RALEIGH Tensions mounted with the costs and regulatory headaches of a $32 billion utilities merger that, despite its financial appeal, exposed deep rifts in management, Duke Energy’s jilted CEO told the N.C. Utilities Commission on Thursday.
Bill Johnson’s four hours on the witness stand lasted longer than his time as Duke’s chief executive. Following reinstated CEO Jim Rogers’s appearance last week, it was Johnson’s turn to explain what went wrong before a commission that had been assured he would run the nation’s biggest utility.
His summary: Duke suffered buyer’s remorse about the deal as costs rose when the companies made concessions to federal regulators. Johnson said he was locked out of contact with Duke directors and executives, other than Rogers, in the six months before the merger closed July 2.
The Duke board, he said, “wanted the merger, then they didn’t want the merger, and they didn’t want to be stuck with me as the person who dragged them into it.”
And while commissioners say their probe is not about personalities, Johnson depicted a losing battle of wills and board votes with the veteran CEO Rogers.
“I was convinced he was trying to walk out on the deal,” Johnson said, “and I was convinced we were going to get it done.”
Johnson won the merger but lost his job, blind-sided, he said, on a 10-5 vote split along company lines.
Duke would have had to pay $675 million to walk away from the merger under terms in effect until the shareholder vote last August.
“The evidence clearly shows that Duke Energy worked diligently to complete the merger throughout the 18-month merger review process,” Duke spokesman Tom Williams said in a statement Thursday night. “Duke Energy, in partnership with Progress Energy, met all regulatory deadlines, achieved all regulatory approvals and successfully completed the merger on July 2.”
In his testimony last week, Rogers painted Johnson as “autocratic” and creating an atmosphere that made it seem like a takeover by the smaller Progress. He blamed Progress under Johnson as not forthcoming about key details on a crippled nuclear plant in Florida.
Johnson, who has been publicly silent since his exit, seemed to relish the chance to redraw that image.
Backed by two former Progress directors now on Duke’s board, perhaps temporarily, he said he had never been confronted about the faults Rogers described.
“It’s odd to me that if these were burning issues, I never heard about them – not from the board, not from (Rogers),” said Johnson, 58. “I’m not a rookie – if I’d heard about some of those things, I would have done something about it.”
Former Progress board member Marie McKee, president of the Corning Museum of Glass in New York state, said directors had little clue of such problems until the day of Johnson’s exit. Johnson and Progress directors sought meetings with the Duke board to no avail, she said.
“We knew as board members they were grinding it out,” she said. “But I don’t know of anything that sent up alarm bells that this deal was going to fall apart.”
As Rogers’ appearance had been, theirs was one side of a complex story. Commission Chairman Edward Finley curtly dismissed a request by Charlotte attorney Jim Cooney, brought in to help represent Duke, to cross-examine the witnesses.
“The only party affected (Duke) was not allowed to participate in the hearing,” Raleigh lawyer Burley Mitchell, a former N.C. Supreme Court chief justice who also represents Duke, told reporters at the end of the day. “I’m very disappointed that we were just cut off.”
Mitchell added: “If they issue some kind of order, we’ll have to appeal it.”
Duke’s lead director, Ann Gray, and longtime board member Michael Browning take the stand Friday. It’s likely the commission will bring in outside experts to complete the investigation before ruling.
Relations between the companies deteriorated quickly after the Federal Energy Regulatory Commission denied their merger application for the second time in December, Johnson testified.
To try to win federal approval, Duke and Progress eventually agreed to concessions that cost them an estimated $225 million. The companies had had wide differences over what the concessions would cost.
Johnson said he was infuriated that Duke proposed renegotiating a commitment to return $650 million in fuel savings to Carolinas customers over five years. The companies instead agreed with the commission’s Public Staff, which represents consumers, to spread the payback over as much as 6-1/2 years.
FERC approved the deal in June.
“It was very apparent to me that Duke management had a change of heart about this deal,” Johnson said during his testimony. “I believe they explored every avenue short of walking away to get out of this deal.”
