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Duke Energy Corp
Bank of America Corp
Jim Rogers is sitting in his sleek, modern office on the 48th floor of the Duke Energy Center in Charlotte, explaining how, after a rancorous merger capped off by an 11th-hour management coup, he remains chief executive officer of the largest electric utility in the U.S. He wonders aloud whether to enliven the account with a metaphor about soured romance. His public-relations man, Tom Williams, vetoes the idea. Rogers ignores him. “When you negotiate a deal,” he says, “it’s like dating, OK? When you go through the integration and planning process, it’s like living together. You’re not quite married, but you’re living together, and you’re learning a hell of a lot about each other.”
On July 2, at 4:02 p.m., just after the market closed, Duke Energy’s (DUK) board of directors gave final approval for the acquisition of Progress Energy, its cross-state rival. Progress’s CEO, the 6-foot-5 William Johnson, a defensive lineman in his Penn State days, was supposed to become chief executive of the combined company. Under the merger terms, Rogers was scheduled to assume the role of executive chairman, a step toward retirement.
At 4:30 p.m. the Duke board elected Johnson CEO. Then, after Johnson left to celebrate, the board took another vote and ousted him. He served as chief executive for two hours, give or take a few minutes. The Duke board awarded him an exit package of $45 million in deferred compensation, severance, and other benefits. To finish an eventful afternoon, the Duke board reinstalled Rogers in the top job.
Photograph by Takaaki Iwabu/Raleigh News and Observer/MCT/Zuma Press
Those caught unaware by Johnson’s stealth firing included investors, utility regulators, and some 29,000 employees of the combined company. That was unfortunate, Rogers concedes. Still, “when the day came to get married, our board reached a decision that he was not the right person to lead the company. I think it was that simple.”
Whatever it was, it was not “simple.” Johnson and other former Progress directors and executives allege that Rogers suckered the smaller company into a merger based partly on a false promise to put Johnson in charge. “This is the most blatant example of corporate deceit that I have witnessed during a long career on Wall Street and as a director of 10 publicly traded companies,” former Progress director John Mullin III wrote in a July 5 letter to the Wall Street Journal. “I couldn’t believe it,” Marie McKee, another former Progress director, said during sworn testimony. “I didn’t know whether to cry or throw up.”
Equally disgusted were some members of the North Carolina Utilities Commission, a body that, like Progress, is based in the state capital of Raleigh, where Johnson is a respected business leader. The commission approved the acquisition on the premise that Johnson would lead the new Duke, a Leviathan with $106 billion in assets and 7.1 million retail customers in six states in the Southeast and Midwest. Now the panel is conducting a formal investigation into whether it was misled. The probe has raised the possibility that at least some commissioners would hold Duke to a tougher standard in future rate cases. Citing increased regulatory risk, Standard & Poor’s (MHP) cut the company’s credit rating from A- to BBB+ with a “negative outlook.” S&P’s anxiety, in turn, spurred a separate investigation by the North Carolina Attorney General.
Rogers, 65, finds himself at the pinnacle of an extraordinary 24-year career as a utility CEO and at the same time under a cloud of mistrust that, if not dispersed, could taint his legacy and inhibit the post-merger success of the combined Duke. In public hearings, the utility commission has signaled that it might seek Rogers’s resignation and a revamp of Duke’s board and top management. That would be a highly aggressive move for regulators whose statutory bailiwick is approving rate hikes and protecting consumers. The Duke board is likely to balk at such demands, and private talks are under way.
If any executive is capable of extricating himself from this predicament, it’s Rogers, who would have been comfortable charming Southern juries if he had decided to become a plaintiffs’ lawyer. He has a gleaming smile and knows how to finesse a sticky situation. Repeatedly over the years, he has broken ranks with his industry to endorse stronger environmental regulation, even as his companies have continued to burn sooty, carbon-emitting coal. Whether he can mollify his current antagonists and get the country’s biggest power producer back to ordinary business will help determine the future direction of the U.S. utility industry and the debate over global warming.
The passion surrounding the Duke debacle makes more sense if one understands Rogers’s unique reputation in the industry and how his outsize personality fits into the insular politics of his adopted home state. Never accused of modesty, Rogers refers to himself as a “CEO statesman.” He attends policy-networking symposia at the Aspen Institute and Davos. A registered Democrat, he co-chaired the Charlotte host committee for the recent Democratic convention. In a short speech to delegates, he spoke about improving the world for his eight grandchildren: “We need to invest heavily in new zero-emission power sources like new nuclear, wind, and solar projects, as well as new technologies like electric vehicles.”
