Duke Energys new era began with a twist Tuesday, as the company announced chief executive Jim Rogers will retain control after the merger with Progress Energy.
Duke offered no insight into the abrupt resignation of Progress CEO Bill Johnson, who for 18 months had been expected to lead the nations largest electric utility. It was Rogers, instead, who spoke with senior executives Monday night about the way forward.
The company said Johnson had resigned by mutual agreement but offered no details. In a securities filing late Tuesday, Duke said it has agreed to pay Johnson as much as $10.3 million in severance and other compensation.
The chairman of the N.C. Utilities Commission, which approved the merger Friday, said the commission had been led to believe Johnson would be Dukes chief executive.
His departure on the same day the merger is closed and three days after our order may raise questions in the minds of some as to the timing of the decision by those involved in it, chairman Edward Finley said in a statement. While management structure and succession are important, a more significant emphasis will be on ensuring that the benefits to the ratepayers will materialize as forecast.
Duke has committed to passing $650 million in fuel savings to Carolinas customers over the next five to six years.
State law allows the utilities commission to rescind or amend its decisions. It is regularly asked to do so, but rarely overturns previous orders.
Robert Gruber, executive director of the Public Staff, the states consumer advocacy agency, told The (Raleigh) News & Observer that he spoke with Rogers in the morning by phone and got assurances the combined Duke will honor the commitments it made to regulators.
But it was clear that the internal shakeup is causing unease.
If the commission had known about this prior to the merger, it might have been a different result, Gruber said. The Public Staff has a lot of respect for Mr. Johnson and confidence in him. Were not sure how this will work without him.
Johnson wrote the 11,000 Progress employees Tuesday to praise both his workforce and the $32 billion merger.
The long-term potential of this strategic combination remains compelling, he wrote. The new company will bring significant benefits to customers, shareholders and employees.
Johnson told the Observer less than two weeks ago that he was shopping for a house in Charlottes Myers Park and SouthPark neighborhoods and intended to be at his new desk on Monday.
The plan to install him as CEO of the new Duke was a strong attraction to Progress directors in considering the merger, according to securities filings.
It was something they were interested in, I would say quite interested in, Johnson told the Observer on June 21. Because in a (stock-swap) transaction like this you are taking the stock of the other company and they wanted to make sure they had a management influence on the direction and the performance of the company.
That was their real interest: How well would the currency they were taking hold up in the future?
No hard and fast rules
Charles Elson, a corporate governance expert at the University of Delaware, said its not unheard of for merging boards to have a change of heart about new leaders based on their personalities.
This happens, he said. A guy may be effective at one company and then the companies combine and he doesnt look so good. In a merger, anything can happen. Its all personality driven, and there are no hard and fast rules.
Rogers and Johnson presented a striking contrast: Rogers, 64, slight but personally charming, at ease on stage; Johnson, 58, the less effusive former Penn State offensive lineman who speaks with lawyerly precision.
Analysts at Bernstein Research said Duke might have to quickly begin looking for Rogers successor: His contract expires at the end of 2013. But for now, having a chief executive whos weathered two previous mergers could offer its own benefits.
Johnsons unforeseen departure does imply a higher degree of uncertainty and risk for investors with respect to the senior management at Duke Energy, Bernstein said. Not only does his departure leave the long-term leadership of Duke unclear, it clouds the outlook for integration of Progress Energys senior management team, some of whom may see their career prospects diminished by Johnsons departure.
Challenges for the utility
Among the first major decisions the new Duke will face is a problem it inherited from Progress whether to fix or retire a crippled nuclear reactor in Florida.
Concrete in the thick containment structure around the Crystal River reactor began separating after Progress punched a hole in it to replace components in 2009. Progress has spent $425 million, not including insurance payments, to repair the plant and replace the lost power. Finishing the repairs could cost up to $1.3 billion, it says.
Neither Rogers nor the lead director of Dukes new board, Ann Maynard Gray, would comment to the Observer or to investment analysts on Johnsons resignation.
Johnson had just signed a three-year contract on June 27, effective July 2. Duke said in its securities filing Tuesday that Johnsons separation agreement includes a severance payout of $7.4 million, an additional $1.4 million representing Johnsons 2012 bonus, and a lump sum payment ranging from $500,000 to $1.5 million.
The new board consists of 11 Duke directors and seven from Progress. Of the nine top executives of the combined companies under Johnson and Rogers, five were to come from Duke and four from Progress. Apart from Johnsons departure, Rogers said Tuesday, no other key executive assignments changed with the mergers close.
Progress shareholders will own 37 percent of the shares in the new Duke after a swap of 2.6125 Duke shares for each Progress share and a three-to-one reverse stock split.
Rogers told the Observer that he will stay as long as (directors) want me to and will work under his existing contract, which paid him about $8.8 million in 2011, mostly in stock. There will not be an executive chairman focused on strategy and external matters, a role Rogers had planned to assume.
I will be responsible for day-to-day operations, Rogers said. I will be focused on bringing these two teams together. Its very important not to think in terms of a former Progress and former Duke.
Rogers said he talked to senior executives from Progress on Monday night and had detailed discussions about the way forward. Im confident that each will contribute to the company. He followed that with an early-morning call to the companys executive leadership team.
My belief is that we have strong people and I hope and expect that everyone will seize these opportunities, Rogers said.
Rogers said he will continue to meet with key company leaders this week and will be in Raleigh next week for an all hands meeting with employees there linked to Dukes workforce in other locations.
Progress has a century-long connection to Raleigh, where it has vacated one downtown building in preparation for the merger. The new company will be based in Charlotte. Progress and Duke will continue to operate separately in the Carolinas under the same corporate ownership.
The N.C. commissions merger approval included a provision that Progress continue to "maintain a significant corporate and utility presence" in Raleigh.
Having served as CEO of Duke and its predecessor companies for more than 23 years, Jim Rogers is well-suited to lead the integration effort and to drive our combined businesses forward, Gray, the lead director, said in a statement. The board of directors looks forward to working with Jim and the rest of the executive team to enhance our position as a utility with financial strength and a greater ability to meet the needs of our customers.
She added: Bill Johnson has been instrumental in helping us close the merger with Progress Energy, and we wish him well in his future endeavors.
Johnson would have been responsible for day-to-day operations of the company, including the task of combining two workforces into one.
Johnson, who represented utilities as an attorney in private practice, joined Progress in 1992. Hes served in a number of roles, including general counsel, and was named its chairman and CEO in 2007.
Duke now employs 29,250 but will trim 1,860 redundant jobs. Progress appears likely to bear the brunt of the cuts. Of the 1,150 workers who have applied for buyouts, 666 work for Progress. Rogers has said the Mecklenburg County workforce, currently at 5,681, will change little.
The merger gives Duke greater financial strength, important as utilities nationwide retire old power plants, build new plants and update transmission and distribution networks. It will move Duke from a company with one-quarter of its business in competitive, commercial markets to one that is 85 percent regulated and has less business risk.
Carolinas customers were guaranteed $650 million in savings, mostly from more efficient use of fuel, over five to six years after the merger. The savings will only partly offset expected rate increases that Duke is expected to seek this summer and Progress this fall.
In a conference call with analysts Tuesday morning, chief financial officer Lynn Good repeated Dukes earnings targets of 4 percent to 6 percent annual growth.
Dukes stock closed Tuesday at $68.69 Tuesday, down 1.65 percent. John Murawski of The (Raleigh) News & Observer contributed.