 | ||||
Book value per share of common stock | $ | 22.32 | $ | 21.89 |
|
At or for the nine months ended September 30, 2005 |
At or for the year ended December 31, 2004 |
||||||
---|---|---|---|---|---|---|---|---|
|
(Millions, except per share amounts) |
|||||||
Duke Energy Holding unaudited pro forma combined amounts: | ||||||||
Earnings per share (from continuing operations): | ||||||||
Basic | $ | 1.17 | $ | 1.35 | ||||
Diluted | $ | 1.14 | $ | 1.32 | ||||
Dividends declared per share of common stock1 | $ | .86 | $ | 1.10 | ||||
Book value per share of common stock | $ | 20.21 | $ | | ||||
Cinergy per share equivalent based on combination of Duke Energy and Cinergy: | ||||||||
Earnings per share (from continuing operations): | ||||||||
Basic | $ | 1.83 | $ | 2.11 | ||||
Diluted | $ | 1.78 | $ | 2.06 | ||||
Dividends declared per share of common stock | $ | 1.34 | $ | 1.716 | ||||
Book value per share of common stock | $ | 31.53 | $ | |
18
Risks Relating to the Mergers
In addition to the other information included and incorporated by reference in this joint proxy statement/prospectus, Duke Energy and Cinergy shareholders should carefully consider the matters described below to determine whether to approve or adopt the merger agreement and thereby approve the mergers.
The value of the shares of Duke Energy Holding common stock that you receive upon the consummation of the mergers may be less than the value of your shares of Duke Energy common stock or Cinergy common stock as of the date of the merger agreement or on the dates of the special meetings.
The exchange ratios in the Duke Energy merger and the Cinergy merger, respectively, are fixed and will not be adjusted in the event of any change in the stock prices of Duke Energy or Cinergy prior to the mergers. There may be a significant amount of time between the dates when the shareholders of each of Duke Energy and Cinergy vote on the merger agreement at the special meeting of each company and the date when the mergers are completed. The relative prices of shares of Duke Energy common stock and Cinergy common stock may vary significantly between the date of this joint proxy statement/prospectus, the dates of the special meetings and the date of the completion of the mergers. These variations may be caused by, among other things, changes in the businesses, operations, results and prospects of our companies, market expectations of the likelihood that the mergers will be completed and the timing of completion, the prospects of post-merger operations, the effect of any conditions or restrictions imposed on or proposed with respect to the combined company by regulatory agencies and authorities, general market and economic conditions and other factors. In addition, it is impossible to predict accurately the market price of the Duke Energy Holding common stock to be received by Duke Energy and Cinergy shareholders after the completion of the mergers. Accordingly, the prices of Duke Energy common stock and Cinergy common stock on the dates of the special meetings may not be indicative of their prices immediately prior to completion of the mergers and the price of Duke Energy Holding common stock after the mergers are completed.
The integration of Duke Energy and Cinergy following the mergers will present significant challenges that may result in a decline in the anticipated potential benefits of the mergers.
Duke Energy and Cinergy will face significant challenges in consolidating functions, integrating their organizations, procedures and operations in a timely and efficient manner, as well as retaining key Duke Energy and Cinergy personnel. The integration of Duke Energy and Cinergy will be complex and time-consuming, due to the size and complexity of each organization and their many business units. The respective managements of Duke Energy and Cinergy will have to dedicate substantial effort to integrating the businesses. The principal challenges will be integrating the combined regulated electric utility operations, combining each of the unregulated wholesale power generation businesses and combining the energy marketing and trading businesses. All of these businesses are complex, and some of the business units are dispersed. Such efforts could also divert management's focus and resources from other strategic opportunities during the integration process. There can be no assurance that the integration will be completed in a timely manner.
The anticipated benefits of combining the companies may not be realized.
Duke Energy and Cinergy entered into the merger agreement with the expectation that the mergers would result in various benefits, including, among other things, synergies, cost savings and operating efficiencies. Although we expect to achieve the anticipated benefits of the mergers, achieving them, including the synergies, cannot be assured. Moreover, the regulatory agencies, which have jurisdiction over certain of our businesses and operations, will require us to pass some of the achieved cost savings to ratepayers.
19
The mergers are subject to the receipt of consent or approval from governmental entities that could delay the completion of the mergers or impose conditions that could have a material adverse effect on the combined company or that could cause abandonment of the mergers.
Completion of the mergers is conditioned upon the receipt of consents, orders, approvals or clearances, as required, from the FERC, the NRC, the FCC, and the public utility commissions or similar entities with jurisdiction in North Carolina, South Carolina, Ohio, Kentucky and Indiana. Although, as of the date of this joint proxy statement/prospectus, the parties have received certain of these consents, orders, approvals, and clearances and expect to receive the remainder in a timely and acceptable manner, a substantial delay in obtaining satisfactory approvals or the imposition of unfavorable terms or conditions in connection with such approvals could have a material adverse effect on the business, financial condition or results of operations of Duke Energy or Cinergy and/or may cause the abandonment of the mergers by Duke Energy or Cinergy.
The merger agreement provides that Duke Energy and Cinergy will use their reasonable best efforts to transfer five generating stations located in the midwest from DENA to The Cincinnati Gas & Electric Company. This transfer will require regulatory approval by the FERC and the IURC. There can be no guarantee that such approvals will be obtained or will be obtained on terms or with conditions acceptable to Duke Energy, Cinergy and Duke Energy Holding.
The mergers will combine two companies that are currently affected by developments in the electric and gas utility industries, including changes in regulation and increased competition. A failure to adapt to the changing regulatory environment and increased competition after the mergers could adversely affect the stability of our earnings and could result in the erosion of the combined company's market positions, revenues and profits.
Because Duke Energy and Cinergy and their subsidiaries are regulated in the United States and Canada at the federal level and in a number of provinces, states and municipalities, the two companies, as well as Duke Energy Holding after the mergers, have been and will continue to be impacted by legislative and regulatory developments. After the mergers, we and/or our subsidiaries including Duke Energy and Cinergy will be subject in the United States to extensive federal regulation as well as to state and local regulation in each of the following jurisdictions: North Carolina, South Carolina, Ohio, Kentucky and Indiana. We will also be subject in Canada to extensive federal regulation as well as to provincial and local regulation, most significantly in Ontario. Each of these jurisdictions has implemented, is in the process of implementing or possibly will implement changes to the regulatory and legislative framework applicable to the electric and gas utilities industry. The continuing effects of recent developments such as the end of the market development period in Ohio under its retail electric competition law, the continuing failure of the Department of Energy to take possession of spent nuclear fuel from commercial nuclear reactors, and the implementation of MISO's energy markets tariff, along with the possible effects of changes under consideration and the possible effects of changes that may occur in the future, could have a material adverse effect on Duke Energy, Cinergy and/or Duke Energy Holding.
The costs and burdens associated with complying with the increased number of regulatory jurisdictions may have a material adverse effect on Duke Energy Holding. Moreover, increased competition resulting from potential legislative changes, regulatory changes or otherwise may create greater risks to the stability of utility earnings generally. If Duke Energy Holding is not responsive to the competitive energy marketplace, it could suffer erosion in market position, revenues and profits as competitors gain access to the service territories of its utility subsidiaries.
We must meet credit quality standards. If we or our rated subsidiaries are unable to maintain an investment grade credit rating, we would be required under trading agreements to provide collateral in the form of letters of credit or cash, which may materially adversely affect our liquidity. We cannot be sure that
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Duke Energy Holding and its rated subsidiaries will maintain investment grade credit ratings following the mergers and the other contemplated transactions.
Each of Duke Energy's, Duke Capital's and Cinergy's senior unsecured long-term debt is rated investment grade by various rating agencies. We cannot be sure that following the mergers and the other transactions contemplated by the merger agreement the senior unsecured long-term debt of Duke Energy Holding or its rated subsidiaries will be rated investment grade.
If the rating agencies were to rate Duke Energy Holding or its rated subsidiaries below investment grade, the entity's borrowing costs would increase, perhaps significantly. In addition, the entity would likely be required to pay a higher interest rate in future financings, and its potential pool of investors and funding sources would likely decrease. Further, if its short-term debt rating were to fall, the entity's access to the commercial paper market could be significantly limited. Any downgrade or other event negatively affecting the credit ratings of our subsidiaries could make their costs of borrowing higher or access to funding sources more limited, which in turn could increase our need to provide liquidity in the form of capital contributions or loans to such subsidiaries, thus reducing the liquidity and borrowing availability of the consolidated group.
Many of our trading counterparties in our power and gas trading businesses would likely require us to deposit additional collateral if the ratings agencies were to downgrade our ratings below investment grade. Failure to deposit collateral may result in a default under the applicable trading agreement, which could lead to termination of that agreement and require us to pay its termination value. A downgrade below investment grade could also trigger termination clauses in some interest rate and foreign exchange derivative agreements, which would require cash payments. All of these events would likely reduce our liquidity and profitability and could have a material adverse effect on our financial position and results of operations.
Duke Energy and Cinergy will incur significant transaction and merger-related integration costs in connection with the mergers.
Duke Energy and Cinergy expect to incur costs associated with consummating the mergers and integrating the operations of the two companies, as well as approximately $32 million in transaction fees in the case of Duke Energy and $35 million in the case of Cinergy. The estimated $32 million of transaction costs incurred by Duke Energy will be included as a component of the purchase price for purposes of purchase accounting. The amount of transaction fees expected to be incurred by each of Duke Energy and Cinergy are preliminary estimates and are subject to change. Duke Energy currently estimates integration costs associated with the mergers to be approximately $727 million over a period of five years, with approximately $464 million being incurred in the first year after completion of the mergers and approximately $129 million being incurred in the second year after completion of the mergers. Duke Energy is in the early stages of assessing the magnitude of these costs, and, therefore, these estimates may change substantially, and additional unanticipated costs may be incurred in the integration of the businesses of Duke Energy and Cinergy. Although Duke Energy and Cinergy believe that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset incremental transaction and merger-related costs over time, we cannot assure you that this net benefit will be achieved in the near term, or at all.
Duke Energy and Cinergy will be subject to business uncertainties and contractual restrictions while the mergers are pending which could adversely affect their businesses.
Uncertainty about the effect of the mergers on employees and customers may have an adverse effect on Duke Energy and Cinergy and, consequently, on the combined company. Although Duke Energy and Cinergy intend to take steps to reduce any adverse effects, these uncertainties may impair Duke Energy's and Cinergy's ability to attract, retain and motivate key personnel until the mergers are consummated and for a period of time thereafter, and could cause customers, suppliers and others that
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deal with Duke Energy and Cinergy to seek to change existing business relationships with Duke Energy and Cinergy. Employee retention may be particularly challenging during the pendency of the mergers, as employees may experience uncertainty about their future roles with the combined company. If, despite Duke Energy's and Cinergy's retention efforts, key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, the combined company's business could be seriously harmed. In addition, the merger agreement restricts Duke Energy and Cinergy, without the other party's consent, from making certain acquisitions and taking other specified actions until the mergers occur or the merger agreement terminates. These restrictions may prevent Duke Energy and Cinergy from pursuing otherwise attractive business opportunities and making other changes to their businesses that may arise prior to completion of the mergers or termination of the merger agreement.
Risks Relating to the Businesses of the Combined Company
After consummation of the mergers, the combined business of Duke Energy Holding will be subject to many risks and uncertainties.
Gas transmission, distribution, gathering, and processing activities involve numerous risks that may result in accidents and other operating risks and costs.
There are inherent in our gas transmission, distribution, gathering, and processing properties a variety of hazards and operating risks, such as leaks, explosions and mechanical problems, that could cause substantial financial losses. In addition, these risks could result in loss of human life, significant damage to property, environmental pollution, impairment of our operations and substantial losses to us. For our pipelines located near populated areas, including residential areas, commercial business centers, industrial sites and other public gathering areas, the level of damages resulting from these risks is greater. We do not maintain insurance coverage against all of these risks and losses, and the insurance coverage we maintain may not fully cover the damages caused by those risks and losses for which we do maintain insurance and therefore could have a material adverse effect on our financial position and results of operations.
Our franchised electric revenues, earnings and results are dependent on state legislation and regulation that affect electric generation, distribution and related activities, which may limit our ability to recover costs.
Our franchised electric businesses are regulated on a cost-of-service/rate-of-return basis subject to the statutes and regulatory commission rules and procedures of North Carolina, South Carolina, Kentucky, Indiana and Ohio. If our franchised electric earnings exceed the returns established by our state regulatory commissions, our retail electric rates may be subject to review by the commissions and possible reduction, which may decrease our future earnings.
We may incur substantial costs and liabilities due to our ownership and operation of nuclear generating facilities.
Our ownership interest in and operation of three nuclear stations subject us to various risks including, among other things: the potential harmful effects on the environment and human health resulting from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials; limitations on the amounts and types of insurance commercially available to cover losses that might arise in connection with nuclear operations; and uncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives.
Our ownership and operation of nuclear generation facilities requires us to meet licensing and safety-related requirements imposed by the NRC. In the event of non-compliance, the NRC may increase regulatory oversight, impose fines, and/or shut down a unit, depending upon its assessment of the severity of the situation. Revised security and safety requirements promulgated by the NRC, which
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could be prompted by, among other things, events within or outside of our control, such as a serious nuclear incident at a facility owned by a third-party, could necessitate substantial capital and other expenditures at our nuclear plants. In addition, if a serious nuclear incident were to occur, it could have a material adverse effect on our results of operations and financial condition.
Our ownership and operation of nuclear generation facilities also requires us to maintain funded trusts that are intended to pay for the decommissioning costs of our nuclear power plants. Poor investment performance of these decommissioning trusts' holdings and other factors impacting decommissioning costs could unfavorably impact our liquidity and results of operations as we could be required to significantly increase our cash contributions to the decommissioning trusts.
Our sales may decrease if we are unable to gain adequate, reliable and affordable access to transmission and distribution assets.
We depend on transmission and distribution facilities owned and operated by utilities and other energy companies to deliver the electricity and natural gas we sell to the wholesale market, as well as the natural gas we purchase to supply some of our electric generation facilities. FERC's power transmission regulations require wholesale electric transmission services to be offered on an open-access, non-discriminatory basis, however, not all markets are as open and accessible as needed. If transmission is disrupted, or if transmission capacity is inadequate, our ability to sell and deliver products may be hindered. Such disruptions could also hinder our providing electricity or natural gas to our retail electric and gas customers and may materially adversely affect our business.
The different regional power markets have changing regulatory structures, which could affect our growth and performance in these regions. In addition, the independent system operators who oversee the transmission systems in regional power markets, such as California, have imposed in the past, and may impose in the future, price limitations and other mechanisms to address volatility in the power markets. These types of price limitations and other mechanisms may adversely impact the profitability of our wholesale power marketing and trading business.
We may be unable to secure long term power purchase agreements or transmission agreements, which could expose our sales to increased volatility.
In the future, we may not be able to secure long-term power purchase agreements for the unregulated power generation facilities that we expect to retain in our ongoing business. Similarly, we may not be able to secure long-term transportation agreements for our gas transmission business. If we are unable to secure either of these types of agreements, our sales volumes would be exposed to increased volatility. Without the benefit of long-term power purchase and transmission agreements, we cannot assure you that we will be able to sell the power generated by our facilities, that our pipelines will be utilized to transport gas at efficient capacity levels, or that our facilities will be able to operate profitably. The inability to secure these agreements could materially adversely affect our results and our business.
The long-term financial condition of our U.S. and Canadian natural gas transmission, distribution, gathering and processing businesses are dependent on the continued availability of natural gas reserves.
Our natural gas businesses are dependent upon the continued availability of natural gas reserves. Unlike some natural gas companies, we do not generally engage in natural gas exploration and therefore rely on others for exploration and development drilling and the installation of production, gathering, storage, transportation, distribution and other facilities that permit natural gas to be produced and delivered to our pipeline systems. Low prices for natural gas, regulatory limitations, or the lack of available capital for these projects could adversely affect the development of additional reserves and production, gathering, storage and pipeline transmission and import and export of natural gas supplies. Additional natural gas reserves may not be developed in commercial quantities and in
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sufficient amounts to fill the capacities of our pipeline systems and the capacities of our gathering systems and plants. The unavailability of natural gas reserves could materially adversely affect our results and our business.
Competition in the unregulated markets in which we operate may adversely affect the growth and profitability of our business.
We may not be able to respond in a timely or effective manner to the many changes designed to increase competition in the electricity industry. To the extent competitive pressures increase, the economics of our business may come under long-term pressure.
In addition, regulatory changes have been proposed to increase access to electricity transmission grids by utility and non-utility purchasers and sellers of electricity. These changes could continue the disaggregation of many vertically-integrated utilities into separate generation, transmission, distribution and retail businesses. As a result, a significant number of additional competitors could become active in the wholesale power generation segment of our industry.
We may also face competition from new competitors that have greater financial resources than we do, seeking attractive opportunities to acquire or develop energy assets or energy trading operations both in the United States and abroad. These new competitors may include sophisticated financial institutions, some of which are already entering the energy trading and marketing sector, and international energy players, which may enter regulated or unregulated energy businesses. This competition may adversely affect our ability to make investments or acquisitions.
We rely on access to short-term money markets and longer-term capital markets to finance our capital requirements and support our liquidity needs, and our access to those markets can be adversely affected by a number of conditions, many of which are beyond our control.
Our business is financed to a large degree through debt and the maturity and repayment profile of debt used to finance investments often does not correlate to cash flows from our assets. Accordingly, we rely on access to both short-term money markets and longer-term capital markets as a source of liquidity for capital requirements not satisfied by the cash flow from our operations and to fund investments originally financed through debt instruments with disparate maturities. If we are not able to access capital at competitive rates, our ability to finance our operations and implement our strategy will be adversely affected.
Market disruptions may increase our cost of borrowing or adversely affect our ability to access one or more financial markets. Such disruptions could include: economic downturns; the bankruptcy of an unrelated energy company; capital market conditions generally; market prices for electricity, gas and natural gas liquids; terrorist attacks or threatened attacks on our facilities or unrelated energy companies; or the overall health of the energy industry. Restrictions on our ability to access financial markets may also affect our ability to execute our business plan as scheduled. An inability to access capital may limit our ability to pursue improvements or acquisitions that we may otherwise rely on for future growth.
We maintain revolving credit facilities to provide back-up for commercial paper programs and/or letters of credit at various entities. These facilities typically include financial covenants which limit the amount of debt that can be outstanding as a percentage of the total capital for the specific entity. Some facilities also include targeted EBITDA interest coverage ratios. Failure to maintain these covenants at a particular entity could preclude that entity from issuing commercial paper or letters of credit or borrowing under the revolving credit facility and could require other of our affiliates to immediately pay down any outstanding drawn amounts under other revolving credit agreements.
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Our investments and projects located outside of the United States expose us to risks related to laws of other countries, taxes, economic conditions, political conditions and policies of foreign governments. These risks may delay or reduce our realization of value from our international projects.
We currently own and may acquire and/or dispose of material energy-related investments and projects outside the United States. The economic, regulatory, market and political conditions in some of the countries where we have interests or in which we may explore development, acquisition or investment opportunities present risks related to, among others, our ability to obtain non-recourse project or other financing on suitable terms, our customers' ability to honor their obligations with respect to projects and investments, delays in construction, limitations on our ability to enforce legal rights, and interruption of business, as well as risks of war, expropriation, nationalization, renegotiation, trade sanctions or nullification of existing contracts and changes in law, regulations, market rules or tax policy, that are in many instances greater than in the United States. In particular, certain countries in Latin America are implementing changes in their market rules and regulations which could materially and adversely impact our ability to recognize anticipated value from our investments in that region.
Our investments and projects located outside of the United States expose us to risks related to fluctuations in currency rates. These risks, and our activities to mitigate such risks, may adversely effect our cash flows and results of operations.
Our operations and investments outside the United States expose us to risks related to fluctuations in currency rates. As each local currency's value changes relative to the U.S. dollarour principle reporting currencythe value of our assets and liabilities in such locality and the cash flows generated in such locality also changes.
We selectively mitigate some risks associated with foreign currency fluctuations by, among other things, indexing contracts to the U.S. dollar and/or local inflation rates, hedging through debt denominated or issued in the foreign currency and hedging through foreign currency derivatives. These efforts, however, may not be effective and, in some cases, may expose us to other risks that could negatively affect our cash flows and results of operations.
Our primary foreign currency rate exposures are expected to be the Canadian Dollar and the Brazilian Real. A 10% devaluation in the currency exchange rate in all of our exposure currencies would result in an estimated net loss on the translation of local currency earnings of approximately $28 million. The consolidated balance sheets would be negatively impacted by such a devaluation by approximately $530 million through cumulative currency translation adjustments.
We will be exposed to market risk and may incur losses from the trading operations and/or activities we take to mitigate our commodity exposure.
We have trading operations that primarily consist of contracts to buy and sell commodities, including contracts for electricity, natural gas, natural gas liquids and other commodities that are settled by the delivery of the commodity or cash. Our trading portfolios also include financial derivatives, including swaps, futures and options. If the values of these contracts or derivatives change in a direction or manner that we do not anticipate, we could realize material losses from our trading activities. We believe that the recently announced agreement to sell substantially all of DENA's power and gas derivative contracts will, upon completion, significantly reduce these risks as they relate to DENA.
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In order to manage our financial exposure related to commodity price fluctuations, primarily with respect to power, natural gas and natural gas liquids, our marketing, trading and risk management operations routinely enter into contracts to hedge the value of our assets and operations, including fixed-price, forward, physical purchase and sales contracts, futures, financial swaps and option contracts traded in over-the-counter markets or on exchanges. Duke Energy and Cinergy Commercial both hedge a portion of their expected commodities exposure. We do not, however, cover the entire exposure of our assets or our positions to market price volatility, and our coverage varies over time.
Our risk management systems, however, may not always be implemented properly or may not always function as planned. In particular, if prices of commodities significantly deviate from historical prices or if the price volatility or distribution of those changes deviates from historical norms, our risk management systems may not protect us from significant losses. In addition, adverse changes in energy prices may result in economic losses in our earnings and cash flows and our balance sheet. To the extent we have unhedged positions or our hedging strategies do not work as planned, fluctuating commodity prices could cause our sales, purchases, and net income to be volatile. In addition, certain types of economic hedging activity may not qualify for hedge accounting under generally accepted accounting principles, resulting in increased volatility in net income.
Duke Energy's plan to dispose of DENA's assets may result in additional charges.
On September 13, 2005, the Duke Energy board of directors approved a plan to pursue the sale or other disposition of substantially all of DENA's physical and commercial assets outside the Midwestern United States, including forward gas and power, gas transportation, storage, structured power and other contracts. DENA's assets subject to the disposition plan are expected to be sold or otherwise disposed of within 12 months from the date Duke Energy's board of directors approved the plan.
The disposition plan resulted in a net initial pre-tax charge of approximately $1.3 billion.
In addition to these initial charges, Duke Energy anticipates recording additional charges of approximately $600 million to $800 million related to the disposition plan. These charges will include:
It is possible that unforeseen events or circumstances could negatively effect the disposition plan, the assumptions underlying the plan or our calculation of the costs of the plan. Accordingly, we may be required to record additional charges in connection with the disposition plan.
Duke Energy's plan to dispose of DENA's assets may not yield the benefits that we expect.
While Duke Energy's management believes it will be able to execute the announced plan, we cannot be certain that we will be able to dispose of DENA's physical and commercial assets within the expected time frame or, if the assets are sold, at what price they may be sold and the impact that such dispositions may have on our profitability. If the proceeds from the sale of DENA's assets subject to the disposition plan are less than anticipated or if the dispositions are not completed within 12 months from the date Duke Energy's board of directors approved the plan, additional charges or changes to our accounting treatment of DENA could be required, either of which could have an adverse effect on our reported results of operations.
Although the approval of the plan to pursue the sale or other disposition of substantially all of DENA's physical and commercial assets described above is expected to reduce our exposure to market risk and losses from trading operations over time, we will remain subject to significant commodity price risk as we execute this plan.
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We are exposed to credit risk of counterparties with whom we do business.
Adverse economic conditions affecting, or financial difficulties of, counterparties we do business with could impair the ability of these counterparties to pay for our services or fulfill their contractual obligations, or cause them to delay such payments or obligations. We depend on these counterparties to remit payments on a timely basis. Any delay or default in payment could adversely affect our cash flows, financial condition or results of operations.
Poor investment performance of pension plan holdings and other factors impacting pension plan costs could unfavorably impact our liquidity and results of operations.
Our costs of providing non-contributory defined benefit pension plans are dependent upon a number of factors, such as the rates of return on plan assets, discount rates, the level of interest rates used to measure the required minimum funding levels of the plans, future government regulation and our required or voluntary contributions made to the plans. While both Duke Energy and Cinergy comply with the minimum funding requirements under the Employee Retirement Income Security Act of 1974, as of September 30, 2004, our combined pro forma pension plan obligations exceeded the value of plan assets by approximately $900 million. Without sustained growth in the pension investments over time to increase the value of our plan assets and depending upon the other factors impacting our costs as listed above, we could be required to fund our plans with significant amounts of cash. Such cash funding obligations could have a material impact on our liquidity by reducing our cash flows and could negatively affect our results of operations.
Possible changes and developments in the Canadian regulatory environment may have a negative impact on our business and operations.
The majority of our Canadian natural gas assets are subject to various degrees of federal and provincial regulation. Changes in such regulation may impact our capacity to conduct this business effectively and sustain or increase profitability. Furthermore, as the regulatory environment within which we conduct our business and operate our facilities continues to evolve from a traditional cost recovery model to a more competitive, market-based approach, there is increasing competition among pipeline companies. We cannot predict the timing or scope of these changes and developments in the regulatory environment or the impact they may ultimately have on our business and operations.
In connection with the Kyoto Protocol, the Canadian government is developing a greenhouse gas emission plan, which may include caps on emissions and allowance trading programs. If implemented, our Canadian operations would likely be subject to the program beginning in 2008. Compliance could require either a combination of purchasing emission credits or reducing actual emissions. Due to the uncertainty regarding such policies, however, we cannot estimate the potential effects of such a plan on future consolidated results of operations, cash flows or financial position.
Claims have been asserted contesting our right to some of our Canadian properties which could negatively impact our business and operations.
Certain aboriginal groups have claimed aboriginal and treaty rights over a substantial portion of the lands on which our facilities in British Columbia and Alberta and the gas supply areas served by those facilities are located. The existence of these claims, which range from the assertion of rights of limited use up to aboriginal title, has given rise to some uncertainty regarding access to public lands for future development purposes. We cannot predict the outcome of these claims or the impact they may ultimately have on our businesses and operations.
Under our holding company structure, the payment of dividends to shareholders will be subject to the ability of our subsidiaries to pay dividends to us.
We will be a holding company with no material assets other than the stock of our subsidiaries. Accordingly, all of our operations will be conducted by our subsidiaries. Our ability to pay dividends on
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our common stock will depend on the payment to us of dividends by our operating subsidiaries. These subsidiaries' payments of dividends to us in turn depend on their results of operations, cash flows and federal and state regulatory constraints.
We may become subject to more market risks and experience more fluctuations in operating results as a result of the mergers, which may have an adverse effect on our operating results, financial performance and/or share price.
Our unregulated businesses include domestic and international gas and power development, operation and ownership, domestic and Canadian gas and power marketing and trading, real estate, telecommunications and midstream gas gathering and processing assets. Our unregulated businesses are more subject to competitive market risks, such as consumer-demand changes, commodity price changes, or market share erosion, than are our traditional utility businesses, which are subject to a regulatory structure that allows an approved rate of return and an exclusive retail franchise service territory. This greater exposure to market risks may lead to more volatile operating performance and results of operations. For the fiscal year ended December 31, 2004, unregulated businesses would have contributed approximately 59% of operating revenues of the combined company on a pro forma basis.
We could incur a significant tax liability and our results of operations and cash flows may be negatively affected if the Internal Revenue Service denies or otherwise makes unusable certain tax credits related to our coal and synthetic fuel business or if such credits are phased out based on crude oil prices.
Cinergy's sale of synthetic fuel intended to qualify for tax credits in accordance with Section 29 of the Code has generated $271 million in tax credits through June 30, 2005. The IRS is currently auditing Cinergy for the 2002 and 2003 tax years. The IRS has recently challenged certain other taxpayers' Section 29 tax credits. If the IRS were to successfully challenge Cinergy's Section 29 tax credits, this could result in the disallowance of up to all $271 million in previously claimed Section 29 tax credits and a loss of our ability to claim future Section 29 tax credits for synthetic fuel produced by such facilities. The amount of tax credits we can claim each year is a function of our projected consolidated regular federal income tax liability. Any conditions that reduce our taxable income in a particular year, thus reducing our regular tax liability in such year, could also diminish our ability to utilize Section 29 credits, including those previously generated in such year. In addition, the proposed transaction may require the partial disposition by Cinergy of its ownership interest in one of its synthetic fuel facilities in order for the fuel produced to continue to qualify for the credit.
Section 29 also provides for a phase-out of the credit based on the average price of crude oil during a calendar year. The phase-out is based on a prescribed calculation and definition of crude oil prices. Based on current estimates of crude oil prices and the recent volatility of such prices, we believe it is possible that for 2006 and 2007 the amount of the tax credits could be reduced.
We are currently involved in litigation with the United States and several states and environmental groups regarding certain environmental matters.
Cinergy is currently involved in litigation in which the EPA is alleging various violations of the Clean Air Act (CAA). Specifically, the lawsuit against Cinergy alleges that Cinergy violated the CAA by not obtaining permits for various projects at its owned and co-owned generating stations. Additionally, the Cinergy suit claims that Cinergy violated an Administrative Consent Order entered into in 1998 between the EPA and Cinergy relating to alleged violations of Ohio's state implementation plan provisions governing particulate matter at one of its generating stations. Three northeast states and two environmental groups have intervened in the Cinergy case. In August 2005, the district court ruled that in determining whether a project was projected to increase annual emissions, it would not hold hours of operation constant. However, the district court subsequently certified the matter for interlocutory appeal to the Seventh Circuit Court of Appeals, which has the discretion to accept or not accept the appeal at this time. There are a number of other legal issues currently before the district
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court judge, and the case is currently in discovery. A second lawsuit being defended by one of Cinergy's co-owners involves similar allegations and is also pending. Duke Energy is a defendant in similar litigation brought by the EPA in which the presiding court has entered judgment in favor of Duke Energy, which was subsequently affirmed on appeal by the 4th Circuit Court of Appeals. The government's request for a rehearing before the Fourth Circuit to review its decision was denied and the government has decided not to appeal. Some intervenor groups have been granted an extension to file a petition for appeal to the U.S. Supreme Court.
In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, and Wisconsin and the City of New York brought a lawsuit against Cinergy, American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc.; on the same day, a second, similar lawsuit was filed against the same companies. These lawsuits allege that the defendants' emissions of CO2 from the combustion of fossil fuels at electric generating facilities contribute to global warming and amount to a public nuisance. The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO2. In September 2005, the district court granted the defendants' motion to dismiss the lawsuit. The plaintiffs have appealed that decision to the Second Circuit Court of Appeals.
We are subject to numerous environmental laws and regulations that require significant capital expenditures, increase our cost of operations, and which may impact or limit our business plans, or expose us to environmental liabilities.
We are subject to numerous environmental regulations affecting many aspects of our present and future operations, including air emissions (such as controlling greenhouse-gas emissions), water quality, wastewater discharges, solid waste and hazardous waste. These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations, and litigation may arise the outcome of which we cannot predict.
For example, North Carolina enacted clean air legislation that requires North Carolina electric utilities, including Duke Energy, to make significant reductions in emissions of sulfur dioxide and nitrogen oxides from the state's coal-fired power plants by 2013. We estimate the cost of achieving the proposed emission reductions to be approximately $1.7 billion. Similarly, the EPA recently issued the Clean Air Interstate Rule (CAIR), formerly the Interstate Air Quality Rule, which requires reductions in sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions in order to address alleged contributions to downwind non-attainment with the revised National Ambient Air Quality Standards and established a two-phase, regional cap and trade program for SO2 and NOx and issued the Clean Air Mercury Rule (CAMR), which requires reductions in mercury emissions from coal-fired power plants through a similar two phase cap and trade program. Over the 2005-2009 time period, Cinergy expects to spend approximately $1.8 billion to reduce mercury, SO2, and NOx emissions, including estimated costs to comply at plants in which we have partial ownership but do not operate. We believe Duke Energy's compliance with the North Carolina clean air legislation will be sufficient to meet its obligations under the CAIR and CAMR. Although we believe that we are legally entitled to recover these costs, if we cannot recover these costs in a timely manner, or in an amount sufficient to cover our actual costs, our financial conditions and results of operations could be materially and adversely impacted. Revised or additional regulations, which result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have a material adverse effect on our results of operations.
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The uncertain outcome regarding the timing, creation and structure of regional transmission organizations, or RTOs, may materially impact our results of operations, cash flows or financial condition.
Congress, FERC, and the state utility regulators have paid significant attention in recent years to transmission issues, including the development of a number of regional transmission organizations. For the last several years, the FERC has supported independent RTOs and has indicated a belief that it has the authority to order transmission-owning utilities to transfer operational control of their transmission assets to such RTOs. Many state regulators, including regulators in North and South Carolina, have expressed skepticism over the potential benefits of RTOs and generally disagree with the FERC's interpretation of its authority to mandate participation in RTOs. We cannot predict the timing or content of any final rules that may be implemented regarding RTOs or the effect that they may have on Duke Energy Holding's utilities' transmission operations or on our future consolidated results of operations, cash flows or financial condition.
Deregulation or restructuring in the electric industry may result in increased competition and unrecovered costs that could adversely affect our financial condition, results of operations or cash flows and our utilities' businesses.
Increased competition resulting from deregulation or restructuring efforts, including from the recently enacted Energy Policy Act of 2005, could have a significant adverse financial impact on us and our utility subsidiaries and consequently on our results of operations and cash flows. Increased competition could also result in increased pressure to lower costs, including the cost of electricity. Retail competition and the unbundling of regulated energy and gas service could have a significant adverse financial impact on us and our subsidiaries due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital. We cannot predict the extent and timing of entry by additional competitors into the electric markets. We cannot predict when we will be subject to changes in legislation or regulation, nor can we predict the impact of these changes on our financial condition, results of operations or cash flows.
Ohio has enacted electric generation deregulation legislation. Our Ohio residential customers are in a market development period through 2005, during which rates are frozen. Non-residential customers are under a recently approved rate stabilization plan, or RSP, that runs through December 31, 2008. Residential customers will be under the RSP beginning in 2006, also ending in 2008. At this time, it is difficult to predict how the regulatory environment will look after the rate stabilization period ends.
We are involved in numerous legal proceedings, the outcome of which are uncertain, and resolution adverse to us could negatively affect our cash flows, financial conditions or results of operations.
We are subject to numerous legal proceedings, many of which are discussed in Duke Energy's and Cinergy's periodic reports. Litigation is subject to many uncertainties, and we cannot predict the outcome of individual matters with assurance. For example, we or our subsidiaries are defendants in numerous purported class actions alleging generally that defendants, alone and in concert with others, manipulated the natural gas markets by various means, including, in some suits, engaging in "wash" trades, providing false information to natural gas trade publications, and unlawfully exchanging information, resulting in artificially high energy prices. Similarly, we are involved in numerous arbitration proceedings including with Southern California Edison Company (relating to approximately $90 million allegedly owed in connection with the termination of bilateral power contracts between the parties in early 2001) and Sonatrach, the Algerian state-owned energy company (regarding approximately $250 million allegedly owed in connection with shipping obligations under a liquefied natural gas purchase agreement and related transportation agreements).
It is possible that the final resolution of some of the matters in which we are involved could require us to make expenditures, in excess of established reserves, over an extended period of time and
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in a range of amounts that could have a material effect on our financial condition, cash flows and results of operations.
Risks Related to the Industry
Our results of operations may be negatively affected by sustained downturns or sluggishness in the economy, including low levels in the market prices of commodities, all of which are beyond our control.
Sustained downturns or sluggishness in the economy generally affect the markets in which we operate and negatively influence our energy operations. Declines in demand for electricity and gas as a result of economic downturns in our franchised electric and gas service territories will reduce overall electricity and gas sales and lessen our cash flows, especially as our industrial customers reduce production and, therefore, consumption of electricity and gas. Our gas transmission and distribution and gas gathering and processing businesses may experience a decline in the volume of natural gas shipped through their pipelines and transport systems or gathered and processed at their plants, resulting in lower revenues and cash flows, as lower economic output reduces energy demand. Although our franchised electric business is subject to regulated allowable rates of return and recovery of fuel costs under a fuel adjustment clause, and our gas transmission business is subject to mandated tariff rates, overall declines in electricity sold or the volume of gas shipped as a result of economic downturn or recession could reduce revenues and cash flows, thus diminishing results of operations.
