Target Rock Views Duke/Progress Merger as a Long-Term Positive for Sustainability: But Governance, Nuclear Issues Create Near-Term Risks

Target Rock Advisors, LLC (TRA) today released its first analysis of a utility merger in terms its potential effect on the sustainability of the new enterprise. The merger of Duke Energy Corporation and Progress Energy, Inc. has the potential to create substantial long-term economic, environmental and social value for shareholders and society as a whole. However, Target Rock believes recent events tarnish Duke's social and governance record, raise questions about the Progress nuclear fleet, increase regulatory risk, and could make for a difficult post-merger integration, reducing or delaying the near- and medium-term benefits.

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Hauppauge, N.Y. (PRWEB) July 19, 2012

Target Rock Advisors, LLC (TRA) today released its first analysis of a utility merger in terms its potential effect on the sustainability of the new enterprise. The merger of Duke Energy Corporation and Progress Energy, Inc. has the potential to create substantial long-term economic, environmental and social value for shareholders and society as a whole. However, Target Rock believes recent events tarnish Duke's social and governance record, raise questions about the Progress nuclear fleet, increase regulatory risk, and could make for a difficult post-merger integration, reducing or delaying the near- and medium-term benefits.

“TRA believes that sustainability should be an important component of merger and acquisition planning and related regulatory approval processes,” said Richard Rudden, co-founder and CEO of Target Rock. “Today’s regulatory approval process focuses mostly on customer benefits, cost synergies and environmental issues. These are critically important, but there are other dimensions that sometimes go unconsidered or are at least not considered in any comprehensive long-term, integrated fashion. In this report, we hope to show the relevance of enterprise-level sustainability analysis to mergers and acquisitions and make a contribution to the understanding and evolution of sustainability planning in the utility industry”

“There’s no question that the negative social and governance events of July 2 and the chain reaction that followed -- including questions about the performance of Progress’ nuclear fleet -- changed our view of the merger,” said Kyle Rudden, co-founder of Target Rock. “Initially this was a fairly clean merger of high sustainability equals that we expected would almost immediately enhance Duke’s sustainability profile across all Triple Bottom Line elements -- Economic, Environmental, and Social (including Governance). This is still a great combination for sustainability, and our ‘net long-term positive’ conclusion remains, but it is now achieved with more balance among pros and cons and our near- to medium-term comfort level is diminished by the introduction of a new set of risks and uncertainties.”

TRA’s analysis of the merger finds a number of substantial long-term benefits including: Increased size and financial strength; promising operating synergies and savings; improved regulatory diversity; more balanced fuels mix profile with a material reduction in coal-fired generation and greater use of cleaner fuels as a percentage of total capacity and net generation; greater potential to further reduce harmful emissions; strong employee safety and development track record; and a civic-minded and generous philanthropic culture.

“Unfortunately the post-merger social, governance and nuclear issues are likely to overshadow these benefits for a while,” Kyle Rudden said.

From a governance perspective the original merger agreement appeared very fair in TRA’s view. Pre-merger Duke Chairman, President, and CEO Jim Rogers was to be Executive Chairman, while the pre-merger Chairman, President, and CEO of Progress, Bill Johnson, was to retain those positions in the new company; a sign that Duke was treating this as a merger of equals. Moreover the proportional post-merger representation of pre-merger Duke and Progress board members and senior executives was as close as possible to the 63/37% economic value of the merger for Duke/Progress shareholders.

On the day the merger closed, Mr. Johnson abruptly resigned from Duke without adequate explanation by the company. Subsequently, several additional former Progress senior executives resigned.

“Mr. Johnson's departure, the lack of transparency surrounding it, and its various collateral effects are cause for concern,” Kyle Rudden added. “In addition to the adverse effects on Duke's social and governance reputation, the situation could negatively affect relations with regulators putting future rate relief at risk, and slow the merger integration. Questions reportedly raised by the Board about the performance of the Progress nuclear fleet also complicate the picture.”

“We don’t want people to lose sight of the fact that on the whole this merger is a positive for Duke’s corporate sustainability profile,” Kyle Rudden said. “The majority of the benefits should be relatively unaffected by the recent governance issues and there are even some governance related improvements that remain intact, such as a larger and more diverse board of directors and a management team that draws top talent from both companies. But the departure of key executives and lack of disclosure will remain a concern until their potential effects are clearer.”

A detailed analysis can be found in a Research Note titled “Duke/Progress Merger: Positive for Corporate Sustainability Despite Governance Concerns” at http://www.targetrockadvisors.com/research-reports/.

About Target Rock

Target Rock is dedicated to the rigorous study and implementation of sustainability policies and practices within the utility and financial industries. The Company’s mission is to provide data, information, analytical systems and deep sector-specific technical expertise that identifies areas for improved performance and helps utility companies achieve their sustainability objectives with favorable social and economic outcomes. For more information visit http://www.targetrockadvisors.com.


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