His detractors describe Rogers as a slippery self-promoter. “I’d like to believe him when he says nice things about building a bridge to a cleaner energy future,” says Jim Warren, executive director of North Carolina Waste Awareness and Reduction Network, a nonprofit in Durham. “But with all the dirty coal he burns, I have to conclude that he’s more concerned about public relations and image than anything else. The Progress CEO thing looks like part of the pattern we’ve seen from Rogers for a long time: Progress and the utility commission got taken so Rogers could get his merger.”
Photograph by Thomas Prior for Bloomberg Businessweek
Rogers, who retains the drawl of his Kentucky youth, attended college and law school at the University of Kentucky while working nights as a reporter for the Lexington Herald-Leader. By the time he graduated, he and his wife had three children. After a stint as a consumer advocate in the Kentucky Attorney General’s office, he moved to Washington, where he worked as deputy general counsel at the Federal Energy Regulatory Commission (FERC) and won a partnership at the influential firm Akin Gump Strauss Hauer & Feld. The legendary Democratic power broker Robert Strauss gave him shrewd advice: “When you see a parade form on an issue in Washington, you have two choices. You can throw your body in front of it and let them walk over you, or you can jump in front of the parade and pretend it’s yours.”
In 1988, after a stop as a pipeline executive at pre-scandal Enron, Rogers made a precocious leap into the CEO ranks. Public Service Indiana, a coal-burning utility on the brink of bankruptcy, decided to take a risk on the smooth-talking 40-year-old. He got PSI’s books in order and applied Strauss’s parade strategy to acid rain. Almost alone in his green-resistant industry, Rogers publicly committed to lessening sulfur dioxide pollution by means of “cap and trade.” In 1990 environmentalists pushed Congress and the George H.W. Bush administration to approve legislation that put a declining cap on emissions causing acid rain and smog. Rogers supported the law because it also created tradable sulfur “allowances” for coal-burning utilities. If the companies cut their own emissions, they could sell allowances to dirtier rivals. The incentives worked: Air pollution decreased during the 1990s, while PSI and similarly opportunistic companies improved their bottom lines.
Rogers earned the respect of his shareholders and also of some green activists. “When we’re trying to move the needle on environmental issues, we need voices beyond the environmental community,” says Fred Krupp, executive director of the Environmental Defense Fund (EDF), a New York-based nonprofit that led the drive for cap and trade. “Jim has been a leading voice in the business community.”
While the federal government ratcheted up environmental regulation, it simultaneously encouraged competition by creating cross-state wholesale markets in electricity. The historically fragmented utility industry began to consolidate, as ambitious CEOs expanded their balance sheets by acquiring rivals. Rogers helped engineer the combination of PSI and Cincinnati Gas & Electric. Even though his smaller company was subsumed, Rogers emerged as the chief executive of what became known as Cinergy. He repeated the exercise in 2005, when the larger Duke Energy acquired Cinergy; once again, Rogers was named CEO.
This was more than empire building, Rogers says. He was also diversifying away from coal (Duke has large nuclear capacity). He sensed that coal would face renewed regulatory attention, not only because of terrestrial pollution but also because it contains so much carbon, which, when burned, forms carbon dioxide, a “greenhouse gas” that traps the sun’s heat in the atmosphere. Duke’s nuclear plants don’t emit carbon dioxide. A year after taking over, Rogers rattled some members of Duke’s board by announcing that the utility would join the nascent campaign for cap-and-trade legislation, the carbon analogue to the successful acid rain program. Krupp of EDF helped assemble a coalition of green groups and major corporations. “We needed a coal-fired utility CEO,” Krupp recalls, a brave soul “who would say, ‘Regulate us. We can reduce carbon, and we should reduce carbon.’ ” Rogers, he adds, “was the obvious choice.”
For his part, Rogers saw carbon cap and trade as an opportunity to get credit for closing inefficient coal-burning plants he wanted to shut anyway. He never became a full-fledged greenie. In 2007, Rogers lost a U.S. Supreme Court case to Krupp, 9-0. EDF v. Duke Energy gave the Environmental Protection Agency greater latitude to oversee coal utility renovations. “I’m quite comfortable talking to folks who are suing me,” Rogers told Krupp. “If I weren’t, I’d be a lonely guy.”
Climate legislation passed the House in 2009. Duke quit the National Association of Manufacturers that year because the group opposed cap and trade. In 2010, though, NAM had its revenge as the carbon bill stalled in the Senate, a victim of mounting Republican opposition inspired by the ascendant Tea Party movement.
