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Duke’s Power Play

Issue 8 and Volume 116.

Restoring confidence in the nation’s largest electric utility will require new leadership.

By Russell Ray, Managing Editor

In a bizarre and unfolding drama, Duke Energy’s botched merger with Progress Energy has raised serious questions about the utility’s credibility and its ability to effectively manage more than 58,000 MW of generation capacity for 7.1 million customers in six states.

Just hours after regulators finalized the merger on July 2, the new board unexpectedly voted to oust former Progress Energy CEO Bill Johnson, who for 18 months was expected to take over as CEO of the new company. Instead, the board chose Duke Energy CEO Jim Rogers to lead the combined company.

The surprise CEO-switch has spawned investigations into whether regulators were misled about the plan to combine the two companies. What’s more, Duke is being sued by shareholders for not disclosing the leadership change, its credit rating has been downgraded by Standard & Poor’s, the company’s stock price has plunged and at least two board members have resigned.

The controversy has led to a loss of trust and confidence and will almost certainly hurt the utility’s ability to gain timely approvals of important regulatory matters in North Carolina and Florida. The new company is expected to ask regulators for a rate increase later this year.

Rogers and Duke Director Ann Maynard Gray testified before the North Carolina Utilities Commission, saying the board felt Johnson’s management style was dictatorial and not suited for the new Duke. They also pointed to Johnson’s handling of Progress Energy’s nuclear reactors, including $2 billion in repairs at the Crystal River Nuclear Plant in Florida, which remains offline.

But regulators will be demanding a better explanation. Progress Energy’s nuclear woes were well known long before the companies agreed to merge, and the board had months to act on concerns about Johnson’s management style and his ability to lead the new company.

Johnson told the commission that Duke began to get cold feet as the merger’s costs rose and was looking for a way to get out of the deal without violating the merger agreement. If Duke backed out of the deal, it would have been forced to pay a $675 million penalty.

It will be a while before we know the truth about the board’s abrupt decision to send Johnson packing with $44 million in severance payments. Regulators will be asking some tough questions as they determine whether the merger should be changed or rescinded. The question is, did Duke’s board conspire to remove Johnson in favor of Rogers?

The merger agreement approved by regulators required the new company to name Johnson CEO. The new board, comprised of 10 Duke directors and five Progress directors, named Johnson CEO of the new company on July 2 but only temporarily. A few hours later, the board voted 10 to 5 to oust Johnson.

In a letter to the New York Times, John H. Mullin, Progress Energy’s former lead director, described the last-minute move by Duke’s directors as “one of the greatest corporate hijackings in U.S. business history.”

This much is clear: The problems Duke Energy now faces are the result of Duke’s covert approach to remove Johnson as CEO of the new company. The Duke board’s sophomoric handling of this situation has jeopardized the merger and complicated efforts to integrate operations effectively and efficiently.

The Duke board didn’t approach Johnson about their concerns and didn’t inform regulators of their plan to remove Johnson as CEO of the new company. Instead, the Duke board worked in secret to undermine the terms of a $32 billion merger agreement approved by shareholders and regulators. The approvals came with the understanding that Johnson would lead the new company.

The Duke board has successfully alienated regulators, divided the full board, angered shareholders and agitated its new customer base. What’s more, the legal and regulatory quandary triggered by the board’s imprudent action will take months to resolve and is expected to thwart earnings growth.

To restore trust and confidence in the nation’s largest electric utility, the board should be revamped with better leadership, and a formal search for a new CEO should be launched.

New leadership is essential for Duke Energy to overcome its problems. The calls for major changes in the board room and the executive suite will only get louder.