During the 18 months that Progress Energy and Duke Energy were waiting for regulatory approval for their $32 billion merger, one Progress director made a point of forwarding the boards annual performance review of CEO Bill Johnson to a counterpart on the Duke board.
John Mullin III, a businessman in Virginia, thought that Dukes lead director, Ann Maynard Gray, would benefit from seeing the evaluation of the chief executive who had been tapped to lead what was destined to become the nations largest utility.
He got very high scores, Mullin said. We were very proud of Bill. I thought she and the Duke board would be as well.
Which is why former Progress directors were shocked when Dukes board announced just hours after the merger was completed on July 2 that Johnson had resigned by mutual agreement, and that Jim Rogers had been reinstated as CEO.
Shock turned to incredulity last week when Rogers testified before the N.C. Utilities Commission that an accumulation of factors including Johnsons autocratic style and mismanagement of Progress stable of nuclear reactors prompted the newly constituted Duke board to send Johnson packing.
Progress nuclear woes, which emerged before the utilities agreed to merge and escalated as the utilities sought regulatory approval, are well known.
Last year a nuclear watchdog group, the Union of Concerned Scientists, ranked Progress plants among the nations worst on a number of key safety and performance measures. Repairs at the Crystal River plant in Florida, which was idled in the fall of 2009, could top $2.5 billion because of a botched attempt to replace its steam generator.
But former directors of Progress say theyre mystified by the criticism of Johnsons management style. They say Johnsons ability to get along with all employees is one of the strengths underscored in his evaluation. They awarded Johnson a $1.2 million bonus last year, his largest since becoming CEO in 2007, despite the deteriorating nuclear performance.
He was a good listener to his employees all the way to the shop floor, said Alfred C. Tollison Jr., who served on the Progress board for six years. He spent a lot of time in the field, listening to what employees thought and giving them firsthand his thoughts and views. Bill is a great gatherer of information and he uses that to make decisions.
Rogers testimony did nothing to change the Progress directors conviction that Johnson was railroaded, the victim of what Mullin decried as the most blatant example of corporate deceit that I have witnessed during a long career on Wall Street.
James E. Bostic Jr., a Progress director, said of Rogers account of how the Duke board viewed Johnsons management style: It was just phony stuff they made up.
Rogers testified that doubts about Johnsons leadership ability arose sometime after March 26. By mid-May, Dukes board went into executive session to discuss its concerns. Rogers said he learned that the board had serious misgivings from Dukes lead director on June 23, less than two weeks before the merger closed and Johnson was axed.
Certainly there were differences in the two companies organizational structures that had to be resolved. At Duke, for example, executives oversee such functions as power delivery, customer service and generation for utility subsidiaries across multiple states. Thus, the division in charge of generation supervises that function for North Carolina, South Carolina, Ohio, Indiana and Kentucky.
Progress officials are accustomed to overseeing multiple functions in one state, rather than a single function across multiple states.
Progress was integrated into Dukes organizational structure. Blending the two companies would likely have caused tensions as those roles and responsibilities were divided up.
Worry from shareholders
Johnsons ouster and the ongoing drama of investigations by the Utilities Commission and the N.C. attorney generals office has Wall Street analysts wondering about Dukes ability in the near-term to integrate the two companies and achieve the economic synergies expected from the merger. Thats particularly true now that a trio of high-level former Progress executives chose to follow Johnson out the door.
The recent management shuffle and Jim Rogers testimony in front of the North Carolina commission give us pause about the depth of the cultural problems facing the combined company, FBR Capital Markets analyst Marc De Croisset wrote in a research note. Such challenges are not easily resolved and are a headwind to turning Duke into a potentially great utility.
Small shareholders and customers have been swept up in the unfolding drama.
We need all the pieces to come together so the shareholders dont come out smelling like garlic on this, said Barbara Adcock, 78, of Waxhaw in Union County. Adcock is a longtime Duke shareholder who relies on her dividends to supplement her Social Security check.
Rogers was hauled before the state Utilities Commission last week after the commissioners, who approved the merger with the understanding that Johnson would be in charge, launched an investigation to determine whether they were misled. Rogers emphatically told them no, but some commissioners were skeptical.
Rogers also insisted he didnt orchestrate Johnsons ouster and stated that the board has the ultimate authority to decide whats in the shareholders best interests. Rogers is chairman of the Duke board but said he was excluded from the board discussions and decision regarding Johnsons fate.
Act 2 unfolds on Thursday when Johnson whose multimillion-dollar severance package includes a golden muzzle that has prevented him from speaking publicly about his ouster is scheduled to testify before the commission. Johnsons nondisparagement clause doesnt apply to proceedings such as Thursdays hearing.
Two former Progress directors who joined the Duke board in the wake of the merger also will testify Thursday. The pair of board members were among the five on the new Duke board who opposed firing Johnson.
True epics have three acts. The curtain goes up on Act 3 on Friday, when two longtime Duke directors will be interrogated by the commissioners. The Duke board members who made the decision to oust Johnson have not spoken publicly about it, and the only company version has come from Rogers testimony before the commission.
A very imperial style
Former Progress directors reject the cultural-wars scenario Rogers alluded to last week.
My impression is the cultures of the two companies are not all that different, said Tollison. Our board thought the cultures were close enough that it would not be ... a particularly difficult merger.
They are both electric utilities. They both have thousands of good people working for them. They are located in geographically similar spots.
Rogers did not detail the culture clash during his testimony, saying that disclosing compromising details would make it harder to bring the two companies together.
Another Progress director, Bostic, said that although he couldnt address the cultural differences between the two companies, he sees little in common between the personal styles of Rogers and Johnson.
Bostic, who met Rogers once when the executive met with the Progress board, said Rogers came across as stiff.
Rogers had a very imperial style of walking into a room, Bostic said. Everyone knew he was there.
By contrast, he described Johnson as a down-to-earth guy. He was very comfortable with other people, Bostic said.
Tollison pointed to this weeks revelation that three top-level former Progress executives quit after Johnson was ousted as proof that Johnson is the anti-autocrat.
If you are a dictator, you dont get that kind of loyalty, Tollison said.
That loyalty extended to the new Duke board. The board voted 10-5 to oust Johnson, according to Rogers testimony, with all five nay votes coming from former Progress directors who joined the Duke board.
That split on the board isnt necessarily a hindrance to Rogers ability to run the new Duke and integrate the two companies.
To have a Duke majority is probably ample control, De Croisset, the analyst, said in an interview. I dont think a board divided in this manner will necessarily make it problematic.
But Bostic suggested the board isnt merely divided; rather, the five former Progress directors could have serious trust issues given the bad blood that has flowed.