NC Utilities Commission approves Duke Energy settlement

Utilities Commission ends lengthy probe of merger 

jmurawski@newsobserver.comDecember 3, 2012 

  • Details of the settlement What’s in it for customers • An extra $25 million in merger-related savings for customers (Duke had previously agreed to $650 million). • Duke will spend an additional $5 million on workforce development and low-income assistance. • 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 until February. What’s in it for Raleigh Duke will keep at least 1,000 employees in Raleigh for at least five years, including president of Duke Energy North Carolina and senior vice president of Carolinas Delivery Operations.
  • Duke, attorney general settle Duke must pay $250,000 to the state General Fund to cover the cost of the AG’s investigation. Duke will also have to conduct a customer-satisfaction survey and an employee satisfaction-survey.
  • Who’s in favor, who’s not IN Lloyd Yates. At Progress Energy, Yates was president and CEO of Progress Energy Carolinas. After the merger with Duke Energy, Yates became executive vice president for customer operations. Now, he’s getting a much bigger job: executive vice president for regulated utilities, considered Duke’s second-highest executive position, overseeing the business that represents the company’s largest source of revenue. All Duke state utility presidents will report to Yates, and he’ll be over federal and state government relations, regulatory affairs, retail rates and planning power plants for the company’s future. John McArthur. The former general counsel for Progress Energy followed CEO Bill Johnson out the door, resigning the week after Johnson’s firing. McArthur has been brought back as part of the settlement to advise Duke for two years on regulatory and legislative matters, and on “procedures for maintaining good relationships” with state officials. He’s being brought in as an outside consultant rather than being hired because he has already received his severance from Duke for his departure. OUT Jim Rogers. The CEO must retire by Dec. 31, 2013, as stated in his contract. A search committee will select a new CEO and board chair by July 1. Marc Manly. The general counsel for Duke is assuming a new, as yet unannounced, leadership role. Keith Trent. Ditto for Trent, who held the job Yates is moving into. Bill Barnett, Phil Sharp, Alex Bernhart, Jim Reinsch, Jim Hance. Duke directors will have to rotate off the board by age 71 as specified in the company’s bylaws, rather than staying on through waivers. Over time, their departures will reduce Duke’s legacy presence on the company’s 11-member board to a minority of five. Jim Rhodes. This Duke board member was allowed a 2-year extension and will step down in 2015 instead of 2013. Harris DeLoach. This legacy Progress board member, subject to the mandatory retirement age, will be aged out of Duke’s board in 2016.
  • Timeline to a merger 2011 Jan. 10: Progress Energy and Duke Energy propose a corporate merger that would form the nation’s biggest electric utility. Sept. 2: Progress and Duke guarantee $650 million in savings over five years for customers in the Carolinas. Sept. 20: Three days of merger hearings get under way before the N.C. Utilities Commission. Sept. 30: The Federal Energy Regulatory Commission rejects the merger, saying it would “have an adverse effect on competition.” Oct. 8: The utilities propose merger revisions. Dec. 14: Federal regulators reject the merger a second time, saying that proposed revisions were inadequate. 2012 Feb. 22: Progress and Duke file merger revisions that include transmission upgrades plus wholesale power sales. May 8: In a compromise with N.C. consumer advocate, Progress and Duke agree to delay or absorb about $450 million in additional merger-related costs. June 8: Federal regulators approve merger with more than a dozen conditions. June 29: N.C. Utilities Commission approves the merger. July 2: Duke and Progress close merger. July 3: Duke announces its board fired Bill Johnson as CEO and replaced him with Jim Rogers following the close of the merger. July 6: Utilities Commission orders investigation of merger; N.C. Attorney General initiates his own investigation. July 10: Rogers testifies before the Utilities Commission. July 19: Bill Rogers and Duke board members testify. Aug. 7: and 21: Duke and Progress file 5,964 pages of documents with the commission; 5,033 of them are sealed as trade secrets. Oct. 19: Commission finds that only 627 of the 5,033 sealed documents are trade secrets and orders rest made public. Nov. 29: Duke announces it has reached a settlement with the staff of the Utilities Commission and the N.C. Public Staff. Dec. 3: Utilities Commission approves settlement; AG’s office announces its own settlement. Sources: N&O, Progress Energy, Duke Energy

— The N.C. Utilities Commission halted its five-month investigation of Duke Energy on Monday by adopting far-reaching changes that will shake up the Charlotte-based power company’s executive ranks and potentially influence how Duke operates from Florida to the Midwest.

The changes reshuffle key executives, establish a special board to search for a new CEO, and strip legacy Duke directors of their majority on the company’s board. Duke signed on to the negotiated terms, which also require the company to issue a written statement of penance for its mishandling of its $32 billion merger with Progress Energy.

