Duke Energy Hitting the Circuit
After a difficult birth and a few months healing, the reborn Duke Energy is back and hitting the circuit. It’s not to hype its controversial merger with Progress Energy; rather, it is to reassure its stakeholders that the company is moving past the debacle and that it is working to ensure that the deal fulfills its promises.
Duke and Progress formed the nation’s largest utility in July when they combined forces. But soon after, the newly-united board of directors said it would release the chief executive it had slated to run the utility and instead, lean on Jim Rogers of Duke. The lack of transparency during this process has caused angst not just among its constituents but also its among state regulators.
Now that the North Carolina Utility Commission and the state’s attorney general are looking into the matter, the question is what will be their verdicts. Duke is now working to regain its credibility. The first test as to whether its strategy is effective will occur later this year when the company heads to the regulators’ offices to ask for rate increases to pay for new transmission upgrades and more efficient and less pollutive power plants.
“The CEO change at the end was a big surprise to this community in particular. That’s not what we had in mind at the start of this long journey,” Rogers told a crowd in Raleigh, as reported by the Raleigh News Observer. “And I’m sorry it created more anxiety about this merger. Some of you already viewed the merger with mixed feelings.”
The story, written by John Murawski, who has been friends with this reporter since we were cubs in the nation’s capitol, goes on to say that Rogers stuck to the script, emphasizing that Duke can be trusted. But the ship’s captain also said that for the $32 billion deal to reach its full potential, it had to create synergies -- a process that would possibly result in the firing of 1,860 people.
The ugly division that occurred between the boards of Duke and Progress is unfortunate. And the powers-that-be at the post-merger Duke have too much class to dwell on the matter beyond satisfying the needs of their regulators.
“Corporate decisions are announced after they are made, not when they are being contemplated,” Rogers told utility commissioners when subpoenaed to explain why the abrupt change was made in July.
The transcripts of those hearings show that the engagement between Duke and Progress started to deteriorate in December 2011. In the ensuing months, the personal and professional relationship between Rogers and the departed CEO Bill Johnson also went downhill. Business wise, Duke’s board members were concerned about a nuclear plant in Florida owned by Progress that had been sitting idle and which was was costing untold sums in lost revenues.
But, if Duke had withdrawn from the arrangement, it would have had to pay $675 million in termination fees to Progress. So, it stuck it out. What transpired, though, is unparalleled in utility history: Soon after the marriage was consummated, Johnson was released and Rogers was rehired.
“(W)e view the lack of transparency associated with this process and with some board members – and which resulted in regulatory hearings and investigations in North Carolina – as significantly heightening regulatory risk for Duke Energy and weakening its consolidated business risk profile,” writes Dimitri Nikas, a debt analyst for Standard & Poor’s that downgraded the company from A- to BBB+. “As a result, we think that management and the board have a journey ahead to restore their credibility with regulators and in the marketplace.”
What now? Duke must convince its customers that the higher rates that they will be paying will result from better offerings, not because of a costly and unnecessary merger between two behemoths. Their electric service, furthermore, will produce more reliability, shorter outages and cleaner air.
Indeed, Seeking Alpha is still calling Duke a “strong company” that has the ability to finance its debt while ensuring growth. It says that its “ambitious plans” are positioning the utility as an “industry leader” for years to come.
Rogers is unmatched in his ability to satisfy those promises -- a man whose reputation is ironclad among a diverse set of constituents. By his own admission, however, the challenges of both the merger and the methods by which it must be managed, are the greatest he has ever faced. Regulators will soon deliver their judgment on the company’s recent conduct. But it will be the marketplace’s assessment that will have the most enduring affect.
EnergyBiz Insider has been awarded the Gold for Original Web Commentary presented by the American Society of Business Press Editors. The column is also the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has been named one of the Top Economics Journalists by Wall Street Economists.