On Tuesday, Duke Energy (DUK) Chairman and CEO Jim Rogers appeared before North Carolina's Utility Commission and answered questions about the ousting of Duke CEO Bill Johnson, which occurred just hours after the company's merger with Progress Energy. We learned two new facts: The company's board lost confidence in Duke's new CEO, Bill Johnson, and the utility commission lost confidence in Duke's newer CEO, Jim Rogers.
The commission had good reason to doubt Rogers, as his testimony painted a confusing picture about the events leading to Johnson's termination. When the testimonial dots are connected, an interesting story emerges.
Rogers had advance warning his board was considering ejecting Johnson at the earliest possible opportunity. On evening of the merger, Duke's new board went into executive session by phone. The members then asked Rogers and Johnson to drop off the line and they voted to push Johnson out (the new board was composed of 11 former Duke directors and seven former Progress directors).
Rogers' explanation for terminating Johnson one hour into his new job was insightful. He claimed it was the board's idea and responsibility, and that he was not directly involved. Each party was operating under contractual agreements; the board was obligated to close the deal and to make Johnson the new CEO. They kept to the contract and Johnson was in fact the new CEO. However, the contract did not stipulate how long he was to be the CEO, so they limited his tenure to a couple of hours.
Rogers testified he felt no obligation to advise the board on extending Johnson's employment for a few weeks or months to give him time to resolve issues. It appears he took a passive-aggressive position, accepted the board's decision without discussion and assumed operational control of the combined company without delay.
Rogers testified that he was asked days in advance if he would be willing to remain as CEO. He also testified he knew his old board had issues with Johnson months before the company merged, but because the new board had yet to convene, technically, the new board's decision about Johnson had not been made.
So, what did Johnson do that was so terrible?
Rogers claims Duke discovered surprising facts about Progress Energy's nuclear power program. He claims the company was shocked by how Progress managed its five nuclear power plants, and had particular concerns about the Crystal River unit located in Florida.
To a casual observer, Rogers' testimony about Progress' nuclear units seemed reasonable. But to those in the nuclear power industry, it was puzzling.
Rogers testified that Duke had undertaken a complete due diligence of Progress' nuclear units and that the company was aware of management challenges. Then, Rogers said Duke discovered surprises associated with Progress' nuclear fleet, which was one of the reasons to demand Johnson's termination. But Rogers later said there were no surprises. A commissioner called Rogers out on the apparent conflicts, whereupon Rogers explained Duke's testimony was always truthful.
Duke couldn't have been surprised over Progress' nuclear units; it's difficult to keep big secrets in an industry that openly shares resources. More to the point, if there was a serious surprise over Progress' nukes, why not terminate the merger agreement?
The real issue was personalities. Rogers offered that clue when he twice testified that Duke's staff became increasingly intimidated by Progress managers. He said Duke's executives became concerned when the prevailing attitude seemed to be that Progress was buying Duke and that the Duke's board of met to discuss and analyze those concerns.
Rogers's testimony paints a troubling picture for the new Duke Energy, which suggests Duke's board is split along legacy lines and that Rogers hasn't earned the respect of all his board members. It also suggests that senior executives below Rogers are split (three former Progress executives just quit). Rogers and the new board will have many challenges facing them as they struggle to build one cohesive organization.
Yesterday's interaction with North Carolina's regulators was Duke's first step. The company must take many more before it can restore the trust and confidence of the North Carolina, South Carolina and Florida regulators.
It appears almost certain Duke may face regulatory blowback, particularly in future rate cases before these same commissioners. Earnings may suffer.
In the end, Duke's shareholders will be fine. But a new board and a new CEO without legacy backgrounds could accelerate the company's healing process.
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At the time of publication, Glenn Williams had no positions in any of the stocks mentioned.