We also sell electricity into the spot market or other competitive power markets on a contractual basis and enter into contracts to purchase and sell electricity, natural gas and natural gas liquids as part of our energy marketing and trading operations. With respect to such transactions, we are not guaranteed any rate of return on our capital investments through mandated rates, and our revenues and results of operations are likely to depend, in large part, upon prevailing market prices for power, natural gas and natural gas liquids in our regional markets and other competitive markets. These market prices may fluctuate substantially over relatively short periods of time and could reduce our revenues and margins and thereby diminish our results of operations.
Lower demand for the electricity we sell, for the natural gas we gather, process, transport and distribute, and lower prices for electricity, natural gas and natural gas liquids result from multiple factors that affect the markets where we sell electricity or gather, process, transport or distribute natural gas, including:
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These factors have led to industry-wide downturns that have resulted in the slowing down or stopping of construction of new power plants and announcements by us and other energy suppliers and gas pipeline companies of plans to sell non-strategic assets, subject to regulatory constraints, in order to boost liquidity or strengthen balance sheets. Proposed sales by other energy suppliers and gas pipeline companies could increase the supply of the types of assets that we are attempting to sell. In addition, recent FERC actions addressing power market concerns could negatively impact the marketability of our electric generation assets.
Our operating results may fluctuate on a seasonal and quarterly basis.
Electric power generation and gas distribution are generally seasonal businesses. In most parts of the United States and other markets in which we operate, demand for power peaks during the hot summer months, with market prices also peaking at that time. In other areas, demand for power peaks during the winter. In addition, demand for gas and other fuels generally peaks during the winter, especially for our natural gas businesses in Canada. Further, extreme weather conditions such as heat waves or winter storms could cause these seasonal fluctuations to be more pronounced. As a result, in the future, the overall operating results of our businesses may fluctuate substantially on a seasonal and quarterly basis and thus make period comparison less relevant.
Our business is subject to extensive regulation that will affect our operations and costs.
We are subject to regulation by FERC and the NRC, by federal, state and local authorities under environmental laws and by state public utility commissions under laws regulating our businesses. Regulation affects almost every aspect of our businesses, including, among other things, our ability to: take fundamental business management actions; determine the terms and rates of our transmission and distribution businesses' services; make acquisitions; issue equity or debt securities; engage in transactions between our utilities and other subsidiaries and affiliates; and pay dividends. Changes to these regulations are ongoing, and we cannot predict the future course of changes in this regulatory environment or the ultimate effect that this changing regulatory environment will have on our business. However, changes in regulation (including re-regulating previously deregulated markets) can cause delays in or affect business planning and transactions and can substantially increase our costs.
FERC has established certain market screens it employs to assess generation market power. Certain of these screens are difficult for a franchised utility such as Duke Power to pass. In an order issued on June 30, 2005 the FERC revoked the authority for Duke Power to make wholesale power sales within its control area at market-based rates based on the FERC's determination that Duke Power fails one of the applicable market screens. Under the FERC's order, Duke Power must pay partial refunds and may prospectively make wholesale power sales within its control area only at cost-based rates.
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Certain events in the energy markets beyond our control have increased the level of public and regulatory scrutiny in the energy industry and in the capital markets which could have a negative impact on our financial condition or results of operations or access to capital.
Due to certain events in the energy markets, regulated energy companies have been under increased scrutiny by regulatory bodies, capital markets and credit rating agencies. This increased scrutiny could lead to substantial changes in laws and regulations affecting us, including new accounting standards that could change the way we are required to record revenues, expenses, assets and liabilities. These types of regulations could have a negative impact on our financial condition or results of operations or access to capital.
Our gas transmission and storage operations are subject to government regulations and rate proceedings that could have an adverse impact on our ability to recover the costs of operating our pipeline facilities.
Our U.S. interstate gas transmission and storage operations are subject to FERC's regulatory authority. FERC has taken actions to strengthen market forces in the natural gas pipeline industry, which have led to increased competition throughout the industry. In a number of key markets, interstate pipelines are now facing competitive pressure from other major pipeline systems. Given the extent of FERC's regulatory power, we cannot predict the regulations under which we ultimately will operate our natural gas transmission and storage business in the future or the effect of regulation on our financial position and results of operations.
Some of our interstate gas transmission companies from time to time have in effect rate settlements approved by FERC which prevent those companies or third parties from modifying rates, except for allowed adjustments. These settlements do not preclude FERC from taking action on its own to modify the rates. It is not possible to determine at this time whether any such actions would be instituted or what the outcome would be, but such proceedings could result in rate adjustments.
Our Canadian gas operations are subject to various degrees of regulation by Canadian authorities. The rates charged by our Canadian gas business for the gathering, processing and transmission services provided to shippers and the terms and conditions under which those services are provided are subject to regulation by the National Energy Board (NEB). In addition, the NEB regulates the operation, maintenance and public safety aspects of the gathering, processing and transmission system and the construction of any additional capital facilities. Union Gas Limited is also subject to regulation by the Ontario Energy Board (OEB) with respect to the rates that it may charge its customers with respect to its natural gas storage, transmission and distribution system, facility expansions or facility abandonment, adequacy of service, public safety aspects of pipeline system construction and certain accounting principles. Actions of these regulators may impact our earnings from operations, and changes in the Canadian regulatory framework could impact the ability of our Canadian operations to conduct business effectively and to sustain or increase profitability.
Potential terrorist activities or military or other actions could adversely affect our business.
The continued threat of terrorism and the impact of retaliatory military and other action by the United States and its allies may lead to increased political, economic and financial market instability and volatility in prices for natural gas and oil which could affect the market for our gas operations and may materially adversely affect us in ways we cannot predict at this time. In addition, future acts of terrorism and any possible reprisals as a consequence of action by the United States and its allies could be directed against companies operating in the United States. In particular, nuclear generation facilities such as our nuclear plants could be potential targets of terrorist activities. The potential for terrorism has subjected our operations to increased risks and could have a material adverse effect on our business. In particular, we may experience increased capital and operating costs to implement increased security for our plants, including our nuclear power plants under the NRC's design basis threat requirements, such as additional physical plant security and additional security personnel.
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The insurance industry has also been disrupted by these events. As a result, the availability of insurance covering risks we and our competitors typically insure against may decrease. In addition, the insurance we are able to obtain may have higher deductibles, higher premiums and more restrictive policy terms.
Increased environmental regulation and liabilities could subject us to significant compliance and remediation costs that adversely affect our results of operations.
Our operations are subject to extensive environmental regulation pursuant to a variety of U.S., Canadian, and other federal, provincial, state and municipal laws and regulations. Such environmental regulation imposes, among other things, restrictions, liabilities, obligations and potential enforcement in connection with the generation, handling, use, storage, transportation, treatment and disposal of hazardous substances and waste and in connection with spills, releases and emissions of various substances into the environment. Environmental legislation also requires that our facilities, sites and other properties associated with our operations be operated, maintained, and reclaimed to the satisfaction of applicable regulatory authorities.
Compliance with environmental regulations can require significant expenditures, including expenditures for clean up costs and damages arising out of contaminated properties, and failure to comply with environmental regulations may result in the imposition of fines and penalties. The steps we take to ensure our facilities are in compliance could be prohibitively expensive, and we may be required to shut down or alter the operation of our facilities, which may cause us to incur losses. Further, our regulatory rate structure and our contracts with clients may not necessarily allow us to recover capital costs we incur to comply with new environmental regulations such as the North Carolina clean air legislation. Also, we may not be able to obtain or maintain from time to time all required environmental regulatory approvals for our development projects. If there is a delay in obtaining any required environmental regulatory approvals, if we fail to obtain and comply with them or if environmental regulations change and become more stringent, the operation of our facilities or the development of new facilities could be prevented, delayed or become subject to additional costs. Should we fail to comply with all applicable environmental laws, we may be subject to penalties and fines imposed against us by regulatory authorities. Although it is not expected that the costs of complying with current environmental regulations will have a material adverse effect on our financial condition or results of operations, no assurance can be made that the costs of complying with environmental regulations in the future will not have such an effect.
In addition, we are generally responsible for on-site liabilities, and in some cases off-site liabilities, associated with the environmental condition of our power generation facilities and natural gas assets which we have acquired or developed, regardless of when the liabilities arose and whether they are known or unknown. In connection with some acquisitions and sales of assets, we may obtain, or be required to provide, indemnification against some environmental liabilities. If we incur a material liability, or the other party to a transaction fails to meet its indemnification obligations to us, we could suffer material losses.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus and the documents that are incorporated into this joint proxy statement/prospectus by reference may contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. Such statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You can typically identify forward-looking statements by the use of forward-looking words, such as "may," "will," "could," "project," "believe," "anticipate," "expect," "estimate," "continue," "potential," "plan," "forecast" and other similar words. Those statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In addition to the risk factors described under "Risk Factors Relating to the Mergers," those factors include:
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In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. The areas of risk and uncertainty described above should be considered in connection with any written or oral forward-looking statements that may be made after the date of this joint proxy statement/prospectus by Duke Energy Holding, Duke Energy or Cinergy or anyone acting for any or all of them. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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On September 13, 2005, the Duke Energy board of directors approved a plan to pursue the sale or other disposition of substantially all of DENA's physical and commercial assets outside the Midwestern United States, including forward gas and power, gas transportation, storage, structured power and other contracts. DENA's assets subject to the disposition plan are expected to be sold or otherwise disposed of within 12 months from the date Duke Energy's board of directors approved the plan.
The disposition plan resulted in a net initial pre-tax charge of approximately $1.3 billion. Going forward, the forward power and gas contracts that were historically accounted for as cash flow hedges will be marked to market, which could result in increased volatility in earnings until the contracts are settled, sold or otherwise disposed of.
In addition to these initial charges, Duke Energy anticipates recording additional charges of approximately $600 million to $800 million related to the disposition plan. These charges will include:
Pursuant to this plan, on November 17, 2005, Duke Energy Marketing America, LLC, Duke Energy North America, LLC (DENA), Duke Energy Trading and Marketing, L.L.C., Duke Energy Marketing Limited Partnership and Engage Energy Canada, L.P. (together, the "Duke Energy Entities") and Barclays Bank PLC entered into a Master Transaction Agreement with respect to substantially all of such Duke Energy Entities' power and gas derivative contracts settling January 2006 forward. Excluded from the master transaction agreement are derivative contracts associated with the near-term value of DENA's West and Northeast generation assets and with remaining gas transportation and structured power contracts. Among other things, the Master Transaction Agreement provides that:
The novation or assignment of physical power contracts is subject to FERC approval. Barclays is a party to various credit facilities with Duke Energy and its affiliates.
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THE DUKE ENERGY SPECIAL MEETING
General
The Duke Energy board of directors is using this joint proxy statement/prospectus to solicit proxies from the holders of shares of Duke Energy common stock for use at the Duke Energy special meeting. Duke Energy is first mailing this joint proxy statement/prospectus and accompanying proxy card to its shareholders on or about [ ], 200[ ].
Date, Time and Place of the Duke Energy Special Meeting
Duke Energy will hold its special meeting of shareholders on [ ], 2006, at 10:00 a.m. local time in the O.J. Miller Auditorium in the Energy Center located at 526 South Church Street in Charlotte, North Carolina.
Purpose of the Duke Energy Special Meeting
At the Duke Energy special meeting, holders of Duke Energy common stock will be asked to:
The Duke Energy board of directors has adopted the merger agreement and approved the mergers and recommends that Duke Energy shareholders vote FOR the approval of the merger agreement and the mergers.
Duke Energy Record Date; Shares Entitled to Vote
The Duke Energy board of directors has fixed the close of business on [ ], 200[] as the record date for determination of shareholders entitled to notice of and to vote at the Duke Energy special meeting. Only holders of record of shares of Duke Energy common stock and Duke Energy preferred stock at the close of business on the record date are entitled to notice of the special meeting, and only holders of record of shares of Duke Energy common stock at the close of business on the record date are entitled to vote at the special meeting and any adjournments or postponements of the Duke Energy special meeting. Under the North Carolina Business Corporation Act, or NCBCA, a North Carolina corporation cannot vote its own shares because North Carolina law does not recognize the concept of treasury shares. Therefore, if a North Carolina corporation acquires its own shares, such shares automatically revert to the status of authorized but unissued shares. Accordingly, Duke Energy will vote no shares at the Duke Energy special meeting.
Each shareholder is entitled to one vote at the Duke Energy special meeting for each share of Duke Energy common stock held by that shareholder at the close of business on the record date. Duke Energy's common stock is its only voting security for the Duke Energy special meeting.
As of [ ], 200[], the record date for the Duke Energy special meeting, there were approximately [ ] shares of Duke Energy common stock outstanding and held by approximately [ ] holders of record.
Quorum
In order to conduct the special meeting, holders of a majority of the outstanding shares of common stock must be present in person or represented by proxy so that there is a quorum. It is important that you vote promptly so that your shares are counted toward the quorum.
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All shares of Duke Energy common stock represented at the Duke Energy special meeting, including abstentions and "broker non-votes," will be treated as shares that are present and entitled to vote for purposes of determining the presence of a quorum. "Broker non-votes" are shares held by a broker or other nominee that are represented at the meeting, but with respect to which such broker or nominee is not instructed by the beneficial owner of such shares to vote on the particular proposal, and the broker does not have discretionary voting power on such proposal. Under NYSE rules, your broker or bank does not have discretionary authority to vote your shares of Duke Energy common stock on the proposal to approve the merger agreement. Without voting instructions on such proposal, a broker non-vote will occur.
Vote Required
Approval of the merger agreement and the mergers requires that at least a majority of the outstanding shares of Duke Energy common stock vote FOR the approval of the merger agreement and the mergers. Abstentions and broker non-votes have the same effect as shares voted against the proposal to approve the merger agreement and the mergers.
Recommendation of the Board of Directors
As discussed elsewhere in this joint proxy statement/prospectus, Duke Energy's board of directors has adopted and approved the merger agreement and the transactions contemplated by the merger agreement, including the mergers, and has determined that the transactions contemplated by the merger agreement are advisable, fair to and in the best interests of Duke Energy and its shareholders. The Duke Energy board of directors recommends that Duke Energy shareholders vote FOR the approval of the merger agreement and the mergers.
Duke Energy shareholders should carefully read this joint proxy statement/prospectus in its entirety for more detailed information concerning the merger agreement and the mergers. In particular, Duke Energy shareholders are directed to the merger agreement, which is attached as Annex A to this joint proxy statement/prospectus.
Voting by Duke Energy's Directors and Executive Officers
As of the record date, Duke Energy's directors and executive officers had the right to vote less than 1% of the Duke Energy common stock outstanding and entitled to vote at the special meeting. Each Duke Energy director and executive officer has indicated his or her present intention to vote, or cause to be voted, the Duke Energy common stock owned by him or her for the approval of the merger agreement.
Voting of Proxies
All shares represented by properly executed proxies received in time for the Duke Energy special meeting will be voted at the Duke Energy special meeting in the manner specified by the shareholders giving those proxies. Properly executed proxies that do not contain voting instructions will be voted FOR the approval of the merger agreement and the mergers.
Only shares affirmatively voted for the approval of the merger agreement and mergers or properly executed proxies that do not contain voting instructions will be counted as favorable votes for the proposals. Accordingly, an abstention or failure to vote will have the same effect as a vote against approval of the merger agreement and mergers. Also, under NYSE rules, brokers and banks who hold Duke Energy common stock in "street name" for customers who are the beneficial owners of those shares may not give a proxy to vote those shares without specific instructions from those customers.
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How to Vote
If you own shares of Duke Energy common stock in your own name, you are an "owner of record." This means that you may use the enclosed proxy card(s) to tell the persons named as proxies how to vote your shares of Duke Energy common stock. If you fail to vote, the proxies cannot vote your shares of Duke Energy common stock at the Duke Energy special meeting. You have four voting options:
Internet. You can vote over the Internet by accessing the website at www.proxyvote.com and following the instructions on the website. Internet voting is available 24 hours a day. If you vote over the Internet, do not return your proxy card(s) or voting instruction card(s).
Telephone. You can vote by telephone by calling the toll-free number (800) 690-6903 in the United States, Canada or Puerto Rico on a touch-tone phone. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Telephone voting is available 24 hours a day. If you vote by telephone, do not return your proxy card(s) or voting instruction card(s).
Mail. You can vote by mail by simply completing, signing, dating and mailing your proxy card(s) or voting instruction card(s) in the postage-paid envelope included with this joint proxy statement/prospectus.
In Person. You may come to the Duke Energy special meeting and cast your vote there. The Duke Energy board of directors recommends that you vote by proxy even if you plan to attend the Duke Energy special meeting. If your shares of Duke Energy common stock are held in a stock brokerage account or through a bank, broker or other nominee, or, in other words, in street name, you must bring a letter from your bank, broker or nominee identifying you as the beneficial owner of the shares and authorizing you to vote such shares at the Duke Energy special meeting.
If you hold shares of Duke Energy common stock in street name, please follow the voting instructions provided by that entity. With respect to the proposal relating to the approval of the merger agreement and mergers, if you do not instruct your bank, broker or other nominee how to vote your shares of Duke Energy common stock, those shares will not be voted at the Duke Energy special meeting, and such bank, broker or other nominee will not be authorized to vote.
A number of banks and brokerage firms participate in a program that also permits shareholders whose shares are held in street name to direct their vote over the Internet or by telephone. This option, if available, will be reflected in the voting instructions from the bank or brokerage firm that accompany this joint proxy statement/prospectus. If your shares are held in an account at a bank or other brokerage firm that participates in such a program, you may direct the vote of these shares by the Internet or telephone by following the voting instructions enclosed with the proxy form from the bank or brokerage firm.
The Internet and telephone proxy procedures are designed to authenticate shareholders identities, to allow shareholders to give their proxy voting instructions and to confirm that these instructions have been properly recorded. Votes directed by the Internet or telephone through such a program must be received by 11:59 p.m., eastern daylight saving time, on [ ], 2006. Directing the voting of your Duke Energy shares will not affect your right to vote in person if you decide to attend the Duke Energy special meeting.
The named proxies will vote all shares at the meeting that have been properly voted (whether by Internet, telephone or mail) and not revoked. If you sign and return your proxy card(s) but do not mark your card(s) to tell the proxies how to vote your shares on the proposal, your proxy will be voted FOR the proposal.
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Duke Energy 401(k) Plan Participants
If you are a participant in the Duke Energy Retirement Savings Plan, you have the right to provide voting directions to the plan trustee on any issues properly presented at the special meeting, by submitting your proxy card, for those shares of Duke Energy common stock that are held by the plan and allocated to your plan account. Plan participant proxies will be treated confidentially. If you elect not to provide voting directions to the plan trustee, shares of Duke Energy common stock allocated to your plan account are to be voted by the plan trustee in the same proportion as those shares held by the plan for which the plan trustee has received voting directions from plan participants. The plan trustee will follow participants' voting directions and the plan procedure for voting in the absence of voting directions, unless it determines that to do so would be contrary to its fiduciary responsibility. Because the plan trustee must process voting instructions from participants before the date of the Duke Energy special meeting, you are urged to deliver your instructions well in advance of the Duke Energy special meeting so that the instructions are received no later than [ ], 2006.
Revoking Your Proxy
You may revoke your proxy at any time after you give it, and before it is voted, in one of the following ways:
If your shares are held in street name by a broker, bank or other nominee you will need to contact your broker to revoke your proxy.
Other Voting Matters
Electronic Access to Proxy Material
This joint proxy statement/prospectus, Duke Energy's Form 10-K for the fiscal year ended December 31, 2004 (Items 6, 7, 7a, 8 and Exhibit 12 of which were revised by the Current Report on Form 8-K filed December 9, 2005), Duke Energy's Form 10-Q for the quarters ended March 31, June 30 and September 30, 2005 (Part I Items 1, 2, and 3 of which were also revised by the Current Report filed on December 9, 2005), and the Current Report on Form 8-K filed December 9, 2005 (which revises the Form 10-K for the fiscal year ended December 31, 2004 and the Form 10-Q's as described above) are available on the Duke Energy website, www.duke-energy.com.
People with Disabilities
Duke Energy can provide you with reasonable assistance to help you participate in the Duke Energy special meeting if you inform Duke Energy of your disability. Please contact Investor Relations by telephone at (800) 488-3853; by electronic correspondence through "Contact Investor Relations" at www.duke-energy.com/investors; or by mail at P.O. Box 1005, Charlotte, N.C. 28201-1005, at least two weeks before the Duke Energy special meeting.
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Proxy Solicitations
Duke Energy is soliciting proxies for the Duke Energy special meeting from Duke Energy shareholders. Duke Energy will bear the entire cost of soliciting proxies from Duke Energy shareholders, except that Duke Energy and Cinergy will share equally the expenses incurred in connection with the filing of the registration statement of which this joint proxy statement/prospectus is a part. In addition to this mailing, Duke Energy's directors, officers and employees (who will not receive any additional compensation for their services) may solicit proxies personally, electronically or by telephone.
Duke Energy has engaged the services of Innisfree M&A Incorporated for a fee of approximately $20,000, plus reimbursement of expenses, to assist in the solicitation of proxies.
Duke Energy and its proxy solicitors will request that banks, brokerage houses and other custodians, nominees and fiduciaries send proxy materials to the beneficial owners of Duke Energy common stock and will, if requested, reimburse the record holders for their reasonable out-of-pocket expenses in doing so. The extent to which these proxy-soliciting efforts will be necessary depends upon how promptly proxies are submitted.
Other Business; Adjournment
The Duke Energy board of directors is not aware of any other business to be acted upon at the special meeting and the NCBCA provides that no business other than that stated in the notice may be transacted at any special meeting.
The persons named as proxies by a Duke Energy shareholder may propose and vote for one or more adjournments of the Duke Energy special meeting, including adjournments to permit further solicitations of proxies. No proxy voted against the proposal to approve the merger agreement will be voted in favor of any adjournment of the Duke Energy special meeting.
Any adjournment may be made from time to time by approval of the Duke Energy shareholders holding a majority of the voting power present in person or by proxy at the Duke Energy special meeting, whether or not a quorum exists, without further notice other than by an announcement made at the Duke Energy special meeting. If a quorum is not present at the Duke Energy special meeting, shareholders may be asked to vote on a proposal to adjourn the Duke Energy special meeting to solicit additional proxies. If a quorum is present at the Duke Energy special meeting but there are not sufficient votes at the time of the Duke Energy special meeting to approve the merger proposal, holders of Duke Energy common stock may also be asked to vote on a proposal to approve the adjournment of the Duke Energy special meeting to permit further solicitation of proxies. Abstentions and broker non-votes will be treated as votes against any such proposal.
Representatives of Deloitte & Touche LLP
Representatives of Deloitte & Touche LLP are expected to be present at the Duke Energy special meeting. The representatives of Deloitte & Touche LLP will have the opportunity to make a statement regarding the proposed mergers if they desire to do so, and they are expected to be available to respond to appropriate questions from Duke Energy shareholders at the Duke Energy special meeting.
Assistance
If you need assistance in completing your proxy card or have questions regarding Duke Energy's special meeting, please contact Innisfree M&A Incorporated toll-free at (877) 825-8906. Banks and brokers may call collect at (212) 750-5833.
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General
The Cinergy board of directors is using this joint proxy statement/prospectus to solicit proxies from the holders of shares of Cinergy common stock for use at the special meeting of Cinergy shareholders. Cinergy is first mailing this joint proxy statement/prospectus and accompanying proxy card to its shareholders on or about [ ], 200[ ].
Date, Time and Place of the Cinergy Special Meeting
Cinergy will hold its special meeting of shareholders at 9:00 am, eastern standard time, on [ ], 2006 at [ ].
Purpose of Cinergy Special Meeting
At the Cinergy special meeting, holders of shares of Cinergy common stock will be asked to:
The Cinergy board of directors has adopted the merger agreement and the transactions contemplated thereby, including the mergers, and recommends that Cinergy shareholders vote FOR the adoption of the merger agreement and the mergers.
Cinergy Record Date; Outstanding Shares; Shares Entitled to Vote
The Cinergy board of directors has fixed the close of business on [ ], 200[ ] as the record date for determination of shareholders entitled to notice of and to vote at the Cinergy special meeting.
As of [ ], 200[ ], the record date for the Cinergy special meeting, there were approximately [ ] shares of Cinergy common stock outstanding and held by approximately [ ] holders of record. Each shareholder is entitled to one vote at the Cinergy special meeting for each share of Cinergy common stock held by that shareholder at the close of business on the record date. Cinergy's common stock is its only voting security, and shares of Cinergy common stock held by Cinergy in its treasury are not voted.
Quorum
In order to conduct the special meeting, holders of a majority of the outstanding shares of common stock must be present in person or represented by proxy so that there is a quorum. It is important that you vote promptly so that your shares are counted toward the quorum.
All shares of Cinergy common stock represented at the Cinergy special meeting, including abstentions and "broker non-votes," will be treated as shares that are present and entitled to vote for purposes of determining the presence of a quorum. "Broker non-votes" are shares held by a broker or other nominee that are represented at the meeting, but with respect to which such broker or nominee is not instructed by the beneficial owner of such shares to vote on the particular proposal, and the broker does not have discretionary voting power on such proposal.
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Vote Required
Adoption of the merger agreement and thereby approval of the mergers, requires that at least a majority of outstanding shares of Cinergy common stock vote FOR the adoption of the merger agreement and the mergers. Abstentions and broker non-votes will be treated as shares voted against the proposal to adopt the merger agreement and approve the mergers.
Recommendation of the Board of Directors
As discussed elsewhere in this joint proxy statement/prospectus, Cinergy's board of directors has approved and adopted the merger agreement and the transactions contemplated by the merger agreement, including the mergers, and has determined that the transactions contemplated by the merger agreement are advisable, fair to and in the best interests of Cinergy and its shareholders. The Cinergy board of directors recommends that Cinergy shareholders vote FOR the adoption of the merger agreement and approval of the mergers.
Cinergy shareholders should carefully read this joint proxy statement/prospectus in its entirety for more detailed information concerning the merger agreement and the mergers. In particular, Cinergy shareholders are directed to the merger agreement, which is attached as Annex A to this joint proxy statement/prospectus.
Voting by Cinergy's Directors and Executive Officers
As of the record date for the Cinergy special meeting, Cinergy's directors and executive officers had the right to vote approximately [ ]% of the Cinergy common stock outstanding and entitled to vote at the meeting. Each Cinergy director and executive officer has indicated his or her present intention to vote, or cause to be voted, the shares of Cinergy common stock owned by him or her for the adoption of the merger agreement and approval of the mergers.
Voting of Proxies
All shares of Cinergy common stock represented by properly executed proxies received in time for the Cinergy special meeting will be voted at the Cinergy special meeting in the manner specified by the shareholders giving such proxies. Properly executed proxies that do not contain voting instructions will be voted FOR the adoption of the merger agreement and approval of the mergers.
How to Vote
If you own common stock in your own name, you are an "owner of record." This means that you may use the enclosed proxy card(s) to tell the persons named as proxies how to vote your shares of Cinergy common stock. If you fail to vote, the proxies cannot vote your shares of Cinergy common stock at the Cinergy special meeting. You have four voting options:
Internet. You can vote over the Internet by accessing the website at www.cesvote.com and following the instructions on the website. Internet voting is available 24 hours a day. If you vote over the Internet, do not return your proxy card(s) or voting instruction card(s).
Telephone. You can vote by telephone by calling the toll-free number (888) 693-8683 in the United States, Canada or Puerto Rico on a touch-tone phone. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Telephone voting is available 24 hours a day. If you vote by telephone, do not return your proxy card(s) or voting instruction card(s).
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Mail. You can vote by mail by simply completing, signing, dating and mailing your proxy card(s) or voting instruction card(s) in the postage-paid envelope included with this joint proxy statement/prospectus.
In Person. You may come to the Cinergy special meeting and cast your vote there. The Cinergy board of directors recommends that you vote by proxy even if you plan to attend the Cinergy special meeting. If your Cinergy shares are held in street name, you must bring a letter from your bank, broker or nominee identifying you as the beneficial owner of the Cinergy shares and authorizing you to vote such shares at the special meeting.
If you hold shares of Cinergy common stock in a stock brokerage account or through a bank, broker or other nominee, or, in other words, in street name, please follow the voting instructions provided by that entity. If you do not instruct your bank, broker or other nominee how to vote your shares with respect to the proposal relating to the adoption of the merger agreement and approval of the mergers, those shares will not be voted at the Cinergy special meeting, and such bank, broker or other nominee will not be authorized to vote.
A number of banks and brokerage firms participate in a program that also permits shareholders whose shares are held in street name to direct their vote over the Internet or by telephone. This option, if available, will be reflected in the voting instructions from the bank or brokerage firm that accompany this joint proxy statement/prospectus. If your Cinergy shares are held in an account at a bank or brokerage firm that participates in such a program, you may direct the vote of these Cinergy shares by the Internet or telephone by following the voting instructions enclosed with the proxy form from the bank or brokerage firm.
The Internet and telephone proxy procedures are designed to authenticate shareholders identities, to allow shareholders to give their proxy voting instructions and to confirm that these instructions have been properly recorded. Votes directed by the Internet or telephone through such a program must be received by 11:59 p.m., eastern standard time, on [ ], 2006. Directing the voting of your Cinergy shares will not affect your right to vote in person if you decide to attend the Cinergy special meeting.
The named proxies will vote all Cinergy shares at the meeting that have been properly voted (whether by Internet, telephone or mail) and not revoked. If you sign and return your proxy card(s) but do not mark your card(s) to tell the proxies how to vote your Cinergy shares on the proposal, your proxy will be voted FOR the proposal.
Cinergy 401(k) Plan Participants
If you are a participant in any of the Cinergy Corp. Non-Union Employees' 401(k) Plan, the Cinergy Corp. Union Employees' 401(k) Plan or the Cinergy Corp. Union Employees' Savings Incentive Plan (these plans are collectively referred to in this joint proxy statement/prospectus as the "Cinergy 401(k) Plan"), you have the right to provide voting directions to the plan trustee by submitting your proxy card for those shares of Cinergy common stock that are held by the Cinergy 401(k) Plan and allocated to your plan account on any issues properly presented at the special meeting of Cinergy shareholders. Plan participant voting directions will be treated confidentially. The plan trustee will follow participants' voting directions unless it determines that to do so would be contrary to the Employee Retirement Income Security Act of 1974. If you elect not to provide voting directions, the plan trustee will vote Cinergy shares allocated to your plan account as it determines in its discretion. Because the plan trustee must process voting instructions from participants before the date of the Cinergy special meeting, you are urged to deliver your instructions well in advance of the Cinergy special meeting so that the instructions are received no later than [ ], 2006.
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Revoking Your Proxy
You may revoke your proxy at any time after you give it, and before it is voted, in one of the following ways:
If your Cinergy shares are held in street name by a broker, bank or other nominee you will need to contact your broker to revoke your proxy.
Other Voting Matters
Electronic Access to Proxy Material
This joint proxy statement/prospectus, Cinergy's Form 10-K for the fiscal year ended December 31, 2004, and Cinergy's Form 10-Q for the quarters ended March 31, June 30 and September 30, 2005 are available on the Cinergy website, www.cinergy.com.
People with Disabilities
Cinergy can provide you with reasonable assistance to help you participate in the Cinergy special meeting if you inform Cinergy of your disability. Please write to or call Julia S. Janson, Corporate Secretary and Chief Compliance Officer at Cinergy Corp., 139 East Fourth Street, Cincinnati, Ohio 45202, (513) 287-3025, at least two weeks before the Cinergy special meeting.
Proxy Solicitations
Cinergy is soliciting proxies for the Cinergy special meeting from Cinergy shareholders. Cinergy will bear the entire cost of soliciting proxies from Cinergy shareholders, except that Cinergy and Duke Energy will share equally the expenses incurred in connection with the filing of the registration statement of which this joint proxy statement/prospectus is a part. In addition to this mailing, Cinergy's directors, officers and employees (who will not receive any additional compensation for such services) may solicit proxies personally, electronically or by telephone.
Cinergy has also engaged the services of Georgeson Shareholder Communications, Inc. for a fee of approximately $20,000, plus reimbursement of expenses, to assist in the solicitation of proxies.
Cinergy and its proxy solicitors will also request that banks, brokerage houses and other custodians, nominees and fiduciaries send proxy materials to the beneficial owners of Cinergy common stock and will, if requested, reimburse the record holders for their reasonable out-of-pocket expenses in doing so. The extent to which these proxy-soliciting efforts will be necessary depends upon how promptly proxies are submitted.
Other Business; Adjournment
The Cinergy board of directors is not aware of any other business to be acted upon at the Cinergy special meeting.
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The persons named as proxies by a Cinergy shareholder may propose and vote for one or more adjournments of the Cinergy special meeting, including adjournments to permit further solicitation of proxies. No proxy voted against the proposal to adopt the merger agreement will be voted in favor of any adjournment of the Cinergy special meeting. Approval of adjournments of the Cinergy special meeting, if necessary, to permit further solicitation of proxies, requires the affirmative vote of at least a majority of the shares of Cinergy common stock present (in person or by proxy) at the Cinergy special meeting. Abstentions and broker non-votes will be treated as votes against such a proposal.
Any adjournment may be made from time to time by approval of Cinergy shareholders holding a majority of the voting power present in person or by proxy at the Cinergy special meeting, whether or not a quorum exists, without further notice other than by an announcement made at the Cinergy special meeting. If a quorum is not present at the Cinergy special meeting, Cinergy shareholders may be asked to vote on a proposal to adjourn the Cinergy special meeting to solicit additional proxies. If a quorum is present at the Cinergy special meeting but there are not sufficient votes at the time of the special meeting to approve the merger proposal, holders of shares of Cinergy common stock may also be asked to vote on a proposal to approve the adjournment of the special meeting to permit further solicitation of proxies.
Representatives of Deloitte & Touche LLP
Representatives of Deloitte & Touche LLP are expected to be present at the Cinergy special meeting. The representatives of Deloitte & Touche LLP will have the opportunity to make a statement regarding the proposed mergers if they desire to do so, and they are expected to be available to respond to appropriate questions from Cinergy shareholders at the Cinergy special meeting.
Assistance
If you need assistance in completing your proxy card or have questions regarding Cinergy's special meeting, please contact Georgeson Shareholder Communications Inc. toll-free at (866) 729-6803. Banks and brokers may call collect at (212) 440-9800.
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The discussion in this joint proxy statement/prospectus of the mergers and the principal terms of the merger agreement are subject to, and are qualified in their entirety by reference to, the merger agreement, a copy of which is attached to this joint proxy statement/prospectus as Annex A and is incorporated into this joint proxy statement/prospectus by reference.
General Description of the Mergers
The mergers are structured as all-stock transactions. Under the terms of the merger agreement, Duke Energy will first reorganize into a holding company structure. Prior to entering into the merger agreement, Duke Energy formed a new Delaware corporation, Duke Energy Holding Corp., which in turn formed two wholly-owned subsidiaries, Deer Acquisition Corp. and Cougar Acquisition Corp. The merger agreement contemplates that Deer Acquisition Corp. will merge with and into Duke Energy with Duke Energy as the surviving corporation. In such merger, holders of Duke Energy common stock will receive the right to receive one share of Duke Energy Holding common stock for each share of Duke Energy common stock held. As a result, the current holders of Duke Energy common stock will become, temporarily, the holders of all of the outstanding shares of Duke Energy Holding common stock, and Duke Energy will become a wholly-owned subsidiary of Duke Energy Holding. We refer to this merger throughout this document as the "Duke Energy merger."
Immediately following the Duke Energy merger, Duke Energy intends to transfer ownership of Duke Capital LLC to Duke Energy Holding and in connection with such transfer intends to convert to a limited liability company. The conversion of Duke Energy to a limited liability company is referred to in this joint proxy statement/prospectus as the "Duke Energy conversion." The Duke Energy merger and the Duke Energy conversion taken together are referred to in this joint proxy statement/prospectus as the "Duke Energy reorganization." After the mergers, the former shareholders of Duke Energy and Cinergy will be the shareholders of Duke Energy Holding.
Following the Duke Energy reorganization, the merger agreement contemplates that Cougar Acquisition Corp. will merge with and into Cinergy, with Cinergy as the surviving corporation. In such merger, holders of Cinergy common stock will receive the right to receive 1.56 shares of Duke Energy Holding common stock for each share of Cinergy common stock held (the Cinergy exchange ratio). As a result, the current holders of Cinergy common stock will become holders of Duke Energy Holding common stock, and Cinergy will become a wholly-owned subsidiary of Duke Energy Holding. We refer to this merger throughout this document as the "Cinergy merger."
