The disappointing recent performance of Progress Energy’s nuclear fleet and what some Duke Energy (NYSE:DUK) board members saw as Bill Johnson’s “autocratic” management style could have prevented the Progress CEO from becoming the CEO of the newly-expanded Duke Energy.
That was part of the assessment issued by BernsteinResearch Senior Analyst Hugh Wynne and other members of the firm following four hours of testimony by Duke Chairman, President and CEO Jim Rogers July 10 before the North Carolina Utilities Commission (NCUC).
Until Rogers’ command performance before the North Carolina commission, Duke had offered no explanation for Johnson’s unexpected departure as president and CEO of the merged company other than to say it was by “mutual agreement” with the Duke board.
In response to commission questions, Rogers testified that the Duke board had gradually lost confidence in Johnson’s leadership over the 18 months that it took to close the Duke-Progress merger.
“I relate these concerns reluctantly, as I have respect for Mr. Johnson and his accomplishments at Progress, and I have related them only because I am subject to your order,” Rogers said in his written testimony to the state commission.
Bernstein Research’s assessment is that the CEO flap will bedevil the new combined company over the next 12 months, but it unlikely to be a major long-term drag on the combined company’s financial health.
Asked to give reasons behind the board’s decision, Rogers testified that different directors had different concerns, but that a common theme was discomfort with Johnson’s management style. “They felt his style was autocratic and discouraged different points of view,” Rogers said.
Crystal River nuclear plant among trouble spots
The recent performance of the Progress Energy nuclear fleet was also a concern. Three out of five Progress Energy nuclear plants are under enhanced oversight by the Nuclear Regulatory Commission, the research firm said.
In Florida, Progress has come under regulatory scrutiny for damage to the containment structure of its Crystal River nuclear power station. The plant has been off-line since 2009, and Progress has estimated that the cost of repairs and replacement power could be as much as $2.5bn. Referring to the Progress nuclear fleet, Rogers promised to “pour money into those plants to bring them back to excellence.”
Finally, Rogers said Duke Energy had been disappointed in Progress Energy’s financial performance, which had not met expectations held by Duke’s management and many Wall Street analysts at the time the merger was announced.
BernsteinResearch said the CEO developments have clearly angered the North Carolina commission and it is tough to say how NCUC will react. The firm noted the Duke board’s move to oust Johnson actually started in late June, days before NCUC issued its final approval of the merger June 29.
“When we consider the objective that is likely to be most important to the Commission – to ensure that no regulated entity can ignore the decisions of the Commission with impunity – it seems highly probable that the Commission will seek to impose a substantial fine on Duke Energy,” the research firm said.
This might not be the only financial problem resulting from the controversy. Duke is obligated to pay Johnson $8.8m in severance and minimum bonus payments. Once the vesting of options earned in prior years is included, the total value of Johnson’s severance package is estimated by Duke is $44m.
There will also be severance due to the resignation of other high-level Progress executives who have also decided to leave. There is also “the prospect of years of less favorable regulatory treatment in North Carolina that might otherwise have been expected,” according to the research firm. North Carolina officials were not pleased that the leadership structure was different than when the merger had been approved days earlier. As a result, the state attorney general is investigating.
“In sum, we believe the consequence of the board’s action will likely be a months-long legal and regulatory quagmire during which the price of Duke stock will be materially discounted,” BernsteinResearch said. “That said, based on the limited information now available, we believe it more likely than not that these legal and regulatory challenges will be resolved over the next twelve months in a way that does not materially affect the underlying business of the company.”
Rogers says benefits remain unchanged
In his pre-filing testimony to the NCUC, Rogers said that the compelling benefits of the merger are unchanged.
These benefits include increased operational scale and an enlarged regulated business. The expanded Duke Energy has also guaranteed a $650m savings in fuel and joint dispatch efficiencies.
“The financial strength of the combined company will enhance our ability to pursue regional nuclear development,” Rogers said.
Rogers stressed until very recently, the Duke and Progress officials planned on Johnson becoming president and CEO of the combined company and Rogers moving to Chairman of the new Duke Energy. On Dec. 8, 2011, the Duke board “gave me a retirement gift in recognition of the fact that I would be stepping down as CEO.”
In early 2012 Duke and Progress worked to tackle the market mitigation issues necessary to win approval from FERC. Rogers also stressed that he had no part in the new Duke’s board’s deliberations on Johnson’s future. “Until very recently, I was well down the path of accepting offers to serve on various other boards and join other organizations,” Rogers said.
The Duke CEO, Rogers, said he learned on June 23 that several board members felt that Johnson “was not the best person to lead the combined company, but that no final decision had been made at that time.
The merger closed July 2 and was effective at 4:02 p.m., right after the stock market closed. The combined company’s board met at 4:30 p.m. to consider various routine, post-closing matters. Roger said that at about 5 p.m. the board of directors went into closed session and Rogers said he and Johnson were asked to leave the room.
The combined-company board then proceeded to vote 10-to-5 to seek Johnson’s resignation and appoint Rogers as CEO. The vote was apparently along company lines with the five board members from Progress voting against the measure, Rogers said.
Duke’s board realized the decision would be controversial, but realistically could not announce their choice until after the July 2 vote was taken.
“Corporate decisions are announced after they are made, not when they are being contemplated,” Rogers said.