One of the cardinal rules in the utility industry is don't surprise your friends. Duke Energy (DUK) Chairman and CEO James Rogers just violated that rule.
After Duke's successful acquisition of Progress Energy last Monday, shareholders expected that Rogers would become executive chairman of the board and that Progress Energy's Bill Johnson would become Duke's president and CEO. But at 12:01 a.m. EDT Tuesday morning, just minutes into his new role as Duke's CEO, Johnson was allegedly forced out of the company by a Rogers-friendly board, and Rogers retook full control of the new Duke.
Apparently, the last-minute decision came as a complete surprise to Johnson. It was also a surprise for Progress Energy's leadership team. Had Progress executives known about Rogers' plan for a management switch before the merger closed, in all likelihood, they would've suspended final approvals.
It couldn't have been a surprise to Rogers. Duke is a big company and cannot spin on a dime. Rogers' plans had to have been socialized with critical board members well before the merger. (The new board is composed of 11 former Duke and seven former Progress members.)
It appears as though Rogers and his carefully selected board members were deceptive and withheld critical information from fellow board members, shareholders, executives and regulators. Worse, it appears as though the Rogers-controlled board members disregarded their fiduciary responsibilities to all shareholders, including the former Progress shareholders.
There is also the issue of corporate culture. As the industry learned from one of Rogers' former employers, Enron, corporate culture starts from the top. If deceptive maneuvers and ambush tactics are adopted and rewarded by senior executives, that culture will find its way down the corporate ladder and become a fixture throughout Duke's organization. That type of management style is not what most shareholders, regulators or the public expect of a nuclear utility.
Public trust and confidence is an essential ingredient for successful utility operations. The public's trust is imperiled when utility management is engaged in deceit. It's further imperiled when a management team's reputation with state and federal regulators is soiled, and Rogers' coup d'état has already attracted unfavorable regulatory attention.
According to Bloomberg, North Carolina's Attorney General opened an investigation to determine if Duke lied to get merger approval and win a rate increase. In addition, Standard & Poor's put Duke on negative credit watch after the firm learned about "the abrupt change in executive leadership."
Adding to the regulatory concerns are the outspoken concerns raised by Progress Energy's board members. John Mullin was one of those members, and he writes in The Wall Street Journal:
The surprise decision to change CEOs as its takeover closed was deceitful. I do not believe that a single director of Progress would have voted for this transaction with the knowledge that Jim Rogers would remain as the CEO of the combined company.
Duke Energy is damaged. The question is how bad and can it be fixed.
The numbers indicate how bad it can get. Last Friday, Duke had the second highest a P/E ratio in its peer group, at approximately 19.82 -- Southern Company (SO) was 18.79, NextEra Energy (NEE) was 13.49, and Exelon (EXC) was 12.33. Looking at the range suggests Duke's market capitalization could easily drop 10% to 20% if investors lose confidence in the company's ability to grow earnings.
There are at least three reasons why investors could lose confidence.
The first is trust. Can investors trust Duke's executive team to manage the new company?
The second is damage control. Can investors rely on state and financial regulators to provide Duke with necessary revenue and margins?
The third is Duke's board. Will they represent the interests of all their shareholders, including former Progress Energy shareholders? Or will they continue to support a charismatic CEO?
How Duke's board deals with its self-inflicted crisis will determine the company's future. Historically, when a nuclear utility such as Duke becomes cross-threaded with the Nuclear Regulatory Commission, the board's first step is to replace nuclear leadership in a bid to restore public and regulatory trust.
Such is the case with Duke. To restore shareholder, regulatory and public trust, Duke's board must do as other boards have done before and require Rogers to leave. The company should also consider asking Bill Johnson to return and lead.
In the event Duke's board hesitates, shareholders should consider replacing their positions with safer bets. Two solid peers are Southern and NextEra. Both companies have lower P/Es, solid management teams, and each earned the trust and confidence of their stakeholders.
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