Raleigh, N.C. — The fallout from the sudden departure of Bill Johnson as CEO of the newly combined Duke Energy and Progress Energy could lead to a financial penalty.
Wall Street doesn't like uncertainty, and the "mutual agreement" leading to Johnson's exit has sparked concern at Standard & Poor's.
Analysts, meanwhile, speculate about why the change was made and what the move means for the company's future/
Johnson, the former chairman and CEO of Raleigh-based Progress, took over as CEO of the combined companies when the merger deal closed Monday. However, by 7 a.m. on Tuesday, he was out. He'll receive a $10.3 million severance package, Duke said in a filing with the Securities and Exchange Commission.
The unexpected and rapid change, with Duke Chairman Jim Rogers assuming the CEO role, led Standard & Poor's Rating Services to put Duke on its "CreditWatch" list, meaning its "A-" corporate credit could be downgraded. S&P cited the "sudden shift" in management.
"The sudden shift in management raises concerns about effective corporate governance, successful handling of the anticipated merger integration, and the ongoing effective management of pending challenges that face the combined entity," said Standard & Poor's credit analyst Dimitri Nikas, according to a report from The Associated Press.
At the same time, S&P also indicated that an improvement in Progress ratings was less likely.
An "A-" rating is an investment grade rating that indicates a company has a strong capacity to meet financial requirements, The AP noted. Progress is ratted "BBB+." A "BBB+" rating indicates a company has adequate capacity to pay back debt but is also vulnerable to a weak economy, according to the AP.
When Duke and Progress announced their merger in January 2011, the companies said that Rogers, 64, would become executive chairman of the company with Johnson serving as president and CEO.
Johnson signed a three-year contract with Duke just days ahead of the merger's final closing.
“There’s no question that social issues play a huge role in how these mergers unfold and this latest turn of events simply highlights just how difficult they are to predict,” said Paul Patterson, a New York-based utilities analyst with Glenrock Associates LLC.
Patterson asked Rogers during a January 2011 conference call after the Progress purchase was announced how he, as executive chairman, would resolve disputes with CEO Johnson.
“Basically, Paul, we’re going to arm wrestle and you know how big Bill is and you know the outcome of that,” Rogers replied. “I would basically say that Bill is going to be CEO and he is going to be making the calls.”
Johnson, 58, has been the chairman and CEO of Progress since 2007.
Duke shares fell 1.7 percent to $68.69 in New York. The takeover received its final regulatory approval yesterday.
“We saw this merger as a succession plan for Duke,” Angie Storozynski, a New York-based analyst for Macquarie Capital USA Inc., said today in an interview. “Now Rogers is back in charge.”
The reconstituted board, which has 11 Duke members and seven from Progress, on Monday asked Rogers to remain as president and CEO, he said today in a telephone interview. He didn’t participate in the deliberations, he said.
“I have a laser focus on making sure the key leaders from Progress feel included and part of this team,” Rogers said. The company
expects to shed about 1,800 workers and about 1,200 already have accepted severance packages, he said. Some employees whose jobs are cut may be offered other positions, he said.
Rogers may not want to continue running the company for much longer than that contract, Andrew Bischof, a Chicago-based equity analyst for Morningstar Inc., said today in an interview.
“The question is how long will Rogers now stay on,” he said. “Duke has one of the better management teams. He’d be able to find a suitable candidate within those ranks.” Succession will probably be a key topic during the company’s third-quarter conference call with analysts, Bischof said.
Rogers “been doing it for a long time and he’s capable,” said Mark Maloney, who helps manage $4.5 billion at Manulife Asset Management US LLC in Boston, including about $1 million of Duke shares. “I’d be more concerned if there weren’t a CEO.”
Rogers and Johnson have revealed differing political views, Maloney said. Rogers is co-chairman and lead fund-raiser for this year’s Democratic National Convention in Charlotte. Johnson is more politically conservative, Maloney said.
Rogers has donated $71,600 in the past two years to political campaigns, according to OpenSecrets.org, which compiles political contributions. His donations to individual politicians have all been to Democrats, including President Barack Obama, former Virginia Governor Tim Kaine and Senator Mary Landrieu of Louisiana.
Progress Energy has donated $32,367 to political campaigns during the 2012 election cycle, with 66 percent going to Republican candidates. Duke Energy has donated $167,155 to candidates, 53 percent for Republicans, according to data compiled by Bloomberg.
With Johnson departing, Duke will need to craft a new succession plan, Andrew Smith, an analyst for St. Louis-based Edward Jones & Co., said today in an interview. He rates Duke shares at hold and owns none.
Johnson’s ability to lead may have been called into question over his handling of repairs at Progress’s Crystal River 3 nuclear reactor in Florida, said Jim Warren, executive director of North Carolina Waste Awareness and Reduction Network, a utility watchdog group.
About three months after the acquisition by Duke was announced, Progress disclosed unexpected damage to the reactor’s containment building while crews were repairing an earlier crack. There were reports last year that Progress engineers further damaged the facility by attempting to fix cracks in its concrete shell by themselves, Warren said.
“It may have raised questions about judgment,” Warren said in a phone interview today. “It represents a multibillion- dollar problem that’s also very embarrassing.” The plant remains shut.
Resolving the cost of the repairs to be covered by insurance, shareholders and utility customers will be the company’s third priority after cutting costs and improving efficiency as the two companies combine operations, Rogers said Tuesday on a conference call with analysts.
(Bloomberg news contributed to this report.)