We refer to the Duke Energy merger and the Cinergy merger together throughout this document as the "mergers." Immediately following completion of the mergers, based on the number of shares of common stock of each of Duke Energy and Cinergy outstanding as of May 6, 2005, the last trading day prior to the public announcement of the mergers, former Duke Energy shareholders will own approximately 76% of Duke Energy Holding's common stock, and former Cinergy shareholders will own approximately 24% of Duke Energy Holding's common stock. We intend to apply to the NYSE prior to the consummation of the mergers to list Duke Energy Holding common stock and intend that shares of Duke Energy Holding common stock will trade under the symbol "DUK."
In connection with the execution of the merger agreement, Duke Energy's shareholder rights plan was amended to exempt the merger agreement and the transactions contemplated by the merger agreement from Duke Energy's shareholder rights plan.
Background of the Mergers
For the past several years, the energy industry, including Duke Energy, has experienced a number of challenges, including a substantial imbalance between supply and demand for electricity, the slow pace of economic recovery, and regulatory and legal uncertainties. In response to these challenges, Duke Energy's focus has been to reduce risks and restructure its business to better focus on its core
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assets. To this end, in 2004, Duke Energy's merchant generation business (DENA) sold eight natural gas-fired merchant power plants in the southeastern United States, and Duke Energy International, LLC disposed of its Asia-Pacific power generation and natural gas transmission business. These and other asset sales provided cash proceeds allowing Duke Energy to reduce debt and strengthen its balance sheet. In addition, in February 2005 Duke Energy Field Services, LLC, or DEFS, sold its subsidiary Texas Eastern Products Pipeline Company, LLC for approximately $1.1 billion, and Duke Energy agreed to transfer a 19.7% interest in DEFS to ConocoPhillips for consideration of approximately $1.1 billion, which transaction closed in the third quarter of 2005.
Prior to the commencement of the discussions between Duke Energy and Cinergy described below, an important goal of Duke Energy's restructuring efforts was to position DENA to be a successful merchant operator. In this regard, Duke Energy considered various options to create a sustainable business model for DENA, including consideration of business combinations with third parties. At such time, Duke Energy considered criteria for a sustainable business model for DENA to include fuel and customer diversity and sufficient size and scope for a substantial market presence to enable DENA to withstand the cyclical nature of its industry.
Duke Energy believes that its progress with respect to the asset sales described above resulted in a company better positioned to pursue growth strategies. The board of directors and management of Duke Energy regularly evaluate options for achieving long-term strategic goals and enhancing shareholder value, and Duke Energy began reviewing potential opportunities for business combinations within the utility industry with increased focus in mid-2004.
From time to time, the board of directors and management of Cinergy examine possible strategic opportunities in an effort to assure that the company is well positioned for future growth in light of industry developments. In this regard, in the course of a telephone conversation in late September 2004 regarding unrelated matters, James E. Rogers, Chairman and Chief Executive Officer of Cinergy, suggested to Paul M. Anderson, Chairman and Chief Executive Officer of Duke Energy, that the two companies might consider the possibility of a joint venture involving DENA or a similar strategic transaction involving the two companies. Mr. Rogers discussed the possibility of such a transaction involving Cinergy and Duke Energy with the Cinergy board of directors as part of his overall review of possible strategic opportunities at the Cinergy board retreat on October 1, 2004. On October 26, 2004, at a regularly scheduled meeting of the Duke Energy board of directors, Mr. Anderson provided a brief review of companies that had expressed an interest in potential business combinations with Duke Energy, including a review of Cinergy's interest in a potential transaction involving DENA.
In early November 2004, Mr. Rogers and one other Cinergy executive and Mr. Anderson and one other Duke Energy executive met in person in Charlotte, North Carolina to discuss further the possibility of a transaction involving Cinergy and DENA, as well as to discuss whether there were other possible mutually beneficial strategic opportunities for the two companies. During this meeting, the parties discussed a merger of the two companies as one possible alternative. On November 10, 2004, Duke Energy and Cinergy entered into a confidentiality agreement covering the discussions between the companies and any material that might be exchanged by the parties. During the next month, Mr. Rogers and Mr. Anderson met one time and spoke by telephone on one additional occasion to discuss a business combination involving the entirety of the two companies. In addition, an executive officer of Duke Energy and an executive officer of Cinergy spoke by telephone on two occasions to discuss a potential transaction. On December 9, 2004, Mr. Rogers updated the Cinergy board of directors on matters relating to discussions with Duke Energy, as well as other possible strategic opportunities. On December 16, 2004, at a regularly scheduled meeting of the Duke Energy board of directors, Mr. Anderson reviewed the discussions with Mr. Rogers and other Cinergy executives and provided a general review of Cinergy as a potential partner for a business combination. Mr. Anderson discussed other potential candidates for a business combination with Duke Energy at the meeting.
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During December 2004, Duke Energy and Cinergy began to exchange confidential financial information, including at a meeting between executives of Duke Energy and Cinergy in McLean, Virginia on December 21, 2004. This information included a high level overview of each company's businesses and projected financial information, including, among other things, Duke Energy's most recent ratings agency presentation and related supplemental financial information.
On January 7, 2005, executives of each of Duke Energy and Cinergy met in Atlanta, Georgia to discuss, among other things, an overview of DENA and Cinergy's Commercial Business Unit and the combination of their operations in the context of a business combination involving the entirety of the two companies.
On January 11, 2005, Mr. Rogers and Mr. Anderson discussed proceeding with the exploration of a potential business combination. This call was followed by a meeting on January 17, 2005 in North Carolina involving Mr. Rogers, Mr. Anderson and executives of each company to discuss matters relating to a possible transaction, including issues relating to DENA, required regulatory approvals and strategic opportunities.
On February 2, 2005, Mr. Rogers updated the Cinergy board of directors as to his discussions with Mr. Anderson. The Cinergy board of directors discussed the potential advantages of a combination of Cinergy and Duke Energy, including the advantages of greater scale and diversification with respect to operations, fuel sources and regulated franchises. Mr. Rogers emphasized that discussions with respect to any transaction were in their very early stages. Mr. Rogers said that he expected to hear from Duke Energy with respect to its level of interest following the Duke Energy board meeting to be held on February 22, 2005.
On February 22, 2005, at a regularly scheduled meeting of the Duke Energy board of directors, members of Duke Energy's senior management presented a preliminary analysis of various theoretical strategic transactions involving Duke Energy's merchant power business, including potential business combinations between Duke Energy and various potential partners, including Cinergy. Duke Energy's board of directors determined not to pursue any of the other strategic alternatives presented because it concluded that such alternatives would not ultimately lead to a transaction on a timetable and with terms that would likely be acceptable to Duke Energy and that the remaining strategic alternatives presented would not accomplish Duke Energy's strategic objectives. One potential partner submitted a non-binding unsolicited preliminary indication of interest regarding a strategic transaction with Duke Energy. The Duke Energy board of directors determined not to pursue the transaction proposed in the preliminary indication of interest as it believed that such transaction was not in the best interest of Duke Energy's shareholders, particularly noting that the proposed transaction did not address Duke Energy's key strategic objectives, including optimizing DENA's business platform and adding significant regulated electricity generation business growth. At this meeting, Mr. Anderson also introduced other strategic alternatives for Duke Energy, including exploring the possibility of separating the electric and gas businesses.
On February 24, 2005, an executive of Duke Energy spoke with an executive of Cinergy and indicated that Duke Energy was interested in continuing to pursue the possibility of a transaction. From the end of February through the middle of March, executives of the two companies (including on one occasion Mr. Rogers and Mr. Anderson) spoke several times regarding a possible transaction.
On March 3, 2005, a senior executive of Duke Energy distributed to the Duke Energy board of directors a preliminary analysis of a potential business combination with Cinergy. This analysis included an overview of Cinergy and its business and operations, a summary of the discussions to date with Mr. Rogers and other Cinergy executives, a Cinergy presentation to analysts from January 2005, an investor presentation of Cinergy from February 2005 and various analyst reports on Cinergy and its business and operations.
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On March 9, 2005, Mr. Anderson and Mr. Rogers met for dinner in Charlotte, North Carolina to continue to discuss a potential transaction. At that dinner, Mr. Anderson provided Mr. Rogers with a preliminary governance term sheet, for discussion purposes, relating only to governance matters and not economic matters in connection with a possible business combination. The preliminary governance term sheet suggested a combined board consisting of nine persons chosen from the existing Duke Board and three persons chosen from the existing Cinergy Board. It also suggested that Mr. Anderson would serve as executive chairman of the combined company until the later of December 31, 2006 or six months after the closing, that Mr. Rogers would be Chief Executive Officer, and that specified executives would initially report to Mr. Anderson for a period of three months after closing. The preliminary governance term sheet also contemplated that the name of the combined company would be Duke Energy, that the corporate headquarters would be in Charlotte, North Carolina, and that the combined company's utilities would maintain their headquarters in their current locations.
On March 16, 2005, executives of the companies met with outside legal counsel in McLean, Virginia to begin discussion of the state and federal regulatory approvals that would be required in connection with any transaction. The companies also discussed the need for Duke Energy to adopt a holding company structure under PUHCA of 1935. Between March 16th and March 24th, several telephone calls among executives of the two companies took place (including on one occasion a telephone call between Mr. Rogers and Mr. Anderson) with respect to a possible transaction. On March 24, 2005, Mr. Anderson met for dinner in Cincinnati, Ohio, with Mr. Rogers and three other members of the Cinergy board of directors for the purpose of introducing Mr. Anderson to these directors and discussing a possible merger transaction. Also on March 16, 2005, Mr. Anderson sent an email to each member of the Duke Energy board of directors briefing them on the continued discussions with Cinergy and his meetings with Mr. Rogers. Mr. Anderson also invited each member of the Duke Energy board of directors to a dinner to meet Mr. Rogers and discuss a potential business combination.
On March 28, 2005, Mr. Rogers, executives of Cinergy and representatives of Cinergy's financial advisor and outside legal counsel met in New York City with Mr. Anderson, executives of Duke Energy and representatives of Duke Energy's financial and accounting advisors and outside legal counsel in order to establish a process for continued exploration of a possible business combination involving the two companies. Also in attendance were representatives of a third-party synergy consultant that was engaged by both Duke Energy and Cinergy to assist their management in preparing an analysis of potential synergies for a potential business combination. The discussions at this meeting included a proposed due diligence schedule, a proposed process and schedule for analyzing potential synergies, a process and timeline for negotiation of a merger agreement, a process and timeline for analyzing the regulatory filings and implications of the proposed transaction and an outline of next steps to be taken in connection with the proposed transaction. Shortly after these meetings, each of the two companies made available to the other and their respective advisors access to electronic data rooms containing extensive confidential financial and other information regarding their respective businesses. Also, after these meetings, the two companies' outside legal counsel and financial advisors met to begin to discuss a possible structure for the proposed transaction.
As part of the due diligence process, executives of each company and representatives of their respective financial advisors and outside legal counsel met in Washington, D.C. on April 6 and April 7, 2005. At these meetings, members of each company's management team made presentations regarding each company's business units. Over the next several weeks, the parties continued to exchange information and engage in discussions for due diligence purposes. Also during this time period the companies' synergy consultant assisted the management of Duke Energy and Cinergy with the development of a synergies analysis related to a potential business combination of the two companies. Executives of each company met with the companies' synergy consultant, together and separately on various occasions, to discuss and participate in the creation of such analysis.
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On April 8, 2005, Mr. Rogers updated the Cinergy board of directors as to the status of these discussions. Later on that day, Duke Energy's outside legal counsel sent Cinergy's outside legal counsel a first draft of a proposed merger agreement. The initial draft merger agreement did not address economic or governance terms.
On April 10, 2005, Mr. Rogers, Mr. Anderson and executives of each company met in Charlotte, North Carolina, to continue to discuss matters relating to the proposed business combination.
On April 13, 2005, Duke Energy's senior management team met in Houston, Texas. At this meeting, officers of Duke Energy presented the status and results of the due diligence review of Cinergy to date, the progress of discussions to date and potential benefits and risks of a business combination between the two companies. Representatives of UBS, financial advisor to Duke Energy, also attended such meeting and discussed the potential financial benefits and implications of a business combination transaction and a range of potential exchange ratios for Cinergy's shareholders. Duke Energy's outside counsel reviewed the federal and state regulatory approvals that would be required and the implications of Duke Energy reorganizing into a registered holding company under PUHCA of 1935. Representatives of the companies' synergy consultant met with the management of Duke Energy and Cinergy to assist them in preparing a management report on potential synergies that could be achieved in a potential combination of the two companies.
On April 14, 2005, Mr. Rogers attended a dinner with Mr. Anderson and four other members of the Duke Energy board of directors in Charlotte, North Carolina, for the purpose of introducing Mr. Rogers to these directors and discussing a possible merger transaction. Following this dinner, Mr. Anderson provided Mr. Rogers with a revised preliminary term sheet, addressing both economic and governance matters for discussion purposes. The revised term sheet proposed an exchange ratio for the potential transaction of 1.5 shares of the new holding company common stock for each Cinergy share. With respect to governance matters, the preliminary term sheet suggested a combined company board that would consist of nine persons chosen from the existing Duke Energy board of directors and three persons chosen from the existing Cinergy board of directors. It also provided that Mr. Anderson would serve as Chairman and Chief Executive Officer of the combined company, and in the event the combined company's electric and gas operations were separated, Mr. Anderson would become the non-executive chairman of the new company holding the combined company's electric assets. The term sheet further provided that Mr. Rogers would be President and Chief Executive Officer of the combined company's electric operations and an individual to be determined would serve as the President and Chief Executive Officer of the combined company's gas operations. The preliminary term sheet also contemplated that the name of the combined company would be Duke Energy, that the corporate headquarters would be in Charlotte, North Carolina, and that the combined company's utilities would maintain their headquarters in their current locations. It also raised issues with respect to the retention of Cinergy executives for the combined company and the change of control severance payments that might be due to Cinergy executives in the event of a combination of the two companies.
On April 15, 2005, Cinergy's outside counsel sent proposed revisions to the draft merger agreement to Duke Energy's outside counsel. These proposed revisions did not address economic or governance matters.
On April 17, 2005, Mr. Rogers sent a term sheet to Mr. Anderson responding to the economic and governance matters raised by the term sheet Mr. Anderson had provided to Mr. Rogers on April 14. The term sheet sent by Mr. Rogers suggested that an exchange ratio of 1.65 Duke Energy shares for each Cinergy share would be appropriate to reflect the fundamental values of the two companies and to permit dividend neutrality for Cinergy's shareholders (i.e., keeping Cinergy's shareholders whole with respect to their current dividend). It also suggested that the combined company board should consist of ten persons chosen from the existing Duke Energy board of directors and five persons chosen from the existing Cinergy board of directors, with a possible rearrangement of the board composition in the event of a separation of the combined company's gas and electric operations. It contemplated that
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Mr. Anderson would serve as chairman of the combined company for a period of between one and five years, that Mr. Rogers would be the Chief Executive Officer of the combined company, and that the remaining organizational and executive structure would be mutually determined by Mr. Anderson and Mr. Rogers prior to the closing of the transaction. The term sheet also accepted that the name of the combined company would be Duke Energy and that the corporate headquarters would be located in Charlotte, North Carolina.
On April 18, 2005, Mr. Anderson attended a dinner in Cincinnati, Ohio, with Mr. Rogers and two additional members of the Cinergy board of directors for the purpose of introducing Mr. Anderson to these directors.
On April 19, 2005, Mr. Anderson sent an e-mail to the Duke Energy board of directors updating them on his meeting with Mr. Rogers and the Cinergy directors and summarizing his views on Mr. Rogers becoming the Chief Executive Officer of the combined company and inviting directors to express their views on the subject.
On April 19, 2005, representatives of Merrill Lynch, Cinergy's financial advisor, met with representatives of UBS, Duke Energy's financial advisor, at the UBS offices in New York City to discuss the relative valuations of Cinergy and Duke Energy.
On April 20, 2005, Mr. Rogers met with Mr. Anderson and several members of the Duke Energy board of directors, in Charlotte, North Carolina, prior to a meeting of the Duke Energy board of directors, for the purpose of introducing Mr. Rogers to these directors.
Later that day, the Duke Energy board of directors held a special meeting to discuss the potential transaction with Cinergy. Duke Energy's management discussed with the Duke Energy board of directors the strategic rationale for the proposed combination, the key terms and conditions of the discussions to that date, the potential financial benefits of the proposed transaction, key merger integration issues and the status and results of due diligence. Representatives of UBS presented their financial analysis of the proposed transaction and discussed the financial implications of the proposed transaction assuming various exchange ratios for Cinergy's shareholders. Representatives of Lazard also attended the meeting and discussed with the board the potential separation of the gas and electric businesses, both on a stand-alone basis and in conjunction with a potential business combination with Cinergy. Duke Energy's outside counsel also attended the meeting and reviewed the duties and obligations of directors in the context of significant transactions such as the proposed transaction with Cinergy. Duke Energy's outside counsel also reviewed the regulatory approvals that would be required to implement the transaction, the process and timing for obtaining such approvals and the implications of being a registered holding company under PUHCA of 1935. Management representatives briefed the Duke Energy board of directors on the synergy analysis performed to date, including the preliminary results of potential operating synergies developed by the management of Duke Energy and Cinergy with the assistance of a third-party consultant, and their preliminary view of the expected synergies from the transaction. At this meeting, the Duke Energy board of directors authorized Duke Energy's management to continue negotiations with Cinergy regarding a potential business combination. The members of Duke Energy's management present at such meeting and the Duke Energy board of directors discussed the ways in which a merger with Cinergy might better position Duke Energy to achieve potential benefits of a separation of its gas and electric businesses, but the Duke Energy board of directors did not take any action regarding the separation of the gas and electric businesses.
On April 21, 2005, Mr. Anderson sent a further revised term sheet to Mr. Rogers. This term sheet proposed an exchange ratio of 1.55 shares of new holding company common stock for each share of Cinergy common stock. It also indicated that Duke Energy intended to raise its quarterly dividend to $1.24 per share such that Cinergy shareholders would be able to maintain dividend neutrality in the proposed transaction. The term sheet proposed that the board of the combined company would be comprised of ten persons chosen from the existing Duke Energy board of directors and four persons chosen from the existing Cinergy board of directors. It contemplated that Mr. Anderson would be
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Chairman of the combined company with explicit responsibility and authority for evaluating and, if appropriate, effecting the separation of gas and electric operations. The revised term sheet proposed that Mr. Anderson would remain non-executive Chairman of the combined company for a minimum of one year, that Mr. Rogers would be President and Chief Executive Officer of the combined company, and that a Duke Energy executive would be President and Chief Executive Officer of the combined company's gas operations and would report directly to Mr. Anderson until a decision regarding separation of gas and electric operations was made. In sending this term sheet, Mr. Anderson indicated that the proposed terms were contingent on Cinergy being able to obtain commitments from members of its management team so as to limit the amount of the change in control costs pursuant to the Cinergy benefit and incentive plans and employment agreements applicable to such persons to an acceptable amount.
On April 22, 2005, Mr. Rogers and Mr. Anderson spoke to discuss the proposed transaction and agreed to speak again following the meeting of the Cinergy board of directors scheduled for April 25, 2005. Also on April 22, representatives of the two companies' outside legal counsel began to discuss issues raised by the draft merger agreement, including, among other matters, fiduciary and breakup fee provisions, covenants describing the level of commitment the parties would make in order to obtain regulatory approval, closing conditions, and the definition of material adverse change.
On April 25, 2005, the Cinergy board of directors met to discuss the proposed transaction. At this meeting, members of Cinergy management made presentations to the board of directors summarizing their synergies and due diligence analysis of Duke Energy as of that date. Also, representatives of Merrill Lynch, Cinergy's financial advisor, reviewed the financial terms of the proposed transaction based on a range of exchange ratios, and Cinergy's outside legal counsel made a presentation regarding the proposed terms of the draft merger agreement. The Cinergy board of directors authorized management to proceed with negotiations relating to a proposed business combination with Duke Energy.
Mr. Rogers sent a further revised term sheet to Mr. Anderson on April 26, 2005. That term sheet focused on governance issues, and suggested deferring further discussion on economic issues until completion of additional ongoing due diligence. The term sheet reiterated Cinergy's position that the combined company board should consist of ten persons chosen from the existing Duke Energy board of directors and five persons chosen from the existing Cinergy board of directors. It accepted Duke Energy's proposal that Mr. Anderson would be Chairman of the combined company with explicit responsibility and authority for evaluating and, if appropriate, effecting the separation of gas and electric operations, and clarified that the decision on such a separation would be a decision of the combined company's board. The term sheet also accepted Duke Energy's proposal that Mr. Anderson would remain non-executive Chairman of the combined company for a minimum of one year, but suggested that this would be subject to rearrangement in the event of a separation of the combined company's gas and electric operations. In addition, the term sheet proposed that Mr. Rogers' removal as President and Chief Executive Officer of the combined company would be subject to a supermajority vote of the combined company's board. The term sheet accepted Duke Energy's proposal that a Duke Energy executive would be President and Chief Executive Officer of the combined company's gas operations, but suggested a dual reporting relationship to Mr. Rogers and Mr. Anderson for a period of six months following closing.
On April 27, 2005, members of Duke Energy's and Cinergy's management and representatives of their respective outside legal counsel met in New York City to discuss issues raised by the draft merger agreement. These discussions focused primarily on the same issues discussed by the parties' outside legal counsel on April 22, and did not include any discussion of economic or governance terms. Also on April 27, Mr. Anderson and Mr. Rogers met in Houston, Texas to discuss the proposed transaction. This discussion included whether or not the governance provisions of the new company would include any supermajority provisions as suggested by Cinergy. Mr. Anderson indicated that Duke Energy was
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not willing to include such a provision. Mr. Anderson also reiterated his requirement that members of the Cinergy management team enter into waivers as necessary to limit the amount of the change in control costs pursuant to the Cinergy benefit and incentive plans and employment agreements applicable to such persons to an acceptable amount and that such management team members would otherwise be available for job opportunities in the merged company. Mr. Anderson and Mr. Rogers spoke on April 28, 2005 and agreed to meet at Mr. Anderson's home in Pemaquid, Maine on April 30 in order to continue to seek to resolve these issues.
During this period, representatives of Cinergy spoke to representatives of Duke Energy to describe the Cinergy change of control provisions and to explain that the potential costs associated with these provisions were expected to be lower than Duke Energy's estimate. In the course of these discussions, representatives of Duke Energy clarified that Duke Energy's primary focus was on retaining members of Cinergy's senior management who might be offered positions with the combined company. For this reason, Duke Energy requested that members of Cinergy's senior management team be asked to waive provisions in their employment agreements that would otherwise entitle them to severance if they were required to move from Cincinnati, Ohio to Charlotte, North Carolina. Mr. Rogers had already indicated to Mr. Anderson that he was willing to enter into such a waiver in connection with his employment as President and Chief Executive Officer of the combined company.
At the meeting in Pemaquid, Maine on April 30, 2005 and on a call on May 1, 2005, Mr. Rogers and Mr. Anderson continued to discuss these issues. Mr. Anderson requested that Mr. Rogers advise him of Cinergy's plan with respect to Cinergy's change in control provisions by Monday, May 2. Also on April 30, 2005, representatives of Duke Energy sent a revised draft of the merger agreement to Cinergy, reflecting changes resulting from the discussions of the merger agreement on April 27.
On May 2, 2005, Mr. Rogers sent Mr. Anderson a detailed analysis of Cinergy's change in control provisions, indicating that the costs resulting from the change in control arising from the proposed transaction were expected to be substantially lower than Duke Energy's estimate. It also reflected Mr. Rogers' agreement that, at the time of execution of the merger agreement, his employment agreement would be amended to supersede the "double trigger" provisions of his existing agreement. Mr. Rogers also told Mr. Anderson that he believed that most of the Cinergy executives who would likely be required to relocate to Charlotte if they were offered equivalent positions with the combined company would be willing to amend their employment agreements so that such relocation would not trigger change in control severance benefits. These amendments would also provide that a change in title would not permit those executives to trigger severance benefits, so long as there was no reduction in their responsibilities, authority and reporting relationships. In addition, as part of these amendments, a new provision would be added so that if Mr. Rogers ceased to continue to serve as Chief Executive Officer of the combined company within two years following the closing (other than as a result of the death, disability or termination for cause of Mr. Rogers or Mr. Rogers' voluntary resignation without good reason under his employment agreement), other Cinergy executives who had accepted positions with the combined company would be entitled to trigger their severance benefits at that time. In addition to these proposals with respect to change in control costs, the materials that Mr. Rogers sent to Mr. Anderson suggested alternatives to the supermajority provisions that had previously been discussed. These materials also proposed that senior officers of the new company would be mutually selected by the two companies' Chief Executive Officers, but that in the event the two were divided over any given candidate, Mr. Rogers would have the right to make a final selection.
Mr. Rogers and Mr. Anderson spoke by phone on the evening of May 2 and on May 3, 2005. Mr. Anderson stated that he wanted more certainty as to the identity of the executives who would enter into the proposed employment agreement amendments. In a written response on May 3, Mr. Anderson also stated that Duke Energy would not agree to any of the alternatives to supermajority provisions suggested by Mr. Rogers. The response accepted Cinergy's proposal with respect to selection of other senior officers, subject to approval by the combined company board of the slate of senior
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officers. With respect to the requested employment agreement amendments, Mr. Anderson said that Duke Energy requested a waiver for relocation to Houston, Texas as well as to Charlotte.
On May 4, 2005, Mr. Rogers advised Mr. Anderson by phone that Cinergy would accept Duke Energy's position with respect to the absence of any supermajority or any similar governance provisions regarding possible removal of Mr. Rogers as Chief Executive Officer of the merged company. He also said that he would advise Mr. Anderson as promptly as he could as to the specific Cinergy executives who would be prepared to enter into the employment agreement amendments. In subsequent calls on May 4, 2005, representatives of Cinergy indicated to representatives of Duke Energy that they would also need to have a final negotiation of the exchange ratio for the transaction. The representatives of Duke Energy responded that Duke Energy's proposal of 1.55 shares of Duke Energy Holding common stock for each share of Cinergy common stock was firm. Cinergy's representatives responded that Cinergy would require an increase from that proposal.
On the evening of May 4, 2005, Mr. Anderson and one other member of the Duke Energy board of directors had dinner in Cincinnati, Ohio, with Mr. Rogers and most of the other members of the Cinergy board of directors. The open issues regarding price and other matters were not discussed at this meeting. At a meeting of the Cinergy board of directors on May 5, the Cinergy directors were updated on the status of the discussions with Duke Energy. Members of management and representatives of Duke Energy and Cinergy also spoke with respect to these matters on May 3 and May 4, 2005.
On the evening of May 5, 2005 and on May 6, 2005, executives of each of Duke Energy and Cinergy and representatives of their respective financial advisors and outside legal counsel met in New York City to discuss the remaining open issues relating to the merger agreement, as well as the proposed employment agreement amendments to be executed by Cinergy senior executives. In addition, representatives of Duke Energy discussed a proposed term sheet amendment to Mr. Rogers' employment agreement with Mr. Rogers' personal legal counsel and with Cinergy's outside legal counsel.
Later on May 6, 2005, Mr. Rogers and Mr. Anderson spoke by phone, at which time Mr. Anderson stated that he would be willing to raise the proposed exchange ratio to 1.56 shares of Duke Energy Holding common stock for each share of Cinergy common stock. Mr. Rogers responded that he would be willing to recommend an exchange ratio of 1.58 to the Cinergy board of directors, but Mr. Anderson said that Duke Energy would be unwilling to make any further increase in the exchange ratio from 1.56. On the morning of May 7, representatives of Duke Energy sent a revised merger agreement to Cinergy.
On May 7, 2005, the Cinergy board of directors met to consider the proposed transaction. At this meeting, members of Cinergy management made presentations to the Cinergy board of directors regarding the proposed transaction, and summarized their updated synergies and due diligence analysis regarding Duke Energy. Representatives of Merrill Lynch, Cinergy's financial advisor, reviewed the financial terms of the proposed transaction using a range of exchange ratios. The representatives of Merrill Lynch indicated that, although Cinergy was continuing to seek an increase in this proposed exchange ratio of 1.56, Merrill Lynch would be prepared to deliver to the Cinergy board of directors its opinion as to the fairness of the proposed 1.56 exchange ratio or at any higher exchange ratio, subject to review of definitive terms. Cinergy's outside legal counsel made a presentation regarding the proposed terms of the merger agreement, the proposed changes to the employment agreements of Mr. Rogers and other members of senior management and the interests of Mr. Rogers and other Cinergy executives arising from a transaction that would be characterized as a change in control under Cinergy's benefit and incentive plans and the executives' employment agreements. Following these presentations and discussion of the proposed transaction, the Cinergy board of directors requested that Mr. Rogers continue to seek an increase in the proposed exchange ratio, and agreed to convene by telephone the next morning to make a final decision on the proposed transaction. Following the
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Cinergy board meeting, Mr. Rogers spoke with Mr. Anderson and said that the Cinergy board of directors requested an increase in Duke Energy's proposed exchange ratio. Mr. Anderson replied that Duke Energy's proposed exchange ratio of 1.56 was final and would not be increased.
On the afternoon of May 7, 2005, at a special meeting, the Duke Energy board of directors met in person in Charlotte, North Carolina to discuss the merger agreement, the mergers and the proposed terms and conditions of the term sheet to Mr. Rogers' employment agreement with the combined company. At this meeting, Duke Energy's management presented reports to the Duke Energy board of directors supplementing the reports made at the special meeting held on April 20, 2005, and reviewed with the Duke Energy board of directors the status of due diligence, an update on the synergies analysis, the resolution of change in control costs associated with Cinergy's senior management, and regulatory approvals required for the transaction.
Duke Energy's general counsel, with assistance from Duke Energy's outside counsel, led the Duke Energy board of directors through a detailed review of the terms and conditions of the merger agreement, amendments to the employment agreements of certain executive officers of Cinergy and the terms and conditions of the term sheet with respect to Mr. Rogers' employment agreement with the combined company. In addition, Duke Energy's financial advisor, UBS, and Lazard, who was engaged to provide a financial opinion with respect to the proposed mergers, discussed the proposed mergers and rendered opinions to the effect that, as of such date and based upon and subject to the assumptions made, matters considered and qualifications and limitations on the review undertaken set forth in their respective opinions, the exchange ratio of 1.56 shares of Duke Energy Holding common stock for each share of Cinergy common stock in the Cinergy merger was fair from a financial point of view to Duke Energy. See "Fairness Opinions Presented to the Duke Energy Board of Directors" beginning on page 64. The members of the Duke Energy board of directors considered and discussed the various presentations made at the meeting and at prior meetings. After considering these matters, the Duke Energy board of directors unanimously approved the proposed transaction and authorized Duke Energy's management to conclude negotiations and execute the merger agreement on the terms described to the Duke Energy board of directors.
Mr. Anderson called Mr. Rogers at the conclusion of the Duke Energy board meeting and indicated that the Duke Energy board of directors had approved the transaction, but had not approved an exchange ratio higher than 1.56. Mr. Rogers indicated at the conclusion of the call that he was prepared to recommend to the Cinergy board of directors that they approve the merger at that exchange ratio. Later that day, representatives of Cinergy sent a revised draft of the merger agreement to Duke Energy.
At a meeting of the Cinergy board of directors on May 8, 2005, Mr. Rogers advised the Cinergy board of directors that Duke Energy was unwilling to increase the proposed exchange ratio. At that meeting, representatives of Merrill Lynch delivered to the Cinergy board of directors its opinion to the effect that, as of that date and based upon the assumptions made, matters considered and limits of review set forth in its opinion, the exchange ratio of 1.56 pursuant to the Cinergy merger was fair, from a financial point of view, to the holders of Cinergy common stock. See "Opinion of Cinergy's Financial Advisor" beginning on page 88. Following further discussion, the Cinergy board of directors unanimously approved the proposed transaction and authorized management to conclude negotiations and execute the merger agreement on the terms described to the Cinergy board of directors. Members of management and representatives of Duke Energy and Cinergy met in New York City for the balance of the day to finalize the merger agreement. Representatives of Duke Energy also worked with Mr. Rogers' legal counsel to finalize the term sheet amending Mr. Rogers' employment agreement. In addition, representatives of Cinergy advised representatives of Duke Energy that subject to execution of the merger agreement, ten members of Cinergy's senior management had executed the employment agreement amendments requested by Duke Energy, of whom two identified by Duke Energy had included a provision that relocation to Houston, Texas, as well as Charlotte, North Carolina, would not permit the executive to trigger severance benefits so long as the executive was offered an equivalent position with the combined company.
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After the merger agreement was finalized, Duke Energy and Cinergy executed the merger agreement on the evening of May 8, 2005. In addition, Duke Energy, Cinergy and Mr. Rogers executed the term sheet to amend Mr. Rogers' employment agreement, and Cinergy delivered to Duke Energy the employment agreement amendments executed by the ten other Cinergy executives. The execution of the merger agreement was publicly announced on the morning of May 9, 2005.
Duke Energy's Reasons for the Mergers and Recommendation of Duke Energy's Board of Directors
The Duke Energy board of directors has unanimously approved the merger agreement, has unanimously determined that the merger agreement and the transactions contemplated thereby, including the mergers, are advisable, fair to and in the best interests of Duke Energy and the holders of Duke Energy common stock, and unanimously recommends that Duke Energy shareholders vote FOR the proposal to approve the merger agreement.
In reaching its determination to recommend the approval of the merger agreement and the mergers, the Duke Energy board of directors consulted with management, as well as UBS Investment Bank, Duke Energy's financial advisor, and Lazard, who was engaged to provide a financial opinion to the Duke Energy board with respect to the mergers, and Duke Energy's internal and outside legal counsel, and considered various material factors, which are discussed below. The following discussion of the information and factors considered by the Duke Energy board of directors is not intended to be exhaustive. In view of the wide variety of factors considered in connection with the mergers, the Duke Energy board of directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific material factors it considered in reaching its decision. In addition, individual members of the Duke Energy board of directors may have given different weight to different factors. The Duke Energy board of directors considered this information and these factors as a whole, and overall considered the relevant information and factors to be favorable to, and in support of, its determinations and recommendations. Among the material information and factors considered by the Duke Energy board of directors were the following:
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and more balance in its electric business. By extending its operations across more states, the mergers will diversify Duke Energy's regulatory risk by subjecting the combined company's utility operations to the jurisdiction of multiple state regulators rather than only North Carolina and South Carolina. The combined company will own a stronger portfolio of utility businesses with 3.7 million retail electric customers and 1.7 million retail gas customers in North Carolina, South Carolina, Ontario, Canada, Ohio, Kentucky and Indiana. The retail electric businesses will have more than 25,000 megawatts of generation and broad operational and regulatory experience. The Duke Energy board of directors considered that the mergers will result in a greater contribution of more stable, regulated earnings from the regulated businesses of the combined company.
Following the public announcement of the mergers, Duke Energy's management continued to evaluate various options for the sustainability of DENA. On September 13, 2005, the Duke Energy board of directors approved a plan to pursue the sale or other disposition of substantially all of DENA's physical and commercial assets outside the Midwestern United States, which include approximately 6,200 megawatts of power generation located primarily in the Northeast and Western United States, as well as forward gas and power, gas transportation, storage, structured power and other contracts. Duke Energy's management and the Duke Energy board of directors believes that the disposition is the best option for the DENA assets from a standpoint of maximizing shareholder value. DENA's assets subject to the disposition plan are expected to be sold or otherwise disposed of within 12 months from the date Duke Energy's board of directors approved the plan.
By letter dated September 16, 2005, Cinergy consented to the decision by the Duke Energy board of directors to implement the disposition plan for DENA's assets and the announcement thereof. The disposition plan for DENA's assets described above does not include DENA's existing generation assets in the Midwestern United States which are expected to be transferred to CG&E pursuant to the terms of the merger agreement and combined with Cinergy's commercial operations.
Accordingly, following completion of the mergers it is expected that the combined company will have approximately 9,875 megawatts of unregulated generation, primarily located in the Midwestern United States.
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Year |
Cost Savings and Synergies ($mm) |
Implementation Costs ($mm) |
||||
---|---|---|---|---|---|---|
1 | $ | 275 | $ | 425 | ||
2 | $ | 350 | $ | 175 | ||
3 | $ | 400 | $ | 50 | ||
4 | $ | 425 | $ | 40 |
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It is expected that approximately 40% of the estimated implementation costs above will be treated as expenses for accounting purposes and approximately 60% of these costs will be capitalized. The Duke Energy board of directors noted that expected cost savings, synergies and implementation costs are estimates, that they may change and that achieving the expected cost savings and synergies is subject to a number of risks and uncertainties.