Rogers took the defeat in stride, turning his full attention to Duke’s growth-and-diversification agenda. He heard from advisers that Progress was struggling and might be amenable to an acquisition. In July 2010, he picked up the phone and called Bill Johnson.
Like Rogers, Johnson began his career as an energy lawyer before working his way up at Progress, itself the product of several mergers. Understated where Rogers is effusive, Johnson was open to the Duke overture. Progress could benefit from combining with a financially stronger partner. By his own admission, Progress was carrying too much debt, and its nuclear fleet had nagging problems. One unit, Crystal River 3 in Citrus County, Fla., had been out of service since October 2009 with a crack in its 42-inch-thick containment wall. Johnson accepted an invitation to lunch at Rogers’s home in Charlotte, and the Duke board invited him to its November 2010 meeting.
The substance of Johnson’s board session went well enough. The combined company would make electricity roughly 30 percent from coal, 30 percent from gas, and 30 percent from nuclear, with the balance coming from hydropower, wind, and solar. On a personal level, though, Johnson struck some Duke board members as standoffish, according to Ann Maynard Gray, the lead director. In particular, she recalled that he said at one point: “I am always ready to learn, although I do not always like being taught.”
The expression, not the most obvious comment to make to one’s potential bosses, is attributed to the ornery Winston Churchill. Gray, a former president of Capital Cities/ABC’s Diversified Publishing Group, didn’t get the reference. She later testified that Johnson’s quip “stayed with our board,” and not in a good way.
On Jan. 10, 2011, the companies jointly announced Duke’s plan to acquire Progress. Duke agreed to pay $13.7 billion in stock to Progress shareholders, a modest 5 percent premium over the market’s valuation of the target company. Duke also said it would assume $12.2 billion of Progress debt. During a teleconference with Wall Street analysts, Rogers was asked how, as executive chairman, he would resolve potential disputes with Johnson. “We’re going to arm wrestle,” Rogers said, “and you know how big Bill is, and you know the outcome of that.” He added: “I would basically say that Bill is going to be CEO, and he is going to be making the calls.”
Employees from the merging companies began the arduous process of seeking approval from state commissions, the FERC, the Nuclear Regulatory Commission (NRC), and other government bodies. They also initiated the painful integration of workforces, not least the consolidation of Progress’s Raleigh staff into Duke’s Charlotte operation. Raleigh, a sleepy city with a small-town feel, would lose its sole Fortune 500 company headquarters. Despite some contraction since the financial crisis of 2008, Charlotte epitomizes the economic dynamism of the New South. Eight companies on the Fortune list, including Duke, Bank of America (BAC), and the steel manufacturer Nucor (NUE), have their headquarters in the city and its environs. Duke and Progress set about trimming more than 1,800 jobs.
Beyond the routine friction over who would head which department and get the corner office, serious problems soon surfaced. Crystal River 3 in Florida developed a second containment-wall crack. Johnson wanted to make repairs that, according to public disclosures, would cost more than $1 billion. It wasn’t clear whether insurance would cover the fix, and the Duke board asked him to hold off. Johnson, according to director Gray, displayed “a significant prejudice for Crystal River to be repaired,” rather than being open to the argument that perhaps the damaged facility should just be closed.
In December, FERC rejected the companies’ proposal for “mitigating” their increased market power by means of such measures as divestitures. This unexpected obstacle raised grave doubts about whether the acquisition could be completed. Indeed, Johnson would later recount that Rogers told him, “We’re going to put our pencils down” on integration planning until the regulatory puzzle was solved. This frustrated Johnson, who testified that he felt more urgency about finishing the deal than Rogers.
Just weeks after the discouraging word from the FERC, Rogers sat for an interview with the Charlotte Business Journal. Explaining the thin 5 percent premium he had negotiated, Rogers said, “I effectively gave up the CEO job to pay a lower premium. I thought it was better for [Duke] shareholders.” (Asked about this assertion, Rogers testified that he stood by it: He sacrificed his executive power to get the best deal.)
The converse of Rogers’s account, though, implies that Johnson and his board sold Progress at a discount so he would get named CEO. That’s not how Johnson saw the deal. He thought he got the promotion on his merits, not as a way to sweeten the acquisition for the other company’s investors. He was “furious” over the Rogers interview, he later testified. “For the next month after that,” he said, “everywhere I went in the company, employees would say to me, with a very jaundiced eye, ‘Did you do that? Did you sell the company cheap so you could be the CEO?’ ” (Johnson’s lawyer, on his behalf, did not respond to requests for an interview.)
