Photo: Wikimedia Commons
A Friday SEC filing saw the resignation of two more Duke Energy Corp. (DUK) directors, the latest development since a surprising board coup led to the July 2nd removal of CEO Bill Johnson. The retirees, John D. Baker II and Theresa M. Stone, were legacy Progress Energy directors, and each was candid about recent developments as they left.In addition to suggesting a change a leadership, Mr. Baker added that actions by Duke’s board members “have revealed serious issues in Duke’s corporate governance practices and procedures”.
Ms. Stone was more specific when recalling the July 2nd meeting: “No notice had been given to the six Progress independent directors who had joined the combined company Board that a change in the CEO position would be an agenda item at that Meeting; and no written materials had been, or were, provided at the Meeting to support removing Bill … the sole reason, given repeatedly by Ms. grey was Bill’s leadership style.” The resignations of Mr. Baker and Ms. Stone from Duke’s board leaves just four Progress Energy legacy directors as opposed to 11 from Duke Energy.
When we covered this story on July 10, CEO James Rogers was in the midst of questioning from the North Carolina Utilities Commission (“the Commission”) over his instalment as CEO and the board’s abrupt loss of confidence in Mr. Johnson.
Though the board reportedly came up with five reasons to oust Mr. Johnson, including the Crystal River nuclear power plant that could cost more than $1 billion to repair, departing director Theresa Stone added that “The Legacy Duke Directors, with Ms. grey as their spokesperson, gave no reasons other than perceived leadership style. Subsequent to the announcement of Bill’s removal, additional concerns about Bill have been expressed by Legacy Duke Board members. However, none of those concerns was raised for discussion with the Legacy Progress Board Directors either in the eighteen months between the signing of the merger agreement and its closing or in the Meeting of July 2 where he was removed.”
At the time of Mr. Rogers’ hearing, the Commission requested additional materials from Duke Energy and on Friday, they reportedly gave the company another week to come up with more than three years of company documents and e-mails concerning the merger and removal of Mr. Johnson as CEO.
The Commission has a number of disciplinary options to explore if they determine the board’s conduct in the merger was illicit, such as imposing regulatory conditions on the company, nullifying the merger altogether, or forcing a replacement of James Rogers as CEO. It could take months to determine whether the public and regulators were misled about the terms of the utility merger.
In addition, a litigation swarm has set in over the last few weeks. A shareholder lawsuit filed on July 17 alleges that “The director defendants’ conspiracy and tactics have had a devastating effect on Duke’s credibility,” in addition to noting that the board’s removal of Mr. Johnson led rating agencies to cut the company’s debt rating. A week later, a class action lawsuit was announced on behalf of those who bought stock between June 28, 2012 and July 9, 2012.
On July 26, another firm announced a similar class action investigation in which “directors misrepresented and failed to disclose material adverse facts in connection with the Merger.” The same day, shareholder rights firm Gilman Law LLP announced their own investigation “concerning potential breach of fiduciary duty claims”.
Furthermore, concerns that the board coup may led to credit rating cuts have already materialised. Standard & Poor’s lowered Duke Energy’s credit rating five days ago, citing “the utility’s lack of transparency in connection with the hiring of a new CEO and the consequences of that decision.” The downgrade statement also included concerns over “two rate-case increases in North Carolina as well as questions about a Florida nuclear power plant which has been out of service since August 2009.” Duke Energy also announced the closing of two coal power plants last Friday.
As this article from Real Money points out, it wasn’t just Standard & Poor’s that downgraded Duke Energy, but UBS and Moody’s as well. The article points out how Duke’s dividend yield of 4.54% is too high, about 15% higher than the average utility yield, signaling “higher-than-average risk.” The article points out that additional bad news could mean a loss of principal for investors, and that more bad news was likely coming.
Jeff Williams on Seeking Alpha wrote this morning on Duke Energy’s financial health. He established through a set of profitability metrics—including Operating Cash Flow, Return on Assets, Net Income, and Quality of Earnings—that the company was currently financially healthy. However, there is no way to calculate the degree of catastrophe potentially resulting from the Commission’s investigation.
As the country’s largest utility, Duke Energy has become increasingly dependent on government regulations, with state limits on how much Duke Energy can charge customers. The merger only introduced additional state regulators into the mix and these investigations have the potential to create a stricter regulatory environment for Duke Energy, potentially damaging credibility and profitability.
Duke has a D on its corporate governance overall. Its financial statements reflect an AGR score of 47, indicating higher accounting and governance risk than 53% of companies.
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