North Carolina utility regulators' No. 1 goal in negotiating a settlement with Duke Energy Corp and board shake-up: restore the spirit of the original Duke-Progress Energy merger.
The agreement, which outlines Chief Executive Jim Rogers' retirement when his contract expires in December 2013, calls for two new independent board members, a mandatory retirement age of 71 and provisions to protect legacy Progress employees.
Given that North Carolina is Duke's largest market, the settlement shows that state's regulators are willing to flex their muscle well beyond routine electricity rate-setting hearings.
"They're not IBM or Exxon, they're a regulated utility," Robert Gruber, executive director of the public staff of the North Carolina Utilities Commission (NCUC), said of Duke. "It's appropriate for the commission to regulate the merger."
The commission felt slighted when Rogers took control of the combined company in July after the $18 billion buyout of Progress closed, according to commission hearing testimony. When the deal was first announced in January 2011, commissioners had been told Bill Johnson of Progress would take the helm of what became the largest U.S. power utility.
The unexpected move to replace Johnson within hours of the deal's closure caught many off guard, and quickly became a hot-button topic throughout North Carolina and on Wall Street. Johnson is slated to become CEO of the Tennessee Valley Authority in January.
"What the commission is trying to do here is restore some of the balance that the original merger contemplated before the board took over and threw Johnson out," said Gruber.
Johnson's exit prompted the commission to immediately launch an investigation.
The settlement announced on Thursday night hinged little on Rogers, as the Duke board had not talked about Rogers staying on past the end of his contract, according to a person close to the company.
The commission had always expected Rogers would retire when his contract expired, Gruber said.
Still, in negotiations with the utility commission Duke pushed back over required lower-level management changes and opposed regulatory intervention into its corporate governance. But ultimately the company decided it wanted to put the issue behind it, the person said.
Duke had already formed a search committee to find Rogers' replacement earlier this fall and has hired executive search firm Russell Reynolds Associates, the person said. Russell Reynolds didn't return phone calls seeking comment.
The search committee originally formed by Duke had seven members: four legacy Duke directors and three legacy Progress directors. With the settlement, the committee will now have eight members, split equally between the legacy companies.
When a new board member joins Duke, he or she will join the search committee, according to the settlement.
"Whether or not you agree that a commission should be able to dictate management changes and board changes, I think an independent CEO and board member will be a good step in improving overall stewardship," Morningstar analyst Andrew Bischof said.
The market seemed to echo that sentiment, as shares of Duke traded up more than 2 percent on the day, outperforming the broader market.
"This hopefully moves the commission and Duke forward," said Sam Watson, general counsel for the NCUC.
Duke declined to say which board members will constitute the search committee. Through a spokesman, Rogers declined to comment.
Charles Pryor Jr, a former Progress Energy board member who voted for the merger and is prohibited by the settlement from re-joining the board, expressed hope the company would move beyond the recent controversy.
"Whatever Duke's obligations are under the regulatory compact, obviously the commission felt that they fell short," Pryor said. "That's the basis upon which all the other terms of the agreement were set down."
The North Carolina Utilities Commission is facing change itself.
Two of the seven commissioners have terms that expire in June. Edward Finley's term as chairman of the commission also expires in June, although his term as commissioner extends to June 2019.
Gruber, the executive director of the commission's public staff, which advocates for consumers, has said he plans to retire next year.
The incoming North Carolina governor, Republican Pat McCrory, who would appoint new commissioners, is a former Duke Energy employee.