State regulators on Friday finally approved the merger between Progress Energy and Duke Energy, ending an 18-month legal marathon and clearing the way for the creation of the nation’s largest electric utility with 7.1 million customers.
The N.C. Utilities Commission embraced the companies’ economic rationale for the deal, rejecting critics’ calls to impose stringent conditions. The merger creates a global energy conglomerate based in Charlotte with 29,000 employees, and operations in a dozen states and in South America.
The approval, which was widely expected, means that Progress stock could stop publicly trading on Tuesday as the Raleigh electric utility becomes a Duke subsidiary. Progress shareholders will become investors in Duke.
The merger faces one more hurdle in South Carolina, where regulators have scheduled a meeting Monday. They are expected to approve an aspect of the deal to allow Progress and Duke to coordinate power plant operations.
Although utility mergers in other regions have encountered political resistance at the local level, with deals getting held up as leverage to limit job cuts and electricity costs, Progress and Duke lined up support early and ducked a firefight by guaranteeing they would not impose merger-related costs on their customers.
Federal regulators in Washington ultimately proved to be the wild card. They approved the deal earlier this month, but only after twice rejecting it on monopoly concerns and delaying the merger’s closing by a half year.
The merger ends Progress Energy’s 104-year run as a standalone company that has become one of the region’s largest employers and one of the state’s most visible businesses. As the utility industry entered a period of consolidation, however, Progress became an increasingly attractive target in a healthy, growing market.
But in the midst of the recession, Progress internally signaled that its financial outlook was clouded. After years of healthy growth fueled by booming real estate markets, the company in 2009 froze its stock dividend, froze executive salaries and imposed cost-cutting measures on employees.
North Carolina’s consumer advocate, Robert Gruber, said one of the merger’s pluses is that it keeps control of a homegrown company in local hands. The companies had revealed that Progress had been courted by other suitors, suggesting that if the Progress-Duke deal fell through, Raleigh’s utility could be a sitting duck for a takeover by an out-of-state company.
“That was one reason to let the two companies combine,” said Gruber, who directs the state’s Public Staff agency. “We could at least keep most of the personnel in the state.”
Former Raleigh Mayor Charles Meeker, who led the city for a decade, said he’s not bemoaning the disappearance of a Fortune 500 corporate headquarters as long as Raleigh is attracting nimble technology companies.
“It’s certainly a change of identity for Raleigh,” Meeker said. “It shows how Raleigh is evolving over the years.”
The companies will next turn to the task of screening thousands of employees for positions throughout the combined organization. Fewer than 500 slots have been filled in the executive and management ranks, leaving the majority of the new corporate structure undefined.
Progress spokesman Mike Hughes said that filling those positions will take up many months and continue into next year. Meanwhile, the companies will begin scheduling departures for the 1,150-some senior-level workers who opted for the early buyouts that were offered to winnow down the workforce.
The N.C. commission received a stream of emails from residents who inveighed against creating a giant monopoly utility without a rate cut. Advocacy organizations complained that the merger’s purported benefits were minimal; they wanted N.C. commissioners to squeeze out greater concessions that would aid the elderly and the poor.
N.C. Waste Awareness and Reduction Network, in Durham, asked the commission to require Progress and Duke to contribute $270 million to low-income programs.
“We’re really concerned that there may be no net public benefit,” said N.C. WARN director Jim Warren. “It’s just really unfortunate that they never really did more on low-income folks.”
Even though Duke is buying Progress, the deal is structured as a merger of equals, in which Duke will be steered by executives and managers from both companies. Progress Energy CEO Bill Johnson, 58, will become chief executive of the merged Duke Energy, while Duke CEO Jim Rogers, 64, will remain board chairman.
Customers will see minimal differences. Progress and Duke will continue operating with their own corporate names and separate electricity rates. Both companies have said they will independently seek rate increases later this year, a plan that will be unchanged by the merger.
“It’s not going to be obvious, but the rates should go up slower than they otherwise would have,” Gruber said. “I don’t think customers will see any real change in terms of how they receive service or how they pay for it.”
The N.C. commission said the merger will bring significant benefits for the public, particularly from the cost savings the companies will achieve by combining power plant operations and by eliminating 1,860 jobs over three years, about 6 percent of the combined workforce.
“The Commission ... finds and concludes that the potential workforce reductions at issue are reasonably necessary, unavoidable, and justified by the weight of the evidence in this proceeding,” the merger ruling said.
The companies will pass on $650 million in guaranteed costs savings from more efficient energy operations achieved by jointly operating power plants. The companies also agreed to absorb $226 million in severance payments to be made to employees who take early buyouts or are laid off.
These savings would almost certainly have occurred anyway but getting a written guarantee was significant, Gruber said.
The merger’s size also strengthens Duke Energy’s balance sheet and could lower borrowing rates as the company embarks on a multi-billion dollar phase of power plant construction and upgrades to an aging transmission grid.
To ensure public benefits, the N.C. commission added several merger conditions that had largely been proposed by the companies themselves last year. The commission rejected conditions proposed by environmental organizations, concluding that “such additional measures or contributions are not necessary or warranted as part of the merger.”
Progress and Duke will be required to contribute about $33.5 million to charitable organizations, for low-income energy assistance, and grants to community colleges for worker training programs.
The commission also said Progress, which will shrink from two office towers to one high-rise, will be required to maintain a significant corporate presence in Raleigh.
Progress will bear the brunt of the staff reductions and is paring its Raleigh workforce by as much as half. The company expects to eliminate 800 to 1,000 jobs. That will leave a “significant presence” of 1,000 to 1,200 workers in downtown Raleigh.
The commission threw in a condition of its own. It will require a $2 million contribution to N.C. GreenPower, a Raleigh nonprofit program that subsidizes small renewable energy projects in the state.
The conditions “represent additional benefits of the merger to the communities” that Progress and Duke serve in North Carolina, the commission said.