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The Duke Takeover of Progress Energy
On August 16, 2012, we posted a report about Exelon’s (EXC) takeover of Constellation Energy, which occurred in March of 2012. That was an example of what typically occurs following a combination of two utilities. In July of 2012, Duke Energy (DUK) acquired Progress Energy for about $17 billion of stock, thereby creating the largest utility in the United States. What happened following the closing of this deal has not been typical, to say the least.
Originally, the chief executive officer of Progress Energy, Bill Johnson, was slated to become Duke Energy’s president and CEO after the transaction was completed. However, on the day on which the transition was supposed to have taken place, Mr. Johnson “resigned . . . by mutual agreement” and received a large severance package. He was replaced by Jim Rogers, Duke’s CEO, who was to have been the executive chairman of the board of directors.
The unexpected CEO change dismayed some people in North Carolina. Some of Progress’ executives resigned about a week later, and two board members stepped down in late July. The North Carolina Utilities Commission (NCUC) expressed some concern that it was misled during the regulatory process to consider the merger, so the commission held hearings about the change, and even hired outside counsel to help its investigation. Mr. Rogers, Mr. Johnson, and Duke board members testified before the NCUC. The state’s attorney general is also investigating this matter. One of the credit-rating agencies even lowered Duke’s corporate credit rating.
As of late August, the NCUC had not rendered a decision. It is questionable whether the regulators could undo a merger that has been completed, or force the board to replace Mr. Rogers as CEO, but they have the ability to fine the utility. We believe Duke will try to settle this matter to put it behind it.
So far, the controversy doesn’t seem to have had a large effect on the share price. The stock’s dividend yield is above the utility average, but it was above the industry mean even before the transaction was completed. That is not to say that there won’t eventually be any effect, however, depending on the outcome of the hearings or the possibility of difficulty in the merger-integration process. Also, Duke is planning to file rate applications in North Carolina later in 2012, for both its service area and that of Progress. This might well affect intervenors’ willingness to reach a settlement (something that happened in the most recent rate filing), or perhaps even the outcome of the case.
Duke is facing other problems, as well. Most notably, the 860-megawatt Crystal River 3 nuclear unit, which it acquired in the Progress deal, has been out of service since September of 2009. The company is still waiting to find out whether the outage is covered by insurance. Management must decide whether to repair the facility (at a probable cost of more than $1 billion) or shut it. Also, unrelated to the takeover, a coal gasification plant that is under construction in Indiana went over budget by nearly $1 billion.
Because orders on these rate cases won’t be issued until 2013, it will be several more months before the full effect of this controversy can be gauged, even if a ruling from the NCUC about the CEO change (or a settlement with the company) occurs before the end of 2012. Crystal River 3 is another key issue. Thus, Duke Energy stockholders have even more reasons than usual to pay attention to news about the company.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.