Wall Street analysts saw the restructuring and closure as making the company stronger. Barclay’s immediately upgraded its outlook for Duke’s shares due to the “material reduction in political and regulatory risk in the Carolinas.” Duke’s shares have risen 2.5 percent, to $63.97, since the settlement was announced Thursday.

The Utilities Commission’s vote was unanimous, without discussion.

“It affects the whole company,” said Alfred Tollison Jr., a former Progress board member who voted for the merger with Duke and regretted the result. “We’ll get a new CEO and chairman, third parties who haven’t been involved in the gymnastics over the past months.”

The conditions accepted by Duke will have the effect of reducing the influence of Duke officials within their company and restoring the power balance that Progress lost when Duke fired CEO Bill Johnson this past summer. The firing prompted the exodus of three top Progress executives and the resignation of two legacy Progress board members from the combined company created by the merger.

“There is no doubt the trust relationship and the mutual respect had been damaged and needed to be repaired,” Duke’s lawyer, Dwight Allen, told the six commissioners before they voted.

The N.C. Utilities Commission had approved the merger June 29 on the understanding that Johnson, who had been CEO at Progress, would lead the new Duke, now the nation’s largest electric utility. Duke board members had planned to remove Johnson as soon as the merger closed, executing their plan July 2 over the pleas of former Progress board members who had joined Duke’s board as part of the deal.

Some described the settlement approved Monday as sweeping in its effect but modest in its bill of particulars. The mandated resignation of CEO Jim Rogers by the end of 2013, and mandatory retirement of board members at age 71, merely hold the company to its own contracts and bylaws. The selection of the next CEO will be handled by a special committee equally represented by Duke and Progress.

The Utilities Commission reassigned two key executives but did not require that they leave the company. A condition requiring that Duke keep at least 1,000 employees in Raleigh for five years codifies a general goal the company had previously spelled out, but the Commission did not go nearly as far as at least one other state that required a merging utility to keep dual headquarters.

“That’s the beauty of it – there’s no loss of face for Duke – but the Commission got what it wanted,” said Hugh Wynne, an analyst with Sanford C. Bernstein & Co. in New York. “Now they can run a nationwide CEO search. They can get the best utility executives to come and talk to them.”

For regulators and Duke officials, the concerns were more immediate: healing the scar tissue from the merger machinations, restoring the integrity of the regulatory process, and allowing Duke and Progress, now a subsidiary of Duke, to move ahead with rate cases in North Carolina. This state, with 3.2 million electricity customers, represents nearly half the company’s rate base in a utility operation spanning six states and 7.1 million customers.

“Getting this investigation resolved before the rate case comes to a head is key,” Wynne said. “Now the people handling the rate case are people the Commission said it can trust.”

Other challenges facing Duke are multibillion dollar costs at a damaged nuclear power plant in Florida and an over-budget coal gasification plant in Indiana.

The settlement also exacts a $30 million payment from Duke in rate savings and other benefits for North Carolina.

The Utilities Commission’s probe will cost more than $2 million, to be billed by the outside law firm that conducted the probe for the state. As part of the settlement, customers will be spared that expense – the tab will be picked up by Duke shareholders.

Johnson’s firing in July triggered a storm of protest from customers and employees, raising suspicions that Duke had deliberately misled shareholders and public officials about its leadership strategy. A Wall Street firm promptly downgraded the company’s credit rating. Former Progress board members broke their silence and said they would not have supported the merger if they had known Johnson was doomed.

“I wish I could turn back the clock two years,” Tollison said of the Commission’s decision to end its probe. “Given all that had happened, this turned out as well as it could.”

The Utilities Commission launched its investigation four days after Johnson was fired, held public hearings that month, grilled Rogers, invited Johnson to give his version of events, put four Duke board members on the stand to testify, and ordered the disclosure of thousands of pages of internal emails and communications.

Since then, the commission has interviewed more than two dozen executives and board members as part of its investigation. By ending its unprecedented probe, the Utilities Commission avoided another round of public hearings and further embarrassing disclosures for Duke.

“It was a distraction,” said Brett Carter, Duke’s state president for North Carolina. “It took a lot of executive time.”

Carter, along with all Duke state presidents, will report to Lloyd Yates, the new vice president of regulated utilities. Yates, a former Progress executive, was promoted as part of the Commission’s strategy to return levers of power to legacy Progress managers. The promotion elevates Yates to Duke’s second-most-powerful corporate position overseeing the company’s electric utility business and profit center.

“By me taking this job, that helps the company get past the investigation, and I was willing to do it,” Yates said on his way out of the commission hearing room after the vote.

Still, Yates said that after Rogers broached the idea, it took him a day to decide to take the job, noting that it was not an easy decision.

“You’ve got to process these things,” Yates said. “At the end of the day, you’ve got to do what’s right for the company, not for yourself.”

Murawski: 919-829-8932

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