Relations between the Duke and Progress management teams “really started to go downhill over the next four or five months,” Johnson said. “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.”
FERC eventually relented and gave its approval to the merger, as did the North Carolina Utilities Commission and other regulators. The closing was scheduled for July 2. That morning, Johnson took an early flight from Raleigh to Charlotte. He wore a new tie his wife had given him for the big day. The week before, he had been house hunting in Charlotte.
Rogers greeted Johnson on the 47th floor of the Duke Energy Center, whose spacious offices are decorated in calming shades of aqua and sea green. After some pleasantries, Rogers reminded his heir apparent that they had to get to the 4:30 p.m. board meeting. “You can’t be late for your election,” he said.
The two executives repaired to a small office with a round white marble table for a conference call with Duke’s directors. It might have seemed strange that the board did not assemble in the flesh for such a momentous event, but no one discussed that. The vote making Johnson CEO took only a few minutes. Rogers shook Johnson’s hand and departed. Johnson headed for the elevators. At that moment, his BlackBerry buzzed with an e-mail from Gray. She had something to discuss in person.
If Gray was in Charlotte, Johnson wondered, why had she not joined Rogers and him for the board vote? She soon arrived, an outside lawyer in tow, to provide the answer.
After Rogers and Johnson left the teleconference, the board had remained on the call and gone into executive session. Gray abruptly made a motion to demand Johnson’s resignation and put Rogers back in charge of the enlarged Duke. The terms of the acquisition had given Duke a decisive majority of the board slots. Prepped in advance for Johnson’s defenestration, all nine other legacy Duke directors endorsed Gray’s motion. One of the nine, Michael Browning, a real estate developer from Indianapolis, testified that a confluence of factors, including the nuke plant and Johnson’s apparent reluctance to share certain financial information, caused a “loss of confidence in Bill’s ability to lead the team. For me, the toothpaste was out of the tube, and I couldn’t figure out how to get it back in.” Five directors who had come over from Progress could do nothing more than express their dismay and cast dissenting votes.
All Gray would tell Johnson when she delivered the news was that his “leadership style” wasn’t right for Duke. She said there was no room for discussion. The board had absolute authority to do this. As a former corporate lawyer, Johnson knew that on this last point, Gray was correct.
It was, he later said, a “pretty grim flight” back to Raleigh. He called his wife as soon as he got off the plane. “Before I could say I’d been fired, she congratulated me.”
“One of the greatest corporate hijackings in U.S. business history” is what John Mullin, the former Progress director, called it in his letter to the Wall Street Journal. “I do not believe,” he added, “that a single director of Progress would have voted for this transaction as structured with the knowledge that the CEO of Duke, Jim Rogers, would remain as the CEO of the combined company.” Beyond personal loyalty, Mullin said his board believed it was Johnson who possessed the skills needed to “lead the combined companies to achieve the potential synergistic benefits of the combination.”
Five days later, the North Carolina Utilities Commission convened hearings to find out, as Chairman Edward Finley Jr. put it, why “Johnson’s ‘resignation’ occurred within hours of the close of the transaction and what ramifications or repercussions might result from these unanticipated events with respect to this commission’s continued jurisdiction over Duke.”
When it interrogated Rogers on July 10, the panel’s six members seemed most concerned about two issues: why they were not informed beforehand of the CEO switch and what the episode said about Duke’s commitment to Raleigh, where the commission is based and Johnson is a pillar of the business establishment. “Raleigh is really important to us,” Commissioner ToNola Brown-Bland told Rogers at one point. “It’s our capital.” She said she feared “a great sucking sound of jobs leaving this area.”
“There will not be a sucking sound with respect to jobs leaving here,” Rogers said. Some employees would remain in Raleigh. As for the surprise factor, he added: “I wish we could have given the commission prior notice, but corporate decisions are announced when they are made, not when they are being contemplated.” Duke, he added, was contractually obliged to close the merger and appoint Johnson. “It was only after the merger closed that the board had the authority to make the decision about Mr. Johnson’s continuation as CEO.”
Rogers enumerated the bill of particulars against Johnson. The Duke board felt he showed “a lack of transparency” about the reliability of the Progress nuclear facilities, a concern that went beyond Crystal River to include three other plants that Rogers said were functioning but on the NRC’s “watch list.” Progress’s financial performance had deteriorated during the 18 months after the acquisition was announced. And Johnson displayed an “autocratic” style, Rogers asserted, which “discouraged different points of view.”
