Duke Pays the Price for Hiring Debacle

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When I wrote about the merger between Duke Energy (NYSE: DUK) and Progress Energy this summer, I expressed concern about the way the appointment of the new chief executive officer position was handled.

Instead of placing Progress Energy's Bill Johnson in the position, which was what had been a term for the merger, the Duke Energy board kept Jim Rogers as CEO. Bill Johnson moved on to head the Tennessee Valley Authority.

Not only did this seem to be in poor taste, but it also seemed to be unethical. It drew such ire from the North Carolina Utilities Commission and the North Carolina Attorney General’s Office that they launched separate investigations, while shareholders sued.

In order to get the final approval for the $32 billion merger, Duke Energy has reached settlements with the utilities commission and the Attorney General’s Office. By merging, Duke Energy and Progress Energy created the largest utility company in the country.

The settlement is far more than a slap on the wrist for Duke Energy, and some of the terms may be appear to be overreaching to some shareholders. Most interesting is that it will lose Rogers, who will likely retire earlier than the planned 2013 contract end date.

Other impactful personnel changes resulting from the settlements include Duke Energy’s board having to find two new board members. The board will have to create a special committee to oversee the recommendation of a successor to Rogers and the search for two new board members. The Raleigh Business Journal reports the board must have a balanced number of former Duke and former Progress Board members, as well as a new member not affiliated with either company.

The general counsel and the vice president of customer operations must be replaced. Duke Energy will have to retain the former general counsel of Progress Energy to advise it for two years on regulatory and legislative matters in North Carolina.

There are other conditions that are also impactful. For example, Duke Energy must retain an independent entity to survey its employees regarding merger integration and post–merger operations, and report the results to the Attorney General within two years. It will also have to designate a liaison in the company to communicate with the Attorney General on customer-related information.

It’s clear that Duke Energy’s board needed some changes, suggestions, and even rules based on its disastrous handling of something that threatened the merger. Still, this was a settlement that Duke Energy’s board knew it had to accept if it wanted the merger to go through.

I imagine this settlement won’t be too pleasing to some shareholders, so the company may have opened its self up to more lawsuits. At the time of writing, I found none to report.

Now that the merger is complete, Duke has a few advantages over some of its competitors. One of those deals with funding challenges. By merging, Duke has said funding pressures should be eased because it will have better access to the financial markets. This should help it fund its capital needs and mitigate the rising costs of delivering service to customers.

Duke’s fiercest competition is from the Southern Company (NYSE: SO). It has a similar market capitalization as Duke ($38 billion, while Duke's is $45 billion), it is strongly positioned, and has the funding capacity to cover its capital needs. In fact, this week it announced that one of its units has begun operating a new natural gas-fired plant that will serve customers in similar markets as Duke.

American Electric Power (NYSE: AEP) also operates in similar markets as Duke. Although it is one of the largest electric utilities in the U.S., I don’t see it as being as much competition to Duke as Southern Company. It being able to serve the niche electric market, though, may make it a player to be acquired.

For now, Duke shareholders have the peace of mind of knowing that this hiring debacle has been settled. The stock jumped on news of the settlement and was trading around $63 on Wednesday.

 


TwillyD has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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