Until Progress Energy CEO Bill Johnson’s stunning exit as chief of the new Duke Energy, their merger seemed to strike a balance. Charlotte would be home to the nation’s largest electric utility as Raleigh-based Progress sent Johnson and five lieutenants to help put the companies together.
That plan is now in tatters. Jim Rogers, the reinstalled Duke CEO, depicted an “autocratic” Johnson to the N.C. Utilities Commission last week. And he said executives of Progress, the smaller company, “saw this as a takeover by Progress.” Three members of Johnson’s team left with him.
Now Duke’s leaders face a long road ahead in rebuilding trust with investors, regulators and a shaken workforce.
The company still stresses the benefits of the merger. Many Wall Street analysts agree, but they say the promise of greater financial strength and operating efficiencies is now more distant.
Last week, Morningstar downgraded its corporate-governance outlook for Duke’s stock, citing potential problems in keeping former Progress executives and replacing Rogers, 64, when he retires. It’s no longer clear who will succeed the veteran CEO.
The decision to oust Johnson “creates a distraction that will make merger integration even more difficult,” analyst Andrew Bischof wrote in a research report. “At a minimum, we think strained relationships between Duke management and the (utilities commission) will persist in what we previously viewed as a favorable regulatory environment.”
Shareholders and customers have been swept up in the unfolding drama.
“We need all the pieces to come together so the shareholders don’t come out smelling like garlic on this,” said longtime Duke shareholder Barbara Adcock, 78, of Waxhaw. Adcock relies on dividends to supplement her Social Security check.
Duke’s stock closed Friday at $66.74, down 4.4 percent from July 2, when the merger closed.
The Utilities Commission has called Johnson and four directors to appear this week as it continues the investigation it began with Rogers’ testimony.
State law directs the Utilities Commission to make decisions that are in the public interest. It may rescind or modify previous orders, appeals courts have found, if circumstances have changed or there’s “misapprehension of fact.”
The commission’s legal staff is researching how those standards apply to the merger investigation. Lawyers call it a “case of first impression” – facts never before confronted.
“We’re looking at the facts and thinking about how the law might be applied, and have not reached any conclusions,” said senior staff attorney Len Green.
While observers say it’s unlikely the commission will rescind the merger, it could impose new conditions or punish Duke financially. Both of Duke’s two operating companies in the Carolinas had planned to seek rate increases later this year.
As utility commissioners and N.C. Attorney General Roy Cooper continue to probe the merger, Duke is left with a 29,000-member workforce fractured by impending buyouts and loyalties to Johnson.
“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.”
Cultural clashes doom a surprising number of mergers, management experts say. Most of those fail because they don’t fully assess intangibles such as how company leaders and cultures will get along, says the global management consulting firm Hay Group.
“When you try to bring two companies together that have very different approaches to governance, management, style, it can be very difficult,” said Deborah Allday, the Hay Group’s mergers-and-acquisitions director for Europe.
A Duke hallmark is its engineering skill in building power plants and operating them efficiently.
While Duke strayed into competitive deregulated markets more than a decade ago, Progress remained a meat-and-potatoes electric utility with a more conservative business profile.
“My impression is the cultures of the two companies are not all that different,” said former Progress director Alfred Tollison, because of their similar businesses and territories. “Our board thought the cultures were close enough that it would not be ... a particularly difficult merger.”
But while Duke sees itself as a collaborative culture that trusts workers to perform, it perceived Progress as one whose leaders are more command-oriented. The two found themselves negotiating the details of even seemingly simple tasks, insiders say.
“Another key area is candor and trust, openness and communication,” Allday said of successfully combining workforces. “And who’s going to deliver value? It ain’t going to be the top three people, it’s going to be the 30,000 at the bottom.”
Across party lines
Peeved utilities commissioners grilled Rogers, not only on Johnson’s ouster after long-laid plans to elevate him, but on Duke’s commitment to Raleigh.
Progress already has vacated one of its towers in downtown Raleigh and the city is expected to lose hundreds of jobs from the merger. Duke’s Charlotte workforce, in addition to keeping its old boss, is expected to remain stable or even grow.
In approving the merger last month, the commission added a condition that Progress, operating under Duke, maintain a “significant presence” in the state capital.
Raleigh is a city in which political, regulatory and business worlds often overlap.
Utilities commissioner Lucy Allen’s son is a partner at the firm of Wade Smith, the Raleigh lawyer who’s representing Johnson. Chairman Edward Finley worked at the same large law firm, Hunton & Williams, as Johnson 20 years ago. Progress executive John McArthur, who resigned last week rather than work for Duke, once worked on the staff of the N.C. attorney general’s office now investigating Duke.
Dozens of emails, many from the Raleigh area, have implored the commission to rescind the Duke merger. Some readers of The Charlotte Observer, meanwhile, penned letters to the editor demanding the commission “let (Rogers) get back to work.”
The contrast evoked century-old tensions between the cities themselves.
“The Great State of Mecklenburg” was traditionally viewed as a business-boosting upstart that had little in common with the state’s political center in Raleigh and Eastern North Carolina. Local leaders claimed Charlotte got the short end of state spending from road construction to universities.
East-west tensions are common among Southern states, said UNC Charlotte historian David Goldfield, forming largely as a result of geography and trade routes. But the economic rivalry between Charlotte and Raleigh has deepened in recent decades, he added.
“What we have is really a situation of envy, where ‘Hey, Charlotte, you have enough already, get to the back of the line,’ ” Goldfield said. “That’s really the attitude in Raleigh and the attitude particularly among easterners.”
Former state Sen. Fountain Odom says the “Great State” tag was more myth than reality in his 14 years representing Mecklenburg County in Raleigh.
“It was more of a joke than anything,” he said. “I really felt, especially after I’d been there for many years, that many people recognized that Mecklenburg was a very strong economic engine for the state.”
Ferrel Guillory, a UNC Chapel Hill journalism professor who writes about Southern politics and policy, discounts any Charlotte-Raleigh antagonisms after the Duke merger. Much of North Carolina now resembles the Charlotte that was once seen as different, he noted.
“The time for that intercity rivalry is just over,” he said. “North Carolina depends on both of these entities now for economic uplift. If there’s some concern on the side of Raleigh, it’s less about the victory of a rival than a weakening of its uptown. I don’t feel that they feel Charlotte outdid them, but that Duke Power outdid them.”
The (Raleigh) News & Observer contributed.