Between December and June, Johnson said, he was shut out of most contact with Duke. At the same time, he said he learned that Rogers and other Duke officials were telling Wall Street analysts that the merger might not be approved.
“This is like dropping an atomic bomb on your deal,” Johnson told the panel.
He also denied that Progress directors wanted to install him to lead the combined companies, as Rogers has suggested, in return for a premium on stock held by Progress investors.
Instead, he said, Progress believed he could capably lead regulated businesses – such as those Duke and Progress operate under assigned territories in the Carolinas. Under the merger, Duke will be a more regulated company than it is now.
Johnson deflected Rogers’ assertion that Progress wasn’t open about problems at the Crystal River plant in Florida, which has been shut down since a botched repair in 2009. Fixing the plant could cost up to $1.3 billion.
Progress made multiple filings to regulatory agencies on the plant’s status, he said. Johnson said Duke hired an engineering firm in May to do its own assessment of the plant and noted that a Duke employee was placed on Progress’ Crystal River evaluation team a year ago.
Tensions also arose, Johnson said, over what Duke’s commitment to a “significant presence” in Raleigh meant. Johnson defined it as “a building full of people,” or about 1,000 employees, and top executives based in the state capital. Rogers last week said he expected 1,000 to 1,300 people to continue working in Raleigh.
Johnson acknowledged that Progress was struggling under heavy debt and slumping earnings, and needed the merger more than Duke. Job cuts in Raleigh might lie ahead without it, he said.
“We had a rough several years ahead of us for not being in the merger,” he said.
‘This was a done deal’
McKee, the director, said the Progress board probably wouldn’t have pursued the merger without Johnson as CEO.
“Bill Johnson is among the top CEOs,” she said. “He is strong, determined, he wants to win. But Bill is also a very smart, forthcoming person who built loyalty among his staff.”
She disputed Rogers’ characterizations of Johnson, including the claim that the smaller Progress intended to “take over” Duke.
The new Duke’s board met by phone after the merger closed at 4:02 p.m. After a 20-minute meeting, the board went into closed session without Rogers or Johnson.
McKee said she thought the board was going to talk about Duke’s Edwardsport power plant, which is more than $1 billion over budget and the focus of ethical controversy in Indiana. Instead, she said, Gray, the lead director, announced that Johnson “was not a good fit” to lead the new Duke and would be asked to resign.
“I didn’t know whether to cry or throw up,” McKee said.
For the next hour, she said, former Progress directors defended Johnson and asked for reasons. No Duke directors other than Gray spoke, she said, repeating little more than that he wasn’t a good fit for the job.
“It became obvious that this was a done deal,” McKee said.
Progress directors then turned to the impacts of his exit on employees, customers and regulators – “all the things that have happened since then,” McKee said. “There were no answers.”
McKee said she’s not sure whether she will stay on the new Duke board.
Added former Progress director James Hyler, a former First Citizens Bank executive: “We were listened to but not heard. I think the decision of what to do had been made.”
No chance to say goodbye
Johnson was headed back to Raleigh after the merger’s close when Gray asked him to wait.
She later appeared at his office at 6:45 p.m. and asked for his resignation.
“The reason is because of your leadership style, which was very much liked at Progress, by Progress directors, but it’s not the right style to lead the new Duke,” he quoted Gray as saying. She asked for his resignation by 7 a.m. the next day, when the merger’s close would be announced.
Stunned, Johnson said he told Gray: “This is going to make it very difficult to integrate the eastern (N.C) half of this company into Duke.”
He and Progress executives flew back to Raleigh.
Finley, the commission chairman, asked Johnson whether Duke’s explanation that it couldn’t tell regulators about the leadership change until the merger was completed was legally defensible.
“I think it was technically compliant with the words of the merger agreement,” Johnson said. “The expectation was that it was for more than 20 minutes or two hours.”
Johnson ended his testimony under Finley’s questioning in a breaking voice.
“I didn’t get an opportunity to say goodbye to a lot of people,” he said. “So I’ll take that opportunity: Thanks.”