Subsequent to the Duke Energy board of directors' approval of the merger agreement, additional analysis led to further refinement of the cost savings analysis such that the mergers were expected to generate approximately $440 million in annual gross synergies when realized in year three. On September 13, 2005, the Duke Energy board of directors approved a plan to pursue the sale or other disposition of DENA's physical and commercial assets outside of the Midwestern United States. In connection with the implementation of this plan, it is expected that, of the aggregate cost savings of approximately $440 million described above, approximately $130 million of the cost savings relate to DENA's assets and will be realized whether or not the mergers are consummated. Accordingly, the mergers are now expected to generate approximately $310 million in annual gross synergies when fully realized in year three.
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below under the caption "Fairness Opinions Presented to the Duke Energy Board of Directors" beginning on page 64. The Duke board of directors also considered the financial analyses of Lazard with respect to the mergers, presented to the Duke Energy board of directors on May 7, 2005 and the opinion of Lazard delivered to the Duke Energy board of directors that, as of the date of such opinion, and based upon and subject to the various factors, assumptions, limitations and qualifications set forth in such opinion, the exchange ratio of 1.56 shares of Duke Energy Holding common stock for each share of Cinergy common stock was fair, from a financial point of view, to Duke Energy (the full text of the opinion setting forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with such opinion is attached as Annex C to this joint proxy statement/prospectus). See "Fairness Opinions Presented to the Duke Energy Board of Directors" beginning of page 64.
The Duke Energy board of directors also considered the potential risks of the mergers, including the following:
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directors' focus on the relative intrinsic values and financial performance of Duke and Cinergy and the percentage of the combined company to be owned by former holders of Duke Energy common stock; and the inclusion in the merger agreement of other structural protections such as the ability to terminate the merger agreement in the event of a material adverse change in Cinergy's business.
The Duke Energy board of directors believed that, overall, the potential benefits of the mergers to Duke Energy and Duke Energy's shareholders outweighed the risks, many of which are mentioned above.
The Duke Energy board of directors realized that there can be no assurance about future results, including results considered or expected as described in the factors listed above. It should be noted that
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this explanation of Duke Energy board of directors' reasoning and all other information presented in this section are forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading "Forward-Looking Statements."
Fairness Opinions Presented to the Duke Energy Board of Directors
Duke Energy's board of directors engaged two financial advisory firms in connection with the mergers. Duke Energy retained UBS Securities LLC to act as its financial advisor in connection with the mergers and in such capacity to provide financial and market related advice and assistance as mutually agreed upon by Duke Energy and UBS, including assisting Duke Energy and its board of directors in analyzing, structuring and negotiating the financial aspects of the mergers. Duke Energy's board of directors also retained UBS to render an opinion, to the board of directors, of the fairness to Duke Energy, from a financial point of view, of the Cinergy exchange ratio in the Cinergy merger. Duke Energy retained Lazard Frères & Co. LLC in connection with the mergers to render an opinion as to the fairness of the financial terms of the transactions contemplated by the merger agreement. Duke Energy retained both financial advisory firms because it believed that the use of two separate firms would maximize the Duke Energy's ability to consider and pursue potential strategic alternatives and the Duke Energy board of directors desired to have the advice and expertise of both firms in determining whether to approve the merger agreement and recommend the merger agreement and the mergers to shareholders.
Opinion of UBS Securities LLC
UBS acted as financial advisor to the board of directors of Duke Energy in connection with the mergers and evaluated the fairness to Duke Energy, from a financial point of view, of the Cinergy exchange ratio in the mergers. Duke Energy's board of directors selected UBS as its financial advisor in connection with the mergers because UBS is an internationally recognized investment banking firm with substantial experience in similar transactions. UBS rendered its opinion to the Duke Energy board of directors that, as of May 7, 2005, and based on and subject to various assumptions made, procedures followed, matters considered and limitations described in the opinion, the Cinergy exchange ratio in the Cinergy merger was fair, from a financial point of view, to Duke Energy.
The full text of UBS' opinion, dated as of May 7, 2005, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken by UBS, is attached as Annex B and is incorporated by reference into this document. UBS' opinion is directed only to the fairness to Duke Energy, from a financial point of view, of the exchange ratio in the mergers, and does not address any other aspect of the mergers. Holders of Duke Energy common stock are urged to read this opinion carefully and in its entirety. This summary is qualified in its entirety by reference to the full text of the opinion attached as Annex B to this joint proxy statement/prospectus.
UBS' opinion did not address Duke Energy's underlying business decision to effect the mergers, nor did it constitute a recommendation to any shareholder of Duke Energy as to how such shareholder should vote or act with respect to the mergers or any other matter. At the direction of the Duke Energy board of directors, UBS was neither asked to, nor did it, offer any opinion as to the material terms of the merger agreement or the form of the mergers. UBS expressed no opinion as to what the value of Duke Energy Holding common stock will be when issued pursuant to the merger agreement or the prices at which Duke Energy common stock, Cinergy common stock or Duke Energy Holding common stock will trade in the future. In rendering its opinion, UBS assumed, with the consent of the Duke Energy board of directors, that the final executed form of the merger agreement did not differ in any material respect from the draft dated May 7, 2005 that UBS examined and that Duke Energy and Cinergy will comply with all the material terms of the merger agreement (without waiver, modification or amendment in any material respect).
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In arriving at its opinion, UBS, among other things:
In connection with its review, with the consent of the Duke Energy board of directors, UBS did not assume any responsibility for independent verification of any of the information reviewed by UBS for the purpose of its opinion and relied on such information being complete and accurate in all material respects. In addition, with the consent of the Duke Energy board of directors, UBS did not make any independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of Duke Energy or Cinergy, nor was it furnished with any such evaluation or appraisal. With respect to the financial forecasts, estimates, pro forma effects and Synergies referred to above, UBS assumed, at the direction of the Duke Energy board of directors, that they had been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Duke Energy. In addition, at the direction of the Duke Energy board of directors, UBS assumed that the future financial results referred to above will be achieved and the Synergies referred to above will be realized at the times and in the amounts projected by Duke Energy management. UBS assumed, with the consent of the Duke Energy board of directors, that the mergers will qualify as a tax-free reorganization for U.S. federal income tax purposes. UBS also assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the transactions contemplated by the merger agreement would be obtained without any material adverse effect on Duke Energy, Cinergy, Duke Energy Holding and/or the mergers. UBS' opinion was necessarily based on
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economic, monetary, market and other conditions as in effect on, and the information made available to UBS as of, May 7, 2005.
UBS and its affiliates, as part of their investment banking and financial advisory business, are continuously engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and other transactions as well as for estate, corporate and other purposes.
In the past, UBS and its predecessors have provided investment banking services to Duke Energy and Cinergy and received customary compensation for the rendering of such services. In 2003, 2004 and 2005, Duke Energy paid to UBS an aggregate of approximately $5.6 million in fees for such investment banking services and reimbursed UBS for any expenses it incurred. As of May 7, 2005, UBS was a lender to Cinergy in two outstanding credit facilities and was providing financial advisory services to Cinergy unrelated to the mergers. In the ordinary course of business, UBS and its successors and affiliates may trade and have traded securities of Duke Energy or Cinergy for their own accounts and the accounts of their customers, and, accordingly, may at any time hold long or short positions in such securities.
Pursuant to a letter agreement dated April 19, 2005, Duke Energy engaged UBS to act as its financial advisor in connection with the contemplated transaction. Pursuant to the terms of this engagement letter, Duke Energy paid UBS an opinion/announcement fee of $4,500,000 which became payable upon the public announcement of the execution of the merger agreement. Duke Energy has also agreed to pay UBS a shareholder approval fee of $4,500,000 upon the approval of the mergers by both Duke Energy's shareholders and Cinergy's shareholders and a transaction fee of up to $7,750,000, where $3,000,000 is payable at Duke Energy's sole discretion, upon the closing of the mergers. In addition, Duke Energy has agreed to pay UBS a termination fee equal to the lesser of (i) 75% of the sum of (a) $4,750,000, (b) to the extent not already paid, the opinion/announcement fee and (c) to the extent not already paid, the shareholder approval fee, or (ii) 10% of any break-up or similar fee and expense reimbursement received by Duke Energy from Cinergy in connection with the termination of the merger agreement. Duke Energy has also agreed to reimburse UBS for its reasonable expenses, including attorneys' fees and disbursements, and to indemnify UBS and related persons against various liabilities, including certain liabilities under the federal securities laws.
Financial Analyses used by UBS
The following is a summary of the material financial analyses used by UBS in connection with rendering the opinions described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by UBS. The order of analyses described does not represent relative importance or weight given to those analyses by UBS. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of the financial analyses of UBS. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before May 6, 2005 and is not necessarily indicative of current market conditions.
Historical Stock Trading Analysis and Relative Trading. UBS reviewed the historical trading prices for shares of Duke Energy common stock and Cinergy common stock for the three-year period from May 6, 2002 to May 6, 2005 and the one-year period from May 6, 2004 to May 6, 2005 to provide background information on the prices at which Duke Energy and Cinergy common stock have historically traded. For perspective on the relative prices at which Duke Energy and Cinergy common stock have historically traded, UBS analyzed the historical trading ratio between Duke Energy common stock and Cinergy common stock based on the closing market share price of Cinergy common stock
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relative to the closing market share price of Duke Energy common stock for the one-year period from May 6, 2004 to May 6, 2005 as well as various other periods within this one-year period. UBS also compared the historical trading ratio between Duke Energy common stock and Cinergy common stock to the exchange ratio of 1.56 Duke Energy Holding common shares to be paid to holders of Cinergy common stock pursuant to the Merger Agreement. The results of this analysis are summarized in the following table:
|
Duke Energy Common Shares per Cinergy Common Share |
||||
---|---|---|---|---|---|
Day/Period |
Trading Ratio (x) |
Premium at 1.56 Exchange Ratio |
|||
May 6, 2005 (current) | 1.375 | 13.4 | % | ||
10-day average | 1.372 | 13.7 | |||
1-month average | 1.386 | 12.6 | |||
3-month average | 1.411 | 10.6 |
Selected Companies Analysis. UBS analyzed and compared certain financial information, ratios and valuation multiples of Cinergy implied by the exchange ratio of 1.56 shares of Duke Energy Holding common stock to corresponding financial information, ratios and public market valuation multiples for selected publicly traded electric utility companies, including Duke Energy, with businesses and operations that, for purposes of analysis, could be considered similar to businesses and operations of Cinergy in certain respects. The following companies were used by UBS for comparison in this analysis, which we refer to as the selected Electric Utility Companies:
In addition, UBS analyzed and compared certain financial information, ratios and public market valuation multiples for Duke Energy to corresponding financial information, ratios and public market valuation multiples for the following selected publicly traded companies, which we refer to as the Integrated Utility Companies:
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UBS used closing stock prices for Duke Energy, Cinergy, the selected Electric Utility Companies and the Integrated Utility Companies as of May 6, 2005. With respect to Duke Energy, Cinergy, the Electric Utility Companies and the Integrated Utility Companies, UBS calculated:
Historical financial results utilized by UBS for purposes of this analysis were based upon information contained in the applicable company's latest publicly available financial statements, projected financial data was based on IBES (a data source that compiles estimates issued by security analysts) consensus estimates as of May 6, 2005. The balance sheet information for Duke Energy was adjusted to reflect the Duke Energy Field Services (DEFS) restructuring transactions announced in February 2005, based on publicly available information. For the selected companies, LTM refers to the latest twelve-month period available from the most recently publicly available information as of March 31, 2005. For purposes of this analysis, the Cinergy projected net income was adjusted to exclude the net earnings contribution from Cinergy's synthetic fuel production facilities, which are referred to collectively as the Cinergy synthetic fuel facility. These net earnings, which include the facility's operating losses and the tax credits under Section 29 of the Code, were excluded for valuation purposes, as the related tax credits, which expire at the end of 2007, represent a temporary contribution to earnings.
Although the selected companies were used for comparison purposes, no selected company is either identical or directly comparable to the businesses of Duke Energy or Cinergy. Accordingly, UBS' comparison of the selected companies to Duke Energy and Cinergy and analysis of the results of these comparisons was not purely mathematical, but instead necessarily involved complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the analysis of the relative values of the selected companies and of Duke Energy and Cinergy.
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The results of these analyses are summarized in the following table:
|
Enterprise Value as Multiple of: |
Equity Value as Multiple of: |
|
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Indicated Dividend Yield (%) |
|
|
||||||||||||||
|
LTM EBITDA (x) |
2005E EBITDA (x) |
2005E Net Income (x) |
2006E Net Income (x) |
Book Value (x) |
Projected Payout Ratio (%) |
Net Debt/ Capital (%) |
||||||||||
Electric Utility Companies | |||||||||||||||||
Maximum | 10.4 | 10.4 | 17.1 | 16.2 | 3.4 | 5.6 | 82.7 | 61.6 | |||||||||
Median | 8.7 | 8.4 | 15.5 | 14.4 | 2.0 | 3.8 | 55.9 | 57.1 | |||||||||
Mean | 8.8 | 8.4 | 15.1 | 14.3 | 2.1 | 4.0 | 60.1 | 56.4 | |||||||||
Minimum | 7.6 | 7.1 | 13.5 | 12.4 | 1.4 | 3.0 | 45.0 | 48.9 | |||||||||
Duke Energy |
10.1 |
8.3 |
18.9 |
17.3 |
1.7 |
3.7 |
71.0 |
50.0 |
|||||||||
Cinergy at May 6, 2005 Market Price |
9.9 |
8.4 |
15.8 |
14.2 |
1.8 |
4.8 |
75.3 |
51.2 |
|||||||||
Cinergy at 1.56 Exchange Ratio | 10.8 | 9.1 | 18.0 | 16.1 | 2.0 | 4.2 | 75.3 | 51.2 | |||||||||
Integrated Utility Companies |
|||||||||||||||||
Maximum | 10.3 | 10.4 | 18.7 | 16.2 | 3.4 | 5.6 | 82.7 | 88.2 | |||||||||
Median | 8.6 | 8.4 | 15.7 | 14.2 | 2.0 | 3.8 | 57.9 | 57.1 | |||||||||
Mean | 8.6 | 8.3 | 15.5 | 14.1 | 2.2 | 3.9 | 60.4 | 58.9 | |||||||||
Minimum | 7.5 | 7.1 | 13.5 | 12.4 | 1.3 | 3.0 | 45.0 | 48.9 | |||||||||
Duke Energy |
10.1 |
8.3 |
18.9 |
17.3 |
1.7 |
3.7 |
71.0 |
50.0 |
Source: SEC filings, FactSet, Bloomberg
Selected Transactions Analysis. UBS analyzed and compared the valuation multiples of Cinergy implied by the exchange ratio of 1.56 shares of Duke Energy Holding common stock to the corresponding valuation multiples paid in selected transactions in the electric utility industry since 1999. The following table lists the transactions used by UBS for comparison:
Date Announced |
Acquiror |
Target |
||
---|---|---|---|---|
December 2004 | Exelon Corp. | Public Service Enterprise Group | ||
July 2004 | PNM Resources Inc. | TNP Enterprises Inc. | ||
February 2004 | Ameren Corp. | Illinois Power Co. | ||
November 2003 | Saguaro | Unisource Energy Corp. | ||
November 2003 | Oregon Electric Utility | Portland General Electric Co. | ||
April 2002 | Ameren Corp. | Cilcorp Inc. | ||
February 2001 | Energy East Corp. | RGS Energy Group Inc. | ||
February 2001 | Potomac Electric Power Co. | Conectiv | ||
September 2000 | National Grid Transco PLC | Niagara Mohawk Holdings Inc. | ||
August 2000 | FirstEnergy Corp. | GPU Inc. | ||
July 2000 | AES Corp. | Ipalco Enterprises Inc. | ||
February 2000 | Powergen PLC | LG&E Energy Corp. | ||
September 1999 | PECO Energy Co. | Unicom Corp. | ||
August 1999 | Carolina Power & Light | Florida Progress Corp. | ||
June 1999 | Energy East Corp. | CMP Group Inc. | ||
June 1999 | Dynegy Inc. | Illinova Corp | ||
May 1999 | Lowe Capital Partners | TNP Enterprises Inc. | ||
March 1999 | New Century Energies Inc. | Northern States Power Co. | ||
February 1999 | New England Electric System | Eastern Utilities Associates |
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For each of the selected transactions and for the mergers, UBS calculated and compared the resulting:
Although the selected transactions were used for comparison purposes, none of the selected transactions nor the companies involved in them is either identical or directly comparable to the mergers, Duke Energy or Cinergy. Accordingly, UBS' comparison of the selected transactions to the mergers and analysis of the results of such comparisons was not purely mathematical, but instead necessarily involved complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the analysis of the relative values of the selected transactions and of the mergers.
The following table presents the results of this analysis:
|
Enterprise Value as a Multiple of: |
Equity Value as a Multiple of: |
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
LTM EBITDA (x) |
Forward EBITDA (x) |
LTM Net Income (x) |
Forward Net Income (x) |
Book Value (x) |
Offer Premium to Stock Price 1 Week Prior (%) |
|||||||
Maximum | 9.5 | 9.2 | 39.9 | 22.0 | 3.6 | 58.4 | |||||||
Mean | 7.7 | 7.2 | 18.2 | 15.3 | 1.8 | 23.9 | |||||||
Median | 7.7 | 7.5 | 17.2 | 15.5 | 1.7 | 29.8 | |||||||
Minimum | 6.1 | 4.8 | 9.9 | 10.9 | 0.2 | (8.0 | ) | ||||||
Cinergy at 1.56 Exchange Ratio | 10.8 | 9.1 | 19.4 | 18.0 | 2.0 | 15.7 |
Discounted Cash Flow Analysis. UBS performed a discounted cash flow analysis to determine the present value of the future unleveraged after-tax cash flows of Cinergy per share of Cinergy common stock. UBS performed the discounted cash flow analysis (i) using the financial projections provided by Cinergy management and as adjusted by Duke Energy management (the "Cinergy Base Case") for fiscal years 2006 to 2009 and (ii) using Duke Energy management's estimates of the synergies and transaction costs resulting from the mergers for fiscal years 2006 to 2015 (the "Synergy Value"). The estimates of cost savings and synergies expected to result from the mergers and related expenses used by UBS were prepared by Duke Energy management as referred to above. UBS assumed discount rates ranging from 5.5% to 6.5%, calculated present values of the unleveraged after-tax cash flows generated over the period covered by the financial forecasts (discounting to December 31, 2005) and then added terminal values assuming multiples ranging from 8.0x to 9.0x terminal year estimated EBITDA. This analysis indicated implied equity values per Cinergy share ranging from $42.03 to $52.29, based on the Cinergy Base Case, and implied equity values of the Synergy Value per Cinergy share ranging from $10.48 to $12.19. The implied equity value per share includes $0.81 to $0.82 of value attributable to the Cinergy synthetic fuel facility (including the operating losses from the facility and the related tax credits under Section 29 of the Code). These implied equity values per Cinergy share were then compared to the implied offer values per Cinergy share based on the Cinergy exchange ratio (calculated using Duke Energy stock prices over various time periods): (i) $45.80 per share (based on the closing price of Duke Energy common stock on May 6, 2005), (ii) $45.06 per share (based on the 10-day average closing price of Duke Energy common stock), (iii) $44.85 per share (based on the 1-month average closing price of Duke Energy common stock), and (iv) $43.49 per share (based on the 3-month average closing price of Duke Energy common stock).
Pro Forma Mergers Analysis. UBS performed a pro forma merger analysis for fiscal years 2006 and 2007 to analyze the potential impact on the mergers on (1) the reported earnings per share of
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Duke Energy common stock under GAAP, which we refer to as the Reported EPS, (2) the ongoing earnings per share of Duke Energy common stock, which was calculated as the reported EPS plus the following costs which would be classified as income statement expenses under GAAP, however which may be viewed as special expenses: (i) the costs of the mergers that would be classified as income statement expenses for accounting purposes and (ii) the impact of the net earnings from the Cinergy synthetic fuel facility, (3) the dividend per share of Duke Energy common stock, and (4) the ratio of dividends paid to company earnings, known as the dividend payout ratio, of Duke Energy common stock. In performing this analysis, UBS assumed, as directed by Duke Energy management, among other things, completion of the mergers as of December 31, 2005, $267 million of estimated pre-tax gross synergies in 2006 and $351 million of estimated pre-tax gross synergies in 2007, pre-tax transaction costs (including costs to achieve the Synergies) of $422 million in 2006 and $173 million in 2007, as provided by Duke Energy management, the conversion of $770 million convertible senior notes on June 1, 2007, and the foregoing of the planned share repurchases in 2006 and 2007. For purposes of this analysis, the number of diluted shares of Cinergy common stock outstanding as of March 31, 2005 was used to calculate the number of shares of Duke Energy Holding common stock that will be issued to holders of Cinergy common stock in the mergers. UBS also performed a sensitivity analysis for both the Reported EPS and Ongoing EPS in which UBS utilized IBES consensus estimates rather than management estimates. We refer to these analyses as the Reported EPS IBES Case and the Ongoing EPS IBES Case.
This analysis indicated that:
Contribution Analysis. UBS performed a relative contribution analysis to compare the historical and estimated future financial operating contributions of Duke Energy and Cinergy to the combined company resulting from the mergers. Using financial information provided by Duke Energy's management, UBS calculated the relative contributions of Duke Energy and Cinergy to the combined company's total enterprise value and equity value based on the Cinergy exchange ratio and the companies' stock prices as of May 6, 2005. UBS then calculated the relative contributions of Duke Energy and Cinergy to the combined company in terms of (1) estimated 2006 and 2007 EBITDA and (2) estimated 2006 and 2007 net income. The relative contributions of Cinergy were adjusted in each case to exclude the financial performance from the Cinergy synthetic fuel facility. The financial performance from the Cinergy synthetic fuel facility was excluded for valuation purposes, as the related tax credits expire at the end of 2007.
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The following table presents the results of this analysis:
|
% Contribution |
|||||
---|---|---|---|---|---|---|
|
Duke Energy |
Cinergy |
||||
Enterprise Value at 1.56 Exchange Ratio | 74.1 | % | 25.9 | % | ||
EBITDA |
||||||
2006 | 74.4 | 25.6 | ||||
2007 | 73.9 | 26.1 | ||||
Equity Value at 1.56 Exchange Ratio |
75.6 |
24.4 |
||||
Net Income |
||||||
2006 | 74.8 | 25.2 | ||||
2007 | 74.5 | 25.5 |
The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth herein, without considering the analyses as a whole, could create an incomplete view of the processes underlying the opinion of UBS. In arriving at its fairness determination, UBS considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis. Rather, UBS made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the analyses described herein as a comparison is directly comparable to Duke Energy, Cinergy or the contemplated transaction.
UBS prepared the analyses described herein for purposes of providing its opinion to the Duke Energy board of directors as to the fairness from a financial point of view to Duke Energy of the Cinergy exchange ratio in the mergers, as of the date of UBS' opinion. These analyses do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of Duke Energy, UBS or any other person assumes responsibility if future results are materially different from those forecasted.
As described above, the opinion of UBS to the Duke Energy board of directors was one of many factors taken into consideration by the Duke Energy board of directors in making its determination to approve the transaction contemplated by the merger agreement. UBS was not asked to, and did not, recommend the specific consideration payable in the mergers, which consideration was determined through negotiations between Duke Energy and Cinergy. The summary contained herein does not purport to be a complete description of the analyses performed by UBS in connection with its fairness opinion and is qualified in its entirety by reference to the written opinion of UBS, attached as Annex B to this joint proxy statement/prospectus.
Opinion of Lazard Frères & Co. LLC
Lazard was retained to give a financial opinion to the Duke Energy board of directors in connection with the mergers. Duke Energy selected Lazard based on Lazard's qualifications, expertise and reputation. In connection with Lazard's engagement, Duke Energy requested that Lazard evaluate the fairness to Duke Energy, from a financial point of view, of the Cinergy exchange ratio. On May 7, 2005, at a meeting of the Duke Energy board of directors held to evaluate the mergers, Lazard rendered to Duke Energy's board of directors an oral opinion, which opinion was subsequently confirmed by delivery of a written opinion dated as of May 8, 2005, the date of the merger agreement,
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to the effect that, as of that date and based on and subject to the matters described in its opinion, the Cinergy exchange ratio was fair to Duke Energy, from a financial point of view.
The full text of Lazard's written opinion, dated May 8, 2005, to the Duke Energy board of directors, which sets forth the procedures followed, assumptions made, matters considered and limitations on the review undertaken, is attached as Annex C and is incorporated by reference into this document. Holders of shares of Duke Energy common stock are urged to, and should, read this opinion carefully and in its entirety. The summary of Lazard's opinion in this document is qualified in its entirety by reference to the full text of the opinion attached as Annex C to this joint proxy statement/prospectus.
In connection with its opinion, Lazard:
In performing its review, Lazard relied upon the accuracy and completeness of the foregoing information, and did not assume any responsibility for any independent verification of such information or any independent valuation or appraisal of any of the assets or liabilities of Duke Energy or Cinergy, or concerning the solvency or fair value of either of the foregoing entities, and was not furnished with any such valuation or appraisal. With respect to financial forecasts, including projected synergies and other anticipated strategic, financial and operational benefits of the mergers, Lazard assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of management of Duke Energy and Cinergy as to the future financial performance of Duke Energy, Cinergy and the combined company, as the case may be, and Lazard assumed that such forecasts and projections (including synergies) will be realized in the amounts and at the times contemplated thereby. Lazard assumed no responsibility for and expressed no view as to such forecasts or the assumptions on which they were based.
Further, Lazard's opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to it as of, the date of such opinion. Lazard assumed no responsibility for updating or revising its opinion based on circumstances or events occurring after the date thereof.
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In rendering its opinion, Lazard assumed that the mergers and the other transactions contemplated in the merger agreement will be consummated on the terms described in the merger agreement executed on May 8, 2005, including, among other things, that the mergers and the related transactions described in the merger agreement will be treated as a tax-free reorganization under Section 368(a) of the Code, and that the mergers will be consummated without any waiver of any material terms or conditions. In addition, Lazard assumed that obtaining the necessary regulatory and third-party approvals for the mergers and the other transactions contemplated by the merger agreement will not have an adverse effect on the combined company. Lazard did not express any opinion as to any tax or other consequences that might result from the mergers, nor did its opinion address any legal, tax, regulatory or accounting matters, as to which Lazard understands that Duke Energy obtained such advice as it deemed necessary from qualified professionals.
Lazard did not express any opinion as to the price at which shares of Duke Energy common stock or shares of Cinergy common stock may trade subsequent to the announcement of the mergers or as to the price at which shares of Duke Energy Holding common stock may trade subsequent to the consummation of the mergers.
Lazard's opinion is directed to the Duke Energy board of directors and relates only to the fairness to Duke Energy of the Cinergy exchange ratio from a financial point of view. Lazard's engagement and its opinion are for the benefit of Duke Energy's board of directors and are not on behalf of, and are not intended to confer rights or remedies upon, Cinergy, any shareholders of Duke Energy, Cinergy or the combined company, or any other person. Furthermore, Lazard's opinion does not address the merits of the underlying decision by Duke Energy to engage in the mergers or the relative merits of the mergers as compared to other business strategies that might be available to Duke Energy. Lazard expressed no opinion or recommendation as to how the shareholders of Duke Energy should vote at any shareholders meeting to be held in connection with the mergers.
In preparing its opinion to the Duke Energy board of directors, Lazard performed a variety of financial and comparative analyses, including those described below. The summary of Lazard's analyses described below is not a complete description of the analyses underlying Lazard's opinion. The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, is not readily susceptible to summary description. In arriving at its opinion, Lazard made qualitative judgments as to the significance and relevance of each analysis and factor that it considered. Accordingly, Lazard believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors, or focusing on information presented below in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.
In its analyses, Lazard considered industry performance, regulatory, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Duke Energy and Cinergy. No company, transaction or business used in Lazard's analyses as a comparison is identical to Duke Energy or Cinergy or the proposed mergers, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions being analyzed.
The estimates contained in Lazard's analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect
74
the prices at which businesses or securities actually may be sold. Accordingly, Lazard's analyses and estimates are inherently subject to substantial uncertainty.
Lazard's opinion and financial analyses were only one of many factors considered by Duke Energy's board of directors in its evaluation of the proposed mergers and should not be viewed as determinative of the views of the Duke Energy board of directors or management with respect to the mergers or the Cinergy exchange ratio.
The following is a summary of the material financial analyses underlying Lazard's written opinion dated May 8, 2005 delivered to Duke Energy's board of directors in connection with the mergers. The measures chosen for analysis were selected by Lazard as customary and relevant to an acquisition utilizing common stock of the acquiring company. The financial analyses summarized below include information presented in tabular format. In order to fully understand Lazard's financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Lazard's financial analyses.
Transaction Multiple Analysis. Lazard calculated an implied value for each share of Cinergy common stock pursuant to the merger agreement of $45.79. This value was calculated by multiplying the Cinergy exchange ratio of 1.56 times the closing price of Duke Energy common stock on May 4, 2005, which was $29.35. Lazard noted that the implied value represented a premium to the closing price of Cinergy common stock on May 4, 2005 of 14.0%.
Exchange Ratio Analysis. In order to provide background information and perspective on the relationship between Cinergy and Duke Energy common stock, Lazard reviewed:
Lazard also calculated:
The results of Lazard's review are summarized in the following table:
|
Implied Exchange Ratio |
Implied Cinergy Ownership |
Implied Premium to Cinergy |
|||||
---|---|---|---|---|---|---|---|---|
As of May 4, 2005 (current market) |
1.368x | 22.6 | % | | ||||
Exchange Ratio in the mergers of 1.56x |
1.56x | 25.0 | % | 14.0 | % | |||
Period: |
||||||||
Five-trading-day average | 1.364x | 22.6 | % | (0.3 | )% | |||
One-month average | 1.388 | 22.9 | 1.4 | |||||
Three-month average | 1.445 | 23.6 | 5.6 | |||||
Six-month average | 1.531 | 24.7 | 11.9 | |||||
One-year average | 1.651 | 26.1 | 20.7 | |||||
Two-year average | 1.769 | 27.5 | 29.3 |
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The review indicated:
Lazard also noted that average exchange ratios for the various periods represented a range of (discounts)/premiums of approximately (0.3)% to 29.3% compared to the 1.368x exchange ratio implied by the current market.
Cinergy Comparable Companies Analysis. Lazard reviewed and compared certain public and internal financial information relating to Cinergy to corresponding financial data for comparable publicly-traded utility companies to derive an implied valuation range for Cinergy. Lazard selected companies that shared characteristics with Cinergy. The companies included in the Cinergy comparable companies analysis were:
In general, historical financial data used was as of March 31, 2005 or December 31, 2004, depending on the date of the most recently available information for each company, and market data was as of May 4, 2005. Projected earnings per share, or EPS, and long term growth rates were based on IBES consensus estimates as of May 4, 2004. Other projected information was based on selected Wall Street equity research reports. The following table summarizes the results of this review:
|
Cinergy Peer Group Range |
Cinergy Peer Group Median |
||||
---|---|---|---|---|---|---|
Multiple of stock price to: | ||||||
Estimated 2005 EPS | 13.5x 17.2x | 15.2 | x | |||
Projected 2006 EPS | 12.4 16.3 | 14.5 | ||||
Book value per share | 1.2 3.1 | 1.8 | ||||
Multiple of enterprise value to: |
||||||
Estimated 2005 earnings before interest, taxes, depreciation and amortization (EBITDA) | 6.5 10.8x | 8.1 | x | |||
Projected 2006 EBITDA | 6.2 9.5 | 7.7 | ||||
Estimated 2005 earnings before interest and taxes (EBIT) | 10.6 15.7 | 12.4 | ||||
Projected 2006 EBIT | 10.3 15.3 | 11.7 |
Applying the representative range of multiples derived from the comparable companies analysis, Lazard calculated a range of implied equity values of Cinergy common stock. Lazard made separate calculations based on (1) estimates for Cinergy results of operations from selected Wall Street equity
76
research reports, and (2) internal estimates of Cinergy's management, as adjusted by Duke Energy's management (we refer to such adjusted internal estimates as the Cinergy base case estimates). Lazard's calculations did not give effect to transaction-related synergies estimated by Duke Energy management.
Based on this analysis, Lazard derived the following ranges of implied equity values per Cinergy share:
|
Implied Value per Share of Cinergy |
|||
---|---|---|---|---|
Based on: | ||||
Wall Street Estimates | $ | 40.00$44.00 | ||
Cinergy Base Case Estimates (1) | $ | 38.00$42.00 |
Lazard noted that the current market price of $40.15 per Cinergy share was within both ranges, and the Cinergy merger consideration of $45.79 was above both ranges.
Cinergy Discounted Cash Flow Analysis. Lazard performed a discounted cash flow analysis for Cinergy, which is designed to provide insight into the value of Cinergy as a function of its future cash flows and expenditures.
Using the Cinergy base case estimates for 2005 to 2008, Lazard performed an analysis of the present value of the unlevered free cash flows that Cinergy could generate from 2005 and beyond. In calculating the terminal value Lazard assumed perpetual growth rates of 2.00% to 2.50% for the projected free cash flows of Cinergy for periods subsequent to 2008. The projected cash flows were then discounted to present value using discount rates ranging from 5.75% to 6.25%, based on Cinergy's estimated weighted average cost of capital. The weighted average cost of capital is a measure of the average expected return on all of a company's securities or loans based on the proportions of those securities or loans in such company's capital structure.
The results of the analysis are summarized in the following table:
|
Equity Value Per Share at Perpetual Growth Rate (1) |
||||||||
---|---|---|---|---|---|---|---|---|---|
Discount Rate |
|||||||||
2.00% |
2.25% |
2.50% |
|||||||
5.75% | $ | 40.28 | $ | 44.58 | $ | 49.53 | |||
6.00% | 36.23 | 39.96 | 44.23 | ||||||
6.25% | 32.64 | 35.93 | 39.65 |
Based on this analysis, Lazard calculated an implied range for Cinergy common stock of $38.00 to $47.00. Lazard noted that both the current market price of $40.15 per Cinergy share and the implied merger consideration of $45.79 were within that range.
Lazard also calculated an implied price range following the methodology described above, but included in the calculation the pro rata net value to Duke Energy of synergies that Duke Energy management anticipates will result from the mergers. Lazard calculated an implied price range for Cinergy common stock of $41.00 to $51.50. Lazard noted that the current market price of $40.15 per Cinergy share was below this range and the implied merger consideration of $45.79 was within that range.
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Precedent Transaction Analysis. Lazard also performed a precedent transaction analysis, which was designed to provide a valuation of Cinergy based on publicly available financial terms of selected transactions that share some characteristics of the mergers. In selecting the transactions it used in this analysis, Lazard reviewed merger transactions since 1997 involving companies in the electric utility industry. The precedent transactions selected by Lazard were (listed by buyer followed by the target company and the date these transactions were publicly announced):
For each of the selected transactions, Lazard calculated the implied equity purchase price as a multiple of the target's last twelve months EBITDA, last twelve months EBIT, last twelve months earnings and book value. The results of these calculations are summarized in the following table:
|
Range |
Median |
||||
---|---|---|---|---|---|---|
Multiple of Equity Purchase Price to: | ||||||
Last twelve months (LTM) EBITDA | 5.5x 9.5x | 7.8 | x | |||
LTM EBIT | 7.9 19.6 | 12.8 | ||||
LTM Earnings | 12.1 28.2 | 17.0 | ||||
Book Value | 0.4 3.1 | 1.9 |
From these multiples, Lazard, based on its experience with merger and acquisitions transactions, derived a reference range for Cinergy common stock of $39.00 to $41.00. Lazard noted that the current market price of $40.15 per Cinergy share was within this range, and the implied Cinergy merger consideration of $45.79 was above the range. However, Lazard noted that most of the selected precedent transactions were announced between 1997 and 2001, which may minimize their relevance as an appropriate valuation reference, particularly as the public market trading multiples for companies in the electric utility industry have generally increased.