When it was Johnson’s turn to testify nine days later, the commission was largely sympathetic. On the question of “transparency,” Chairman Finley asked rhetorically why Johnson had “a duty to inform the Duke board of the steps you were taking with respect to Crystal River 3,” when in the spring of 2012, Rogers and the Duke board were contemplating his ouster, “and neither you nor the Progress board was informed.” Johnson sidestepped this bizarre inside-out quiz on the old sauce for the goose/sauce for the gander rule and said flatly, “I did not fail to inform anybody about anything.”
On the notion of his being “autocratic,” Johnson invoked geography and personal history: “I’ve lived in Raleigh 30 years. I’ve worked here 30 years. People who know me know this isn’t true.” To the contrary, he said, his senior management “would say my real shortcoming [is that] I was too democratic. I would dither over issues.”
Johnson owned up to missed earnings projections in 2011 and 2012. He acknowledged that “Progress had three back-to-back nuclear outages” during the first six months of this year alone, leading to unanticipated expenses of $160 million. The FERC uncertainty had only added to the anxiety. Duke’s leadership experienced “buyer’s remorse,” Johnson said. “They wanted the merger, then they didn’t want it, then they couldn’t get out of it, and they didn’t want to be stuck with me as the person who dragged them into it.”
Finley wanted to know whether Johnson considered his firing to have been compliant with the merger agreement or “a sham.” Duke followed the letter of the contract, Johnson conceded. “The condition was they would make me CEO. The expectation was that it would be more than 20 minutes or two hours.”
Two months later, Rogers takes time out of a rush-rush day to muse about how a big part of his job is “storytelling.” He’s sitting in the office that Johnson assumed he would have moved into by now. “Life is about making stuff up as you go,” Rogers says. “You’re constantly taking a story line, changing the narrative, looking at it from all different perspectives.”
Yes, there were periods of doubt about completing the merger, but now he’s confident the combination makes sense for customers, investors, and the environment. Out of Duke’s domestic production of 57,000 megawatts, it’s in the process of retiring 5,000 Mw of older coal capacity. It’s opening new gas plants to take advantage of low gas prices. Burning gas releases about 50 percent less carbon dioxide than coal. Duke, Rogers vows, will get all the legacy Progress nukes off the NRC watch list and fully up to code. It will make a call on Crystal River 3. (The body language at Duke points toward a decision to cut losses, retire the plant, and take a big write-off.)
Rogers’s dim view of Johnson’s financial stewardship was reinforced on Aug. 2, when Progress and Duke released their final quarterly earnings as separate companies. For the second quarter of 2012, Duke’s net income rose 2.1 percent, to $444 million. Progress, in part because of its continuing nuclear woes, saw a gaping 64 percent decline in profits, to $63 million. Since Johnson’s fleeting tenure as Duke’s CEO on July 2, the company’s stock is down 7.7 percent, to $63.43.
Across the street in another Duke building, employees drawn from both companies are dispatching electricity among Progress and Duke facilities, depending on consumer demand, the weather, and other factors. This new collaboration is part of a program that Duke says will save customers $650 million over five years by using the enlarged fleet of plants to keep the most efficient facilities online and burning the least expensive fuel available at any given hour. The new colleagues staring at computer arrays and sending streams of instant messages appear to be working in a collegial fashion under the supervision of a former Progress manager.
Without a government-mandated cap-and-trade program, or some alternative for putting a price on carbon, such as a tax, Duke’s leadership on the climate front will be limited to what it does unilaterally. Rogers is no altruist. He will continue to expand the company’s renewable operations, but only those that make a profit. By the end of this year, Duke will produce 2,000 Mw of wind and solar power, almost all of which it sells to other utilities. That’s 3.5 percent of its total. Five years ago, the company had practically zero wind and solar capacity. Whether one sees this as adequate progress—Rogers does—depends a lot on personal perspective.
As for the company’s corporate governance, Rogers says, what might seem to have been a CEO-succession fiasco this summer will one day be viewed positively. “It actually reflects a strong board that made a tough decision.” That, anyway, is the story he’s sticking to.
“A subset of people think I engineered this,” Rogers acknowledges. “I wish I was that good.” To demonstrate that he truly intended to step away from the fray, he notes that before events took a weird turn, his old board held a retirement dinner and gave him an antique chess set as a going-away gift. He’s not retiring anytime soon, he says, and no, he doesn’t plan to return the chess set.