HOUSTON North Carolina officials late Friday launched two investigations into the surprising move by Duke Energy Corp (DUK.N) directors to replace former Progress Energy Chief Executive Bill Johnson with Duke CEO Jim Rogers, just a day after a deal to create the largest U.S. utility company was finalized.
The North Carolina Utilities Commission, which approved Duke's $18 billion buyout of Progress late last week, ordered Rogers to appear at a hearing Tuesday to answer questions on the timing of the decision to replace Johnson, the commission said in a two-page order.
Separately, Roy Cooper, attorney general in North Carolina where both companies are based, opened an investigation and ordered Duke officials to produce merger-related documents from board members and senior managers of both companies from as far back as January 2011.
"This significant management change within hours after the merger has put the company on credit watch, so we need to get to the bottom of this to make sure we protect consumers," Cooper said in a statement.
The attorney general requested "all documents or communications that discuss the prospective chief executive officer of the merged entity" and "any discussion of any effort or plan for James E. Rogers to be the chief executive officer of such merged entity."
The agency also seeks documents that "identify or assess risks and/or impacts," such as financial, investor or regulatory associated with a change of management after the merger.
A Duke spokesman said Rogers would be at the commission hearing Tuesday and the company was evaluating the request for documents from the attorney general.
The investigations followed public comment earlier Friday by Progress's former lead director that Duke directors acted in "bad faith" when it replaced Johnson.
Duke completed the buyout of Progress on Monday, and on Tuesday the Duke board announced that Johnson, who had been slated to run the combined company, was leaving by "mutual agreement."
The decision came as a surprise to many Duke shareholders, Wall Street analysts, and utility commissions that had approved the deal.
Standard & Poor's said it was reevaluating credit ratings for Duke and its utilities, citing the management news.
"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," S&P said.
Replacing Johnson "can only be described as an incredible act of bad faith with regard to the undertakings of the merger agreement," John Mullin, former lead director at Progress, said in the public letter dated July 5. "I think it was a clearly premeditated contravention of one of the most central tenets of our agreement."
The decision by the 18-person Duke board, with 11 legacy Duke directors and seven Progress directors, to install Rogers as chief executive officer was "the most blatant example of corporate deceit that I have witnessed," Mullin wrote.
Duke declined to comment on Friday. Earlier in the week, the company and its lead director, Ann Maynard Gray, declined to give any further details about Johnson's resignation.
Under a non-disparage clause in the separation agreement, Johnson and Duke are not allowed to make statements that cast the other "in a critical or unfavorable light."
Johnson will receive up to $44 million in payouts related to his resignation from the company, according to regulatory filings.
The deal, announced in January 2011, created the largest U.S. power company, with 57,000 megawatts of generating capacity and 7.1 million electricity customers in North Carolina, South Carolina, Florida, Indiana, Kentucky and Ohio.
It also became the second largest U.S. operator of nuclear power plants.
The original plan had been for Rogers to serve as executive chairman of the combined company, with Johnson as president and CEO.
Johnson was on the board when the decision was made, along with Rogers. It is unclear if either man voted on the CEO change, though Johnson has now left the Duke board, reducing its size to 17.
Duke shares have dropped 4.4 percent since the announcement on Tuesday morning. By comparison, Standard & Poor's' utilities index .GSPU is down about 1.4 percent over the same period.
Duke shares closed down 2.3 percent Friday at $66.23 amid a broad market slide.
Despite the controversy, corporate governance expert and University of Delaware professor Charles Elson said he was untroubled by the move.
"Until the two companies come together, you never know who will be the best," Elson said. "The board's job is to pick who is the most effective leader, period. Sometimes before a merger, one person appears better and after a merger someone else appears better."
NORTH CAROLINA CONCERNS
Robert Gruber, executive director of the NCUC Public Staff, an independent agency that makes recommendations to the utility commission on consumer matters, said Johnson's sudden departure raises questions about how the combined utility will operate.
"They presented it as a friendly merger that made the best of the synergies, the cost-savings and putting the best people possible in place to manage the company," Gruber said. "Suddenly, it became an unfriendly merger in one day."
The controversy did not appear to concern Gruber's counterparts in South Carolina.
"We have great respect for Bill Johnson, but we also have great respect for Jim Rogers," said Dukes Scott, executive director of the South Carolina Office of Regulatory Staff, which participated in the merger deliberations.
Johnson's departure from Duke cost him a leadership position at the Nuclear Energy Institute, the nuclear industry's Washington-based trade group.
Johnson, elected in May to a second one-year term as chairman of the organization, was no longer eligible to lead NEI once he resigned, an NEI spokesman said in an email.
Johnson's resignation is not without precedent among large companies that have combined.
John Thain was forced to quit as head of Bank of America Corp's (BAC.N) investment banking and wealth management business just three weeks after he sold Merrill Lynch to the bank, after the scope of losses from mortgages and toxic debt on Merrill's books came to light.
And Citigroup Inc's (C.N) plan to have Sandy Weill and John Reed serve as co-chairmen and co-CEOs after Citicorp merged with Travelers in 1998 lasted about a year-and-a-half. Reed stepped down in 2000.
(Additional reporting by Ernest Sheyder and Michael Erman in New York; editing by Leslie Gevirtz, Jeffrey Benkoe and Richard Chang)