What did three days of testimony before the N.C. Utilities Commission reveal about the corporate drama that the Duke Energy merger has become?
That despite stark differences over what led to Progress Energy CEO Bill Johnson’s forced resignation hours after the merger, both sides still agree the massive deal was worth doing.
“This merger is a very good thing to do,” former Progress director, and Johnson supporter, Marie McKee testified. “The way it has happened makes it much harder to do what needs to be done.”
It’s also shown that:
• Outrage over Johnson’s abrupt dismissal, palpable in the Raleigh hearing room, won’t fade soon. Duke has fences to mend not only with the commission and former Progress employees but across Eastern North Carolina.
“We have to maintain an element of trust,” commission Chairman Edward Finley chided at the end of Duke CEO Jim Rogers’ testimony July 10.
• Duke followed the letter, if not the spirit, of the merger agreement the commission approved less than a month ago. The company repeatedly asserted during the hearings its right to change managers as its sees fit and emphasized the merger’s benefits to customers and investors.
• While it seems unlikely the commission will try to force Duke to rehire a CEO its board fired – one of the possibilities Finley floated – members have an array of options, from rescinding the merger to adding new terms to doing nothing. N.C. Attorney General Roy Cooper also has an investigation under way.
The commission and Cooper have requested a trove of meeting minutes, emails and other documents from Duke, due by July 31.
• All sides are “lawyering up,” in Finley’s words, for a battle on new legal ground that could end in court.
Johnson is represented by esteemed Raleigh lawyer Wade Smith, Duke by former N.C. Supreme Court Chief Justice Burley Mitchell and prominent Charlotte lawyer Jim Cooney. A New York lawyer appeared with the two former Progress directors who testified Thursday. The commission is expected to hire its own experts to continue the investigation.
• The accounts of six witnesses, three each from Duke and Progress, left it up to interpretation what really happened to Johnson.
Rogers and two Duke directors blamed Johnson’s “controlling” management style and team. Johnson blamed cold feet on Duke’s part.
In the critical six months before the merger closed, costs of complying with regulators’ demands grew as Progress’ appeal to Duke appeared to fade. Progress wrestled with stubborn problems at a downed nuclear plant and disappointing earnings. Duke’s board had no contact with Johnson during that period, in which Rogers publicly said Duke would be fine if the merger failed.
While Johnson said he was stunned by his ouster, he was aware of increasing friction between the companies’ top executives. Tensions rose over federal compliance costs, suggestions on Wall Street that the merger might fail and internal disputes over the $650 million in savings guaranteed to Carolinas customers.
“There were a lot of footprints in the snow at that point,” Johnson said.
Rogers testified last week that, “It’s my judgment that Bill, based on his management style, knew exactly what was going on.”
Wall Street analysts are divided on the long-term implications for investors.
“Most importantly for Duke shareholders, we did not hear any ‘smoking gun’ suggesting the company/board did something unallowed within the context of the merger and CEO change,” Credit Suisse analyst Dan Eggers wrote after Johnson’s testimony.
“We think near-term headlines could leave a cloud over Duke but fundamentally we see considerable value in the shares for investors and in savings from the merger for customers.”
Analyst Hugh Wynne of Bernstein Research took a dimmer view.
“The board’s action appears to have triggered what we believe will be a months-long legal and regulatory quagmire that will constitute a material impediment to effective management of the company” and hurt earnings growth, he wrote in a report Friday.
Wynne said Duke’s strained relationship with the commission will make it harder to win the rate increases to be sought this year. Hard feelings among Johnson loyalists is likely to hurt the ability of Duke to mesh the workforce, he added, and “suggests that Rogers’ ability to lead the combined companies may also have been eroded.”