Why Did Duke Sever Its Head?

It took fully 18 months for Duke Energy (NYSE: DUK  ) to complete its merger with its fellow North Carolina-based public utility Progress Energy. But once the combination, which had been agreed to in January 2011, was consummated on the first business day of this month, only hours were needed for the directors of the combined company to literally remove Duke's head.

Here he comes; there he goes
As you may have heard, William D. Johnson, who had been CEO of Progress, had been scheduled throughout the merger's incubation process to assume the same role at the combined company, which is also called Duke Energy. However, before his first day in his expanded position had been completed, he was sacked and immediately replaced by James E. Rogers, who'd been CEO of the pre-merger Duke. Now with resulting vitriol figuratively spewing into the Carolina skies -- Progress was headquartered in Raleigh, while Duke (old and new) resides in Charlotte -- one key question involves whether the company remains compelling for Foolish investors.

After all, the company is now the nation's largest public utility, with more than 7 million customers in both Carolinas, Florida, Indiana, Kentucky, and Ohio. Further, its 30,000 employees across that footprint provide power to that sizable base through the use of coal, natural gas, nuclear, and hydro.

Given its scope and the relatively healthy economic locations it serves -- much like Atlanta-based Southern (NYSE: SO  ) -- Duke appears to be worth a gander from Fools attracted to the relative stability of public utilities. Beyond that, the company's 4.70% indicated forward dividend yield appears to add to its attractiveness, doesn't it? That may well be the case, but before you place a buy order, let's look at the wacky chain of events at Duke of late.   

It appears that on July 2, with the combination of the two utilities having finally cleared a myriad of regulatory hurdles and become a fait accompli, Johnson received the imprimatur of Duke's board of directors as the company's CEO. Strangely, however, it appears that the board, which included twice as many representatives from Duke as from Progress -- then immediately went into executive session, sans Messrs. Johnson and Rogers. Soon thereafter, Ann Maynard Gray, the board's lead director, left the meeting and, on behalf of her fellow directors, requested a resignation from the 58-year-old Johnson.

The board's lurking surprise
Why the seemingly rapid-fire and possibly impulsive action so hard on the heels of a brand-new $26 billion merger? According to testimony before the North Carolina Utilities Commission Tuesday by Rogers, the Duke contingent had become progressively more disenchanted with the Progress CEO as the due diligence and regulatory approvals processes moved forward. Rogers had been scheduled for a post-merger role as the new Duke's executive chairman.

According to Rogers, 64, who joined Duke a half-dozen years ago through its merger with Ohio-based Cinergy, there were a handful of specific concerns about Johnson (who likely will walk away with a severance package of about $44 million) that disenchanted the Duke crew as time went on. They included:

  • What was termed his autocratic management style.
  • His (questionable) oversight of nuclear facilities owned by Progress, including the shuttered Crystal River plant in Florida.
  • The weakening financial performance of Progress following the announcement of the merger.

Misconceptions don't make for progress
Also according to Rogers, throughout the pre-merger process, his bigger company viewed the impending combination as a "merger of equals." However, he said that, as the process moved forward, it became apparent that his counterparts at Progress "viewed this as a takeover of Duke, based on behavior, based on actions, based on treatment of people."

The Foolish bottom line
It's impossible to predict precisely where the company's surprising contretemps will lead. Indeed, in addition to the current probe by North Carolina's utilities commissioners, the state's attorney general has similarly begun an investigation into the state of affairs at Duke, which counts among its progeny Spectra Energy (NYSE: SE  ) , a Texas-based natural gas company that is generally similar to the likes of Energy Transfer Equity (NYSE: ETE  ) and Kinder Morgan Energy Partners (NYSE: KMP  ) .

So what about that potential buy order for Duke shares? My inclination, given the ongoing investigations into events at the company, a new Standard & Poor's credit watch stemming from those events, and questions relating to a replacement for the near-retirement Rogers, is to simply monitor the company for now. An ideal way begin doing so is to add it to your individualized version of My Watchlist.    

Fool contributor David Lee Smith doesn't have financial interests in any of the companies named in this article. Motley Fool newsletter services have recommended buying shares of Southern and Spectra Energy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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