Right off we will admit we have never liked Duke Energy as a company and as a stock. Never have we owned Duke as a long in the past due to our concern over what we considered wacky management. CEO Jim Rogers has been like the energizer bunny with a lack of direction. He has led Duke through what seems to be his many phases of trying to figure out where he wanted the company to go in future years. This mismanagement led them into areas like the unregulated energy trading business where the famous Enron went for a few years. Duke got hit hard in losses and could barely make enough cash flow to pay it's dividend for a time.
Duke has also dived headlong into green energy projects many of which have been money losers and negative cash flow to the bottom line. In the past year CEO Rogers gave 10 million dollars to the Democrats for their convention in Charlotte NC which frankly is not a good use of a regulated utility's funds since ratepayers are the ones who will be actually paying that expense. Even with the entry in green energy projects and the convention gift Duke Energy and Jim Rogers have few friends on the environmental and liberal side of the isle. Frankly all the expense has been wasted money.
Now this will not be the last major regulated utility merger in this country as the new EPA rules are forcing these companies to merge to cut costs and get bigger to spread all the new environmental mandate costs over a greater number of customers. Unfortunately this will lead to more situations like the ones this past month where storm crews are taking not days, but weeks to get power restored to areas hit by storms. Less local management and less connection locally means less response to outages and the like. More costly EPA mandates and state renewable energy mandates mean more costs and less cash flow so rates are going up and there will be even less crews available to take care of power lines and maintenance. Note however the EPA actually likes the larger utility structure because it is much easier to force these companies to do as told.
This new regulated utility world needs management that has an especially talented leader to negotiate and keep customers, employees, and investors happy. Simply put the people assigned to approve the merger of Duke and Progress knew Jim Rogers was not up to the task. Progress CEO Bill Johnson has been on a learning curve with Progress Energy having made mistakes too, but showed he was a quick study by not making the same mistakes two times. Progress had issues back several years ago with cash flow and stopped annually raising their dividend which they had done for about 25 years in order to conserve cash flow. But never did Progress get into the energy trading business and never did they have to be concerned about having enough cash flow to pay their dividend. Progress has been on a nice up trend of late and lots of that is due to CEO Bill Johnson's direction. The regulatory board in NC knowing that allowing the two companies to merge would basically mean one utility in the whole state of NC were most skeptical of Jim Rogers running the entire company and were heartened when the Duke board told them the merged company would be run by Bill Johnson.
States where Duke also does business like Indiana and Florida approved the merger with the understanding Jim Rogers would step down as well since they had concerns about his leadership. But all this went array shortly after the merger was consummated when out of the blue Jim Rogers and the Duke board announced that Bill Johnson would be leaving the company and with a $40 million dollar plus hush money account. Duke, now an even larger company has the same poor leader Jim Rogers and NC regulators voiced their displeasure. They have said they are going to take another look at the merger and maybe even consider rescinding the approval. Once again Jim Rogers has shown his loony side and run afowl of the very people who he must depend on to approve rate increases and who can mandate many things about how his company is run. Now that is a level of stupid I do not understand. Normally regulated utility CEO's get in trouble caught trying to curry favor with regulatory boards with nice trips and fine dining expenditures, but not Mr. Rogers.
Let's add in that this morning the SEC has decided to do a investigation into this matter and there is news that the former Progress shareholders will begin a lawsuit as well. NC Attorney General Roy Cooper has also decided to do his own study of what happened. All this will lead to millions of dollars of added costs and likely some significant payouts to former Progress Energy shareholders who approved the deal with the understanding Jim Rogers was gone. One can also expect requests for resignations from the Duke Energy board notably the head Ann Gray to step down due to not looking after shareholder interest. All these added costs and distractions just when the new company needs good leadership. Frankly some of these lawsuits could end up quite costly since the Duke board could have actually led regulators astray with promises of new CEO leadership when they had no intention of such changes.
Now no one knows where all this is going. But what we do know is unless the NC regulatory commission puts it's foot down hard Jim Rogers is running Duke going forward. We want none of that personally. Currently we own over 4000 shares of this company as a option, but that option expires in 2 weeks and we will not renew it since this kind of silliness makes us nervous.
If you own Duke and have a low cost in it we would hold it going forward just to keep the taxes from eating into capital. But do not expect a steady ride and be prepared for some setbacks in stock price with all the bad news that is going to come over the next few months. If you have a higher cost basis best to get out now as you might get a chance to buy it lower again sometime down the road. One further points on capital gains, if Obama is re-elected we would highly suggest that ANY capital gain you are sitting on being sold since it is almost guaranteed that future capital gains taxes will be confiscatory. Duke despite now being the largest utility in the country has too many issues to make for a smart purchase right now and if you do not believe me check out what the market has done to Duke stock since the merger. For those interested in regulated utility purchases may we suggest Southern Company and SCANA Corp. as better choices. Both are better run and operate in better regulatory environments.
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