Duke Energy's troubles far from over, analysts say

Duke's board of directors never told the North Carolina Utilities Commission that officials were considering a change at the top, even as the regulatory agency rushed to meet the timetable for merging the two utility companies. Observers say that means regulators may be less likely to grant key approvals in the future — just as a basketball referee might make up for a bad foul call by making another call in the other direction.

Duke Energy's board surprised the business world July 2 by scrapping a year and a half of promises to make Progress Energy CEO Bill Johnson the expanded company's top executive, dumping him within hours of the deal's legal conclusion in favor of Duke CEO Jim Rogers.

The utilities commission and state Attorney General Roy Cooper launched separate investigations to find out what else the public wasn't told.

The questions escalated after Rogers testified under oath at a utilities commission hearing that Duke board members had started to tell him about their doubts about Johnson in late May. Then, over dinner five days before the commission approved the merger and removed the last major obstacle, two Duke directors asked Rogers whether he'd consider staying in control if Johnson was replaced. The companies had pressed the commission to approve the merger before July 8, when either company could walk away without penalty.

The commission was showered last week with criticism from North Carolina electricity consumers angry that the regulator seemed too cozy with companies they're supposed to watchdog, and that Johnson's departure comes with nearly $45 million in severance, pension, deferred compensation and stock.

"Forget about being industry insiders or corporate players. Duke spit in your face," Todd Singleton of Wendell, the information technology director at an industrial supplies company, said in one email to the commission. "You gonna sit there and take it or do your job on behalf of consumers? Show some stones and regulate."

State law allows the commission to rescind or change its decision approving the merger. The regulatory board also approves electricity rate increase requests. Both Duke Energy and Progress Energy, which remain separate operating companies in the Carolinas, are expected to seek rate increases later this year.

So what's likely to come of the state investigations?

Despite public demands that the utilities commission break up the companies again, that's inconceivable to people who make a living observing Duke Energy.

"They would be stupid to do that. That would be an irresponsible thing to do at this point," said Daniel Fogel, a former oil company executive and professor of executive strategy at Wake Forest University.

The bigger company can save fuel and staffing costs and borrow money more cheaply as decades-old coal and nuclear plants are upgraded for its more than 7 million customers in North Carolina, Kentucky, Ohio, Indiana, Florida and South Carolina, Fogel said .

But state regulators indicated while questioning Rogers last week that they've lost trust in Duke executives. That's certain to mean increased skepticism if Duke Energy and Progress Energy seek rate increases later this year as expected, Fogel said.

"I think they're worried about their own butts," Fogel said of the commission. "What I really am concerned about is that the utilities commission bends over the other way and gets so involved in the operations of the company that it screws up the company also."

The utilities commission is unlikely to try telling Duke Energy who should run the company or "unscramble the omelet of the Duke-Progress merger," Bernstein Research analyst Hugh Wynne said.

But what's likely most important to the commission is that it be taken seriously, so "it seems highly probable that the commission will seek to impose a substantial fine," Wynne wrote in a note to investors. Duke Energy's stock price is likely to suffer as it copes with "a months-long legal and regulatory quagmire," Wynne and other analysts said.

BMO Capital Markets analyst Michael Worms and Citi Research's Brian Chin doubt state regulators will impose a fine or other major penalties. But peers at Deutsche Bank, UBS and Wells Fargo expect trust will be an issue in the background when Duke Energy seeks future rate increases.

Public statements by former Progress Energy board members John Mullin and Alfred Tollison Jr. that they felt misled by the last-minute CEO switch could encourage former shareholders of Progress to file lawsuits for failing to respect the terms of the merger agreement, Wynne said. Progress Energy directors agreed to a relatively low sale price to Duke Energy due in part to being assured their top executive would lead the expanded company for three years.

Rogers, 64, said until he was asked to stay as chief executive he'd been preparing for reduced demands as post-merger Duke Energy's strategic planner and executive chairman. He had joined the boards of high-profile nonprofit organizations including the Brookings Institution, the Nature Conservancy and the Aspen Institute. Rogers said his board held a retirement dinner in December and gave him a parting gift, which a spokesman said was a chess set for the avid player.

Fogel said he expects Rogers to give up the CEO position after about six months, and for the company to replace some directors with business executives with national reputations for integrity.

Meanwhile, Cooper is mum on what his investigation might accomplish. He's challenging the utility commission's approval last year of a 7 percent rate increase for Duke Energy's North Carolina customers. He's appealing to the state Supreme Court that bad economic times should be a consideration when the commission approves rate increases, which translate into profits that please shareholders.

"Our ultimate goal is reasonable rates and quality service for consumers," Cooper said.

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Emery Dalesio can be reached at http://twitter.com/emerydalesio