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Duke Seeks Progress: Where Does IT Fit?

12.01.2011
The buzz this week is all about the merger between Duke and Progress, leading to a mega-utility. According to Jim Rodgers in the , the merger "creates a company positioned for future financial strength and capability that will be greater than the sum of the two separate companies. Both companies are underway with significant fleet modernization strategies. We are updating our aging infrastructure to meet future demand growth projections and future environmental constraints. This combination will allow both companies to achieve additional cost savings and efficiencies, helping to minimize potential future customer rate increases." This seems to say focus is on "sustainability", in some ways similar to TXU going private. So, in that statement there is more emphasis on availability of capital for cleaner generation and perhaps a smarter grid to replace aging infrastructure, with less emphasis on what was emphasized during the 1999 to 2000 wave of mergers - synergy savings. This may mean that transformation and synergy savings will come at the same time, especially where IT is concerned.

Still, digging a little deeper, efficiencies (or synergy savings) are substantial. The companies have put most of the emphasis on achieving efficiencies from having contiguous service territories. Biggest emphasis seems to be on fuel and joint dispatch of generation - about $600 million to $800 million for five years. As for non-fuel efficiencies, according to Lynn Good, CFO of Duke, "Historically, regulated utility merger transactions have delivered annual, non-fuel cost savings in the range of 5% to 7% of total non-fuel O&M costs. Based upon combined 2012 non-fuel adjusted O&M projections of around $6 billion, we believe that the total annual savings realized over time from this transaction will fall within that range." So, if I am reading that correctly, it would be $300 million to $400 million "over time." Of course, some financial analysts are saying non-fuel savings are neither huge nor immediate.

We expect that IT will play a significant role in this merger. The most obvious reason is that the AR Mullinax, VP of Information Systems and CIO at Duke will co-lead the integration effort with Progress Energy's Paula Simms. As those who have been involved in IT in the industry know that the CIO is in a good position to lead integration efforts as IT is aware of the business processes and systems used across business units. Both utilities are experienced in integration (Duke and Cinergy, Progress and Florida Power). It also helps that utilities have worked together on regional planning exercises around transmission planning to incorporate offshore wind resource.

The rule of thumb for synergy savings attributable to IT has, in the past, been 10%, so expected savings could be $30 million to $40 million. IT savings will likely from typical sources, such as server consolidation and virtualization, storage and application consolidation and, eventually, rationalization. Enterprise Resource Planning (ERP) and Customer Information Systems (CIS) are the two largest expenditures when it comes to spending on applications, so there are some possibilities there. Savings can also be achieved through assessing opportunities in the telecommunications infrastructure, especially as the company embarks on smart grid initiatives. One utility we know of was able to save $50 million on telecommunications contracts with their merger even before the days of smart grid. In our opinion, the biggest transformation, but hardest when it comes to quantifying "savings", will come if capital investments in infrastructure (plants and T&D) come with more automation and embedded intelligence.