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Premium Paid Analysis. Lazard also performed a premium paid analysis, which is designed to provide a valuation of Cinergy based on the premium paid in the selected precedent transactions. Lazard's analysis was based on the one day, one week and four week implied premiums of such transactions. The implied premiums in this analysis were calculated comparing the transaction price prior to the announcement of the transaction to the target company's stock price one day, one week and one month prior to the announcement of the transaction. The results of these calculations are as follows:
|
Range |
Median |
|||
---|---|---|---|---|---|
One-Day | 7.0% 57.8% | (1) | 24.5% | (1) | |
One-Week | 4.9 58.4 | (1) | 31.3 | (1) | |
One-Month | (44.9) 36.2 | (2) | 12.2 | (2) |
From these multiples, Lazard, based on its experience with merger and acquisitions transactions, derived a reference range for Cinergy common stock of $45.00 to $50.00. Lazard noted that the current market price of $40.15 per Cinergy share was below this range and the implied Cinergy merger consideration of $45.79 was within the range.
Duke Energy Comparable Companies Analysis. Lazard reviewed and compared certain public and internal financial information relating to Duke Energy to corresponding financial data for comparable publicly-traded companies to derive an implied valuation range for Duke Energy. Lazard selected companies that shared characteristics with Duke Energy's utility and gas transmission businesses.
The companies included in the Duke Energy comparable companies analysis were:
Electric Utility |
Gas Transmission |
|||
---|---|---|---|---|
| American Electric Power Company, Inc. | | Enbridge Inc. | |
| Constellation Energy Group, Inc. | | El Paso Corporation | |
| Dominion Resources, Inc. | | Kinder Morgan, Inc. | |
| Entergy Corporation | | Southern Union Company | |
| Exelon Corporation | | TransCanada Corporation | |
| FPL Group, Inc. | | The Williams Companies, Inc. | |
| Progress Energy, Inc. | |||
| The Southern Company |
In general, financial data used was as of March 31, 2005 or December 31, 2004, depending on the date of the most recently available information for each company, and market data was as of May 4, 2005. Projected earnings per share and long-term growth rates were based on median IBES estimates
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as of May 4, 2004. Other projected information was based on selected Wall Street equity research reports. The results of this review of comparable companies was as follows:
|
Electric Utility Peer Group Median |
Gas Transmission Peer Group Median |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Range |
Median |
Range |
Median |
||||||
Multiple of stock price to: | ||||||||||
Estimated 2005 EPS | 13.8x16.1 | x | 15.5 | x | 15.9x20.3 | x | 17.9 | x | ||
Projected 2006 EPS | 13.2 15.1 | 14.2 | 13.4 18.7 | 16.7 | ||||||
Reported book value per share | 1.4 3.5 | 2.0 | 1.8 3.3 | 2.1 | ||||||
Multiple of enterprise value to: |
||||||||||
Estimated 2005 EBITDA | 7.4x10.0 | x | 8.6 | x | 7.5x12.8 | x | 9.5 | x | ||
Projected 2006 EBITDA | 7.2 9.5 | 8.1 | 7.1 12.9 | 8.9 | ||||||
Estimated 2005 EBIT | 11.2 15.7 | 12.1 | 11.3 18.6 | 12.6 | ||||||
Projected 2006 EBIT | 10.4 15.3 | 11.5 | 10.8 18.8 | 11.7 |
Applying the representative ranges of multiples derived from the comparable companies analysis, Lazard calculated a range of implied equity values of Duke Energy. Lazard made separate calculations based on (1) estimates for Duke Energy results of operations from selected Wall Street equity research reports, and (2) internal estimates of Duke Energy's management.
Based on the foregoing analysis, Lazard derived the following ranges of implied equity values of Duke Energy common stock:
|
Implied Value per Share of Duke Energy |
|||
---|---|---|---|---|
Based on: | ||||
Wall Street Estimates | $ | 28.00$32.00 | ||
Duke Energy's Management Estimates | $ | 27.00$31.00 |
Lazard noted that the closing price of Duke Energy common stock on May 4, 2005 was $29.35, which is within both ranges.
Duke Energy Sum-of-the-Parts Valuation Analysis. A sum-of-the parts valuation analysis reviews a business' operating performance and outlook on a segment-by-segment basis and compares each segment's performance to a group of publicly traded peer companies to determine an implied market value for the enterprise as a whole. Lazard performed a sum-of-the-parts valuation analysis for the following business segments of Duke Energy:
For DEGT, DEFS and DEI, Lazard analyzed projected 2006 EBITDA; for Duke Power, projected 2006 net income; for Crescent, book value as of December 31, 2004; and for DENA, EV/kW. The
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metrics reviewed by Lazard were based on Wall Street equity research reports and other publicly available information.
Based on a group of publicly-traded peer companies, Lazard applied relevant multiple ranges to the metrics listed above for each segment, to arrive at a range of enterprise values for each of those segments.
Lazard calculated an implied enterprise value reference range of $41.0 billion to $45.8 billion for Duke Energy. Lazard also calculated an implied range for Duke Energy shares of $27.68 to $32.80, and noted that the $29.35 price as of May 4, 2005 was within that range.
Duke Energy Discounted Cash Flow/Sum-of-the-Parts Valuation. Lazard performed a discounted cash flow analysis for the Duke Power and DEGT segments, which is designed to provide insight into the value of those segments as a function of their future cash flows and expenditures. Using Duke Energy management's internal estimates for 2005 to 2007, Lazard performed an analysis of the present value of the unlevered free cash flows that the Duke Power and DEGT segments could generate from 2005 and beyond. In calculating the terminal value of Duke Power and DEGT, Lazard assumed perpetual growth rates of 1.50% to 2.00% and 2.50% to 3.00%, respectively, for the projected free cash flows of each segment for periods subsequent to 2007. The projected cash flows were then discounted to present value using discount rates ranging from 5.75% to 6.25% for Duke Power, and 6.50% to 7.00% for DEGT, which were based on Duke Power's and DEGT's respective estimated weighted average cost of capital. Based on these calculations, Lazard calculated an implied enterprise value range for each of the Duke Power and DEGT segments.
Lazard combined the ranges of enterprise value it calculated for the Duke Power and DEGT segments with ranges of enterprise value it calculated for each of the DENA, DEFS, DEI and Crescent segments using the publicly-traded peer companies multiples it used in the sum-of-the part valuation analysis described under the heading "Duke Energy Sum-of-the-Parts Valuation Analysis," but applying to such ranges Duke Energy's internal projections.
Lazard calculated an implied enterprise value reference range of $42.6 billion to $48.8 billion for Duke Energy. Lazard further calculated an implied price range for Duke Energy common stock of $29.22 to $35.82, and noted that the $29.35 price as of May 4, 2005 was within that range.
Contribution Analysis. Lazard performed a contribution analysis to compare the relative financial operating contributions of Duke Energy and Cinergy to the combined company. Lazard analyzed the relative contributions of Duke Energy and Cinergy to the combined company of:
All projections for Cinergy were based on the internal Cinergy base case estimates, and all Duke Energy projections were derived from the internal Duke Energy management projections.
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The analysis indicated a range of contribution percentages of Cinergy from 23.0% to 29.2% in the mergers as compared to the pro-forma ownership of Cinergy resulting from the Cinergy exchange ratio of 25.0%:
|
Cinergy Percentage |
Duke Energy Percentage |
||||
---|---|---|---|---|---|---|
Revenues | ||||||
Projected 2006 | 29.2 | % | 70.8 | % | ||
Projected 2007 | 29.0 | 71.0 | ||||
EBITDA |
||||||
Projected 2006 | 23.0 | % | 77.0 | % | ||
Projected 2007 | 23.7 | 76.3 | ||||
EBIT |
||||||
Projected 2006 | 23.2 | % | 76.8 | % | ||
Projected 2007 | 23.6 | 76.4 | ||||
Net Income |
||||||
Projected 2006 | 27.1 | % | 72.9 | % | ||
Projected 2007 | 27.0 | 73.0 | ||||
Book Equity Value |
21.4 |
% |
78.6 |
% |
||
Equity Ownership at 1.56x exchange ratio |
25.0 |
% |
75.0 |
% |
Pro Forma Merger Analysis. Lazard analyzed the potential pro forma effect of the mergers on Duke Energy's and Cinergy's projected earnings per share for calendar years 2006 and 2007 using the internal Duke Energy estimates and Cinergy base case estimates, and assuming a January 1, 2006 closing of the mergers. Lazard calculated the accretion or dilution to Duke Energy's and Cinergy's estimated earnings per share under three separate scenarios:
Lazard noted that the mergers are expected to be dilutive to Duke Energy earnings per share under scenario (1) in 2006 and 2007, and accretive in both years under scenarios (2) and (3). Lazard also noted that the mergers are expected to be dilutive to Cinergy 2006 and 2007 earnings per share under all three scenarios.
Fees. Duke Energy has agreed to pay Lazard a fee of $3 million in connection with rendering its opinion, which fee became payable upon Lazard's delivery of its opinion to the Duke Energy board of directors. Duke Energy also has agreed to reimburse Lazard for its out-of-pocket expenses, including reasonable fees and expenses of legal counsel and any other advisor retained by Lazard, and to indemnify Lazard and its members, employees, agents, affiliates and controlling persons, if any, against liabilities, including liabilities under the federal securities laws, arising out of its engagement. Lazard in the past has provided investment banking and financial advisory services to Duke Energy and Cinergy, for which services Lazard has received customary fees. Lazard currently provides advisory services to Duke Energy, and in the future may provide advisory and other services to Duke Energy, Cinergy and the combined company.
Lazard provides a full range of financial advisory and other services and, in the course of its business, may from time to time effect transactions and hold securities, including derivative securities,
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of Duke Energy and Cinergy for its own account and for the account of clients and customers, and, accordingly, may hold a long or short position in such securities.
Interests of Duke Energy's Directors and Executive Officers in the Mergers
Shareholders should note that some Duke Energy directors and executive officers have interests in the mergers as directors or officers that are different from, or in addition to, the interests of other Duke Energy shareholders. As provided in the merger agreement, at the completion of the mergers, the Duke Energy Holding board of directors will include 10 Duke Energy designees and 5 Cinergy designees. Accordingly, it is expected that certain current members of the Duke Energy board of directors will serve as directors of Duke Energy Holding upon completion of the merger. The merger agreement also provides that certain executive officers of Duke Energy may become officers of Duke Energy Holding when the mergers are consummated. Paul M. Anderson, the Chairman and Chief Executive Officer of Duke Energy, will become the Chairman of the Duke Energy Holding board of directors. Mr. Anderson has stated that he intends to serve in such capacity for at least one year following completion of the mergers.
In addition, the following Duke Energy executives have been proposed to serve in the following positions: Paul H. Barry, currently vice president, mergers and acquisitions at Duke Energy, will lead Duke Energy Americas, including trading and marketing, non-regulated generation, Duke Energy International and Cinergy Solutions; Julie A. Dill, currently vice president, shareholder and investor relations at Duke Energy, will lead investor relations and corporate communications; Fred J. Fowler, currently president and chief operating officer at Duke Energy, will lead the gas businessesDuke Energy Gas Transmission and Duke Energy Field Services; David L. Hauser, currently group vice president and chief financial officer at Duke Energy, will lead the financial function, which will include the controller's office, treasury, tax, risk management and insurance; Jim W. Mogg, currently group vice president and chief development officer at Duke Energy will become advisor to the chairman with Crescent Resources reporting to him; Thomas C. O'Connor, currently group vice president, corporate strategy at Duke Energy, will lead U.S. franchised electric and gas operations which will include regulated fossil/hydro generation, fossil/hydro fleet services, power and gas delivery, customer service call centers, engineering and construction, portfolio optimization and shared services; Christopher C. Rolfe, currently vice president, human resources at Duke Energy, will lead the human resources function, including human resources and labor policy, diversity, management and employee development, and compensation and benefits; Ruth G. Shaw, currently president and chief executive officer at Duke Power, will provide executive leadership for nuclear strategy and operations, environmental policy and other public policy issues; B. Keith Trent, currently group vice president, general counsel and secretary at Duke Energy, will lead corporate development, including corporate strategy, and mergers and acquisitions; and Steven K. Young, currently vice president and controller at Duke Energy, will lead the controller's function, reporting to David L. Hauser (all selections are subject to board approval as described on page 105).
The compensation committee of Duke Energy's board of directors has determined that the transactions contemplated by the merger agreement will not constitute a change in control within the meaning of the Duke Energy 1998 Long-Term Incentive Plan. Moreover, the transactions contemplated by the merger agreement will not constitute a change in control within the meaning of the employment and severance agreements of Duke Energy executive officers.
The merger agreement provides that, during any rolling twelve-month period, Duke Energy may grant discretionary bonus awards to directors and employees (including executive officers) in the form of cash or otherwise, in addition to any other payments made in the ordinary course of business consistent with past practice, with an aggregate value not in excess of $60 million.
The merger agreement provides that Duke Energy may establish retention and/or project specific bonus plans that (in the aggregate over all such plans) provide for payments to directors and employees (including executive officers) not in excess of $50 million during any rolling twelve-month period, provided that Duke Energy must notify the senior Cinergy Human Resources officer within five business days after making any individual such payment in excess of $200,000. As of the date hereof, no such retention and/or project specific bonuses have been granted to any executive officers.
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The merger agreement provides that Duke Energy and its subsidiaries may amend existing severance plans or establish new severance plans for employees (including executive officers, but in any event exclusive of severance arrangements applicable to only one individual) to provide additional severance benefits during any rolling twelve-month period with an aggregate value not in excess of $50 million more than would have been provided had no such additional benefits been payable.
The merger agreement includes provisions relating to indemnification and insurance for directors and officers of Duke Energy. See "Indemnification and Insurance" beginning on page 106.
Cinergy's Reasons for the Mergers and Recommendation of Cinergy's Board of Directors
The Cinergy board of directors has unanimously approved and adopted the merger agreement, has unanimously determined that the merger agreement and the transactions contemplated thereby, including the mergers, are advisable, fair to and in the best interests of Cinergy and the holders of Cinergy common stock, and unanimously recommends that Cinergy shareholders vote "FOR" the proposal to adopt the merger agreement and approve the mergers and the other transactions contemplated by the merger agreement.
In reaching its determination to recommend the adoption of the merger agreement and approval of the transactions contemplated by the merger agreement, including the mergers, the Cinergy board of directors consulted with management, as well as Merrill Lynch, Cinergy's financial advisor, and Cinergy's internal and outside legal counsel, and considered various material factors, which are discussed below. The following discussion of the information and factors considered by the Cinergy board of directors is not intended to be exhaustive. In view of the wide variety of factors considered in connection with the mergers, the Cinergy board of directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific material factors it considered in reaching its decision. In addition, individual members of the Cinergy board of directors may have given different weight to different factors. The Cinergy board of directors considered this information and these factors as a whole, and overall considered the relevant information and factors to be favorable to, and in support of, its determinations and recommendations. Among the material information and factors considered by the Cinergy board of directors were the following:
The combined company will own and/or operate approximately 54,000 megawatts of electric generation domestically and internationallyrelying on a diverse fuel mix of nuclear, coal, natural gas and hydroelectric power to meet customers' needs. Duke Energy also operates more than 17,500 miles of natural gas transmission pipeline with 250 billion cubic feet of natural gas storage capacity and, through its joint venture with ConocoPhillips, is the largest producer of natural gas liquids (NGLs) in North America. The combined company will have operations in two-thirds of the United States, as well as Canada and several other
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international
locationsprimarily in Latin America.
The combined company will create a stronger portfolio of utility businesses with approximately 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 megawatts of generation and broad operational and regulatory experience. The Cinergy board of directors believes that together with the pipeline operations, the regulated businesses will contribute a substantial percentage of stable earnings and create the financial strength and scale to participate in the continuing consolidation of the utility sector, all at lower risk given the broader diversification described above.
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spending and overlapping functions, improved sourcing strategies, avoidance of planned expenditures and the consolidation of non-regulated business unit operations. The companies anticipate that upon review with state commissions, regulated savings will be shared between customers and shareholders over time in an equitable manner. The Cinergy board of directors took note of the fact that the cost synergy numbers were estimates, that they may change and that achieving the cost synergies is subject to a number of uncertainties. Subsequent to the Cinergy board of directors' approval of the merger agreement, additional analysis led to further refinement of the cost savings analysis such that the mergers were expected to generate approximately $440 million in annual gross synergies when realized in year three. On September 13, 2005, the Duke Energy board of directors approved a plan to pursue the sale or other disposition of DENA's physical and commercial assets outside of the Midwestern United States. In connection with the implementation of this plan, it is expected that, of the aggregate costs savings of approximately $440 million described above, approximately $130 million of the cost savings relate to DENA's assets and will be realized whether or not the mergers are consummated. Accordingly, the mergers are now expected to generate approximately $310 million in annual gross synergies when fully realized in year three.
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The Cinergy board of directors also considered the potential risks of the Cinergy merger, including the following:
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The Cinergy board of directors believed that, overall, the potential benefits of the mergers to Cinergy and Cinergy's shareholders outweighed the risks, many of which are mentioned above.
The Cinergy board of directors realized that there can be no assurance about future results, including results considered or expected as described in the factors listed above. It should be noted that this explanation of the Cinergy board of directors' reasoning and all other information presented in this section are forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading "Special Note Regarding Forward-Looking Statements" beginning on page 35.
Opinion of Cinergy's Financial Advisor
Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
On May 8, 2005, Merrill Lynch delivered to the Cinergy board of directors its oral opinion, which opinion was subsequently confirmed in writing, to the effect that, as of that date and based upon the assumptions made, matters considered and limits of review set forth in its written opinion, the exchange ratio of 1.56 pursuant to the Cinergy merger was fair, from a financial point of view, to the holders of
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Cinergy common stock. A copy of Merrill Lynch's written opinion is attached to this joint proxy statement/prospectus as Annex D.
Merrill Lynch's written opinion sets forth the assumptions made, matters considered and limits on the scope of review undertaken by Merrill Lynch. Each holder of Cinergy common stock is encouraged to read Merrill Lynch's opinion in its entirety. Merrill Lynch's opinion was intended for the use and benefit of the Cinergy board of directors, does not address the merits of the underlying decision by Cinergy to enter into the merger agreement or any of the transactions contemplated thereby, including the Cinergy merger, and does not constitute a recommendation to any shareholder as to how that shareholder should vote on the Cinergy merger or any related matter. Merrill Lynch was not asked to address nor does its opinion address the fairness to, or any other consideration of, the holders of any class of securities, creditors or other constituencies of Cinergy, other than the holders of Cinergy common stock. This summary of Merrill Lynch's opinion is qualified in its entirety by reference to the full text of the opinion attached to this joint proxy statement/prospectus as Annex D.
In arriving at its opinion, Merrill Lynch, among other things:
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy and completeness of all information supplied or otherwise made available to it, discussed with or reviewed by or for it, or publicly available, and Merrill Lynch did not assume any responsibility for independently verifying such information or undertake an independent evaluation or appraisal of any of the assets or liabilities of Cinergy or Duke Energy and was not furnished with any such evaluation or appraisal, nor did it evaluate the solvency or fair value of Cinergy or Duke Energy, under any state or federal laws relating to bankruptcy, insolvency or similar matters. In addition, Merrill Lynch did not assume any obligation
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to conduct any physical inspection of the properties or facilities of Cinergy or Duke Energy. With respect to the financial forecast information and the Expected Synergies furnished to or discussed with Merrill Lynch by Cinergy or Duke Energy, Merrill Lynch assumed that such forecasts were reasonably prepared and reflected the best currently available estimates and judgment of Cinergy's or Duke Energy's management as to the expected future financial performance of Cinergy or Duke Energy, as the case may be, and the Expected Synergies. Merrill Lynch further assumed that the Duke Energy merger and the Cinergy merger would each qualify as a reorganization within the meaning of Section 368(a) of the Code.
Merrill Lynch's opinion was necessarily based upon market, economic and other conditions as they existed and could be evaluated on, and on the information made available to it as of, the date thereof. Merrill Lynch assumed that in the course of obtaining the necessary regulatory or other consents or approvals (contractual or otherwise) for the transaction, no restrictions, including any divestiture requirements or amendments or modifications, would be imposed that would have a material adverse effect on the contemplated benefits of the transaction.
In connection with the preparation of its opinion, Merrill Lynch was not authorized by Cinergy or the Cinergy board of directors to solicit, nor did it solicit, third-party indications of interest for the acquisition of all or any part of Cinergy.
Merrill Lynch's opinion did not express any opinion as to the prices at which Cinergy common stock or Duke Energy Holding common stock will trade following the announcement or consummation of the transaction, as the case may be.
The following is a summary of the material financial and comparative analyses performed by Merrill Lynch that were presented to the Cinergy board of directors in connection with the delivery of its opinion. Some of the financial analyses summarized below include information presented in a tabular format. In order to fully understand Merrill Lynch's financial analyses, the tables must be read together with the text of the summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data set forth below in tables without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Merrill Lynch.
Transaction Overview
Based upon the $29.36 closing price of Duke Energy common stock on May 6, 2005, the last full trading day prior to the public announcement of the mergers, and the Cinergy exchange ratio, Merrill Lynch noted that the implied value of the consideration to be received in the Cinergy merger per share of Cinergy common stock as of that date was $45.80, which is referred to as the "implied consideration value." Based upon the implied consideration value, approximately 199.1 million diluted shares of Cinergy common stock outstanding (calculated using the treasury stock method), and approximately $4.852 billion of net debt and liquidation value of preferred stock, Merrill Lynch also noted that the Cinergy merger implied a net offer value of approximately $9.120 billion, and a transaction value of approximately $13.971 billion, which is referred to as the "implied transaction value."
Merrill Lynch compared the implied consideration value to the closing price of Cinergy common stock on May 6, 2005 and to the average daily closing prices of Cinergy common stock for various time periods ending on that date and noted the following implied offer premia:
Time Period |
Cinergy common stock price |
Implied Premium* |
||||
---|---|---|---|---|---|---|
Current (May 6, 2005) | $ | 40.38 | 13.4 | % | ||
1 week average | $ | 40.10 | 14.2 | % | ||
4 week average | $ | 39.84 | 15.0 | % | ||
8 week average | $ | 39.86 | 14.9 | % | ||
12 week average | $ | 40.12 | 14.1 | % | ||
52 week average | $ | 39.63 | 15.6 | % |
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Analysis of Cinergy
Historical Trading Performance
Merrill Lynch reviewed the historical trading prices for the Cinergy common stock separately and in relation to Duke Energy common stock and the Philadelphia Utility Sector Index of publicly-traded utilities to provide background information on the prices at which Cinergy common stock has historically traded. This review indicated that during the 52-week period ending May 6, 2005, the Cinergy common stock traded as low as $34.92 per share and as high as $42.63 per share, and during the 3-month period ending May 6, 2005, the Cinergy common stock traded as low as $38.75 and as high as $41.69. These trading prices compared to the closing price of Cinergy common stock on May 6, 2005 of $40.38 and the implied consideration value of $45.80.
Comparable Public Companies Analysis
Using publicly available information, Merrill Lynch compared certain financial and operating information, ratios, and valuation multiples for Cinergy with corresponding financial and operating information, ratios, and valuation multiples for selected utility companies with businesses and operations that, for purposes of analysis, could be considered similar to businesses and operations of Cinergy in certain respects. The following six companies were used by Merrill Lynch for comparison in this analysis:
Using publicly available information and research analyst estimates, Merrill Lynch reviewed for each of these companies:
This analysis showed the following:
Cinergy Comparable Public Companies Analysis
Multiple |
High |
Low |
Mean |
||||
---|---|---|---|---|---|---|---|
2005E P/E | 17.2 | x | 13.5 | x | 15.7 | x | |
2006E P/E | 16.3 | x | 12.4 | x | 14.3 | x |
For purposes of this analysis, Merrill Lynch used both financial forecasts provided by Cinergy management, which are referred to as the "Cinergy Management Case," and selected publicly available equity research reports and consensus earnings per share estimates published by First Call for the period 2004 through 2006, and projected earnings per share and long term growth rates published by First Call and selected equity research reports and discussions with Cinergy management for the period
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2007 through 2009, which are collectively referred to as the "Cinergy Street Case." Merrill Lynch also reviewed:
For purposes of Merrill Lynch's analyses, to compare the multiples implied by the Cinergy Management Case and the Cinergy Street Case to Public Utility Companies (see table below), the Cinergy Management Case and the Cinergy Street Case were adjusted to exclude the financial performance (including the facility's operating losses and the related tax credit under Section 29 of the Code) from Cinergy's synthetic fuel production facilities, which are referred to collectively as the Cinergy synthetic fuel facility, through 2007, because such federal income tax credits generated by the Cinergy synthetic fuel facility expire at the end of 2007 and represent a temporary contribution to earnings. As a result, the implied transaction value and the implied consideration value were reduced by $0.69 per share of Cinergy common stock, which amount represents the estimated net present value of the projected cash flows from the Cinergy synthetic fuel facility using a discounted cash flow analysis.
Merrill Lynch compared these multiples to the corresponding multiples for the group of six public utility companies listed above based upon their respective enterprise values (which means equity value plus indebtedness minus cash plus liquidation value of preferred stock and minority interest) and share prices. This analysis showed the following:
Multiple |
Cinergy Management Case |
Cinergy Street Case |
Public Utility Companies* |
||||
---|---|---|---|---|---|---|---|
Implied transaction value/2005E EBITDA | 8.6 | x | 9.1 | x | 8.1 | x | |
Implied transaction value/2006E EBITDA | 7.9 | x | 8.4 | x | | ||
2005E Implied P/E | 18.0 | x | 18.0 | x | 15.7 | x | |
2006E Implied P/E | 16.3 | x | 16.7 | x | 14.3 | x | |
2007E Implied P/E | 14.7 | x | 15.6 | x | 12.9 | x |
Merrill Lynch estimated the following implied equity value per share ranges of Cinergy common stock, before giving effect to the Expected Synergies, based upon the Cinergy Management Case and the Cinergy Street Case, in each case, excluding projected earnings from the Cinergy synthetic fuel facility, using the reference ranges shown in the table below, plus the $0.69 per share which represented the discounted cash flow from the Cinergy synthetic fuel facility. The implied equity values in the table
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below compared to the closing price of Cinergy common stock on May 6, 2005 of $40.38 and the implied consideration value of $45.80.
|
|
Implied Equity Value per Share of Cinergy Common Stock |
||||||
---|---|---|---|---|---|---|---|---|
Multiple |
Reference Range |
Cinergy Management Case |
Cinergy Street Case |
|||||
2005E P/E | 14.0x16.0x | $ | 35.75$40.75 | $ | 35.75$40.75 | |||
2006E P/E | 13.0x15.0x | $ | 36.75$42.25 | $ | 35.75$41.25 |
Discounted Cash Flow Analysis
Merrill Lynch performed a discounted cash flow, or DCF, analysis for Cinergy, valuing Cinergy as the sum of the DCF values of the following business segments:
Merrill Lynch estimated the present value of the stand-alone, unleveraged, after-tax cash flows that these business segments could produce over the fiscal years 2005 to 2009 on a stand-alone basis before giving effect to the Expected Synergies. Estimated financial data for each of the business segments were based upon the Cinergy Management Case. The range of terminal values was derived by applying multiples ranging from 7.5x to 8.5x terminal year estimated EBITDA to fiscal year 2009 estimated EBITDA for each of the business segments. In order to derive implied equity value per share ranges for Cinergy, Merrill Lynch discounted the free cash flows and terminal values to present value using a range of discount rates and then subtracted net debt (which means the total of all short and long term Cinergy debt minus cash). The relevant discount rates and multiples used were as follows:
Cinergy Business Segment |
Discount Rate |
2009E Terminal Multiple Range |
||
---|---|---|---|---|
Commercial Business | 7.5 | % | 7.5x8.5x EBITDA | |
Regulated Business | 6.5 | % | 7.5x8.5x EBITDA |
For purposes of this analysis, the projected cash flows through 2007 from Cinergy's synthetic fuel facility (including the operating losses from the facility and the related tax credits under Section 29 of the Code) were separately valued using a discounted cash flow analysis and a discount rate of 7.5%, and Cinergy's power technology and infrastructure services business was separately valued based on book value.
This analysis indicated an implied equity value per share range of Cinergy common stock from approximately $39.25 to $46.75, compared to the closing price of Cinergy common stock on May 6, 2005 of $40.38 and the implied consideration value of $45.80.
Research Analyst Price Targets
Merrill Lynch reviewed the most recent Wall Street research equity analyst per share target prices for Cinergy common stock, which ranged from $41.00 to $46.00, compared to the closing price of Cinergy common stock on May 6, 2005 of $40.38 and the implied consideration value of $45.80.
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Analysis of Duke Energy
Historical Trading Performance
Merrill Lynch reviewed the historical trading prices for the Duke Energy common stock to provide background information on the prices at which Duke Energy common stock has historically traded. This review indicated that during the 52-week period ending May 6, 2005, the Duke Energy common stock traded as low as $18.85 per share and as high as $29.52 per share, and during the 3-month period ending May 6, 2005, the Duke Energy common stock traded as low as $25.62 and as high as $29.52. These trading prices compared to the closing price of Duke Energy common stock on May 6, 2005 of $29.36.
Comparable Public Companies Analysis
Using publicly available information, Merrill Lynch analyzed and compared certain financial and operating information, ratios, and valuation multiples for Duke Energy with corresponding financial and operating information, ratios, and valuation multiples for selected companies with businesses and operations that, for purposes of analysis, could be considered similar to businesses and operations of Duke Energy in certain respects. The following nine energy and power companies were used by Merrill Lynch for comparison in this analysis:
Using publicly available information and research analyst estimates, Merrill Lynch reviewed for each of these companies:
This analysis showed the following:
Duke Energy Comparable Public Companies Analysis
Multiple |
High |
Low |
Mean |
||||
---|---|---|---|---|---|---|---|
2005E P/E | 17.9 | x | 12.6 | x | 15.5 | x | |
2006E P/E | 16.4 | x | 10.6 | x | 14.3 | x |
Using publicly available information and research analyst estimates, Merrill Lynch also reviewed the historical trading prices for the Duke Energy common stock in relation to a composite index consisting of the nine public energy and power companies listed above on May 6, 2005 and for various
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time periods ending on that date. Merrill Lynch compared the Duke Energy common stock trading prices during those periods as a multiple of estimated earnings per share for the next twelve months, as published by First Call, which is referred to as "Forward P/E," to the Forward P/E for such other companies, and noted the differential between the Forward P/E for Duke Energy and such other companies which reflected the extent to which Duke Energy has traded at a higher multiple of projected earnings compared to such other companies. This analysis showed the following:
Duke Energy Forward P/E Analysis
Time Period |
Duke Energy Forward P/E |
Public Company Composite Index Forward P/E |
Differential |
||||
---|---|---|---|---|---|---|---|
Current (May 6, 2005) | 18.3 | x | 15.2 | x | 3.1 | x | |
One month average | 18.1 | x | 15.2 | x | 2.8 | x | |
Three month average | 17.7 | x | 15.1 | x | 2.6 | x | |
Six month average | 17.5 | x | 14.8 | x | 2.7 | x | |
One year average | 17.4 | x | 14.0 | x | 3.4 | x | |
Two year average | 16.3 | x | 13.5 | x | 2.8 | x | |
Three year average | 14.4 | x | 12.7 | x | 1.6 | x | |
Five year average | 14.8 | x | 12.9 | x | 1.9 | x | |
Ten year average | 14.7 | x | 13.0 | x | 1.7 | x |
Using the reference ranges shown in the table below, Merrill Lynch estimated the following implied equity value ranges per share of Duke Energy common stock, before giving effect to the Expected Synergies, based upon financial forecasts provided by Duke Energy management, as adjusted by Cinergy management, which are referred to as the "Duke Adjusted Case," and selected publicly available equity research reports for the period 2004 through 2006, and projected earnings per share and long term growth rates published by First Call and selected equity research reports for the period 2007 through 2009, which are collectively referred to as the "Duke Street Case." These implied equity values compared to the closing price of Duke Energy common stock on May 6, 2005 of $29.36 as follows:
|
|
Implied Equity Value per Share of Duke Energy common stock |
||||||
---|---|---|---|---|---|---|---|---|
Benchmark |
Reference Range |
Duke Adjusted Case |
Duke Street Case |
|||||
2005E P/E | 17.0x19.0x | $ | 26.50$29.75 | $ | 26.25$29.50 | |||
2006E P/E | 16.0x18.0x | $ | 26.00$29.25 | $ | 27.25$30.50 |
Discounted Cash Flow Analysis
Merrill Lynch performed a DCF analysis for Duke Energy, valuing Duke Energy as the sum of the DCF values of the following five principal business entities:
Merrill Lynch estimated the present value of the stand-alone, unleveraged, after-tax cash flows that these business entities could produce over the fiscal years 2005 to 2009 on a stand-alone basis before giving effect to the Expected Synergies. Estimated financial data for each of the business entities were based on the Duke Adjusted Case.
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The range of terminal values was derived by applying a range of multiples to fiscal year 2009 estimated EBITDA for each of the relevant business entities. In order to derive implied equity value per share ranges for Duke Energy, Merrill Lynch discounted the free cash flows and terminal values to present value using a range of discount rates and then subtracted net debt (which means the total of all short and long term Duke Energy debt minus cash). The relevant discount rates and multiples used were as follows:
Duke Energy Business Segment |
Discount Rate |
2009E Terminal Multiple Range |
||
---|---|---|---|---|
Duke Power | 6.0% | 8.0x9.0x EBITDA | ||
Duke Energy Gas Transmission | 7.5% | 8.0x9.0x EBITDA | ||
Duke Energy Field Services | 9.0% | 7.0x8.0x EBITDA | ||
Duke Energy North America | 9.0% | 8.0x9.0x EBITDA | ||
Duke Energy International | 9.5% | 6.0x7.0x EBITDA |
For purposes of this analysis, Duke Energy's Crescent Resources, LLC was separately valued using a sum-of-the-parts asset valuation.
This analysis indicated an implied equity value per share range of Duke Energy common stock from approximately $27.25 to $32.00, compared to the closing price of Duke Energy common stock on May 6, 2005 of $29.36.
Research Analyst Price Targets
Merrill Lynch reviewed the most recent Wall Street research equity analyst per share target prices for Duke Energy common stock, which ranged from $24.00 to $33.00, compared to the closing price of Duke Energy common stock on May 6, 2005 of $29.36.
Exchange Ratio Analysis
Historical Implied Exchange Ratio Trading Analysis
Merrill Lynch reviewed the per share daily closing trading prices for the Cinergy common stock and the Duke Energy common stock for the three-year period ending May 6, 2005 to provide background information on the prices at which Cinergy and Duke Energy common stock have historically traded. For perspective on the relative prices at which Cinergy and Duke Energy common stock have historically traded, Merrill Lynch calculated the historical implied exchange ratios by dividing the daily closing prices of Cinergy common stock by those of Duke Energy common stock. This analysis showed the following:
|
Implied Exchange Ratios |
||||||
---|---|---|---|---|---|---|---|
|
Low |
Mean |
High |
||||
Current (05/07/05) | 1.375 | x | 1.375 | x | 1.375 | x | |
One Month | 1.357 | 1.386 | 1.414 | ||||
Three Months | 1.357 | 1.441 | 1.544 | ||||
Six Months | 1.357 | 1.510 | 1.702 | ||||
One Year | 1.357 | 1.665 | 1.939 | ||||
Two Years | 1.357 | 1.794 | 2.123 | ||||
Three Years | 0.951 | 1.745 | 2.598 |
In addition, Merrill Lynch compared the Cinergy exchange ratio to the low, mean and high implied exchange ratios over the same time periods and noted the amount by which the Cinergy exchange ratio
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constituted a premium (or discount) to the implied exchange ratios for such periods. This analysis showed the following:
|
Implied Premium/(Discount) |
||||||
---|---|---|---|---|---|---|---|
|
Low |
Mean |
High |
||||
Current (05/07/05) | 13.4% | 13.4% | 13.4% | ||||
One Month | 15.0% | 12.6% | 10.3% | ||||
Three Months | 15.0% | 8.3% | 1.1% | ||||
Six Months | 15.0% | 3.3% | (8.3% | ) | |||
One Year | 15.0% | (6.3% | ) | (19.5% | ) | ||
Two Years | 15.0% | (13.1% | ) | (26.5% | ) | ||
Three Years | 64.1% | (10.6% | ) | (40.0% | ) |
Based upon the 52-week and 3-month high and low trading prices for the Cinergy common stock and the Duke Energy common stock noted above, Merrill Lynch calculated a range of implied exchange ratios of a share of Cinergy common stock to a share of Duke Energy common stock, in each case compared to the Cinergy exchange ratio. This analysis showed the following:
|
Implied Exchange Ratio |
|||
---|---|---|---|---|
|
Low to High* |
High to Low** |
||
52-Week High/Low | 1.183 | 2.262 | ||
3-Month High/Low | 1.313 | 1.627 |
Relative Comparable Public Companies Analysis
Based upon the implied equity values per share of Duke Energy common stock and Cinergy common stock that were estimated using the comparable public companies analyses described above, Merrill Lynch calculated a range of implied exchange ratios of a share of Cinergy common stock to a share of Duke Energy common stock, based upon
This analysis yielded the following implied exchange ratios, compared to the Cinergy exchange ratio:
|
Range of Implied Exchange Ratio |
|||
---|---|---|---|---|
|
Low to High* |
High to Low** |
||
Cinergy Management Case and Duke Adjusted Case | 1.202 | 1.625 | ||
Cinergy Street Case and Duke Street Case | 1.172 | 1.552 |
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Relative DCF Analysis
Based upon the implied equity values per share of Duke Energy common stock and Cinergy common stock that were estimated using the DCF methodologies described above, Merrill Lynch calculated a range of implied exchange ratios of a share of Cinergy common stock to a share of Duke Energy common stock, based upon the Cinergy Management Case and the Duke Adjusted Case. This analysis yielded the following implied exchange ratios, compared to the Cinergy exchange ratio:
Range of Implied Exchange Ratio |
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Low to High* |
High to Low** |
|
1.227 | 1.716 |
Relative Contribution Analysis
Merrill Lynch performed a relative contribution analysis to compare the relative financial operating contributions of Duke Energy and Cinergy to the combined company resulting from the mergers. Merrill Lynch performed this analysis by calculating the relative contributions of Cinergy and Duke Energy to the combined company of projected EBITDA and net income for fiscal years 2005 to 2009, based upon the Cinergy Management Case and the Duke Adjusted Case, and the Cinergy Street Case and the Duke Street Case, respectively, in each case before giving effect to the Expected Synergies. The relative contributions of Cinergy were adjusted in each case to exclude the financial performance from the Cinergy synthetic fuel facility. The financial performance from the Cinergy synthetic fuel facility was excluded for valuation purposes, as the related tax credits expire at the end of 2007.
