The planned corporate merger between Duke Energy and Progress Energy faces its first major hurdle today with a crucial vote by shareholders of both companies.
By most accounts, the outcome will be lopsided, if not a landslide. The merger has received near-unanimous backing from Wall Street, based largely on presentations and information from the two companies.
But investors will cast ballots to form the nation's largest electric utility before they have all the facts. The vote takes place just three days before consumer advocates, environmental groups and others are expected to challenge the merger with N.C. regulators. If the challenges are successful in winning rate cuts and other concessions, they would diminish the shareholder value of the $26 billion deal.
The merger, announced in January, could reshape the economic landscape of North Carolina and the entire Southeast. It will result in the elimination of a Fortune 500 corporate headquarters in Raleigh and erase hundreds of jobs from local economies as the two companies consolidate.
It will determine the energy bills for millions of households throughout the South and Midwest for decades to come. Company executives have said they will continue to seek expansion opportunities regionally to help pay for building nuclear plants, upgrading transmission systems and complying with stricter regulations.
The companies' hurdles
Getting to this point has not been without effort. The two utilities have had to fend off a spate of shareholder lawsuits while acknowledging the deal's financial intricacies had left many individual investors befuddled. Uniting the companies will involve reducing the number of Duke shares to a third, after Progress shareholders get 2.6125 shares of Duke stock for every Progress share.
Company officials have not dealt with the shareholders casually, given that retirees, employees and other individual investors own 50 percent of Progress shares and 43 percent of Duke shares.
Still, today's vote will be dominated by global funds and institutional investors that are the biggest shareholders in Duke and Progress. Indeed, the list of the biggest shareholders includes a dozen funds that together own more than 20 percent of shares in each utility and will therefore get to vote their shares twice, once as a Progress investor and then again as a Duke holder.
"This merger makes a tremendous amount of sense, to have such economies of scale," said Gordon Howald, a New York analyst with East Shore Partners, echoing a consensus sentiment. "The benefits of the merger are pretty clear: There's a lot of money that can be saved that can go back to the ratepayer to try to offset some of the rate increases we'll see over the next 20 years."
Benefits not with rates
Executives at Charlotte-based Duke and Raleigh-based Progress have said the merger would squeeze costs and therefore benefit customers, but they have not promised rate cuts or rate freezes.
To assess the merger's touted public benefits, the state's consumer protection agency for utility rate matters has been auditing the utilities' claims for months, said James McLawhorn, head of the Public Staff's Electric Division.
The Public Staff has hired a consultant to conduct computer analyses so complex it takes 13 hours for the merger data to be processed and analyzed in a single run-through. The computer analysis tests hundreds of assumptions for future operating cost savings that will come from fuel contracts, procurement, borrowing rates and other efficiencies expected from the combined utility, which is to be based in Charlotte.
What's more, the analysis will give the most detailed picture yet of the financial benefits that will come from the staff cuts both companies are planning as part of their consolidation. To date Duke and Progress have not revealed how many jobs will be eliminated or the extent of the cost savings.
"It's definitely been one of the more challenging reviews we've done in terms of scope and manpower," McLawhorn said. "We're also working on the regulatory conditions that will be imposed as conditions of the merger to prevent adverse impacts on customers. They will be detailed and very lengthy."
Filings are expected from environmental organizations, municipal power agencies, rural electric cooperatives and a host of others that buy power from or could be affected when the two regional monopolies are combined into a mega-utility spanning six states with 7.1 million customers.
Environmental groups, including politically seasoned organizations that were instrumental in creating the state's landmark 2002 Clean Smokestacks Act, are expected to press for commitments to expand green energy and pollution reductions as a condition of getting the merger approved. Among them are the Sierra Club, Environmental Defense Fund and Southern Alliance for Clean Energy.
A group of activist organizations that will make separate arguments includes the N.C. Justice Center, N.C. Housing Coalition, Greenpeace and Public Citizen.
"We want them to change their business model," said Jim Warren, director of N.C. Waste Awareness and Reduction Network, one of the activist groups. "Our basic position will be that saving energy is a whole lot smarter than trying to build new power plants."
Regulators' OK needed
The merger still awaits approval from the N.C. Utilities Commission and Federal Energy Regulatory Commission, among others, with hearings scheduled Sept. 20 in Raleigh. Such reviews have been a "real threat" in past utility mergers, according to an analysis by ISS Proxy Advisory Services, an investment advisory group.
ISS backed the Duke-Progress merger earlier this month, noting that the merger will result in resumed dividend growth for Progress shareholders, more than two years after the Raleigh company froze the quarterly payout that investors cherish.
"Progress' board felt that the partnership with Duke would have the lowest regulatory risk due to the improvements in customer service that would come from the operational synergies, which will be looked upon favorably by regulators," the ISS analysis said.
The roster of those who have spoken favorably of the merger includes Chief Judge John Jolly of the N.C. Business Court, who oversaw a class-action lawsuit filed by Progress shareholders who claimed they were being given short shrift by the merger.
In a July hearing in Raleigh on a proposed settlement of the suit, Jolly said he struggled with approving legal fees for the lawyers and questioned the merits of their case.
"You dug a well looking for oil, and you came up kind of dry," Jolly said.
"I recognize ... these lawsuits are part of the culture of the merger and acquisition world," Jolly said. "I mean, it may not be a dry hole, maybe a dribbling hole, but that happens with a lot of these cases."
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