RALEIGH — The N.C. Utilities Commission halted its five-month investigation of Duke Energy on Monday by adopting far-reaching changes that will shake up the Charlotte-based power companys executive ranks and potentially influence how Duke operates from Florida to the Midwest.
The changes reshuffle key executives, establish a special board to search for a new CEO, and strip legacy Duke directors of their majority on the companys board. Duke signed on to the negotiated terms, which also require the company to issue a written statement of penance for its mishandling of its $32 billion merger with Progress Energy.
Wall Street analysts saw the restructuring and closure as making the company stronger. Barclays immediately upgraded its outlook for Dukes shares due to the material reduction in political and regulatory risk in the Carolinas. Dukes shares have risen 2.5 percent, to $63.97, since the settlement was announced Thursday.
The Utilities Commissions vote was unanimous, without discussion.
It affects the whole company, said Alfred Tollison Jr., a former Progress board member who voted for the merger with Duke and regretted the result. Well get a new CEO and chairman, third parties who havent been involved in the gymnastics over the past months.
The conditions accepted by Duke will have the effect of reducing the influence of Duke officials within their company and restoring the power balance that Progress lost when Duke fired CEO Bill Johnson this past summer. The firing prompted the exodus of three top Progress executives and the resignation of two legacy Progress board members from the combined company created by the merger.
There is no doubt the trust relationship and the mutual respect had been damaged and needed to be repaired, Dukes lawyer, Dwight Allen, told the six commissioners before they voted.
The N.C. Utilities Commission had approved the merger June 29 on the understanding that Johnson, who had been CEO at Progress, would lead the new Duke, now the nations largest electric utility. Duke board members had planned to remove Johnson as soon as the merger closed, executing their plan July 2 over the pleas of former Progress board members who had joined Dukes board as part of the deal.
Some described the settlement approved Monday as sweeping in its effect but modest in its bill of particulars. The mandated resignation of CEO Jim Rogers by the end of 2013, and mandatory retirement of board members at age 71, merely hold the company to its own contracts and bylaws. The selection of the next CEO will be handled by a special committee equally represented by Duke and Progress.
The Utilities Commission reassigned two key executives but did not require that they leave the company. A condition requiring that Duke keep at least 1,000 employees in Raleigh for five years codifies a general goal the company had previously spelled out, but the Commission did not go nearly as far as at least one other state that required a merging utility to keep dual headquarters.
Thats the beauty of it theres no loss of face for Duke but the Commission got what it wanted, said Hugh Wynne, an analyst with Sanford C. Bernstein & Co. in New York. Now they can run a nationwide CEO search. They can get the best utility executives to come and talk to them.
For regulators and Duke officials, the concerns were more immediate: healing the scar tissue from the merger machinations, restoring the integrity of the regulatory process, and allowing Duke and Progress, now a subsidiary of Duke, to move ahead with rate cases in North Carolina. This state, with 3.2 million electricity customers, represents nearly half the companys rate base in a utility operation spanning six states and 7.1 million customers.
Getting this investigation resolved before the rate case comes to a head is key, Wynne said. Now the people handling the rate case are people the Commission said it can trust.
Other challenges facing Duke are multibillion dollar costs at a damaged nuclear power plant in Florida and an over-budget coal gasification plant in Indiana.
The settlement also exacts a $30 million payment from Duke in rate savings and other benefits for North Carolina.
The Utilities Commissions probe will cost more than $2 million, to be billed by the outside law firm that conducted the probe for the state. As part of the settlement, customers will be spared that expense the tab will be picked up by Duke shareholders.
Johnsons firing in July triggered a storm of protest from customers and employees, raising suspicions that Duke had deliberately misled shareholders and public officials about its leadership strategy. A Wall Street firm promptly downgraded the companys credit rating. Former Progress board members broke their silence and said they would not have supported the merger if they had known Johnson was doomed.
I wish I could turn back the clock two years, Tollison said of the Commissions decision to end its probe. Given all that had happened, this turned out as well as it could.
The Utilities Commission launched its investigation four days after Johnson was fired, held public hearings that month, grilled Rogers, invited Johnson to give his version of events, put four Duke board members on the stand to testify, and ordered the disclosure of thousands of pages of internal emails and communications.
Since then, the commission has interviewed more than two dozen executives and board members as part of its investigation. By ending its unprecedented probe, the Utilities Commission avoided another round of public hearings and further embarrassing disclosures for Duke.
It was a distraction, said Brett Carter, Dukes state president for North Carolina. It took a lot of executive time.
Carter, along with all Duke state presidents, will report to Lloyd Yates, the new vice president of regulated utilities. Yates, a former Progress executive, was promoted as part of the Commissions strategy to return levers of power to legacy Progress managers. The promotion elevates Yates to Dukes second-most-powerful corporate position overseeing the companys electric utility business and profit center.
By me taking this job, that helps the company get past the investigation, and I was willing to do it, Yates said on his way out of the commission hearing room after the vote.
Still, Yates said that after Rogers broached the idea, it took him a day to decide to take the job, noting that it was not an easy decision.
Youve got to process these things, Yates said. At the end of the day, youve got to do whats right for the company, not for yourself.