This analysis yielded the following implied exchange ratios, compared to the Cinergy exchange ratio:
|
Range of Implied Exchange Ratio |
|||
---|---|---|---|---|
|
Low* |
High** |
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Cinergy Management Case and Duke Adjusted Case | 1.494 | 2.100 | ||
Cinergy Street Case and Duke Street Case | 1.419 | 1.742 |
Pro Forma Analysis
Merrill Lynch performed a pro forma merger analysis for fiscal years 2007 and 2008 to analyze the potential effect of the mergers on Cinergy shareholders using the Cinergy Management Case and the Duke Adjusted Case. These projections assumed, among other factors, estimates of retained synergies provided by Cinergy management. The pro forma impact was found to be dilutive to earnings in 2007 and accretive to earnings in 2008 to Cinergy shareholders.
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The summary set forth above summarizes the material analyses performed by Merrill Lynch but does not purport to be a complete description of the analyses underlying the Merrill Lynch opinion or the presentation made by Merrill Lynch to the Cinergy board of directors. The preparation of a fairness opinion is a complex analytic process and is not necessarily susceptible to partial or summary description. Accordingly, Merrill Lynch believes that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by Merrill Lynch, without considering all analyses and factors, could create an incomplete view of the processes underlying the Merrill Lynch opinion. Merrill Lynch did not assign relative weights to any of its analyses in preparing its opinion. The matters considered by Merrill Lynch in its analyses were based on numerous macroeconomic, operating and financial assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Cinergy and Merrill Lynch, and involve the application of complex methodologies and educated judgments. In addition, no company utilized as a comparison in the analyses described above is identical to Cinergy or Duke Energy.
Any estimates contained in the analyses performed by Merrill Lynch are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. In addition, as described above, the Merrill Lynch opinion was among several factors taken into consideration by the Cinergy board of directors in making its determination to approve the merger agreement and the mergers. Consequently, Merrill Lynch's analyses should not be viewed as determinative of the decision of the Cinergy board of directors with respect to the fairness to Cinergy of the Cinergy exchange ratio.
The Cinergy board of directors selected Merrill Lynch to render a fairness opinion because Merrill Lynch is an internationally recognized investment banking firm with substantial experience in transactions similar to the mergers. As part of its investment banking business, Merrill Lynch is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, secondary distributions of listed and unlisted securities and private placements.
Merrill Lynch acted as financial advisor to Cinergy in connection with the transaction and will receive a fee from Cinergy for its services pursuant to a letter agreement dated as of March 28, 2005. Pursuant to this letter agreement, Cinergy paid Merrill Lynch for its services in connection with the Cinergy merger a fee of approximately $5,900,000 in cash upon public announcement of the merger agreement, and has agreed to pay to Merrill Lynch an additional fee in cash equal to the greater of (a) 0.17% of the Purchase Price (as defined below) and (b) $22,000,000, a portion of which will be payable upon adoption of the merger agreement by Cinergy shareholders and the balance of which will be payable contingent upon closing of the Cinergy merger, against which the fee payable to Merrill Lynch upon the public announcement of the merger agreement will be credited. For purposes of Merrill Lynch's engagement in connection with the Cinergy merger, "Purchase Price" means an amount equal to the sum of (a) the aggregate fair market value of the Duke Energy Holding common stock issued to Cinergy shareholders in connection with the Cinergy merger, (b) the amount of all indebtedness and preferred stock of Cinergy that is assumed, acquired, retired or defeased in connection with the Cinergy merger and (c) the fair market value of any assets of Cinergy (including working capital items) retained by Cinergy or any extraordinary dividends declared or paid by Cinergy. The fair market value of the Duke Energy Holding common stock and any other non-cash consideration delivered or retained in connection with the Cinergy merger will be the value determined by Cinergy and Merrill Lynch upon the closing of the Cinergy merger. Cinergy has also agreed to pay Merrill Lynch an amount in cash equal to 10% of any break-up, termination, topping, expense reimbursement or similar fee or payment received by Cinergy (net of any taxes payable by Cinergy in respect of such amounts), in connection with termination of the merger agreement, less the amount of any fee previously paid to Merrill Lynch, but in no event exceeding 33% of the success fee that was
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expected to be paid upon the closing of the Cinergy merger. Cinergy has also agreed to reimburse Merrill Lynch for its reasonable expenses, including attorneys' fees and disbursements.
Merrill Lynch has, in the past, provided financial advisory and financing services to Cinergy and Duke Energy and/or its affiliates and has received customary fees for such services. Merrill Lynch continues to provide such services to Cinergy and Duke Energy and will receive fees for the rendering of such services. During the past two years, Merrill Lynch has received fees in the amount of approximately $75,000 from Cinergy and/or its affiliates for such financial advisory and financing services and approximately $1,000,000 from Duke Energy and/or its affiliates for such financial advisory and financing services, including an aggregate of $870,500 in connection with the accelerated share repurchase program and the open market purchase program described below under the heading "Comparative Stock Prices and Dividends," on page 141. In addition, in the ordinary course of its business, Merrill Lynch may actively trade the Cinergy common stock and other securities of Cinergy, as well as the Duke Energy common stock and other securities of Duke Energy, for its own account and for the accounts of its customers and for Duke Energy and, accordingly, may at any time hold a long or short position in such securities.
Interests of Cinergy's Directors and Executive Officers in the Mergers
In considering the recommendation of the Cinergy board of directors with respect to the merger agreement, Cinergy's shareholders should be aware that some of Cinergy's executive officers and directors have interests in the mergers and have arrangements that are different from, or in addition to, those of Cinergy's shareholders generally. The Cinergy board of directors was aware of these interests and considered them, among other matters, in reaching its decisions to approve and adopt the merger agreement and to recommend that Cinergy's shareholders vote in favor of adopting the merger agreement and approving the mergers. Messrs. Duncan and Grealis, two of Cinergy's former executive officers, are no longer employed with Cinergy, and therefore their interests are not described separately below. See "Former Executive Officers," on page 104.
Equity Compensation Awards. The merger agreement provides that upon completion of the mergers, each Cinergy stock option, including those held by executive officers and directors of Cinergy, will be converted into Duke Energy Holding stock options based on the Cinergy exchange ratio. In addition, the merger agreement provides that, upon completion of the Cinergy merger, each share of restricted stock or phantom stock and other equity award based upon shares of Cinergy common stock, including those held by executive officers and directors of Cinergy, will be converted into shares of restricted stock or awards based upon shares of Duke Energy Holding common stock based on the Cinergy exchange ratio. Upon completion of the Cinergy merger, each stock option and share of restricted stock or phantom stock held by executive officers and granted prior to the date of the merger agreement will vest in full. Equity compensation awards, including stock options and restricted stock, granted after the date of the merger agreement will not vest upon completion of the Cinergy merger, but will vest in accordance with their normal vesting schedule or, depending on the terms of the applicable award agreement, upon an earlier involuntary termination of employment without "cause" or a voluntary termination of employment for "good reason" (as each such term is defined in the applicable award agreement). Based on Cinergy equity compensation awards held by executive officers and directors of Cinergy as of May 9, 2005 and assuming a closing date of June 1, 2006, upon completion of the Cinergy merger, Messrs. Rogers, Cyrus and Turner, and the remaining executive officers and directors, as a group, respectively, would vest, as of completion of the Cinergy merger, in respect of 275,900, 51,900, and 39,600 and 369,800 shares of Cinergy common stock subject to their stock options and 129,049, 9,948, and 11,145 and 49,782 shares of Cinergy restricted stock and phantom stock. Under the employment agreements (described below), in the event that an executive officer terminates employment during the two-year period following a change in control, such as completion of the Cinergy merger, each of the executive officer's stock options will remain exercisable until the shorter of three months following termination of employment or the remaining term of the stock option (determined without regard to the termination of employment).
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LTIP Performance Share Awards. Upon completion of the Cinergy merger, each performance share award granted under the Long-Term Incentive Compensation Program prior to the date of the merger agreement will be paid based on maximum performance levels without proration, which will result in a payout of 200% of the target award. In the absence of the Cinergy merger, the performance shares would be paid out based on Cinergy's actual level of achievement of the applicable performance measures, but without any assurance that the maximum achievement level would be reached. Upon completion of the Cinergy merger, each performance share award granted after the date of the merger agreement and prior to completion of the Cinergy merger, will be paid based on the greater of target performance or actual performance pro rated through completion of the Cinergy merger. Based on Cinergy performance share awards held by executive officers of Cinergy as of May 9, 2005 and assuming a closing date of June 1, 2006, upon completion of the mergers, Messrs. Rogers, Cyrus and Turner and the remaining executive officers, as a group, respectively, would be provided, as of completion of the Cinergy merger, 307,462, 57,782, and 44,110 and 210,724 shares of Cinergy common stock (or their cash equivalent) in connection with their performance share awards, plus accrued dividends. With respect to performance shares granted after the date of the merger agreement and prior to completion of the Cinergy merger, if, following completion of the Cinergy merger, during the period that the performance period was scheduled to occur, a participant in Cinergy's performance share program incurs an involuntary termination of employment without "cause" or a voluntary termination of employment for "good reason" (as each such term is defined in the applicable award agreement), such participant will receive a non-pro rated payment of such performance share awards based on target performance (reduced by the amount paid to such participant upon completion of the Cinergy merger with respect to such performance period).
Retention Bonuses. Prior to completion of the Cinergy merger, the merger agreement provides that Cinergy may provide for retention and/or project specific bonuses to employees, including executive officers, not in excess of $50 million in the aggregate, except that Cinergy must obtain the prior approval of Duke Energy if retention and/or project specific bonuses exceed $20 million in the aggregate during any twelve-month rolling period or if any such bonus exceeds $200,000 for any one individual. As of the date hereof, no such retention and/or project specific bonuses have been granted to any executive officers.
Employment Agreements. Except for two executive officers, one of whom has no employment agreement and one of whom has an employment agreement that provides for two years of additional salary and welfare benefits in the event the executive's employment is involuntarily terminated without "cause" or is voluntarily terminated for "good reason" (as each term is defined in the agreement), each of Cinergy's executive officers, including Messrs. Rogers, Cyrus and Turner, is party to an employment agreement with a term that renews annually such that the term is never less than two years (absent a notice of non-renewal). Under the terms of the employment agreement, in the event that, within two years following a change in control, such as completion of the Cinergy merger, the executive's employment is involuntarily terminated without "cause" or is voluntarily terminated for "good reason" (as each term is defined in the agreements), the executive officer will be entitled to (1) a lump sum payment equal to three times the sum of (a) the executive's annual base salary and (b) the greatest of (I) the executive's target bonus for the year in which the date of termination occurs, (II) the annual bonus earned by the executive for the year immediately preceding the year in which the date of termination occurs, (III) the annual bonus earned by the executive for the year immediately preceding the year in which the change in control occurs, or (IV) the annual bonus that would have been earned by the executive for the year in which the date of termination occurs; (2) a lump sum equal to any benefits under Cinergy's supplemental life insurance program as of the date of termination, calculated as if the executive was fully vested as of the date of termination; (3) three additional years of age and service credit for purposes of determining the executive's entire supplemental retirement benefit as of the date of termination, the ability to elect to receive the actuarial equivalent of their entire supplemental retirement benefit in a lump sum, and full vesting in the executive's accrued benefits as
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of the date of termination under the Cinergy retirement plans (i.e., the excess pension plan and supplemental executive retirement plan); (4) a lump sum payment, grossed up for taxes, equal to 36 months of premiums under Cinergy's life, disability, accident and health insurance benefit plans; (5) a lump sum payment of $15,000, grossed up for taxes, in order to cover tax counseling services from an agency selected by the executive; (6) a lump sum payment of $60,000, $50,000 or $35,000 (depending on the terms of the executive's agreement), grossed up for taxes, in lieu of any other rights with respect to the executive's automobile; (7) outplacement services and (8) a prorated annual bonus for the year of termination (unless the termination occurs in the same year as the change in control).
In the event that the executive would be subject to the excise tax under Section 4999 of the Code, the executive will receive an additional payment such that he or she is placed in the same after-tax position as if no excise tax had been imposed.
Unless waived by Cinergy, under the terms of the employment agreements, the executive officers are not permitted to sell or otherwise dispose of any shares of Cinergy's stock acquired pursuant to the exercise of a stock option, other than to pay the option exercise price or the related tax withholding obligation, until 90 days after termination of employment. In connection with the Cinergy merger and in consideration for the amendments to the employment agreements described below, Cinergy's board of directors has reserved the right to consider this provision such that following completion of the Cinergy merger and consistent with then-current Duke Energy policies and requirements, no such restriction might apply. Duke Energy's then-current minimum stock ownership policy, however, will continue to apply.
In connection with the signing of the merger agreement, Cinergy entered into amendments to the employment agreements with certain of its executive officers, including each of Messrs. Cyrus and Turner pursuant to which each of the executives has agreed to waive his or her right to resign for good reason and be entitled to severance benefits solely as a result of being required to relocate to Charlotte, North Carolina or, for some executives, Houston, Texas in connection with the Cinergy merger. In addition, the good reason definitions were amended to eliminate the executives' right to resign for good reason and collect severance due to changes in the executives' titles that may arise as a result of the Cinergy merger and to add a right to resign for good reason and collect severance pay in the event that Mr. Rogers fails to continue to serve as Chief Executive Officer of Duke Energy Holding following completion of the mergers (other than as a result of his death, disability, termination for "cause" or his voluntary resignation without "good reason").
Assuming that the Cinergy merger is completed on June 1, 2006 and each of the executive officers' employment is involuntarily terminated without "cause" or is voluntarily terminated for "good reason" immediately after completion, the estimated amount of additional cash severance (based upon current base salaries and maximum bonus opportunities and excluding supplemental retirement benefits and continued medical and welfare benefits) that would be payable to each of Messrs. Rogers, Cyrus and Turner, and the remaining executive officers, respectively, as a group, is approximately $11,438,892, $4,325,558, and $3,670,182 and $17,165,198, and the estimated lump sum actuarial equivalent of the enhanced supplemental retirement benefits payable as a result of the mergers to each of Messrs. Rogers, Cyrus and Turner, and the remaining executive officers, respectively, as a group is $7,042,514, $2,652,949, and $1,361,747 and $10,137,944. These estimates do not include excise tax gross-up payments which, depending on a variety of factors, Cinergy may be required to make.
Term Sheet with James E. Rogers. At the completion of the Cinergy merger, James E. Rogers will become President and Chief Executive Officer of Duke Energy Holding. In connection with adoption of the merger agreement, Duke Energy, Cinergy, Duke Energy Holding and Mr. Rogers executed a term sheet pursuant to which the parties agreed to amend Mr. Rogers' existing employment agreement, as described above, in certain respects to reflect the merger agreement and the transactions contemplated thereby. Mr. Rogers' employment agreement will be assumed by Duke Energy Holding
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effective upon the completion of the Cinergy merger and will provide for a three-year term of employment commencing upon completion of the mergers, which will renew automatically for subsequent one-year periods thereafter if neither Mr. Rogers nor Duke Energy Holding gives notice prior to or as of a specified date.
Under the term sheet, Mr. Rogers has agreed to waive his right to claim "good reason" for a termination as a result of his required relocation to Charlotte, North Carolina. In addition, Mr. Rogers' term sheet provides that the parties will negotiate in good faith to restructure the current compensation arrangements for Mr. Rogers to provide that he will be paid substantially in the form of equity compensation by which the current Duke Energy Chief Executive Officer is presently compensated, in any event on economic terms no less favorable than Mr. Rogers' existing compensation arrangements.
If Mr. Rogers' employment is involuntarily terminated without "cause" or Mr. Rogers resigns for "good reason" on or prior to the second anniversary of the completion of the Cinergy merger, or within two years following a change in control of Duke Energy Holding, then he will receive an amount no less than the economic value to which he would otherwise be entitled under his existing employment agreement had he terminated employment under such circumstances immediately following the completion of the Cinergy merger. If such termination of employment occurs at any time following the second anniversary of the completion of the Cinergy merger (other than within two years following a change in control of Duke Energy Holding), then he will receive an amount no less than the economic value to which he would otherwise be entitled under his existing employment agreement had he terminated employment immediately prior to the completion of the mergers (and, in either case, such economic value will be determined without regard to the form of his then-restructured compensation arrangements).
Under the term sheet, the parties have agreed to quantify the present value of Mr. Rogers' supplemental retirement benefits (i.e., SERP benefits) immediately prior to the completion of the Cinergy merger and provide for the deferral of such amount. The parties also agreed to reimburse Mr. Rogers for the costs he incurs to relocate to Charlotte, North Carolina and to remove the restriction on the sale of stock acquired upon the exercise of stock options, provided that Mr. Rogers will be subject to applicable stock ownership guidelines.
In addition, the following Cinergy officers have been proposed to serve in the following positions at Duke Energy Holding upon completion of the mergers: Lynn J. Good, currently executive vice president and chief financial officer at Cinergy, will lead the treasury function, reporting to David L Hauser; Marc E. Manly, currently executive vice president and chief legal officer at Cinergy, will lead the legal group, which will also include federal affairs, internal audit, ethics and compliance and the corporate secretary; and James L. Turner, currently president at Cinergy, will lead U.S. franchised electric and gas commercial functions, which will include the company's regulated utility entities and their shared legal, finance, and rates and regulatory functions (all selections are subject to board approval as described on page 105).
Annual Incentive Plan (Management Employees). Upon a change in control, such as completion of the Cinergy merger, each corporate target goal and individual goal under the Annual Incentive Plan for management employees will be deemed to have been fully satisfied at the maximum level and each participant who is employed by Cinergy at the time of the change in control will be entitled to receive an annual performance award in the same manner as though the maximum incentive level had been obtained for the full performance period. In the absence of the Cinergy merger, the Annual Incentive Plan amounts would be paid out based on the actual level of achievement of the applicable performance measures, but without any assurance that the maximum incentive levels would be reached. In the event that Cinergy has not adopted an annual program in the year in which a change in control occurs, then each participant who is employed by Cinergy will be entitled to receive an annual performance award in the same manner as though the prior year's annual program were in effect and
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the maximum incentive level had been obtained for the full performance period. Upon a change in control, the estimated amount of the annual incentive plan award (based upon the current base salaries and maximum bonus opportunities) that would be payable as a result of the mergers to each of Messrs. Rogers, Cyrus and Turner, and the remaining executive officers, respectively, as a group is $2,405,005, $676,229, and $567,000 and $2,437,718.
Directors' Plans. Following a change in control, such as completion of the Cinergy merger, each director who participates in the Retirement Plan for Directors will be entitled to receive a lump sum payment of the actuarial equivalent of the benefits accrued and remaining unpaid as of the date of the change in control. The lump sum equivalent will be calculated assuming the interest rate used by the Pension Benefit Guaranty Corporation in determining the value of immediate benefits as of the immediately preceding January 1. Following a change in control, such as completion of the Cinergy merger, each director's account under the Directors' Equity Compensation Plan, and, at the discretion of the compensation committee of the board of directors of Cinergy, amounts deferred by each director under the Directors' Deferred Compensation Plan or otherwise, become immediately payable.
Nonqualified Executive Plans. Upon a change in control, such as completion of the Cinergy merger, the compensation committee of the board of directors of Cinergy in its sole discretion may elect to accelerate the distribution of a participant's benefits under the Excess Pension Plan, Supplemental Executive Retirement Plan, 401(k) Excess Plan, Excess Profit Sharing Plan and Nonqualified Deferred Incentive Compensation Plan so that a participant's benefits will be distributed to the participant in a single lump sum payment no later than 30 days after the change in control. In addition, selected executive officers who participate in such plans have been provided the opportunity to elect to receive their benefits thereunder (and the supplemental retirement benefits provided under their employment agreements) in a lump sum in the event of termination of employment following the change in control.
Non-Union Employees' Pension Plan. During the three year period following a change in control, such as completion of the Cinergy merger, participants in the Non-Union Employees' Pension Plan, including the executive officers, are entitled to certain protections, including in the event that such plan is merged or consolidated with any other plan or a portion of its assets and liabilities are transferred to another plan, and the plan may not be amended in any manner that would adversely affect the computation or amount of, or the entitlement to, retirement benefits under the plan.
Service of Directors. As noted below, in the section entitled "The MergersContinuing Board and Management Positions," five of the 15 directors of Duke Energy Holding upon completion of the mergers will be individuals who were directors of Cinergy before completion of the mergers. Accordingly, it is expected that certain current members of the Cinergy board of directors will serve as directors of Duke Energy Holding upon completion of the merger.
Indemnification. The merger agreement includes provisions relating to indemnification and insurance for directors and officers of Cinergy. See "Indemnification and Insurance" beginning on page 106.
Former Executive Officers. Mr. William J. Grealis retired from Cinergy effective as of June 1, 2005. For a description of his retirement and consulting agreement, see Exhibit 10-ffff to Cinergy's Quarterly Report on Form 10-Q for the period ended March 31, 2005, filed with the SEC on May 10, 2005. In addition to the benefit to which Mr. Grealis is entitled pursuant to the terms of his retirement and consulting agreement, assuming a closing date of June 1, 2006, upon completion of the Cinergy merger Mr. Grealis would be provided 17,562 shares of Cinergy common stock (or their cash equivalent) in connection with the performances share awards he held as of May 9, 2005 pursuant to the terms of the performance share agreements. Mr. R. Foster Duncan resigned from Cinergy effective as of June 30, 2005. For a description of his separation agreement, see exhibit 10.1 to Cinergy's Current
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Report on Form 8-K filed with the SEC on July 8, 2005. Under his separation agreement, one-half of Mr. Duncan's supplemental retirement benefit, which is otherwise payable in installments over his (and his surviving spouse's) lifetime, will be paid to him in a lump sum of $2,244,874 on March 1, 2009, if the Cinergy merger is completed prior to that date.
Continuing Board and Management Positions
The Duke Energy Holding board of directors will consist initially of 10 directors designated by Duke Energy and 5 directors designated by Cinergy. Committee members and chairpersons will be chosen from among the members of the board of directors without regard to whether a director was formerly a director of Duke Energy or formerly a director of Cinergy. Under the merger agreement, prior to the first annual meeting of shareholders of Duke Energy Holding at which Directors are elected following the effective date of the mergers, the size of the board of Duke Energy Holding may not be increased or decreased without the affirmative vote of at least 80% of the entire board.
The merger agreement provides that Mr. Rogers will be the President and Chief Executive Officer of Duke Energy Holding and Mr. Anderson will be the Chairman of the board of directors of Duke Energy Holding. In addition to the duties of the Chairman of the board of directors attendant to such position set forth in the by-laws of Duke Energy Holding, Mr. Anderson will have management responsibilities for analyzing potential strategic alternatives regarding the separation of Duke Energy Holding's gas and electric business, and, if approved by Duke Energy Holding's board of directors, the implementation of such separation. Accordingly, the President or other chief officer of the gas business will report directly to the Chairman of the board of directors (as well as to the President and CEO). In his capacity as President and CEO, Mr. Rogers will have all duties customary to such position.
Mr. Anderson and Mr. Rogers are to jointly evaluate candidates to fill the 25 most senior officer positions at Duke Energy Holding, although in the event they cannot agree on a candidate, Mr. Rogers will select the individual to serve. These officer positions, however, are subject to the approval (as a slate) of the pro forma board of directors of Duke Energy Holding. Pursuant to this selection process, the following officers have been selected as of the date of this joint proxy statement/prospectus: Paul H. Barry, currently vice president, mergers and acquisitions at Duke Energy, will lead Duke Energy Americas, including trading and marketing, non-regulated generation, Duke Energy International and Cinergy Solutions; Julie A. Dill, currently vice president, shareholder and investor relations at Duke Energy, will lead investor relations and corporate communications; Fred J. Fowler, currently president and chief operating officer at Duke Energy, will lead the gas businessesDuke Energy Gas Transmission and Duke Energy Field Services; Lynn J. Good, currently executive vice president and chief financial officer at Cinergy, will lead the treasury function, reporting to David L. Hauser; David L. Hauser, currently group vice president and chief financial officer at Duke Energy, will lead the financial function, which will include the controller's office, treasury, tax, risk management and insurance; Marc E. Manly, currently executive vice president and chief legal officer at Cinergy, will lead the legal group, which will also include federal affairs, internal audit, ethics and compliance and the corporate secretary; Jim W. Mogg, currently group vice president and chief development officer at Duke Energy, will become advisor to the chairman with Crescent Resources reporting to him; Thomas C. O'Connor, currently group vice president, corporate strategy at Duke Energy, will lead U.S. franchised electric and gas operations which will include regulated fossil/hydro generation, fossil/hydro fleet services, power and gas delivery, customer service call centers, engineering and construction, portfolio optimization and shared services; Christopher C. Rolfe, currently vice president, human resources at Duke Energy, will lead the human resources function, including human resources and labor policy, diversity, management and employee development, and compensation and benefits; Ruth G. Shaw, currently president and chief executive officer at Duke Power, will provide executive leadership for nuclear strategy and operations, environmental policy and other public policy issues; B. Keith Trent, currently group vice president, general counsel and secretary at Duke Energy, will lead
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corporate development, including corporate strategy, and mergers and acquisitions; James L. Turner, currently president at Cinergy, will lead U.S. franchised electric and gas commercial functions, which will include the company's regulated utility entities and their shared legal, finance, and rates and regulatory functions; and Steven K. Young, currently vice president and controller at Duke Energy, will lead the controller's function, reporting to David L. Hauser (subject to board approval as described above).
As of the date of this joint proxy statement/prospectus, neither Duke Energy nor Cinergy has determined which directors will be appointed to the Duke Energy Holding board of directors.
Indemnification and Insurance
Each of the parties to the merger agreement agreed that, to the fullest extent permitted under applicable law, all rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the consummation of the Cinergy merger existing as of the date of the merger agreement in favor of the current or former directors, officers, employees or fiduciaries under benefit plans currently indemnified by Cinergy and its subsidiaries or Duke Energy and its subsidiaries, as the case may be, as provided in their respective certificate or articles of incorporation, by-laws (or comparable organizational documents) or other agreements providing indemnification will survive the mergers and will continue in full force and effect in accordance with their terms. In addition, from and after the consummation of the Cinergy merger, directors, officers, employees and fiduciaries under benefit plans currently indemnified of Cinergy or Duke Energy or their respective subsidiaries who become directors, officers, employees or fiduciaries under benefit plans of Duke Energy Holding will be entitled to the indemnity rights and protections afforded to directors, officers, employees and fiduciaries under benefit plans of Duke Energy Holding.
Further, the merger agreement provides that for six years after the consummation of the mergers, Duke Energy Holding will maintain in effect the directors' and officers' liability (and fiduciary) insurance policies currently maintained by Cinergy and Duke Energy covering acts or omissions occurring on or prior to the consummation of the mergers with respect to those persons who are currently covered by Cinergy's and Duke Energy's respective directors' and officers' liability (and fiduciary) insurance policies on terms with respect to such coverage and in amounts no less favorable than those set forth in the relevant policy in effect on the date of the merger agreement. If such insurance coverage cannot be maintained, Duke Energy Holding will maintain the most advantageous policies of directors' and officers' insurance otherwise obtainable. In addition, each of Duke Energy and Cinergy may purchase a six-year "tail" prepaid policy prior to the consummation of the mergers on terms and conditions no less advantageous to the parties entitled to indemnification than the existing directors' and officers' liability (and fiduciary) insurance maintained by Duke Energy or Cinergy, as the case may be, covering without limitation the transactions contemplated by the merger agreement, including the mergers. If Duke Energy or Cinergy purchases a "tail" prepaid policy prior to the consummation of the mergers, Duke Energy Holding will, and will cause Duke Energy and Cinergy, as the case may be, after the consummation of the mergers, to maintain such policy in full force and effect, for its full term, and to continue to honor their respective obligations under such policy.
The merger agreement also provides that from and after the consummation of the Cinergy merger, each of Duke Energy Holding and the corporation surviving the Cinergy merger will jointly and severally indemnify and hold harmless each present director and officer of Cinergy or any of its subsidiaries (in each case, for acts or failures to act in such capacity), determined as of the date of the merger agreement, and any person who becomes such a director or officer between the date of the merger agreement and the consummation of the Cinergy merger, against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or prior to the
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consummation of the Cinergy merger, whether asserted or claimed prior to, at or after the consummation of the Cinergy merger (including any matters arising in connection with the transactions contemplated by the merger agreement), to the fullest extent permitted by applicable law (and Duke Energy Holding and the surviving company in the Cinergy merger will also advance expenses as incurred to the fullest extent permitted under applicable law, provided that if required by applicable law the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification).
The merger agreement further provides that from and after the consummation of the Duke Energy merger, each of Duke Energy Holding and Duke Power, as the successor to the corporation surviving the Duke Energy merger, will jointly and severally indemnify and hold harmless each present director and officer of Duke Energy or any of its subsidiaries (in each case, for acts or failures to act in such capacity), determined as of the date of the merger agreement, and any person who becomes such director or officer between the date of the merger agreement and the consummation of the Duke Energy merger, against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or prior to the consummation of the Duke Energy merger, whether asserted or claimed prior to, at or after the consummation of the Duke Energy merger (including any matters arising in connection with the transactions contemplated by the merger agreement), to the fullest extent permitted by applicable law (and Duke Energy Holding or Duke Power will also advance expenses as incurred to the fullest extent permitted under applicable law, provided that if required by applicable law the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification).
The obligations of Duke Energy Holding, the surviving company in the Cinergy merger and Duke Power will not be terminated or modified by such parties in a manner so as to adversely affect any of the persons entitled to indemnification without the consent of such affected persons. If Duke Energy Holding, the surviving company in the Cinergy merger or Duke Power or any of their respective successors or assigns (i) consolidates with or merges into any other corporation or entity and is not to be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any individual, corporation or other entity, then, and in each such case, proper provisions will be made so that the successors and assigns of Duke Energy Holding, the surviving company in the Cinergy merger or Duke Power Company LLC, as the case may be, assumes all of the foregoing indemnification obligations.
Listing of Duke Energy Holding Common Stock
It is a condition to the completion of the mergers that the Duke Energy Holding common stock issuable to Duke Energy and Cinergy shareholders pursuant to the merger agreement be approved for listing on the NYSE, subject to official notice of issuance.
Deregistration and Delisting of Duke Energy and Cinergy Common Stock
If the mergers are completed, Duke Energy and Cinergy will delist their respective common stock from the NYSE and may deregister their respective common stock under the Exchange Act. The shareholders of each of Duke Energy and Cinergy will become shareholders of Duke Energy Holding and their rights as shareholders will be governed by Delaware law and by Duke Energy Holding's certificate of incorporation and by-laws. See "Comparison of Shareholder Rights" beginning on page 161.
Duke Energy and Cinergy may cease filing periodic reports pursuant to the Exchange Act with the SEC following deregistration of their common stock, subject to securities laws requirements. It is currently anticipated, however, that Duke Power, Duke Capital, Cinergy and Cinergy's utility
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subsidiaries will continue to engage in selected financing activities and likely will continue to issue securities registered pursuant to the Securities Act, and thus will continue to file periodic reports pursuant to the Exchange Act for some period of time, as required by the Exchange Act.
Dividends
In accordance with the merger agreement, on June 29, 2005, Duke Energy increased its regular quarterly dividend to $0.31 per share of common stock paid on September 16, 2005. Accordingly, Duke Energy's current dividend is $1.24 per share of common stock on an annual basis. The most recent quarterly dividend declared by Cinergy was $0.48 per share paid on November 15, 2005. Cinergy's current dividend is $1.92 per share of common stock on an annual basis.
The merger agreement provides that Cinergy may continue to pay its regular quarterly cash dividend, not to exceed $0.48 per share, and does not currently anticipate making any changes to its dividend policies prior to the consummation of the mergers, and pursuant to the merger agreement is not permitted to increase its dividend absent the consent of Duke Energy.
The boards of directors of Duke Energy and Cinergy will continue to evaluate their respective dividend policies in light of business, financial and regulatory considerations.
After the mergers, Duke Energy Holding expects to pay dividends in an amount equal to the annual dividends of Cinergy in effect immediately prior to the consummation of the mergers. The payment of dividends by Duke Energy Holding, however, will be subject to approval and declaration by the Duke Energy Holding board of directors and will depend on a variety of factors, including business, financial and regulatory considerations and the amount of dividends paid to it by its subsidiaries.
Material U.S. Federal Income Tax Consequences of the Duke Energy Reorganization and the Cinergy Merger
The following is a discussion of the material U.S. federal income tax consequences of the Duke Energy reorganization and the Cinergy merger to U.S. persons who hold Duke Energy common stock or Cinergy common stock. The discussion which follows is the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to Duke Energy, insofar as it sets forth United States federal income tax consequences of the Duke Energy reorganization to shareholders of Duke Energy, and is the opinion of Wachtell, Lipton, Rosen & Katz, counsel to Cinergy, insofar as it sets forth United States federal income tax consequences of the Cinergy merger to shareholders of Cinergy. The discussion which follows is based on the Code, Treasury regulations issued under the Code, and judicial and administrative interpretations thereof, all as in effect as of the date of this joint proxy statement/prospectus, all of which are subject to change at any time, possibly with retroactive effect. The discussion applies only to shareholders who hold Duke Energy common stock or Cinergy common stock as a capital asset within the meaning of Section 1221 of the Code. The discussion assumes that the Duke Energy reorganization and the Cinergy merger will be consummated in accordance with the merger agreement and as further described in this joint proxy statement/prospectus. This discussion is not a complete description of all of the consequences of the Duke Energy reorganization and the Cinergy merger, and, in particular, may not address U.S. federal income tax considerations applicable to Duke Energy shareholders and Cinergy shareholders subject to special treatment under U.S. federal income tax law, including, without limitation:
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In addition, tax consequences under state, local and foreign laws or under federal laws other than federal income tax laws are not addressed in this joint proxy statement/prospectus.
Duke Energy shareholders and Cinergy shareholders are strongly urged to consult with their own tax advisors regarding the tax consequences of the Duke Energy reorganization and the Cinergy merger to them, as applicable, including the effects of U.S. federal, state, local, foreign and other tax laws.
