One of those shocking developments
There wasn’t much debate about who Business North Carolina’s Mover and Shaker of the Year should be. Not only did Jim Rogers engineer a merger of two of the state’s largest corporations to create the nation’s biggest utility, but he got his job back the same day he relinquished it. On top of that, he helped bring the Democratic National Convention to Charlotte, shining a global spotlight on his headquarters city. But playing major roles in two momentous events didn’t mean his selection was without controversy. To be specific: Was the once and future CEO of Duke Energy Corp. hero or heel in 2012? Our Mover and Shaker of the Year can be either — or both. The magazine’s editors give the award to the person they feel left the biggest wake, for better or worse, in the state’s economy. Rogers made waves, but through three-quarters of the year we weren’t sure if they were from propulsion or revulsion.
Two years ago, Duke announced plans to acquire Progress Energy Corp., the state’s other major energy company. Though Duke’s market value towered $10 billion above its Raleigh-based rival’s, this was dubbed a merger of equals. Rogers, though chief executive of the larger company, would hand the reins to Progress CEO Bill Johnson and become executive chairman of the board. He joked that he would settle any disputes that might arise by arm-wrestling the much bigger Johnson. From the outside, the marriage looked like a good match. “We had a favorable view of the merger,” says Dimitri Nikas, director of Standard & Poor’s ratings for regulated utilities. “We viewed the combination of the two companies as something that would provide for a stronger company operationally. The customer base would be larger; the customer base would be more diverse. Its generation fleet would be more diverse. At the time, Duke’s financial profile was strong enough to support Progress’ relatively weaker financial profile.” The credit-rating agency affirmed Duke’s and raised Progress’.
But federal regulators’ fears that the combination could cripple competition in the Carolinas delayed the closing until July 2, about sixth months later than originally planned. That day, Johnson became CEO. The day after, Duke announced he had resigned, with Rogers reinstalled. Johnson wouldn’t comment, his lips stitched by a rich severance package. If the merger had been between sock-makers, that probably would have been the end of it. But power companies are heavily regulated, and the N.C. Utilities Commission, assured by Duke all along that everything was proceeding as planned, was embarrassed. It launched an investigation, summoning Rogers and Johnson to testify, its subpoena powers unmuzzling them from confidentiality agreements. Rogers’ testimony July 10 attracted so much interest that the Internet feed carrying his inquisition crashed. The usually dapper, self-assured and media-savvy executive, himself a lawyer and former newspaperman, looked thin and brittle. He sounded defensive.
Yes, he testified, the board asked for Johnson’s resignation the day it approved his appointment to the job. Over the long, drawn-out engagement, Duke directors had changed their minds, said Rogers, who depicted Johnson as a control freak who had a “chilling impact on many of the top executives at Duke in terms of whether they were free to speak out on their concerns for fear of retaliation.” Not so, Johnson countered when he testified nine days later. Duke had been trying to get out of the merger since December 2011, when it realized that meeting federal stipulations for approval would cost between $200 million and $225 million. He claimed that Rogers told analysts Duke would be better without the merger and had tried to renegotiate terms. “We’re not renegotiating,” Johnson told the commission he had replied, reminding Rogers that Duke would have to dish out a $675 million exit fee if it reneged. “They wanted the merger, then they didn’t. Then they couldn’t get out of it, and they didn’t want to be stuck with me as the person who dragged them into it.” When Johnson suggested there was no way to fight the board’s request for his resignation, Utilities Commission Chairman Edward Finley replied, “Maybe, maybe not.”
Rogers had little time to recover from the commission’s grilling. In early September, the Democratic National Convention converged on Charlotte. As co-chair of the host committee, he had agreed to raise almost $37 million to pay for the three-day event and had to do so without corporate contributions because of party-imposed restrictions. The committee fell more than $12 million short of its original goal, forcing it to tap a $10 million line of credit guaranteed by Duke that must be repaid early this year. The utility promised customers that they wouldn’t have to pick up the tab. These events coalesced to give Duke and its CEO a black eye. “Their brands have been hurt,” says Dan Fogel, who teaches corporate strategy at Wake Forest University. “People want to say they’re evil.” But as time passed, two things became clear: Duke had little choice but to jettison Johnson, and the company isn’t in the dire straights its press clippings might lead you to believe.
