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The Globe and Mail

Boardroom politics turn off this Duke Energy investor

James Rogers, chief executive at Duke Energy Corp. attends a session at the World Economic Forum in Davos in this Jan. 30, 2009, file photo.


As part of my strategy to look for solid U.S. companies that pay dividends exceeding Treasury rates, I bought 100 shares of Duke Energy Corp. in August, 2011. With hundreds of thousands of customers in the eastern half of the United States, a price-to-earnings ratio around 12, and a dividend yield that topped 5 per cent, it seemed like an excellent pick as a stable profit producer.

Stable, however, is not the word that now comes to mind. In a boardroom coup vicious by even today's standards, the Duke Energy board sacked its new CEO, Bill Johnson, after 20 minutes on the job.

Duke Energy had acquired Mr. Johnson along with his previous employer, Progress Energy. The day the two companies closed their merger, the Duke Energy board decided that Mr. Johnson wasn't the right fit for the company, and welcomed back Jim Rogers, the CEO who was supposed to be easing into an executive-chairman role. Mr. Johnson's exit package has been estimated at $44-million (U.S.).

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So you might imagine my interest when an e-mail arrived in my in-box early Thursday, more than a week after the drama, with the subject line "Duke Energy Corporation Important Release." Surely, I figured, the company was stepping up to provide an explanation after the torrent of bad publicity it's received.

"I am pleased to announce that the merger between Duke Energy and Progress Energy has been successfully completed," the letter, signed by the new/old CEO Mr. Rogers, said. "This combination of two outstanding companies creates a utility with greater financial strength and a unique opportunity to balance and enhance the long-term interests of our customers, investors and employees."

That Johnson guy who we'd said for the last year would be the new leader? No mention of him. Which leads me to the question: Should I really continue to own the shares of a company that behaves this way?

There are still good financial reasons. Although it's gained 25 per cent in the 11 months I've owned it, it still has a 4.6-per-cent dividend yield and, at a forward price-to-earnings ratio around 20, it's not excessively expensive.

The problem, though, is that the Duke decision to whack Mr. Johnson creates too many questions about the future.

News reports suggest the 10 Duke Energy directors who were holdovers voted to remove Mr. Johnson; the five new directors who came from Progress Energy voted against the sacking.

John Mullin, the former lead director of Progress Energy, told The Wall Street Journal "I do not believe that a single director of Progress would have voted for this transaction as structured with the knowledge that the CEO of Duke, Jim Rogers, would remain as the CEO of the combined company."

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Meanwhile, Mr. Rogers, called to testify under oath before North Carolina regulators, said the Duke board became concerned about Mr. Johnson's leadership style; his management of his company's nuclear plants, including one that's been closed for nearly three years; and Progress Energy's recent financial performance. (Mr. Johnson is expected to testify this week, which should be entertaining.)

Three top executives who came from Progress Energy have already resigned, including the new chief administrative officer and the new chief integration and innovation officer.

So, to review: The people entrusted to run Progress Energy wouldn't have sold the company to Duke Energy if Mr. Rogers stayed as CEO. Duke Energy's board, however, now believes the company they bought has more problems than they first thought. Key executives who were supposed to help the two companies combine have now walked away, and hey – how well do you think this board is going to work together, going forward?

I feel lucky the shares are only down 4 per cent.

Morningstar Equity Research analyst Andrew Bischof downgraded his "stewardship" rating of Duke Energy from "standard" to "poor," noting the company might have a more difficult time getting permission to raise rates from the regulators who just blessed the merger with the understanding Mr. Johnson would be CEO.

And, of course, that "the board should have done a better job vetting the management team during merger due diligence and the subsequent 18 months of regulatory review."

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Perhaps this is just a passing storm, and Duke Energy will be that great company Mr. Rogers told me about in the letter. I'll be a detached observer, however: My "sell" order went through Monday morning.

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