U.S. Federal Income Tax Consequences to Duke Energy Shareholders
It is a condition to the obligation of Duke Energy to effect the Duke Energy reorganization that Duke Energy receive a written opinion from Skadden, Arps, Slate, Meagher & Flom LLP, counsel to Duke Energy, dated as of the closing date, to the effect that the Duke Energy reorganization will qualify as a reorganization under Section 368(a) of the Code and that the Cinergy merger will qualify as a reorganization under Section 368(a) of the Code. The condition relating to such opinion is not waivable by Duke Energy after receipt of the Duke Energy shareholder approval unless further shareholder approval is obtained with appropriate disclosure. The opinion will rely on assumptions, representations and covenants, which may include assumptions regarding the absence of changes in existing facts and law and the completion of the Duke Energy reorganization and the Cinergy merger in the manner contemplated by the merger agreement and representations contained in representation letters of officers of Duke Energy, Cinergy, Duke Energy Holding, Deer Acquisition Corp. and Cougar Acquisition Corp. If any of those representations, covenants or assumptions is inaccurate, counsel may be unable to render the required opinion and the tax consequences of the Duke Energy reorganization could differ from those discussed here. An opinion of counsel represents counsel's best legal judgment and is not binding on the IRS or any court, nor does it preclude the IRS from adopting a contrary position. No ruling has been or will be sought from the IRS on the U.S. federal income tax consequences of the Duke Energy reorganization or the Cinergy merger.
Assuming that the Duke Energy reorganization qualifies as a reorganization within the meaning of Section 368(a) of the Code, for U.S. federal income tax purposes, in general:
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Duke Energy shareholders who hold their Duke Energy common stock with differing bases or holding periods should consult their tax advisors with regard to identifying the bases or holding periods of the particular shares of Duke Energy Holding common stock received in the Duke Energy reorganization.
U.S. Federal Income Tax Consequences to Cinergy Shareholders
It is a condition to the obligation of Cinergy to complete the Cinergy merger that Cinergy receive a written opinion from Wachtell, Lipton, Rosen & Katz, counsel to Cinergy, dated as of the closing date, to the effect that the Cinergy merger will qualify as a reorganization under Section 368(a) of the Code. The condition relating to that opinion is not waivable by Cinergy after receipt of the Cinergy shareholder approval unless further shareholder approval is obtained with appropriate disclosure. The opinion will rely on assumptions, representations and covenants, which may include assumptions regarding the absence of changes in existing facts and law and the completion of the Duke Energy reorganization and the Cinergy merger in the manner contemplated by the merger agreement and representations contained in representation letters of officers of Duke Energy, Cinergy, Duke Energy Holding, Deer Acquisition Corp. and Cougar Acquisition Corp. If any of those representations, covenants or assumptions is inaccurate, counsel may be unable to render the required opinion and the tax consequences of the Cinergy merger could differ from those discussed here. An opinion of counsel represents counsel's best legal judgment and is not binding on the IRS or any court, nor does it preclude the IRS from adopting a contrary position. No ruling has been or will be sought from the IRS on the U.S. federal income tax consequences of the Cinergy merger.
Assuming that the Cinergy merger qualifies as a reorganization within the meaning of Section 368(a) of the Code, for U.S. federal income tax purposes, in general:
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of the cash received instead of fractional shares and the shareholder's tax basis allocable to such fractional shares. Any such capital gain or loss will be a long-term capital gain or loss if the holding period of the Cinergy common stock exchanged for the fractional shares of Duke Energy Holding common stock is more than one year at the time of the Cinergy merger.
Cinergy shareholders who hold their Cinergy common stock with differing bases or holding periods should consult their tax advisors with regard to identifying the bases or holding periods of the particular shares of Duke Energy Holding common stock received in the Cinergy merger.
The discussion of material U.S. federal income tax consequences set forth above is not intended to be a complete analysis or description of all potential United States federal income tax consequences of the Duke Energy reorganization and the Cinergy merger. Moreover, the discussion set forth above does not address tax consequences that may vary with, or are contingent upon, individual circumstances. In addition, the discussion set forth above does not address any non-income tax or any foreign, state or local tax consequences of the Duke Energy reorganization or the Cinergy merger and does not address the tax consequences of any transaction other than the Duke Energy reorganization and the Cinergy merger.
Accounting Treatment
The Cinergy merger will be accounted for as a purchase by Duke Energy Holding under accounting principles generally accepted in the United States of America. Under the purchase method of accounting, the assets and liabilities of Cinergy will be recorded, as of completion of the Cinergy merger, at their respective fair values and added to those of Duke Energy Holding. The reported financial condition and results of operations of Duke Energy Holding issued after completion of the Cinergy merger will reflect Cinergy's balances and results after completion of the Cinergy merger, but will not be restated retroactively to reflect the historical financial position or results of operations of Cinergy. Following completion of the Cinergy merger, the earnings of the combined company will reflect purchase accounting adjustments, including increased amortization and depreciation expense for acquired assets.
Dissenters' or Appraisal Rights
Duke Energy
The merger agreement provides, and North Carolina law requires, that Duke Energy shareholders will have dissenters' rights in connection with the Duke Energy merger. Therefore, any Duke Energy shareholder may elect to be paid for such shareholder's shares in accordance with the procedures set forth in the NCBCA.
The following is a summary of the material terms of the statutory procedures to be followed by holders of Duke Energy common stock in order to dissent from the Duke Energy merger and perfect dissenters' rights under the NCBCA. The following discussion is not a complete description of the law relating to dissenters' rights available under North Carolina law and is qualified in its entirety by the full text of Article 13 of the NCBCA, which is reprinted in its entirety as Annex E to this joint proxy statement/prospectus. If you wish to exercise dissenters' rights, you should review carefully the following discussion and Annex E; Duke Energy urges you to consult a lawyer before electing or attempting to exercise these rights.
If the Duke Energy merger is completed, and you are a shareholder of record of Duke Energy who objects to the mergers and who fully complies with Article 13 of the NCBCA, you will be entitled to demand and receive payment in cash of an amount equal to the fair value of all, but not less than all, of your shares of Duke Energy common stock. The amount you would receive in connection with the exercise of statutory dissenters' rights would be the fair value of your common stock immediately before the Duke Energy merger completion date, excluding any appreciation or depreciation in anticipation of the Duke Energy merger unless exclusion would be inequitable.
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Under Article 13, all shareholders entitled to dissenters' rights in the Duke Energy merger must be notified in the meeting notice relating to the Duke Energy merger that shareholders are entitled to assert dissenters' rights. This joint proxy statement/prospectus constitutes that notice.
If you are a Duke Energy shareholder and desire to dissent and receive cash payment of the fair value of your Duke Energy common stock, you must:
Except as described in the following sentence, the notice of intent to demand payment for your Duke Energy shares must be executed by the holder of record of shares of Duke Energy common stock as to which dissenters' rights are to be exercised. A beneficial owner who is not the holder of record may assert dissenters' rights only if it (i) submits to Duke Energy the record holder's consent to the dissent not later than the time the beneficial holder asserts dissenters' rights and (ii) dissents with respect to all shares of Duke Energy common stock of which such person is the beneficial owner. A record owner, such as a broker or bank, who holds shares of Duke Energy common stock as a nominee for others, may exercise dissenters' rights with respect to the shares held for all or less than all beneficial owners of shares as to which it is the record owner, provided the record owner dissents with respect to all shares of Duke Energy common stock beneficially owned by any one person. In this case, the demand notice submitted by the broker or bank, as record owner, must set forth the name and address of the beneficial owner on whose behalf the record holder asserts dissenters' rights.
If the Duke Energy merger is approved by Duke Energy's shareholders, Duke Energy will be required to mail by registered or certified mail, return receipt requested, a written dissenters' notice to all Duke Energy shareholders who have satisfied the above requirements. The dissenters' notice must be sent no later than 10 days after shareholder approval of the mergers is obtained, and it must:
A Duke Energy shareholder who receives a dissenters' notice must demand payment and deposit the shareholder's Duke Energy share certificates in accordance with the terms of the dissenters' notice. A Duke Energy shareholder who demands payment and deposits share certificates retains all other rights of a Duke Energy shareholder until those rights are canceled or modified by the effectiveness of the Duke Energy merger. A Duke Energy shareholder who does not demand payment or deposit its Duke Energy share certificates where required, each by the date set forth in the dissenters' notice, is not entitled to payment for its Duke Energy shares under the NCBCA.
As soon as the Duke Energy merger is completed or within 30 days after receipt of a payment demand from a dissenting Duke Energy shareholder who has complied with the statutory requirements, whichever is later, Duke Energy will pay the dissenter the amount that Duke Energy estimates to be the fair value of the dissenting shareholder's Duke Energy shares, plus accrued interest. Duke Energy's payment will be accompanied by:
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Within 30 days after Duke Energy pays the estimated fair value of the Duke Energy shares of a dissenting shareholder, or within 30 days of Duke Energy failing to timely act in accordance with the NCBCA, the dissenting Duke Energy shareholder may notify Duke Energy that he or she does not accept the estimate of fair value of the Duke Energy shares and interest due on that fair value and that the Duke Energy shareholder demands payment in the amount of the Duke Energy shareholder's own estimate of the fair value of the Duke Energy shares and interest due. If a dissenting shareholder does not demand payment of the Duke Energy shareholder's own estimate of the fair value of the Duke Energy shares and the interest due within the 30-day period described above, the Duke Energy shareholder will be deemed to have withdrawn his dissent and demand for payment.
If, within 60 days of Duke Energy's payment or a dissenting Duke Energy shareholder's demand for payment of a different amount, whichever is earlier, the payment amount has not been settled, the dissenting Duke Energy shareholder may file an action in the Superior Court Division of the North Carolina General Court of Justice requesting that the fair value of the dissenting shareholder's Duke Energy shares and the accrued interest be determined. The dissenting Duke Energy shareholder will not have the right to a jury trial. The court will have discretion to make all dissenting Duke Energy shareholders whose demands remain unsettled parties to the proceeding.
If you do not follow precisely the steps required by the NCBCA for perfecting dissenters' rights, you may lose those rights. In view of the complexity of these provisions and the requirement that they be strictly complied with, if you hold Duke Energy common stock and are considering dissenting from the approval of the merger agreement and the mergers and exercising your dissenters' rights under the NCBCA, you should consult a lawyer promptly.
The NCBCA provides that the exercise of dissenters' rights will be the exclusive method for a Duke Energy shareholder to challenge the mergers in the absence of a showing that the mergers are either unlawful or fraudulent as to that shareholder.
All written communications from shareholders with respect to the exercise of dissenters' rights should be mailed to:
Duke
Energy Corporation
526 South Church Street
Charlotte, North Carolina 28202
Attention: B. Keith Trent, Group Vice PresidentGeneral Counsel and Secretary
Duke Energy recommends that such communications be sent by registered or certified mail, return receipt requested.
Voting against, abstaining from voting or failing to vote on the proposal to approve the merger agreement is not sufficient to perfect your dissenters' rights and receive the fair value of your Duke Energy shares, plus accrued interest. You must also comply with all other conditions set forth in Article 13 of the NCBCA, including the conditions relating to the separate written notice of intent to dissent to the Duke Energy merger, the separate written demand for payment of the fair value of your shares of Duke Energy common stock, the deposit of your Duke Energy stock certificates, and the separate notification and demand for payment in excess of an initial payment made by Duke Energy.
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Cinergy
Under the Delaware General Corporation Law, Cinergy shareholders will not have any appraisal or dissenters' rights as a result of the mergers.
Principal Corporate Offices
After completion of the mergers, Duke Energy Holding will maintain its headquarters and principal corporate offices in Charlotte, North Carolina. Each of Duke Power, The Cincinnati Gas & Electric Company, PSI Energy, Inc. and The Union Light, Heat and Power Company will maintain its utility headquarters in its present location.
Workforce and Employee Benefit Matters
Continuation of Agreements
After the completion of the Cinergy merger, Duke Energy Holding will, or as applicable, will cause its subsidiaries to, honor all obligations of the respective employer under any employment contracts, agreements, collective bargaining agreements, plans (as they may be amended in accordance with the merger agreement) and commitments of Duke Energy and Cinergy and their respective subsidiaries existing as of the date of the merger agreement (or as established or amended in accordance with the merger agreement) that apply to any current or former employee, or current or former director of Cinergy or Duke Energy or any of their subsidiaries, provided that neither Duke Energy Holding nor its subsidiaries will be prevented from enforcing such contracts, agreements, collective bargaining agreements, plans (as they may be amended in accordance with the merger agreement) or commitments in accordance with their terms, including any reserved right to amend, modify, suspend, revoke or terminate any such contract, agreement, collective bargaining agreement or commitment. Until the first anniversary of the mergers, Duke Energy Holding will provide, or will cause to be provided, to each individual who is an employee of Cinergy or its subsidiaries (exclusive of any individual who is employed subject to a collective bargaining agreement) immediately prior to the mergers such compensation and benefits from time to time that are no less favorable, in the aggregate, than the compensation and benefits provided to those employees immediately prior to the mergers.
Workforce Reductions
Subject to obligations under applicable law and applicable collective bargaining agreements, Duke Energy Holding's current intention is that:
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to the completion of the mergers was with Cinergy and its subsidiaries or with Duke Energy and its subsidiaries.
Further, until the later of (1) the first anniversary of the completion of the Cinergy merger and (2) December 31, 2007, individuals who were employees of Cinergy immediately before the completion of the Cinergy merger will be eligible to receive severance benefits (exclusive of severance benefits provided pursuant to individual agreements or pursuant to arrangements covering only select highly compensated or management employees) in amounts and on terms and conditions no less favorable than the more favorable of (x) those provided to Cinergy employees pursuant to policies in effect immediately prior to the completion of the Cinergy merger or (y) those provided to similarly situated employees of Duke Energy and its subsidiaries immediately prior to the completion of the mergers pursuant to policies (other than DENA Asset Partners, L.P. 2003-2005 Severance Benefits Plan) as in effect from time to time during such time period.
Employee Benefit Plans
Subject to applicable law and applicable collective bargaining agreements, Duke Energy Holding and its subsidiaries will give credit under all employee benefit plans, programs and arrangements to employees for all service prior to the mergers with Duke Energy or Cinergy or their respective subsidiaries, or any predecessor employer (but in each case only to the extent that such credit was given by Duke Energy or Cinergy or any of their respective subsidiaries) for all purposes for which such service was taken into account or recognized by Duke Energy or Cinergy or their respective subsidiaries. Credit will not be given if and to the extent crediting such service would result in duplication of benefits, including for benefit accrual purposes under defined benefit pension plans.
Effect on Awards Outstanding Under Stock Plans
Duke Energy
At the time of the mergers, each outstanding stock option granted under the Duke Energy stock option plans, whether vested or unvested, will be converted into an option to acquire, on the same terms and conditions as were applicable under such Duke Energy stock option (after taking into account the transactions contemplated by the merger agreement), the same number of shares of Duke Energy Holding common stock at the same price per share. Likewise, at the time of the mergers, each restricted share of Duke Energy common stock will be converted into the same number of restricted shares of Duke Energy Holding common stock on the same terms and conditions as were applicable to such share of Duke Energy common stock (after taking into account the transactions contemplated by the merger agreement), and all outstanding Duke Energy equity or equity-based awards other than such Duke Energy stock options and restricted stock, whether vested or unvested, as of immediately prior to the mergers will be converted into an equity or equity-based award in respect of the same number of shares of Duke Energy Holding common stock on the same terms and conditions as were applicable to such Duke Energy equity or equity-based award (after taking into account the transactions contemplated by the merger agreement).
Cinergy
At the time of the mergers, each outstanding stock option granted under the Cinergy stock option plans, whether vested or unvested, will be converted into an option to acquire, on the same terms and conditions as were applicable under such Cinergy stock option, including vesting (taking into account any acceleration of vesting that may occur as a result of the transactions contemplated by the merger agreement), a number of shares of Duke Energy Holding common stock equal to the number of shares of Cinergy common stock subject to the option immediately before the Cinergy merger multiplied by 1.56 (rounded to the nearest whole share) at a price per share of Duke Energy Holding common stock equal to the price per share under such Cinergy option divided by 1.56 (rounded to the nearest cent).
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Likewise, at the time of the mergers, each restricted share of Cinergy common stock will be converted into a number of restricted shares of Duke Energy Holding common stock equal to the number of restricted shares of Cinergy common stock multiplied by 1.56, on the same terms and conditions as were applicable to such share of Cinergy common stock, including vesting (taking into account any acceleration of vesting that may occur as a result of the transactions contemplated by the merger agreement), and all outstanding Cinergy equity or equity-based awards other than such Cinergy stock options and restricted stock, whether vested or unvested, as of immediately prior to the Cinergy merger will be converted into an equity or equity-based award in respect of a number of shares of Duke Energy Holding common stock equal to the number of Cinergy common stock represented by such award multiplied by 1.56, on the same terms and conditions as were applicable to such Cinergy equity or equity-based award, including vesting (taking into account any acceleration of vesting that may occur as a result of the transactions contemplated by the merger agreement).
General
Except as otherwise contemplated by the merger agreement and except to the extent required under the respective terms of the Cinergy and Duke Energy stock options, all restrictions or limitations on transfer and vesting with respect to such stock options awarded under the Cinergy and Duke Energy equity incentive compensation plans or any other plan, program or arrangement of Cinergy, Duke Energy or any of their subsidiaries, to the extent that such restrictions or limitations shall not have already lapsed, will remain in full force and effect with respect to such stock options after giving effect to the mergers and the assumption by Duke Energy Holding as described above.
Resale of Duke Energy Holding Common Stock
Duke Energy Holding common stock issued in the mergers will not be subject to any restrictions on transfer arising under the Securities Act of 1933, as amended (the "Securities Act"), except for shares issued to any Duke Energy or Cinergy shareholder who may be deemed an "affiliate" of Duke Energy or Cinergy under the Securities Act at the time of the Duke Energy or Cinergy special meetings, respectively. Such shares may generally only be resold by them in accordance with Rule 145 under the Securities Act. Duke Energy Holding expects that these shareholders will agree not to transfer any Duke Energy Holding common stock received in the mergers except pursuant to an effective registration statement under the Securities Act or in a transaction not required to be registered under the Securities Act. The merger agreement requires each of Duke Energy and Cinergy to use reasonable best efforts to cause its shareholders who are, or are expected to be, affiliates to enter into these agreements as of the closing date. This joint proxy statement/prospectus does not cover resales of Duke Energy Holding common stock received by any person upon completion of the mergers, and no person is authorized to make any use of this joint proxy statement/prospectus in connection with any resale.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS, DIRECTORS AND EXECUTIVE OFFICERS
Security Ownership of Certain Beneficial Owners and Management of Duke Energy
The table below provides the number of shares of Duke Energy common stock beneficially owned by current directors, nominees and certain executive officers of Duke Energy, as of [May 20, 2005], as well as the aggregate number of shares of Duke Energy common stock beneficially owned by such individuals together with the other executive officers as a group. This information has been furnished by each individual. Each individual has sole voting and investment power, unless otherwise indicated. All directors, nominees and executive officers as a group beneficially own less than 1% of the outstanding shares of Duke Energy common stock.
Name of Beneficial Owner |
Shares of Common Stock Beneficially Owned1 |
% of Class |
||
---|---|---|---|---|
R. Agnelli | 214 | * | ||
P.M. Anderson | 753,421 | * | ||
W. Barnet, III | ||||
G.A. Bernhardt, Sr. | 22,682 | * | ||
W.T. Esrey | 82,476 | * | ||
F.J. Fowler | 1,092,611 | * | ||
A.M. Gray | 61,954 | * | ||
James H. Hance, Jr. | 20,000 | * | ||
D.L. Hauser | 195,510 | * | ||
D.R. Hendrix(2) | 301,021 | * | ||
A.M. Lennon | 24,592 | * | ||
J.G. Martin | 22,850 | * | ||
J.W. Mogg | 433,155 | * | ||
M.E.J. Phelps | 47,358 | * | ||
J.T. Rhodes | 17,721 | * | ||
R.G. Shaw | 558,606 | * | ||
Directors and executive officers as a group (21 persons) | 4,570,340 | * |
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Security Ownership of Certain Beneficial Owners and Management of Cinergy
The table below provides the number of shares of Cinergy common stock beneficially owned by current directors, nominees and certain executive officers of Cinergy, as of [ ], as well as the aggregate number of shares of Cinergy common stock beneficially owned by such individuals together with the other executive officers as a group. This information has been furnished by each individual. Each individual has sole voting and investment power, unless otherwise indicated. All directors, nominees and executive officers as a group beneficially own approximately 1.71% of the outstanding shares of Cinergy common stock.
Name of Beneficial Owner |
Shares of Common Stock Beneficially Owned1 |
% of Class |
|||
---|---|---|---|---|---|
Michael G. Browning | 124,463 | * | |||
Phillip R. Cox | 15,743 | * | |||
Michael J. Cyrus | 251,595 | * | |||
R. Foster Duncan(2) | 251,531 | * | |||
William J. Grealis(3) | 470,792 | * | |||
George C. Juilfs | 48,939 | * | |||
Thomas E. Petry | 32,201 | * | |||
James E. Rogers | 1,656,869 | * | |||
Mary L. Schapiro | 26,566 | * | |||
John J. Schiff, Jr. | 64,711 | * | |||
Philip R. Sharp | 8,344 | * | |||
Dudley S. Taft | 44,235 | * | |||
James L. Turner | 160,064 | * | |||
All directors and executive officers as a group (21 persons) |
3,396,127 | 1.71 | % |
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To complete the mergers, Cinergy and Duke Energy must obtain approvals or consents from, or make filings with a number of United States federal and state public utility, antitrust and other regulatory authorities as well as authorities in various foreign jurisdictions. The material United States and Canadian federal and state approvals, consents and filings are described below. Cinergy and Duke Energy are not currently aware of any other material governmental consents, approvals or filings that are required prior to the parties' consummation of the mergers other than those described below. If additional approvals, consents and filings are required to complete the mergers, Cinergy and Duke Energy contemplate that such consents, approvals and filings will be sought or made.
Cinergy and Duke Energy will seek to consummate the mergers by mid-2006. Although Cinergy and Duke Energy believe that they will receive the required consents and approvals described below to complete the mergers, there can be no assurance as to the timing of these consents and approvals or as to Cinergy's and Duke Energy's ultimate ability to obtain such consents or approvals (or any additional consents or approvals which may otherwise become necessary) or that such consents or approvals will be obtained on terms and subject to conditions satisfactory to Duke Energy, Cinergy and Duke Energy Holding.
Hart-Scott-Rodino Act
The mergers are subject to the requirements of the HSR Act, and the rules and regulations promulgated thereunder, which provide that certain acquisition transactions may not be consummated until required information has been furnished to the Antitrust Division of the Department of Justice and the FTC and until certain waiting periods have been terminated or have expired. Duke Energy and Cinergy provided the required information on July 12, 2005. On August 11, 2005, at the end of the initial investigation period, the Antitrust Division and the FTC granted early termination of the HSR Act waiting period. The termination of the HSR Act waiting period does not preclude the Antitrust Division or the FTC from challenging the mergers on antitrust grounds and seeking to preliminarily or permanently enjoin the proposed mergers. Neither Duke Energy nor Cinergy believes that the mergers will violate federal antitrust laws, but there can be no guarantee that the Antitrust Division or the FTC will not take a different position. If the mergers are not consummated within 12 months after the termination of the initial HSR Act waiting period, Duke Energy and Cinergy will be required to submit new information to the Antitrust Division and the FTC, and a new HSR Act waiting period will have to expire or be earlier terminated before the mergers could be consummated.
Federal Power Act
Section 203 of the Federal Power Act, or FPA, provides that no public utility may sell or otherwise dispose of its jurisdictional facilities, directly or indirectly merge or consolidate its jurisdictional facilities with those of any other person, or acquire any security of any other public utility without first having obtained authorization from the FERC. Because Cinergy and Duke Energy own "jurisdictional facilities" under the Federal Power Act, the approval of the FERC under Section 203 is required before Cinergy and Duke Energy may consummate the mergers. Section 203 provides that the FERC is required to grant its approval if the mergers are found to be "consistent with the public interest."
The FERC stated in its 1996 Merger Policy Statement that, in analyzing a merger under Section 203, it will evaluate the following criteria:
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The FERC will review these factors to determine whether the mergers are consistent with the public interest. If the FERC finds that the mergers would adversely affect competition, wholesale rates, or regulation, it may, pursuant to the FPA, deny approval of the mergers or impose remedial conditions intended to mitigate such effects. In the event the FERC chooses to impose remedial conditions, Cinergy and Duke Energy would then review such conditions and decide whether to accept them. Based on FERC precedent, Cinergy and Duke Energy believe that the mergers should satisfy the FERC's merger guidelines and that any mitigation conditions imposed by the FERC would not have a material adverse effect on the anticipated benefits of the transactions. However, there can be no guarantee that the FERC will agree with the parties' characterization of FERC precedent or that the FERC will not change its analytic framework in a manner adverse to the parties. The companies and their public utility subsidiaries filed their application under Section 203 on July 12, 2005. The applicants have received a number of interventions and protests to their Section 203 application and have filed a response to the protests. While FERC's disposition of the Section 203 application cannot be guaranteed, Duke Energy and Cinergy believe that the protests to Section 203 application are without merit.
Section 205 of the FPA requires that public utilities have on file with FERC tariff schedules showing all rates and charges for any transmission or sale of electric energy subject to FERC's jurisdiction and the classification, practices, and regulations affecting such rates, together with all contracts which in any manner affect or relate to such rates, charges, classifications and services. Section 205 requires that such FERC jurisdictional rates, charges, classifications, practices and regulations be just and reasonable. Duke Energy is currently pursuing a proposal at FERC under Section 205 that would provide for the administration by an independent entity of certain aspects of transmission service on Duke Power's transmission system. The application was filed July 22, 2005, comments were filed August 11, 2005 and Duke Energy filed a response on September 15, 2005. Although it is not possible to predict the outcome of the Section 205 proceeding Duke Energy and Cinergy believe that, based on FERC precedent, Duke Energy will be able to obtain FERC approval of this proposal in a form acceptable to Duke Energy and interested state regulators.
Nuclear Regulatory Commission
Under the Atomic Energy Act of 1954, as amended, and NRC regulations, an NRC power plant licensee must seek and obtain prior NRC consent for the indirect transfer of its NRC licenses resulting from the transfer of control over the licensee in a merger. Duke Energy holds licenses issued by the NRC with respect to its ownership and operational interests in the Oconee, McGuire and Catawba nuclear power plants. As a result of the Duke Energy merger, Duke Energy, the current licensee will become a wholly-owned subsidiary of Duke Energy Holding. The transfer of control of the license to Duke Energy Holding requires prior NRC approval. An application to obtain such approval was filed with the NRC on August 5, 2005.
In reviewing a license transfer application, the NRC assesses, among other things, the transferee's technical and financial qualifications to own and operate the nuclear facilities, whether there is assurance that adequate decommissioning funds will be available to safely decommission the facilities at the end of their useful lives and whether the transfer is otherwise consistent with the applicable provisions of laws, regulations and orders of the NRC. Financial qualifications are presumed by the NRC for state rate-regulated utilities such as Duke Energy that are authorized to recover the costs and operating expenses of their nuclear facilities through state approved rates. The NRC also permits state rate-regulated entities like Duke Energy to provide decommissioning funding assurance through the use of external sinking funds.
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Typically, NRC approvals of license transfers take approximately six to eight months to complete. The timing of NRC approval may be extended in the event issues are raised by intervenors as part of the license transfer proceeding. Duke Energy filed an application with the NRC requesting its approval of the indirect license transfers on August 5, 2005. Given that there will be no material changes with respect to nuclear management and the operation of the facilities in question, and given Duke Energy, as Duke Power, will continue to recover each facilities' costs as a state rate-regulated utility and continue to fund its future decommissioning liabilities using its existing external sinking funds, Cinergy and Duke Energy have no reason to believe that the NRC will not approve the license transfer. On September 27, 2005, NRC staff issued a notice of its intent to propose to the NRC that the application for indirect transfer posed no significant hazards. Interventions and/or requests for hearings are due within 60 days of this notice. No such interventions or requests were filed. The NRC, however, only filed one notice for the three sites instead of the required three notices. Accordingly, the NRC published new notices on December 2, 2005, and the public will have thirty days from that point to comment or request intervention.
State Regulatory Approvals
Duke Energy is currently subject to regulation by the utility commissions of North Carolina and South Carolina. Cinergy (through its public utility subsidiaries) is currently subject to regulation by the public utility commissions of Indiana, Kentucky and Ohio. The following is a brief description of state regulatory jurisdiction over the mergers and required approvals:
technical, and managerial abilities to provide reasonable service, the KPSC must approve the Cinergy merger application if it is made in accordance with the law, for a proper purpose, and is consistent with the public interest. On November 29, 2005, the KPSC approved the Cinergy merger.
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"justified by the public convenience and necessity." The NCUC has found that standard is met if:
Factors considered by the NCUC in evaluating benefits include measurable cost savings as well as less quantifiable financial, competitive, employment, tax base and service reliability benefits accrued from the increased size and diversity offered by merging companies. Duke Energy filed its application with the NCUC on July 15, 2005. On November 30, 2005, Duke Energy announced that it had reached agreement with the North Carolina Public Staff on conditions to be imposed in connection with NCUC's approval of the application. Such conditions are subject to approval of the NCUC, and include the sharing of merger savings with North Carolina retail customers in the amount of approximately $117.5 million. The NCUC will hold its evidentiary hearing in this proceeding on December 13, 2005.
transaction than are received by electric customers in other jurisdictions. Factors considered by the PSCSC in evaluating a merger include impacts on retail rates, retail cost of service, and jurisdictional revenues and expenses. Duke Energy filed its application with the PSCSC on July 15, 2005. On October 7, 2005, Duke Energy announced that it had reached agreements with the South Carolina Office of Regulatory Staff and other parties to the proceeding on conditions to be imposed in connection with the PSCSC's approval of the application. Such conditions include the sharing of merger savings with South Carolina retail customers in the amount of approximately $40 million. The PSCSC approved the merger application and these agreements on November 1, 2005.
The sharing of the anticipated merger-related savings and related costs to achieve such savings allocated among various ratepayers and the shareholders of Duke Energy Holding will either be considered by the IURC, KPSC, NCUC, PUCO, and PSCSC as a part of their respective merger proceedings or will be considered by them as a part of future rate proceedings. Cinergy and Duke Energy are working with each state utility commission in a collaborative process to allocate merger-related savings and costs applicable to each jurisdiction between ratepayers and shareholders. Approval proceedings have been set for a hearing in each state where approvals are pending except Ohio, where the proceeding has been stayed. Various parties have intervened in each proceeding, but neither Duke Energy nor Cinergy believes that any such intervention will prevent approval of the mergers in any of the states where approval is required and not yet received.
Federal Communications Commission
Under the provisions of the Communications Act of 1934, as amended by the Telecommunications Act of 1996, an entity holding licenses for the provision of telecommunications services must obtain the approval of the FCC before the transfer of control or assignment of those licenses. Affiliates of both Duke Energy and Cinergy hold certain FCC licenses for the provision of telecommunications services
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in the United States and, thus, must obtain prior FCC approval to assign or transfer control of those licenses.
Immediately following the completion of the Duke Energy merger, Duke Energy intends to convert into a limited liability company organized under the laws of the State of North Carolina. Prior FCC approval is required for this transfer of control of the FCC licenses held by affiliates of Duke Energy. As a result of the Cinergy merger, Cinergy will become a wholly-owned subsidiary of Duke Energy Holding. Prior FCC approval, therefore, also is required for the transfer of control of these Cinergy licenses from Cinergy to Duke Energy Holding. FCC approval for the Duke Energy license transfers and the Cinergy license transfers ordinarily would be expected to be obtained within 30 days from the date of filing of the applications unless significant public interest concerns are raised by outside parties. As of the date of this joint proxy statement/prospectus, the FCC has approved six of the seven applications that have been filed.
Securities and Exchange Commission
On August 8, 2005, President Bush signed the Energy Policy Act of 2005 which, among other things, repealed PUHCA of 1935. The repeal of PUHCA of 1935 takes effect six months from the date of enactment of the Energy Policy Act of 2005, or February 8, 2006. Although the mergers would require SEC approval under PUHCA of 1935 if they were consummated prior to that date, because the mergers are not expected to close until after that date, SEC approval under PUHCA of 1935 is not being sought and will not be required.
Under the Energy Policy Act of 2005, FERC's jurisdiction over merger transactions will be expanded effective six months from the date of the Energy Policy Act of 2005. The Energy Policy Act of 2005 also provides that applications pending before the FERC prior to the date of the Energy Policy Act of 2005 will be reviewed in accordance with FERC's review authority in existence prior to enactment of the Energy Policy Act of 2005. Because our FPA Section 203 application was pending before the FERC prior to enactment of the Energy Policy Act of 2005, our application is subject to FERC's review in accordance with its authority prior to enactment of the Energy Policy Act of 2005. If we re-file our FPA Section 203 application, however, FERC's review of such re-filed application may be conducted using the standards of its expanded authority.
Canadian Competition Act
The mergers are subject to the requirements of the Canadian Competition Act, and the rules and regulations promulgated thereunder, which provide that certain acquisition transactions may not be consummated until required information has been furnished to the Canadian Competition Bureau and until certain waiting periods have been terminated or have expired. The expiration or earlier termination of the applicable waiting period under the Canadian Competition Act would not preclude the Commissioner of Competition under the Act from challenging the mergers in Canada on Canadian antitrust grounds.
The parties filed the requisite premerger notification in summer 2005. On October 3, 2005, the Canadian Competition Bureau determined that it would not oppose, or take other action regarding, the merger.
Other International Approvals
The mergers may also be subject to the antitrust laws, rules and regulations of other governmental authorities, which may provide that certain acquisition transactions may not be consummated until required information has been furnished to the appropriate entity that regulates antitrust matters and until certain waiting periods have been terminated or have expired.
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The following is a summary of the material terms of the merger agreement. This summary does not purport to describe all the terms of the merger agreement and is qualified in its entirety by reference to the complete merger agreement, as amended, which is attached as Annex A to this joint proxy statement/prospectus and incorporated by reference herein. All shareholders of Duke Energy and Cinergy are urged to read the merger agreement carefully and in its entirety to understand the rights and obligations of Duke Energy and Cinergy under the merger agreement.
The Mergers and the Restructuring Transactions
Duke Energy Preferred Stock and Preferred Stock A
Prior to the effective time of the Duke Energy merger, each issued and outstanding share of Preferred Stock, par value $100 per share, of Duke Energy and each issued and outstanding share of Preferred Stock A, par value $25 per share, of Duke Energy, will be redeemed at a redemption price equal to the amounts required to be paid upon redemption of any applicable series, pursuant to the term of each such series, plus all dividends accrued and unpaid to the redemption date.
The Duke Energy Merger
At the effective time of the Duke Energy merger, Deer Acquisition Corp. will be merged with and into Duke Energy in accordance with the NCBCA. Duke Energy will be the surviving corporation and will continue its corporate existence under the laws of North Carolina and will succeed to and assume all of the rights and obligations of Duke Energy and Deer Acquisition Corp. in accordance with the NCBCA. As a result of the Duke Energy merger, Duke Energy will become a wholly-owned subsidiary of Duke Energy Holding. Immediately after the effective time of the Duke Energy merger, all shares of Duke Energy Holding common stock owned by Duke Energy will be canceled.
The Duke Energy Restructuring and the Duke Energy Conversion
Immediately following the effectiveness of the Duke Energy merger, Duke Energy intends to distribute to Duke Energy Holding the membership interests in Duke Capital, after which Duke Capital will be a direct wholly-owned subsidiary of Duke Energy Holding. In connection with such distribution, Duke Energy intends to convert to a limited liability company pursuant to a plan of conversion adopted pursuant to Section 55-11A-11 of the NCBCA and Section 57C-9A-02 of the North Carolina Limited Liability Company Act. In the conversion, Duke Energy will be renamed Duke Power Company LLC and will be a limited liability company, all of whose membership or other equity interests will be held by Duke Energy Holding. It is also possible that select business units will be transferred from Duke Capital to Duke Energy Holding. Duke Energy will provide prior notice to Cinergy of this restructuring transaction, and any other restructuring that it proposes to effect in connection with the completion of the mergers. The merger agreement provides that the Duke Energy restructuring transactions are not a condition to the completion of the mergers and Duke Energy is not permitted to effect any restructuring transaction that would prevent the satisfaction of any of the conditions to the closing under the merger agreement.
The Cinergy Merger
Immediately following the completion of the latest of the Duke Energy merger, the Duke Energy conversion and the Duke Energy restructurings, if any, at the effective time of the Cinergy merger, Cougar Acquisition Corp. will be merged with and into Cinergy in accordance with the Delaware General Corporation Law, or DGCL. Cinergy will be the surviving corporation and will continue its corporate existence under the laws of Delaware and will succeed to and assume all of the rights and obligations of Cinergy and Cougar Acquisition Corp. in accordance with the DGCL. As a result of the Cinergy merger, Cinergy will become a wholly-owned subsidiary of Duke Energy Holding.
