Duke Energy Corp. (DUK:US) Chairman and Chief Executive Officer James Rogers is scheduled to speak publicly for the first time about the unexpected leadership change as the largest U.S. utility owner closed its $17.8 billion takeover of Progress Energy Inc.
Rogers will be the only witness at a North Carolina Utilities Commission hearing today investigating Duke’s decision to oust Progress Energy CEO Bill Johnson as head of the combined company. One day after the deal closed, Johnson resigned and was replaced by Rogers, who was slated to become executive chairman under terms of the merger agreement.
The executive-suite shuffle caused Charlotte, North Carolina-based Duke’s shares to decline, put the company on Standard & Poor’s negative credit watch and prompted investigations into whether it misled regulators. Four former Progress board members said they would have voted against the takeover had they known that Rogers would remain in charge.
“While the board’s decision to dismiss Mr. Johnson and hand the reigns to Mr. Rogers may be as simple as an ego- motivated power play, we suspect there’s more to it than that,” Philip Adams, an analyst with Gimme Credit LLC, wrote in a report yesterday.
Duke’s board may have disliked Johnson’s handling of a shuttered Florida nuclear plant, whose multibillion-dollar repair bill was disclosed after the merger was announced, Adams wrote. Another factor may have been the merger’s 18-month review, delayed after federal regulators rejected an initial plan to address antitrust concerns, he said.
While CEO shake-ups are rare following major mergers, they aren’t unprecedented, Adams said. Hugh McColl “pushed out” David Coulter as CEO of Bank of America Corp. shortly after it was acquired by Charlotte, North Carolina-based Nationsbank Corp. in 1998, Adams said in the report.
North Carolina regulators, who approved the merger June 29, want to know if Duke and Progress misled the commission when they filed an employment agreement stating that Johnson would be CEO, according to a July 6 filing. The commission is holding a hearing that begins at 2 p.m. local time in Raleigh, North Carolina.
State law gives the right to rescind or alter prior decisions, Sam Watson, the commission’s general counsel, said in a telephone interview yesterday.
“I’ve never seen anything like this,” Christopher Ayers, a Raleigh-based partner at law firm Poyner Spruill LLP who has represented companies at the commission, said in a phone interview yesterday. The commission is “seriously considering whether or not there was misrepresentation or false information that would lead to unwinding the deal.”
North Carolina Attorney General Roy Cooper is also investigating whether Duke misled regulators or customers to gain approval for the merger and win a rate increase, according to a July 6 statement.
“Boards always have a right to change players, that’s implicit in any transaction,” Charles Elson, a professor at the University of Delaware who specializes in corporate governance, said in a telephone interview yesterday. “Transparency in this matter is critical.”
Duke rose 5 cents to $65.36 at 10:28 a.m. in New York. The shares have fallen (DUK:US) 6.4 percent since July 2, the day before the CEO switch was announced. The company is the worst performer for the past eight days on the Standard and Poor’s 500 Utilities Sector Index, which has declined 1.5 percent during that period.
Johnson is eligible for as much as $44.7 million in cash and stock on his exit from the company. Rogers plans to explain the executive changes to employees during a town hall meeting tomorrow in Raleigh, where Progress was based, Tom Williams, a Duke spokesman, said in a phone interview yesterday.
The merger was announced in January 2011 and completed on July 2 after receiving state and federal approvals.
The new Duke board met in an executive session without Rogers or Johnson and decided on the switch shortly after the transaction closed, Rogers said in a July 3 interview. Under terms of the merger, the board is composed of 11 Duke representatives and seven from Progress.
“I do not believe 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,” John Mullin, a former Progress board member, wrote in a July 5 letter to the Wall Street Journal.
Three other former directors, James Bostic Jr., Alfred Tollison and Charles Pryor Jr., have also said they would have opposed the deal with Rogers as CEO.
It’s improbable that the board made the CEO change “simply because Jim Rogers had second thoughts about giving up his role as CEO,” a group of Stanford C. Bernstein analysts led by Hugh Wynne wrote in a note for clients yesterday.
The company faces a six- to 12-month “legal and regulatory quagmire” for its actions, according to the note. “We doubt that Duke’s board would have replaced Johnson, and assumed the consequent legal risks, without a compelling and legally defensible reason.”
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