RALEIGH, N.C. -- As Duke Energy settled both state investigations of its merger with Progress Energy on Monday, the nation’s largest utility hoped to hit the reset button on a $32 million combination that strayed off track from the start.
Duke foresees an end to the distractions that occupied its management for five months, and new stability in its relations with regulators and investors. Barclay’s immediately upgraded its outlook for Duke’s stock, which rose 15 cents to $63.97, due to the “material reduction in political and regulatory risk in the Carolinas.”
The settlement also adds to the utility’s already heavy workload, chiefly in finding a successor for CEO Jim Rogers.
Under its terms, which the N.C. Utilities Commission unanimously approved Monday, Rogers will retire when his contract expires at the end of 2013. But the settlement also tasks an executive search committee with finding Rogers’ replacement by July 1.
Duke is expected to announce more management changes later this week.
Under the agreement, chief legal officer Marc Manly will move to another position within the company. Former Progress executive Lloyd Yates will replace Keith Trent as chief of Duke’s regulated utilities division, its largest unit, and Trent is also expected to move elsewhere in the company. A Progress executive who quit after former Progress chief Bill Johnson’s ouster, John McArthur, will be brought back as a consultant for two years.
The Utilities Commission, with no comment, approved a settlement signed last week by Duke, the commission’s staff and its Public Staff, which advocates for consumers.
N.C. Attorney General Roy Cooper also settled his own investigation of the merger’s aftermath, in which Johnson was abruptly fired as CEO of the combined companies.
Monday’s settlements are “what we needed to do for shareholders and customers,” said Duke’s North Carolina president, Brett Carter, who added that Duke’s differences with the commission should be laid to rest.
“I think it gives a lot of clarity for us to move forward. We are really ready to get back to brass tacks. … Every piece of this was very difficult.”
Duke will add $25 million to the $650 million in fuel-related cost savings it has guaranteed Carolinas customers and $5 million to workforce development and low-income assistance programs.
It will also pay the bills, expected to be in the millions of dollars, of the law firm the Utilities Commission hired to interview Duke and Progress officials and sift through nearly 6,000 pages of emails and other documents the companies were ordered to produce.
The settlements should help stabilize a newly combined workforce that’s been caught in the middle during the investigation probes. Under the commission settlement, Duke agrees to keep at least 1,000 employees in Raleigh, Progress’ former headquarters city.
“Time heals a lot of wounds,” said Carter, who will be based in Raleigh. “This closes the chapter on something that was obviously an open wound.”
Rate cases, cost overruns
Following a longer-than-expected 18-month merger approval process, Duke spent tens of millions of dollars more than expected in concessions to appease federal regulators. Then Johnson’s dismissal prompted an in-state backlash over whether Duke’s directors had changed a significant merger selling point – Johnson as CEO – without warning.
With that issue resolved, Duke by early next year will have two N.C. rate cases in motion. It also has to resolve cost overruns at a new power plant in Indiana and the fate of a crippled nuclear plant in Florida.
The commission’s general counsel, Sam Watson, said the agreement reaffirms the regulatory process, sweetens benefits to customers and restores the managerial balance between Duke and the smaller legacy Progress.
“This was a good day for the regulatory process,” Raleigh attorney Dwight Allen, who represented Duke at the hearing, told commissioners.
“All the parties had the long-term benefits of Duke Energy in mind. There were differences in how we got there.”
The six sitting commission members – one seat is vacant – approved the settlement without comment and with only one question on a detail of the agreement. The commission is expected to issue a written order within a few days.
N.C. WARN, the Durham-based watchdog group that fought Duke over the merger, asked the commission Monday not to approve the settlement without more hearings on the merger itself.
The group says the commission has not forced Duke to present a full accounting of the merger’s benefits to consumers and its costs, including millions of dollars WARN claims N.C. customers face over upgrading the former Progress nuclear fleet and residual costs of repairing or retiring the troubled Crystal River nuclear plant in Florida.
“It’s not clear that revoking the merger at this time would be in the best interests of the public,” said WARN director Jim Warren. “We’re ready to look at other remedies.”
Agreement with attorney general
Attorney General Cooper had declined to join the commission settlement. On Monday, he filed his own agreement.
Duke agreed, in settling with Cooper, to survey its 3.2 million N.C. customers about their satisfaction with the company and to report to the attorney general’s staff in a year. Duke will also survey its own employees on how the merger, which closed in July, is going.
The company will pay $250,000 in legal fees to the attorney general’s office.
As in the merger signed last week with the Utilities Commission’s staff and consumer agency, Duke doesn’t admit illegal or improper actions.
Cooper, in a statement, called the settlements “positive for consumers.” The merger settlement does not end his challenge of Duke’s last rate increase, in January. Cooper has appealed to the N.C. Supreme Court, saying the Utilities Commission didn’t evaluate the 7.7 percent increase’s effect on consumers.
“As we continue our fight for lower rates in the Supreme Court and before the commission, these settlements will provide a framework for ensuring more complete and accurate information from Duke Energy in the future,” Cooper said in a statement.
As a result of the settlement:
• Duke must pass on to North Carolina customers an extra $25 million in merger-related savings to the $650 million it had previously guaranteed.
• Duke will keep at least 1,000 employees in Raleigh for at least five years, including the president of Duke Energy North Carolina and the senior vice president of Carolinas Delivery Operations.
• Duke CEO Jim Rogers will retire as planned on Dec. 31, 2013.
• Duke will spend an additional $5 million on workforce development and low-income assistance.
• Lloyd Yates, who moved from Progress Energy, will take over as executive vice president responsible for its regulated state power subsidiaries.
• Former Progress Energy General Counsel John McArthur, who resigned after the takeover, will get a two-year position advising on regulatory and legislative matters in North Carolina.
• The committee searching for Rogers’ successor will have a balanced number of former Duke and former Progress board members, plus a new outside board member.
• Duke will issue a statement acknowledging that “its activities have fallen short of the commission’s understanding of Duke’s obligations” as a regulated utility.
• Duke can’t charge rate payers’ severance costs associated with the firing of Bill Johnson or the departures of other executives.
• Duke must pay all fees associated with the investigation and is not allowed to pass those on to rate payers.
• Duke Energy Carolinas will defer an upcoming rate request, initially expected to come this year, until February.