Duke Energy and Progress Energy merger: Turning two companies into one

bhenderson@charlotteobserver.comJune 29, 2013 

  • Merger timeline

    Jan. 10, 2011 Duke Energy announces it will merge with Progress Energy in a $32 billion stock-swap acquisition.

    Aug. 23, 2011 Duke and Progress shareholders approve the merger with 90 percent and 96 percent of their respective votes.

    Sept. 30, 2011 The Federal Energy Regulatory Commission refuses to approve the merger, saying it will hurt competition for wholesale electricity in the Carolinas.

    Dec. 14, 2011 FERC rejects a modified merger plan.

    June 8, 2012 FERC approves the merger, conditioned on the new Duke building transmission projects and temporarily offering wholesale power sales to ease market-competition concerns.

    June 29, 2012 The North Carolina Utilities Commission approves the merger. South Carolina’s Public Service Commission follows suit on July 2.

    July 2, 2012 Duke’s board approves the merger, installs Progress CEO Bill Johnson as chief executive and then dismisses him. Duke CEO Jim Rogers, slated to become executive chairman, resumes chief executive duties.

    July 10, 2012 Rogers, summoned before the North Carolina commission, cites “loss of confidence” in Johnson by the board prompted by culture clashes, Progress nuclear-plant problems and slumping earnings.

    July 19, 2012 Johnson testifies before the commission that Duke suffered buyer’s remorse and tried to get out of the merger. He says he was locked out of contact with directors and other executives.

    Dec. 3, 2012 Rogers agrees to retire by the end of 2013 as part of executive and board changes settling the five-month utilities investigation. Duke agrees to keep 1,000 employees in Raleigh and adds $25 million to guaranteed customer savings.

    June 18 Duke’s board announces chief financial officer Lynn Good will succeed Rogers as president and CEO, effective Monday.

    June 27 The Duke board announces that lead director Ann Maynard Gray will succeed Rogers as chair on Dec. 31.

A year after the shock and awe of Duke Energy’s merger with cross-state Progress Energy, the companies are starting to work as one, says the executive charged with making that happen.

“We’re hitting our numbers and feeling pretty good about it,” said Lee Mazzocchi, Duke’s chief integration and innovation officer.

The combination that closed July 2, 2012, created the nation’s biggest regulated utility with 7.2 million customers in the Carolinas, Florida, Ohio, Indiana and Kentucky.

A year later, after five-month state investigations, it also paved the way for Duke to be led by women. New CEO Lynn Good starts Monday, replacing Jim Rogers, and lead director Ann Maynard Gray will take over as chairwoman on Dec. 31.

A core selling point for the merger was expected savings to be passed to customers, taking some of the sting out of future rate increases.

Through April, Mazzocchi said, Duke has recorded $97 million of the $687 million in savings it guaranteed to Carolinas customers over five to six years. The savings, which are far ahead of the $70 million Duke expected to save in the first year, come from using less fuel and jointly operating its Carolinas power plant fleet.

The fuel savings have come from burning cheaper coal from the Illinois Basin and Northern Appalachians at Duke’s larger plants, and from greater use of low-priced natural gas. Duke says it has locked in, through contracts, $238 million of the $331 million in fuel savings it expects over five years.

Customers see the savings in adjustments to the fuel portion of their bills.

The “joint dispatch” of the power plant fleet – which allows operators to choose the most efficient generation at any given moment – is possible because of the Carolinas’ regulated markets and the adjoining territories of Duke and Progress.

Morningstar analyst Andrew Bischof wrote last week that the 5 percent to 7 percent reduction in overall costs Duke expects with the merger is attainable. But delivering the promised fuel and dispatch savings to customers, he said, could be tougher.

“Virtually none of those benefits will go to shareholders, and the … savings guarantee to Carolina regulators ultimately could come out of shareholders’ pockets if Duke can’t meet that minimum,” Bischof wrote.

A shrinking workforce

Since the merger 1,051 employees have left Duke, 820 of them taking buyouts and leaving a workforce of 26,643.

Duke expects to cut 1,860 positions, in all, through additional buyouts and voluntary departures. Layoffs have claimed 102 jobs so far.

In Wake County, the former Progress home base, Duke now has 2,870 employees, compared with 3,237 last summer. Duke now employs 6,035 people in Mecklenburg County, compared with 5,732 a year ago.

Many of the cuts were of redundant administrative jobs, Mazzocchi said. Some jobs, including engineering and craft positions at nuclear plants, weren’t open to buyouts. Scaling back the workforce could take several years to unfold in areas such as finance, human resources and work management.

Teams of Duke and Progress employees started working together to look for potential operating efficiencies in early 2011, well before the merger’s target date of the end of that year. Then regulators took an extra six months to approve the merger, interrupting the companies’ momentum.

Combining the companies meant applying best practices in core operating, supply-chain and other functions from one company to the other – and sometimes, Mazzocchi said, discovering new efficiencies.

Duke has completed nearly 230 of 600 integration initiatives and expects to finish 400 by the end of the year, he said.

Surprise and uncertainty

The softer side of Mazzocchi’s job, combining two corporate cultures, “started with a surprise, a lot of emotion and a certain degree of uncertainty,” he said.

Duke’s board closed the merger, installed Progress CEO Bill Johnson as chief executive and promptly fired him, saying his management style didn’t fit Duke. Employees were stunned.

“I had doubts,” Mazzocchi said. “I was very sorry to see Bill leave.”

A Cary native who trained as a civil engineer at N.C. State University, Mazzocchi was a 22-year Progress employee and its chief procurement officer. At Duke, he replaced Paula Sims, one of three top Progress executives who quit after Johnson was fired.

Settling an investigation by the N.C. Utilities Commission shook Duke from the top down.

Rogers will retire by the end of this year, under the agreement.

Former Progress executive Lloyd Yates took charge of Duke’s regulated utilities, replacing Keith Trent, who is now chief operating officer of those utilities. Duke’s former chief legal officer, Marc Manly, became president of commercial businesses. Duke agreed to add two new directors to its board with no previous ties to either company.

The advocacy group NC WARN is still fighting the merger approval before the N.C. Court of Appeals, after the Utilities Commission refused to hear what the group says is new evidence.

WARN argues that the merger is a bad deal for consumers, a charge Duke says is not true. The group says private deals between Duke and some customer groups, and likely spending on nuclear plants, will erode promised savings for customers. WARN was joined by the city of Orangeburg, S.C., in its court appeal but has agreed to mediation.

Two working as one

As the regulatory waters boiled, the companies shared five goals:

• Completing the merger.

• Integrating the two companies.

• Resolving two state investigations.

• Deciding whether to close a troubled nuclear plant in Florida

• Settling the cost overruns of a new power plant in Indiana.

“We really rallied around those, and nothing brings a company together like a common enemy,” Mazzocchi said. “They became the focus, and the more we focused, the more we worked together, we found we liked working together and the rapport built.”

Top executives embarked on “conversation tours” to meet with employees and answer questions. Merger success stories were posted on the employees’ Web portal. Managers were coached to look forward, not back.

“We’ve gone through the stage of grieving,” Mazzocchi said. “We’re talking more and more about being one company, and less about being two.”

Henderson: 704-358-5051 Twitter: @bhender

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