Duke Energy Has Made Utilities Interesting Again, For All The Wrong Reasons

By Stephen D. Simpson, CFA | July 10, 2012 AAA

Internal corporate politics are often confusing, if not incomprehensible, to outsiders, but sometimes a corporation goes above and beyond the call of duty in creating a "what the ... ?" moment for analysts and investors to ponder. Enter Duke Energy (NYSE:DUK) and what appears to be a scandal-in-the-making regarding its sudden CEO change in the wake of the closing of its acquisition of Progress Energy.

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Farewell Bill Johnson, We Hardly Knew Ye
Throughout most of the lead-up to final approval and execution of the Duke Energy - Progress Energy merger, Progress CEO Bill Johnson had been tapped to be the head of the combined company, and it was on this basis that the North Carolina Utilities Commission (NCUC) approved the merger. According to newspaper articles quoting unnamed insiders, though, Bill Johnson's tenure lasted all of about 20 minutes.

SEE: Analyzing An Acquisition Announcement

As the story goes, upon the closing of the deal the board of directors immediately demanded Johnson's resignation. Johnson complied and Jim Rogers (CEO of Duke Energy prior to the merger) became the CEO once again.

Bill Johnson may have received a strong shove off the ledge, but the board of directors did see fit to make sure there was cushion for the landing. In exchange for a non-disparagement agreement, Johnson is taking away up to $44 million for his 20-minute tenure as CEO.

The Investigations Are Already Beginning
It hasn't taken long for this action to generate a response. The Attorney General of North Carolina has announced an investigation, as has the NCUC. Although making/keeping Johnson as CEO wasn't a condition of the NCUC's approval of the merger, maintaining a "significant presence" in Raleigh was an explicit condition, and it is pretty clear that the NCUC feels as though it was misled by the company.

It seems improbable that any government body in North Carolina can undo this deal, but that doesn't mean that Duke Energy gets off scot-free. Duke will be filing two major rate cases in North Carolina in the next few months, and the company may find a sudden chill to what has generally been a pretty industry-friendly regulatory regime. At a minimum, Jim Rogers will be under extreme pressure to make a convincing case when he speaks on this issue (starting July 10, apparently).

How Much Should Investors Care?
Both Rogers and Johnson were/are quality utility executives, though they have very different styles. Duke is likely to be more aggressive under Rogers, and that's not necessarily a bad thing. Still, it raises significant questions about the leadership in the boardroom and the directors' willingness to communicate openly and honestly with the actual owners of the company.

With the sell-off, Duke shares do offer a yield premium to shares of Southern Company (NYSE:SO), DTE Energy (NYSE:DTE), Edison International (NYSE:EIX) and Xcel Energy (NYSE:XEL). The shares likewise offer about the same dividend yield as American Electric Power (NYSE:AEP) and Black Hills (NYSE:BKH), despite operating in a region with above-average growth trends.

The Bottom Line
Unfortunately, I think this issue is likely to linger on and weigh on the company. Regulators do not like being lied to, and Duke Energy is going to need to have an extremely good explanation for what happened in that boardroom if they want to avoid some regulatory blow-back.

SEE: Utility Funds: A Bright Choice In Bear And Bull Markets

At the same time, I don't know how shareholders can feel great about this board right now; not only was Johnson's going-away gift pretty excessive, but the lack of a cogent explanation to shareholders suggests an arrogance and indifference that is troubling at best. I'm not really a utilities guy, but today I'd feel much better about owning AEP or Edison International than Duke Energy.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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