Progress Energy and Duke Energy vowed Thursday to press ahead with their corporate merger, despite two stinging rejections from federal regulators that have raised questions about what sacrifices will be required to complete the $26 billion deal.
The two power companies said they will file a third merger revision soon to appease federal monopoly concerns. The earliest possible time the deal could now be completed would be in March, three months behind the original schedule. But Wall Street analysts are projecting the merger could take six more months to complete, assuming the feds accept the next round of revisions.
Duke spokesman David Scanzoni declined to comment on the criticism, and said the utilities don't yet know what revisions will be made to the plan.
"We're still very optimistic about the merger and eager to move forward," he said.
Many Wall Street analysts remain unshaken in their faith that the merger will be approved. They say the case is overwhelmingly in favor of combining Duke and Progress for the benefit of customers and shareholders.
The merger scenario, setbacks notwithstanding, may be playing out exactly as planned, said Gordon Howald, an analyst with Doyle Trading Consultants in New York.
"You probably go out there and see if you can get the merger done without committing to anything, or committing to as little as possible," he said. "They've been at this for a year now, and I'd think they're smart enough to know what can and what can't be done."
Charlotte-based Duke and Raleigh-based Progress announced more than 11 months ago their plan to form the nation's largest electric utility, with 7.1 million customers in six states. Duke and Progress CEOs confidently predicted their merger would sail through regulatory approvals and be completed before the end of this year.
The companies proceeded with a corporate integration plan that called for the elimination of 1,860 employees, dismantling Progress's corporate headquarters in downtown Raleigh, and reassigning dozens of executives and managers to the combined company's headquarters in Charlotte.
As the months passed, several hundred employees left the two companies rather than face uncertainty or layoffs. More than 1,000 have opted for voluntary buyouts, but they will not depart until the merger is completed.
FERC's demands
The Federal Energy Regulatory Commission shattered any expectations of a quick approval. The agency warned twice, most recently Wednesday, that the merger raised serious concerns that the combined utility would manipulate wholesale market prices of electricity in North Carolina. The federal commission wants the companies to give up control of power plants or transmission lines, either by selling or leasing those assets, moves Duke and Progress have been reluctant to take.
In a joint statement Thursday, the companies said they will file a revised merger plan after they review the federal commission's order.
"The FERC ruling does not call into question the benefits of the merger," the joint statement said. "The combination of Duke Energy and Progress Energy will provide clear benefits for our customers, including overall lower corporate costs and $650 million in guaranteed benefits to customers in the Carolinas."
The federal commission issued its latest rejection of merger revisions late Wednesday after the close of market trading so as not to rattle investors. Shares in both companies barely moved Thursday.
Still, executives and employees at both companies were taken aback by the failure of their most recent merger revision, or "mitigation," which the companies said would have sacrificed more than the FERC required.
One FERC commissioner issued her own statement Thursday, saying the companies still have an opportunity to fix the problems.
"The decision to reject the proposed mitigation plan was not taken lightly," Commissioner Cheryl LaFleur wrote. "I recognize that our December 14th orders, like the merger proposal itself, are important to the companies, their customers, other electric customers in the region, and state regulators and officials."
State regulators
The merger also awaits approval from regulators in North Carolina and South Carolina. The state agencies won't rule until the FERC issues a final approval and sets the terms of the merger. Substantial revisions to the merger could trigger new rounds of public hearings before the respective state utilities commissions, adding months to the merger timeline.
"Everything the companies do is going to affect the final value of the merger," said Paul Franzen, an analyst with Edward Jones in St. Louis. "The question is, How much is too much?"
For North Carolina regulators, the key to approving the merger is demonstrating that its benefits outweigh the costs and risks to the public.
Duke and Progress had systematically sidelined merger critics by signing private settlements that promised sweeteners to each of those groups in exchange for dropping their objections. Those that signed included the state's consumer advocate, known as the Public Staff, as well as several leading environmental groups.
Each of those side deals, backed by months of analysis, is now at risk as the merger is restructured.
"How do you put Humpty Dumpty back together again?" Public Staff Director Robert Gruber said. "It's going to take them a while to pull this off."
