CHARLOTTE, NC - JANUARY 10: The building that houses one of two Duke Energy headquarters is seen... [+]
The nation’s largest utility has stumbled out of the gate, prompting regulators and former board members alike to question both the company’s judgment and its intent. The newly-combined Duke Energy and Progress Energy fired its chief executive after 20 minutes of duty and then re-hired its trusted hand, Jim Rogers.
It may smack of something shady but in the end, the revised Duke Energy will move ahead and the incident will be forgotten. Despite the screw-up, the mega-merger is being touted as the prototype for what the utility world could look like -- one with financial muscle that is able to increase its leverage in the market. That, then, benefits both shareholders and consumers.
Why now? Recession has tormented the electric power business since 2009. The demand for power has fallen, which has chipped away at bottom lines, all of which has forced utilities to delay much needed investment in infrastructure. But such capital outlays will be required not just to meet the expected upswing in power demand but also to satisfy utility regulators at both the national and state levels.
Enter Duke-Progress, a 57,000 megawatt behemoth that is expected to be highly productive and to create enormous efficiencies -- the kind that will drive down the price of everything from power purchases to paper clips. As those synergies start to escalate, the hope is that the savings would flow back to both ratepayers and shareholders, who benefit in the form of greater dividends. At the same time, the combined entity would be better positioned to invest in new technologies so that it could become cleaner.
Both companies have strong balance sheets with lots of cash on hand, allowing Moody’s Investor Services to maintain its “stable outlook” for the combined entity. But the credit ratings agency went on to say that the managerial fluctuation creates an “uncertain” environment whereby other executives may also leave.
The sudden change-up in leadership has capped what has otherwise been a relatively undramatic merger campaign. As with all such deals, the two utilities had to satisfy a plethora of regulatory bodies. In the end, the companies now have to build more transmission to allow competing energy to flow more freely into Carolinas where the two are based. Despite arguments that the merger would create a lopsided market, regulators agreed that a financially stronger company would be better positioned to bankroll future projects.
With previous mega-mergers, it has been the state regulators that have been the deciding factor -- a proposition that has derailed some major deals. New Jersey utility commissioners, for example, rejected in 2006 the marriage of Exelon Corp. and PSEG Corp, saying that the merged company would be too powerful. Meantime, Constellation Energy and Florida Power & Light wanted to combine in 2006 but state regulators nixed the idea for the same reason.
Today, though, state regulators blessed Exelon’s purchase of Constellation. The same prevailing dynamics that allowed that marriage have also paved the wave for the Duke-Progress deal.
But with the apparent CEO flop now hovering over that coronation, the state regulators are perplexed. They are holding discussions next week and say that they can take action, although it would seem improbable that they would now reject the merger based on who the current board of directors want as their top manager.
To that end, Jim Rogers, who has led Duke for years, has a stellar reputation with all of the utility’s stakeholders. In previous discussions with this writer, he has said that his door is always open and that much of his job is to ensure a mutual understanding. It’s about building clean, affordable and reliable electric generation, he says, which means that utilities must have a “portfolio of options.”
Such conciliation, however, is not placating certain former Progress Energy board members who still believe in Bill Johnson, who led that company and was slated to head Duke. In a letter to the Wall Street Journal, past Progress board member, John Mullin, said that none of his colleagues would have voted for this transaction if they thought CEO Rogers would have continued to head the combined utility.
That fuss may also light up other opponents of the deal. Beyond the community activists who don’t like “bigger-is-better,” there are some concerns from those shareholders who fear that the deal won’t live up to its promise -- that the expected synergies won’t pay off and that the corporate cultures might not mesh.
But corporate officers from all sectors say that they have learned from past mistakes. Companies, generally, say that their approach to merging is more thoughtful, all with the aim of realizing expected future benefits such as cost savings and complementary features. For their part, utilities have high fixed capital costs that might be better managed if they are spread over a broader geographical base.
Before the market can ultimately determine whether size matters, state regulators may have something else to say about the Duke-Progress merger. The odds are still in the utilities’ favor but they sure screwed up and have given their critics plenty of fodder.