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Timing of Closing
The closing of the mergers, conversion and the restructuring transactions described above will take place at 10:00 am, local time, on a date to be specified by the parties, which will be no later than the second business day after satisfaction or waiver of the conditions to closing set forth in the merger agreement (other than those conditions that by their terms are to be satisfied at the closing, but subject to the satisfaction or waiver or such conditions at the time of closing), unless another time or date is agreed to by the parties. The closing will be held at a location in the City of New York agreed to by the parties.
Merger Consideration
Cancellation of Certain Duke Energy Common Stock in the Duke Energy Merger
At the effective time of the Duke Energy merger, each share of Duke Energy common stock that is owned by Duke Energy, Cinergy or Duke Energy Holding will automatically be canceled and no consideration will be delivered in exchange therefor.
Conversion of Duke Energy Common Stock in the Duke Energy Merger
At the effective time of the Duke Energy merger, each issued and outstanding share of Duke Energy common stock (other than those shares to be canceled and other than dissenting shares) will be converted into the right to receive one fully paid and nonassessable share of Duke Energy Holding common stock. Based on the number of shares of Cinergy and Duke Energy common stock outstanding on May 6, 2005, the last trading day prior to the announcement of the business combination, former Cinergy shareholders will own approximately 24% of the common equity of the new company, and former Duke Energy shareholders will own approximately 76%.
Conversion of Deer Acquisition Corp. Common Stock in the Duke Energy Merger
At the effective time of the Duke Energy merger, the aggregate of all shares of the capital stock of Deer Acquisition Corp. issued and outstanding immediately prior to the effective time of the Duke Energy merger will be converted into 100 shares of common stock of Duke Energy, as the surviving corporation in the Duke Energy merger.
Cancellation of Certain Cinergy Common Stock in the Cinergy Merger
At the effective time of the Cinergy merger, each share of Cinergy common stock that is owned by Cinergy, Duke Energy or Duke Energy Holding immediately prior to the effective time of the Cinergy merger will automatically be canceled and no consideration will be delivered in exchange therefor.
Conversion of Cinergy Common Stock in the Cinergy Merger
At the effective time of the Cinergy merger, each issued and outstanding share of Cinergy common stock (other than those share to be canceled) will be converted into the right to receive 1.56 fully paid and nonassessable shares of Duke Energy Holding common stock.
Conversion of Cougar Acquisition Corp. Common Stock in the Cinergy Merger
At the effective time of the Cinergy merger, the aggregate of all shares of the capital stock of Cougar Acquisition Corp. issued and outstanding immediately prior to the effective time of the Cinergy merger will be converted into 100 shares of common stock of Cinergy, as the surviving corporation in the Cinergy merger.
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Exchangeable Shares of Duke Energy Canada Exchangeco, Inc.
As of the effective time of the Duke Energy merger, each issued and outstanding exchangeable share of Duke Energy Canada Exchangeco, Inc., a corporation incorporated under the laws of Canada and indirect subsidiary of Duke Energy, will become exchangeable for one share of Duke Energy Holding common stock, and one share of Duke Energy Holding common stock will be issuable upon a redemption or retraction of each exchangeable share, in each case in accordance with the terms of the provisions relating to such shares immediately prior to the effective time of the Duke Energy merger. Following the effective time of the Cinergy merger, Duke Energy Holding will execute such assignment and assumption agreements and documentation as are necessary to cause Duke Energy Holding to be bound by the terms and provisions of the support agreement among Duke Energy, Duke Energy Canada Call Co. and Duke Energy Canada Exchangeco, dated March 14, 2002, and the voting and exchange trust agreement among Duke Energy, Duke Energy Canada Exchangeco and Computershare Trust Company of Canada, dated March 14, 2002.
Procedures for Exchange of Share Certificates; Fractional Shares
Duke Energy and Cinergy will choose an exchange agent who will be engaged by Duke Energy Holding. As soon as is reasonably practicable after the effective time of the mergers, the exchange agent will mail to each holder of record, immediately prior to the effective time of the mergers, who is entitled to receive Duke Energy Holding common stock:
Upon surrender of a certificate for cancellation to the exchange agent, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the exchange agent, the holder will be entitled to receive in exchange therefor that number of whole shares of Duke Energy Holding common stock (which shares will be in uncertificated book-entry form unless a physical certificate is requested by such holder), cash in lieu of fractional shares and certain other dividends or distributions. In the event of a transfer of ownership of Duke Energy common stock or Cinergy common stock that is not registered in the transfer records of Duke Energy or Cinergy, as the case may be, the proper number of shares of Duke Energy Holding common stock may be issued to a person other than the person in whose name the certificate so surrendered is registered if such certificate is properly endorsed or otherwise in proper form for transfer and the person requesting such issuance will pay any transfer or other taxes required by reason of the issuance of shares of Duke Energy Holding common stock to a person other than the registered holder of such certificate or establish to the satisfaction of Duke Energy Holding that such tax has been paid or is not applicable. Until surrendered as described, each certificate will be deemed at any time after the effective time of the Duke Energy merger or the effective time of the Cinergy merger, as the case may be, to represent only the right to receive the consideration upon such surrender which the holder has the right to receive, cash in lieu of fractional shares and certain other dividends or distributions. No interest will be paid or will accrue on any consideration payable to holders of certificates.
Duke Energy Holding will not issue any fractional shares of its common stock upon the surrender of any certificates, except that fractional shares will be issued in connection with shares of Duke Energy and Cinergy common stock held in each of Duke Energy's and Cinergy's dividend reinvestment plans to be rolled over into a dividend reinvestment plan to be established by Duke Energy Holding. Holders of shares of Duke Energy and Cinergy common stock will receive cash in lieu of fractional shares.
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As promptly as practicable after the effective time of the Cinergy merger, the exchange agent will sell on the New York Stock Exchange the excess of the number of whole shares of Duke Energy Holding common stock delivered to the exchange agent over the aggregate number of whole shares of Duke Energy Holding common stock to be distributed to former holders of Cinergy. As promptly as practicable after the effective time of the Duke Energy merger, the exchange agent will sell on the New York Stock Exchange the excess of the number of whole shares of Duke Energy Holding common stock delivered to the exchange agent over the aggregate number of whole shares of Duke Energy Holding common stock to be distributed to former holders of Duke Energy. The exchange agent will pay to each former Duke Energy and Cinergy shareholder, as the case may be, a portion of the sale proceeds based upon the ratio of each shareholder's fractional share interest to the aggregate amount of fractional share interests to which all former Duke Energy and Cinergy shareholders, as the case may be, are entitled.
Conditions to the Completion of the Mergers
The merger agreement contains customary closing conditions, including the following conditions that apply to the obligations of both Duke Energy and Cinergy:
The merger agreement further provides that in the event that it becomes reasonably likely that it will not be possible to obtain any required statutory approval in a manner that will result in the satisfaction of the respective closing conditions prior to the initial termination date (i.e., the 12-month anniversary of the date of the merger agreement, subject to extension to the 15-month anniversary as further described below), or reasonably likely that it will not be possible for any other condition to the obligations of any of the parties to consummate the transactions contemplated by the merger agreement, the parties will use reasonable best efforts to modify the structure of the mergers and the other transactions contemplated by the merger agreement in order to permit the mergers to be consummated without altering the Cinergy exchange ratio or the exchange ratio in the Duke Energy merger, or the anticipated United States federal income tax consequences to Duke Energy, Cinergy or their respective shareholders as promptly as practicable in accordance with their respective terms.
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Termination of the Merger Agreement
The merger agreement may be terminated at any time prior to the completion of the mergers, whether before or (unless otherwise noted below) after the Duke Energy shareholders approve the merger agreement or the Cinergy shareholders adopt the merger agreement:
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reasonably likely to result in a breach of the board of directors' fiduciary obligations under applicable law, provided that the terminating party notifies the other party that such party has determined that the third-party takeover proposal is a superior proposal (as defined below) and at least five business days following receipt by the other party of such notice, the board of directors of the terminating party has determined that such third-party takeover proposal remains a superior proposal.
A "third-party takeover proposal" means a bona fide inquiry, proposal or offer from any person relating to (i) any direct or indirect acquisition or purchase of a business (a "material business") that constitutes 20% or more of the net revenues, net income or the assets of the subject company and their subsidiaries, (ii) any direct or indirect acquisition or purchase of 20% or more of any class of voting securities of the subject company or 20% or more of the voting power of any class of stock of any subsidiary of the subject company owning, operating or controlling a material business, (iii) any tender offer or exchange offer that if consummated would result in any person beneficially owning 20% or more of any class of voting securities of the subject company or 20% or more of the voting power of any class of stock of any subsidiary of the subject company owning, operating or controlling a material business, or (iv) any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving the subject company or any subsidiary of the subject company owning, operating or controlling a material business, in each case other than the transactions contemplated by the merger agreement.
A "superior proposal" means any written third-party takeover proposal of a party that such party's board of directors determines in good faith (after consultation with a financial advisor of nationally recognized reputation) to be more favorable (taking into account (i) all financial and strategic considerations, including relevant legal, financial, regulatory and other aspects of such third-party takeover proposal and the mergers and the other transactions contemplated by the merger agreement deemed relevant by such party's board of directors, (ii) the identity of the third-party making such third-party takeover proposal, and (iii) the conditions and prospects for completion of such third-party takeover proposal) to such party's shareholders than the mergers and the other transactions contemplated by the merger agreement (taking into account all of the terms of any proposal by the other party to amend or modify the terms of the Cinergy merger or the Duke merger, as the case may be, and the other transactions contemplated by the merger agreement), except that (1) the reference to "20%" in (i), (ii) and (iii) of the definition of third-party takeover proposal set forth above is replaced by "50%", (2) a superior proposal only means a transaction involving Cinergy or Duke Energy, and not involving any of their respective material businesses alone, and (3) the references to any subsidiary of either company owning, operating or controlling a material business in (ii), (iii) and (iv) of the definition of third-party takeover proposal set forth above are deemed to be deleted.
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Termination Fees; Reimbursement of Expenses
Under the circumstances described below, Duke Energy or Cinergy, as applicable, would be required to (i) reimburse the other party for the other party's fees and expenses in an amount not to exceed $35 million and/or (ii) pay a termination fee of $300 million in the case of a termination fee payable by Cinergy to Duke Energy and a termination fee of $500 million in the case of a termination fee payable by Duke Energy to Cinergy provided that any termination fee payable will be reduced by any amount of any fees and expenses previously reimbursed.
A termination fee would be payable by a party if (i) prior to that party's receipt of its shareholders approval, (ii) that party receives an unsolicited written third-party takeover proposal, (iii) that party's board of directors determines in good faith, after consulting with outside counsel, that failure to terminate the merger agreement in response to the third-party takeover proposal would be reasonably likely to result in a breach of its fiduciary obligations under applicable law, (iv) that party's board of directors determines, in good faith that such third-party takeover proposal constitutes a superior proposal, (v) that party notifies the other party in writing of the determination that the alternative takeover proposal is a superior proposal, (vi) at least 5 days after receipt of that notice by the other party, the party that received the third-party takeover proposal determines that the third-party takeover proposal remains a superior proposal and (vii) that party terminates the merger agreement because of the receipt of that superior proposal.
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A termination fee would be payable by the other party if a party terminates the merger agreement because the other party's board of directors (i) withdraws or modifies, or proposes publicly to withdraw or modify, its approval or recommendation of the merger agreement and the mergers (whether or not in connection with a competing proposal), unless the approval is withdrawn or modified primarily due to adverse conditions, events or action of or relating to the terminating party, or (ii) approves or recommends, or proposes to approve or recommend, a third-party takeover proposal. With respect to (i) above, the party whose board of directors withdraws or modifies its approval or recommendation bears the burden of proof in any court proceeding or arbitration to establish that it did so primarily because of adverse conditions, events or actions of or relating to the terminating party.
No Solicitation
Each party agreed in the merger agreement that it will not solicit, initiate or knowingly encourage, or knowingly take any other action designed to facilitate, any inquiries or the making of any third-party takeover proposal or participate in any negotiations or substantive discussions regarding any third-party takeover proposal. Notwithstanding this prohibition, if, at any time prior to receipt of a party's shareholder approval, that party's board of directors determines in good faith, after consultation with its legal and financial advisors, that a third-party takeover proposal that was not solicited by such party and that did not otherwise result from a breach of such party's non-solicitation obligations (other than in immaterial respects) is, or is reasonably likely to lead to, a superior proposal, then, after providing prior written notice of its decision to take such action to the other party and otherwise complying with these provisions, the party may:
Neither the board of directors of Duke Energy or Cinergy nor any committee thereof may:
Notwithstanding these prohibitions, in response to a third-party takeover proposal that was not solicited by the party and that did not otherwise result from a breach of that party's non-solicitation obligations (other than in immaterial respects), at any time prior to receipt of that party's shareholder approval, the board of directors of that party may, if it determines in good faith, after consulting with outside counsel, that the failure to take such action would be reasonably likely to result in a breach of the board of directors' fiduciary obligations under applicable law:
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However, in the case of the foregoing (ii) and (iii), the board of directors must first have determined in good faith that the third-party takeover proposal constitutes a superior proposal and in the case of the foregoing (iii), the party must have notified the other party in writing of its determination that the third-party takeover proposal constitutes a superior proposal and, at least 5 business days following receipt by the other party of the notice, the board of directors of that party determines that the superior proposal remains a superior proposal.
In circumstances other than in connection with a third-party takeover proposal, at any time prior to receipt of a party's shareholder approval, the board of directors of such party may, if it determines in good faith, after consulting with outside counsel, that the failure to take such action would be reasonably likely to result in a breach of the board of directors' fiduciary obligations under applicable law, withdraw or modify, or propose publicly to withdraw or modify, the approval or recommendation by such board of directors or any committee thereof of the merger agreement or the mergers, but only after:
In addition to the foregoing obligations, the party will as promptly as practicable advise the other party, orally and in writing, of any request for information or of any third-party takeover proposal (and in any case within 24 hours of such request or the receipt of such third-party takeover proposal), the principal terms and conditions of such request or third-party takeover proposal and the identity of the person making such request or third-party takeover proposal. The party will keep the other party informed of the status and details (including amendments and proposed amendments) of any such request or third-party takeover proposal. Contemporaneously with any termination of the merger agreement, the terminating party will provide the other party with a written verification that it has complied with its obligations pursuant to this paragraph (other than noncompliance which is immaterial).
Legal Proceedings
Cinergy and its directors have been named as defendants in a purported class action filed in the Common Pleas Court, Hamilton County, Ohio, brought on behalf of a proposed class consisting of holders of Cinergy common stock excluding defendants and their affiliates and captioned NECA-IBEW Pension Fund v. Cinergy Corp., et al., C.A. No A0504123 (Action). The complaint in the Action alleges, among other things, that the merger agreement was the product of breaches of fiduciary duty by the defendants, in that it allegedly does not provide for full and fair value for Cinergy's public shareholders; and that the merger agreement and the Cinergy merger were approved as the result, allegedly, of improper self-dealing by certain defendants who would receive certain alleged employment compensation benefits and continued employment pursuant to the merger agreement. As relief, the complaint in the Action seeks, among things, rescission of the Cinergy merger if it is consummated, an order requiring the defendants to "obtain a transaction which is in the best interests of Cinergy's
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shareholders," imposition of a constructive trust upon certain benefits to be received by certain defendants pursuant to the merger agreement and other agreements and benefit arrangements, a declaration that the merger agreement was entered into in breach of the defendants' duties, and an injunction against consummation of the Cinergy merger "unless and until [Cinergy] adopts and implements a procedure or process to obtain the highest possible price for shareholders." Cinergy and the individual defendants filed a motion to dismiss the Action in July 2005 which the court granted in November 2005. The plaintiffs have not yet appealed that decision. Both Duke Energy and Cinergy believe that the Action is without merit and that the defendants have substantial meritorious defenses to the claims made in the Action.
There have been news reports indicating that Cinergy has been named, along with 12 other U.S. and Canadian power companies, in a lawsuit brought by residents of Ontario, Canada for alleged damages due to emissions from the companies' power plants. To date, Cinergy has not been served in this lawsuit.
Other Expenses
All expenses incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expenses, whether or not the mergers are consummated, except that each of Duke Energy and Cinergy will bear and pay one-half of the costs and expenses incurred in connection with:
Duke Energy Holding will pay taxes, if any, attributable to (i) the transfer of beneficial ownership of Duke Energy's real property and (ii) the transfer of Duke Energy common stock pursuant to the merger agreement. Cinergy will pay taxes, if any, attributable to (i) the transfer of the beneficial ownership of Cinergy's real property and (ii) the transfer of Cinergy common stock pursuant to the merger agreement. Cinergy, Duke Energy and Duke Energy Holding will cooperate with respect to the filing of tax returns.
Transition Committee
Duke Energy and Cinergy established a transition committee to examine various alternatives regarding the manner in which to best organize and manage the business of Duke Energy Holding after the effective time of the mergers. The transition committee is co-chaired by Paul Anderson and James Rogers and includes Jim W. Mogg and Fred J. Fowler of Duke Energy and James L. Turner of Cinergy.
Name of the New Company
A new company incorporated in Delaware, currently named Duke Energy Holding Corp. (formerly named Deer Holding Corp.) will hold what today are Duke Energy's and Cinergy's independent businesses. Upon consummation of the mergers, the new company will be renamed Duke Energy Corporation.
Charitable Contributions
The parties agree that provision of charitable contributions and community support in their respective service areas serves a number of their important corporate goals. During the two-year period immediately following the consummation of the mergers, Duke Energy Holding and its subsidiaries taken as a whole intend to continue to provide charitable contributions and community support within
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the service areas of the parties and each of their respective subsidiaries in each service area at levels substantially comparable to the levels of charitable contributions and community support provided, directly or indirectly, by Duke and Cinergy within their respective service areas during the two-year period immediately prior to the consummation of the mergers.
Amendment; Extension and Waiver
The merger agreement may be amended by the parties at any time before or after the Cinergy shareholders approve the merger agreement or the Duke Energy shareholders approve the merger agreement; provided, however, that after any such approval, there will not be made any amendment that by law requires further approval by the shareholders of Duke Energy or Cinergy without the further approval of those shareholders. The merger agreement may not be amended except by an instrument in writing signed on behalf of each of the parties.
At any time prior to the effective time of the mergers, a party may:
Any agreement on the part of a party to any such extension or waiver will be valid only if set forth in an instrument in writing signed on behalf of that party. The failure of any party to the merger agreement to assert any of its rights under the merger agreement or otherwise will not constitute a waiver of such rights.
Representations and Warranties
The merger agreement contains substantially reciprocal customary representations and warranties made by Duke Energy and Cinergy to each other. These representations and warranties are subject to qualifications and limitations agreed to by Duke Energy and Cinergy in connection with negotiating the terms of the merger agreement. Some of the more significant of these relate to:
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Representations made only by Duke Energy:
Representation made only by Cinergy:
THE DESCRIPTION OF THE MERGER AGREEMENT IN THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN INCLUDED TO PROVIDE YOU WITH INFORMATION REGARDING ITS TERMS. THE MERGER AGREEMENT CONTAINS REPRESENTATIONS AND WARRANTIES MADE BY AND TO THE PARTIES THERETO AS OF SPECIFIC DATES. THE STATEMENTS EMBODIED IN THOSE REPRESENTATIONS AND WARRANTIES WERE MADE FOR PURPOSES OF THE CONTRACT BETWEEN THE PARTIES THERETO AND ARE SUBJECT TO QUALIFICATIONS AND LIMITATIONS AGREED BY THE PARTIES THERETO IN CONNECTION WITH NEGOTIATING THE TERMS OF THAT CONTRACT. IN ADDITION, CERTAIN REPRESENTATIONS AND WARRANTIES WERE MADE AS OF A SPECIFIED DATE, MAY BE SUBJECT TO A CONTRACTUAL STANDARD OF MATERIALITY DIFFERENT FROM THOSE GENERALLY APPLICABLE TO SHAREHOLDERS, OR MAY HAVE BEEN USED FOR THE PURPOSE OF ALLOCATING RISK BETWEEN THE PARTIES RATHER THAN ESTABLISHING MATTERS AS FACTS.
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Covenants of Duke Energy and Cinergy
Pending the consummation of the transactions contemplated by the merger agreement, except as expressly contemplated or permitted by the merger agreement, for transactions solely involving one or more of a party's direct or indirect wholly-owned subsidiaries or between two or more direct or indirect wholly-owned subsidiaries of a party, or to the extent that the other party previously consents in writing (such consent not to be unreasonably withheld or delayed):
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provided that Duke Energy (i) may increase its regular quarterly dividend to an amount not to exceed $0.31 per share between the date of the merger agreement and the effective time of the Duke Energy merger and (ii) may pay a special pro rata dividend on Duke Energy common stock if the Duke Energy merger is completed between a record date and payment date of a regular quarterly dividend;
or redemptions of preferred stock of a party's subsidiaries (and in the case of Duke Energy, preferred stock of Duke Energy), and (4) in the case of Duke Energy, the redemption by Duke Energy of Duke Energy Preferred Stock and Duke Energy Preferred A stock (as described in more detail under "The Merger AgreementThe Mergers and Restructuring Transactions" beginning on page 124;
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expenditures or acquire or agree to acquire (whether by merger, consolidation, purchase or otherwise) any person or assets if:
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authority in respect of its business operations except as required by law, to renew permits or agreements in the ordinary course, as may be necessary in connection with the consummation of permitted acquisitions or to effect the transactions contemplated by the merger agreement;
Duke Energy will not permit Duke Energy Holding or any of its subsidiaries to take, or to commit to take, any action after the effective time of the Duke Energy merger and prior to the effective time of the Cinergy merger, except for the actions expressly set forth in the merger agreement as actions to be taken by any such person during such period.
From the date of the merger agreement, until it is consumated, Duke and Cinergy will coordinate with the other regarding the declaration and payment of dividends in respect of the shares of Duke Energy common stock and Cinergy common stock and the record dates and payment dates relating thereto, including, if applicable, through the payment of the special dividend contemplated by the merger agreement.
Duke, Cinergy and Duke Energy Holding shall and shall cause each of their subsidiaries to use their reasonable best efforts prior to the closing to obtain all consents and approvals necessary to transfer at the closing, or as soon as reasonably possible thereafter, certain generation stations to The Cincinnati Gas & Electric Company and shall effect such transfer as promptly as practicable following the consummation of the mergers, subject to the receipt of all such necessary consents and approvals.
Each party will use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things reasonably necessary or advisable to consummate and make effective, in the most expeditious manner reasonably practicable, the mergers and the other transactions contemplated by the merger agreement; provided however, "reasonable best efforts" will not require any party to (i) sell, or agree to sell, hold or agree to hold separate, or otherwise dispose or agree to dispose of any asset, in each case if such sale, separation or disposition or agreement with respect thereto would, individually or in the aggregate, reasonably be expected to have a material adverse effect on Duke Energy Holding, Cinergy or Duke Energy (in addition to certain specified dispositions) or (ii) conduct or agree to conduct its business in any particular manner if such conduct or agreement with respect thereto would, individually or in the aggregate, reasonably be expected to have a material adverse effect on Duke Energy Holding, Cinergy or Duke Energy.
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COMPARATIVE STOCK PRICES AND DIVIDENDS
Duke Energy common stock is listed for trading on the NYSE under the symbol "DUK," and Cinergy common stock is listed for trading on the NYSE under the symbol "CIN." The following table sets forth, for the periods indicated, dividends and the high and low intra-day sales prices per share of Duke Energy common stock and Cinergy common stock on the New York Stock Exchange composite transaction reporting system. For current price information, you should consult publicly available sources. See also "The MergersDividends" on page 108.
|
Duke Energy Common Stock |
Cinergy Common Stock |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Calendar Period |
High |
Low |
Dividends Paid |
High |
Low |
Dividends Paid |
|||||||||||||
2002 | |||||||||||||||||||
First Quarter | $ | 40.00 | $ | 31.99 | $ | 0.275 | $ | 35.75 | $ | 31.00 | $ | 0.45 | |||||||
Second Quarter | $ | 39.60 | $ | 28.50 | $ | 0.275 | $ | 37.19 | $ | 34.25 | $ | 0.45 | |||||||
Third Quarter | $ | 31.09 | $ | 17.81 | $ | 0.275 | $ | 36.21 | $ | 25.40 | $ | 0.45 | |||||||
Fourth Quarter | $ | 22.00 | $ | 16.42 | $ | 0.275 | $ | 34.19 | $ | 28.25 | $ | 0.45 | |||||||
2003 | |||||||||||||||||||
First Quarter | $ | 21.57 | $ | 12.21 | $ | 0.275 | $ | 35.87 | $ | 29.77 | $ | 0.46 | |||||||
Second Quarter | $ | 20.75 | $ | 13.51 | $ | 0.275 | $ | 38.75 | $ | 33.50 | $ | 0.46 | |||||||
Third Quarter | $ | 19.70 | $ | 16.75 | $ | 0.275 | $ | 36.99 | $ | 33.14 | $ | 0.46 | |||||||
Fourth Quarter | $ | 20.89 | $ | 17.08 | $ | 0.275 | $ | 38.86 | $ | 35.19 | $ | 0.46 | |||||||
2004 | |||||||||||||||||||
First Quarter | $ | 22.70 | $ | 19.86 | $ | 0.275 | $ | 41.10 | $ | 37.17 | $ | 0.47 | |||||||
Second Quarter | $ | 22.90 | $ | 18.85 | $ | 0.275 | $ | 41.04 | $ | 34.92 | $ | 0.47 | |||||||
Third Quarter | $ | 23.00 | $ | 19.84 | $ | 0.275 | $ | 40.75 | $ | 36.95 | $ | 0.47 | |||||||
Fourth Quarter | $ | 26.16 | $ | 22.85 | $ | 0.275 | $ | 42.63 | $ | 38.08 | $ | 0.47 | |||||||
2005 | |||||||||||||||||||
First Quarter | $ | 28.20 | $ | 24.37 | $ | 0.275 | $ | 41.70 | $ | 39.05 | $ | 0.48 | |||||||
Second Quarter | $ | 29.98 | $ | 27.34 | $ | 0.275 | $ | 45.30 | $ | 38.75 | $ | 0.48 | |||||||
Third Quarter | $ | 30.55 | $ | 27.84 | $ | 0.31 | $ | 45.95 | $ | 41.41 | $ | 0.48 | |||||||
Fourth Quarter (through December 8, 2005) | $ | 29.35 | $ | 25.06 | $ | 0.31 | $ | 44.60 | $ | 38.19 | $ | 0.48 |
The following table sets forth the high and low sales prices per share of Duke Energy common stock and Cinergy common stock on the NYSE Composite Transaction reporting system on May 6, 2005, the last full trading day prior to the public announcement of the mergers, and on December 8, 2005, the last trading day for which this information could be calculated prior to the filing of this joint proxy statement/prospectus:
|
Duke Energy Common Stock |
Cinergy Common Stock |
Cinergy Equivalent Per Share(1) |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
High |
Low |
High |
Low |
High |
Low |
||||||||||||
May 6, 2005 | $ | 29.50 | $ | 29.16 | $ | 40.52 | $ | 40.18 | $ | 46.02 | $ | 45.49 | ||||||
December 8, 2005 | $ | 26.60 | $ | 26.14 | $ | 40.86 | $ | 40.20 | $ | 41.50 | $ | 40.78 |
On March 18, 2005, Duke Energy and Merrill Lynch International, an affiliate of Merrill Lynch, entered into an accelerated share repurchase agreement whereby Duke Energy repurchased 30 million shares of its common stock from Merrill Lynch International, with Merrill Lynch International
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purchasing an equivalent number of common shares of Duke Energy in the open market during the term of the purchase agreement. The purchase agreement provided for a contingent purchase price adjustment, final settlement of which occurred on September 22, 2005, whereby Duke Energy paid Merrill Lynch International $23,737,600 (net of interest) reflecting the adjustment for prices actually paid by Merrill Lynch International for its open-market purchases. From March 18, 2005 to the settlement date, Merrill Lynch International had purchased 30 million shares at a weighted average price of $28.42 per share, including 23.4 million shares purchased at a weighted average price of $28.48 per share from May 9, 2005, the first day of trading following public announcement of the merger agreement to the settlement date. The purchase agreement between Duke Energy and Merrill Lynch International is filed as Exhibit 10.4 to Duke Energy's Form 10-Q for the quarter ended March 31, 2005 and is incorporated herein by reference.
Duke Energy also entered into a separate open market purchase plan with Merrill Lynch International on March 18, 2005 to repurchase up to an additional 20 million shares of its common stock through December 27, 2005. Duke Energy may terminate this plan at any time, without penalty. The timing of any repurchase of shares by Merrill Lynch International pursuant to this plan is dependent upon certain specified factors, including the market price of Duke Energy's common stock. At May 6, 2005, Duke Energy had repurchased 2.6 million shares of its common stock through this plan at a weighted average price of $28.97 per share. On May 9, 2005, Duke Energy announced plans to suspend additional repurchases under the open market purchase plan pending further assessment.
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DUKE ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Duke Energy Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 31, 2004, and the nine-month period ended September 30, 2005 reflect the reduction, effective July 1, 2005, of Duke Energy's ownership interest in Duke Energy Field Services LLC (DEFS) from 69.7% to 50%, which resulted in Duke Energy and ConocoPhillips becoming equal 50% owners in DEFS (the DEFS disposition transaction).
The Unaudited Pro Forma Condensed Consolidated Statements of Operations give effect to the DEFS disposition transaction as if it had occurred on January 1, 2004. Duke Energy's historical results of operations subsequent to July 1, 2005 reflect the effects of the DEFS disposition transaction. Additionally, since the DEFS disposition transaction occurred on July 1, 2005, no unaudited pro forma condensed consolidated balance sheet has been provided as the effect of the transaction has been reflected in Duke Energy's historical consolidated balance sheet as of September 30, 2005.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations should be read in connection with Duke Energy's consolidated financial statements as of December 31, 2004, including the notes thereto, included in Duke Energy's Form 8-K filed on December 9, 2005, as well as the unaudited consolidated financial statements as of September 30, 2005, including the notes thereto, included in Duke Energy's Form 10-Q for the nine months ended September 30, 2005.
The accompanying Unaudited Pro Forma Condensed Consolidated Statements of Operations are provided for informational purposes only and are not necessarily indicative of the consolidated results of operations of Duke Energy that would have been reported had the DEFS disposition transaction been completed at the dates indicated, nor is it indicative of Duke Energy's future consolidated results of operations.
The accompanying Unaudited Pro Forma Condensed Consolidated Statements of Operations do not reflect the impact of financing, liquidity, acquisition or other use of proceeds from the DEFS disposition transaction that may occur subsequent to September 30, 2005, and do not reflect the impact of any future distributions from DEFS.
For the DEFS disposition transaction, Duke Energy received, directly and indirectly through its ownership interest in DEFS, a total of approximately $1.1 billion in cash and assets from ConocoPhillips and DEFS in exchange for 19.7% of DEFS. The DEFS disposition transaction included the transfer to Duke Energy of DEFS' Canadian natural gas gathering and processing facilities and the acquisition of the Empress System assets from ConocoPhillips. As a result of the DEFS disposition transaction and subsequent to July 1, 2005, DEFS is no longer consolidated into Duke Energy's historical consolidated financial statements and is accounted for as an equity method investment.
In February 2005, DEFS sold its wholly owned subsidiary Texas Eastern Products Pipeline Company, LLC (TEPPCO GP), which is the general partner of TEPPCO Partners, LP (TEPPCO LP), for approximately $1.1 billion and Duke Energy sold its limited partner interest in TEPPCO LP for approximately $100 million, in each case to Enterprise GP Holdings LP, an unrelated third party. These transactions resulted in pre-tax gains of approximately $1.2 billion for the nine months ended September 30, 2005. Additionally, minority interest expense of $343 million was recorded related to these gains for the nine months ended September 30, 2005 to reflect ConocoPhillips' proportionate share in the pre-tax gain on the sale of TEPPCO GP. As these TEPPCO sale transactions were contemplated in connection with and directly related to the DEFS disposition transaction, the accompanying Unaudited Pro Forma Consolidated Statements of Operations assume the TEPPCO sale transactions were completed prior to January 1, 2004. Therefore, the results of operations for DEFS' and Duke Energy's investment in TEPPCO LP as well as the gains recognized on the TEPPCO sale transactions have been removed from the accompanying Unaudited Pro Forma Consolidated Statements of Operations.
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DUKE ENERGY CORPORATION
Unaudited Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 2005
(In millions)
|
Duke Energy Historical |
Deconsolidation of DEFS(a) |
Other DEFS Pro Forma Adjustments |
Duke Energy Pro Forma |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating Revenues | |||||||||||||||
Non-regulated electric, natural gas, natural gas liquids, and other | $ | 6,877 | $ | (5,524 | ) | $ |
31 62 55 171 |
(f) (g) (j) (h) |
$ | 1,672 | |||||
Regulated electric | 4,099 | 4,099 | |||||||||||||
Regulated natural gas and natural gas liquids | 2,654 | (79 | ) | 60 | (j) | 2,635 | |||||||||
Total operating revenues | 13,630 | (5,603 | ) | 379 | 8,406 | ||||||||||
Operating Expenses | |||||||||||||||
Natural gas and petroleum products purchased | 5,679 | (4,641 | ) | 123 | (j) | 1,161 | |||||||||
Operation, maintenance and other | 2,479 | (287 | ) | 18 36 (8) |
(f) (g) (j) |
2,238 | |||||||||
Fuel used in electric generation and purchased power | 1,229 | | 1,229 | ||||||||||||
Depreciation and amortization | 1,349 | (150 | ) | 7 5 |
(f) (g) |
1,211 | |||||||||
Property and other taxes | 432 | (26 | ) | 1 | (f) | 407 | |||||||||
Impairment and other charges | 140 | | (125 | )(h) | 15 | ||||||||||
Total operating expenses | 11,308 | (5,104 | ) | 57 | 6,261 | ||||||||||
Gains on Sales of Investments in Commercial and Multi-Family Real Estate | 117 | | 117 | ||||||||||||
Gains on Sales of Other Assets, net | 589 | (2 | ) | (577 | )(b) | 10 | |||||||||
Operating Income | 3,028 | (501 | ) | (255 | ) | 2,272 | |||||||||
Other Income and Expenses | |||||||||||||||
Equity in earnings of unconsolidated affiliates | 256 | 1,089 | (793 (88 (2 (6 |
)(c) )(d) )(f) )(e) |
456 | ||||||||||
Gains (losses) on sales of equity investments | 1,225 | (1,138 | ) | (105 | )(c) | (18 | ) | ||||||||
Other income and expenses, net | 19 | (16 | ) | (275 | )(h) | (272 | ) | ||||||||
Total other income and expenses | 1,500 | (65 | ) | (1,269 | ) | 166 | |||||||||
Interest Expense | 813 | (81 | ) | 732 | |||||||||||
Minority Interest Expense | 508 | (479 | ) | 29 | |||||||||||
Earnings From Continuing Operations Before Income Taxes | 3,207 | (6 | ) | (1,524 | ) | 1,677 | |||||||||
Income Tax Expense from Continuing Operations | 1,095 | (6 | ) | (564 | )(i) | 525 | |||||||||
Income From Continuing Operations | 2,112 | | (960 | ) | 1,152 | ||||||||||
Dividends and Premiums on Redemptions of Preferred and Preference Stock | 7 | 7 | |||||||||||||
Income from Continuing Operations Available for Common Stockholders | $ | 2,105 | $ | | $ | (960 | ) | $ | 1,145 | ||||||
Common Stock Data |
|||||||||||||||
Weighted-average shares outstanding | |||||||||||||||
Basic | 936 | 936 | |||||||||||||
Diluted | 973 | 973 | |||||||||||||
Earnings per share (from continuing operations) | |||||||||||||||
Basic | $ | 2.25 | $ | 1.22 | |||||||||||
Diluted | $ | 2.17 | $ | 1.18 |
See accompanying Notes to the Duke Energy Corporation Unaudited Pro Forma Condensed Consolidated Statements of Operations, which are an integral part of these statements.
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DUKE ENERGY CORPORATION
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2004
(In millions)
|
Duke Energy Historical |
Deconsolidation of DEFS(a) |
Other DEFS Pro Forma Adjustments |
Duke Energy Pro Forma |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating Revenues | |||||||||||||||
Non-regulated electric, natural gas, natural gas liquids, and other | $ | 12,232 | $ | (10,279 | ) | $ |
61 106 175 173 |
(f) (g) (h) (j) |
$ | 2,468 | |||||
Regulated electric | 5,041 | 5,041 | |||||||||||||
Regulated natural gas | 3,276 | 106 | (j) | 3,382 | |||||||||||
Total operating revenues | 20,549 | (10,279 | ) | 621 | 10,891 | ||||||||||