July 2 was not supposed to be an ordinary day for Bill Johnson, the former chief executive of Progress Energy. But it ended in an extraordinary way that even he hadn’t expected.

For 18 months, Johnson had overseen a painful merger process with Duke Energy and regulators finally gave their approval to combine their generating capacity of 58,200MW to create the largest electric utility in the United States.

Duke Energy signed the agreement to merge with Progress in a $32bn deal in January 2011 with the aim of closing the deal well before the 12-month deadline. Shareholder agreements and approval of the North Carolina Public Utilities Commission followed in September last year.

But in December, the Federal Energy Regulatory Commission rejected the original mitigation plan and the companies had to ask for a six-month extension to complete the deal.

The merger closed at 4:02pm just after the stock markets closed and the combined company board convened at 4:30pm. After half an hour of the board meeting via conference call, the lead director requested an executive session without Johnson and put forward a motion calling for a motion to replace him with Duke Energy’s long-serving CEO, Jim Rogers.

The motion was carried by the 10 legacy Duke directors against the 5 legacy Progress directors, making Johnson’s tenure as CEO probably the shortest in the US history of the US utility industry.

Johnson accepted a $45 million severance package and Rogers’ re-appointment was announced early the next day.

But since then, things have not gone smoothly.

accumulation of factors that led to a loss of confidence in Mr Johnson’s ability to lead the combined company.” – Rogers

Duke is now at risk of de-merger and Standard & Poor’s downgraded Duke’s rating from A- to BBB+ citing lack of transparency and regulatory risk around the CEO transition that could threaten the success of the utility’s rate case.

S&P said in its downgrade statement: “Although the Duke Energy Corp. board of directors claimed a good faith exercise of its fiduciary duty in appointing a new CEO following the close of the merger with Progress Energy, we view the lack of transparency associated with this process and with some board members – and which resulted in regulatory hearings and investigations in North Carolina – as significantly heightening regulatory risk for Duke Energy and weakening its consolidated business risk profile.”

Commissioners at the NCUC were furious at such a fundamental change to a merger plan they had agreed with Johnson at the helm and launched an investigation on July 6 into the boardroom “coup” to oust the “20 minute CEO”.

Days after the merger, NCUC called on Johnson, Rogers and board members to give testimony.
According to Duke Energy, as regulators devised a long list of conditions to ensure fairness for the 7 million ratepayers, its chief executive Rogers and some board members lost confidence over Johnson’s ability to manage the newly merged company with $100 billion in assets.

In written testimony, Rogers spoke of an “accumulation of factors that led to a loss of confidence in Mr Johnson’s ability to lead the combined company.”

Rogers said Duke staff had told him that Johnson’s was “autocratic” and board members had expressed concern over bungled repairs to Progress’s Crystal River 3 nuclear power plant in Florida, which may cost $1.3 billion to fix.

“This was a period of challenge and conflict between the two companies and highlighted the cultural differences between us,” Rogers told regulators.

“During this period of obtaining approvals and merger integration efforts, I became aware that individual members of the Duke board had concerns … about whether Mr Johnson was the best person to lead the integration of the two companies…”

A Deteriorating Situation

Rogers insisted that he had been excluded from the board’s decision to replace Johnson and explained that Duke could not disclose the decision to remove him before the new board met for the first time.

“Corporate decisions are announced after they are made, not when they are being contemplated,” he said.

Johnson admitted to regulators that relations worsened between between himself and Rogers.
In testimony before the NCUC, he said: “This started to go downhill … pretty substantially at the end of December, and it really began to go downhill over the next four or five months. The tensions between the teams were very high. The relationship between Mr Rogers and I deteriorated. I believe some intemperate things were said. Tempers flared.”

Johnson also said that Duke management had “a change of heart” because of the conditions FERC attached to its mitigation plan.

“They explored every avenue to get out of this merger, short of violating the agreement from the beginning of January.”

But Duke would have been liable for a $675 million termination fee to Progress if it had walked away from the deal.

The NCUC has requested Duke submit “letters, agreements, meeting minutes, memos, emails, and other written and recorded documents” relating to the merger. Several thousand documents have been submitted to the commission as the investigation continues.

Some observers have said that the NCUC has over-reached its authority in raising objections over the selection of CEOs at a publicly-traded utility company that has a duty to satisfy shareholders and ratepayers.

FERC chairman, Jon Wellinghoff, told a Platts Energy Podium in Washington: “I believe that a board of directors of a utility has the right to decide whoever they want to run the utility. Once the board of directors does that, regardless of their timing, I think everybody needs to move on.”

Christopher Ayers, a utilities lawyer and partner at Poyner Spruill law firm in Raleigh, North Carolina, said: “Nothing like this has ever happened before in North Carolina and the utilities commission has never really had to deal with these types of issues. There’s a lot of speculation with respect to what can happen and what will happen.

“The conventional wisdom is that the potential ramifications are everything from the commission admonishing Duke that they should have been more forthcoming all the way through to potentially undoing the merger itself.

“There’s a possibility that they could penalise Duke in some way. There’s also the very real possibility that Duke will have to comply with additional regulatory conditions.

“It comes down to what is in the best interests of Duke’s customers the ratepayers. That’s their statutory responsibility and that’s what they are most concerned about.”

The only thing that is clear is that the investigation into whether the NCUC was misled over the approval and closing of the merger will take some time. The NCUC has hired Chicago-based law firm Jenner & Block to help pore over the thousands of files already submitted by Duke.

But the impact on the Fortune 250 company has already been felt on the New York Stock Exchange where Duke Energy shares are listed. Duke stock closed at $69.84 on the day the merger closed, but fell 5.3% to $66.14 by the day Rogers testified on July 10.

Although its stock price has started to rally, it is still trading below the S&P and Dow Jones index average.

However, utilities in general have bucked the trend during the economic crisis and are in relatively good financial shape.

Despite a 0.6% drop in electric output in 2011, publicly owned electric utilities earned a net income of $30.9bn.

“The utility industry attracts the attention of income-oriented investors due to its steady income generation capacity,” said a recent Zacks equity research note.

“A big positive for the utility operators is that there is hardly any viable substitute for utility services.”

Zacks was especially bullish on the future fortunes of Duke as the economy recovers and demand increases.

“Looking ahead, our bullish outlook for the company is supported by its recently concluded
merger proceedings with Progress Energy, paving the way for the largest US utility. In addition, its strong balance sheet, ongoing capital expansion projects and above industry average dividend yield add visibility to the story.”

Whoever is at the helm after Duke’s battles over the boardroom are resolved will want to restore that visibility to a positive outlook as soon as possible.