Progress had been struggling. Its second-quarter earnings were down 64% from the year before. More problematic was the performance of Progress’ nuclear fleet, especially its plant in Crystal River, Fla., which went offline in 2009 after routine maintenance created a crack in a containment wall. Johnson estimated repairs could cost $900 million to $1.3 billion. But a consultant hired by Duke discovered the bill could reach $3.4 billion. Duke will have to decide whether to shutter or repair the plant. Either way, it’s on the hook for millions — perhaps billions — it hadn’t accounted for. “It appears just on Crystal River alone that they had justification to fire him,” says Jim Warren, executive director of N.C. WARN, a Durham-based utilities watchdog. “According to the record, he was low-balling Duke and regulators on repair bills.” Something similar occurred in 1998 when Charlotte-based NationsBank Corp. merged with San Francisco-based BankAmerica Corp., whose CEO was supposed to succeed Hugh McColl as chief executive of the combined company. As McColl told BNC (“Hugh’s View,” November 2012), “He had gotten us into a terrific, terrible jam, truthfully against his own board’s advice, where we were exposed to losing $50 billion to $100 billion. … He had been theoretically my successor, but he never made it to the first board meeting.”
Duke could have tried to change the arrangement before the deal was done, but that would have delayed the already late merger even further. “The expense would’ve been tremendous,” Fogel says. “They really had to make a good business decision.” The move didn’t seem so adroit in the following months. Analysts and shareholders worried that the commission’s embarrassment would lead to harsh reprisals. A few even predicted an unwinding of the merger. Many thought the commission would take a harder line on rate increases in the future. Standard & Poor’s downgraded Duke’s corporate credit rating, and though the company’s performance beat analysts’ forecasts for the third quarter, its stock price dropped 8.6% between July 2 and Nov. 30. Then the Utilities Commission announced its settlement with Duke. The utility agreed to pass on an additional $25 million in fuel-related savings to retail customers (it had already promised to deliver about $650 million as part of the original merger agreement) and keep 1,000 employees in Raleigh for five years, among other things. Most newsworthy was Rogers’ promise to retire by the end of 2013, when his contract expires. “The company and the commission can now move forward with a degree of mutual trust that had been lost due to Duke’s actions surrounding the merger,” says Sam Watson, general counsel for the Utilities Commission. When asked if that means state regulators are trying to restore their good relationship with the company, he says, “Absolutely,” then adds: “I don’t want that to be misunderstood as cozy.”
But that’s how many critics viewed it. “The settlement is very little more than window dressing,” Warren says. “There doesn’t look like much meat, much penalty for Duke at all. The markets’ and analysts’ reactions reflect that.” S&P’s Nikas predicts the settlement will allow the utility and the commission to reset their relationship. “I don’t know for certain, but I think the fact that the commission readily approved the settlement should indicate that going forward, regulatory relations should revert to a pattern that existed in the past.” Nikas won’t have to wait long to find out if he’s right, as the Progress subsidiary is seeking an 11% rate increase. Having made its mea culpa, Duke should soon reap the financial benefits of the merger, such as elimination of almost 2,000 jobs over three years. Its stock has rebounded 3% since the settlement was announced. That leaves Rogers, 65, to soldier on in his old role until his mandated retirement at the end of the year, if he stays that long. But some believe he always planned to leave sooner rather than later. “I think he really does want to retire,” Fogel told BNC before the settlements. “He just needs to create stability. I think in the next six months you’re going to see another transition.”
So here’s Jim Rogers’ year that was: He oversaw the creation of the nation’s largest utility, a company now worth more than $45 billion; he guided that company through government investigations and public vicissitude; and he recruited and helped pay for a convention that brought 35,000 people to Duke’s hometown. The DNC’s true value will be decided years from now and will depend on whether Charlotte can land other major events, as Atlanta did with the 1996 Summer Olympics after hosting the DNC in 1988. Regardless, it was an example of community outreach few other corporations can match. As the year ended, some media mavens were mentioning him as a possible secretary of energy under President Obama, who was nominated for a second term at that convention. Long a proponent of cap-and-trade legislation, Rogers “would be the perfect architect of and spokesman for a new, outside-the-box approach to reducing carbon,” Bloomberg Businessweek columnist Paul M. Barrett writes. “And would Republicans really oppose the appointment of an energy industry CEO?” A Duke spokesman says Rogers isn’t interested, but the speculation shows that though his company’s shares struggled last year, its CEO’s stock has never been stronger.