James Rogers Of Duke Energy Co.

Mr. Rogers’ Neighborhood

The newly merged power giant’s CEO hopes to please shareholders by cutting costs and building new plants. But he also wants to lead the fight against global warming.

James Rogers attributes much of his success in life to what he learned during three years in Kentucky as a cub reporter for the Lexington Herald-Leader in the late 1960s: Deadlines matter. “I learned about the urgency of getting it done,” says Rogers, CEO of Duke Energy Co.

He carried that lesson with him through three years of law school at the University of Kentucky — from which he also holds a bachelor’s degree in business administration — and a diverse professional career. After clerking for the Supreme Court of Kentucky, Rogers served as an assistant attorney general for the state, a post in which he fought on behalf of consumers against utility-company rate increases. Later he became an attorney for the Federal Energy Regulatory Commission and a partner in Washington law firm Akin, Gump, Strauss, Hauer & Feld, before joining the energy industry as a pipeline executive at Enron Corp. in the mid-1980s. In 1988 he signed on with Plainfield, Indiana–based PSI Energy as CEO. He kept the top job when PSI merged with Cincinnati Gas & Electric Co. in 1994 to form Cinergy Corp.

Today Rogers has more to get done than ever. In April, Cinergy completed a $9.1 billion merger with Charlotte, North Carolina–based Duke Energy. (The resulting company has kept Duke’s name and Charlotte headquarters.) The deal gives Duke much-needed scale to battle rising raw-materials prices. It also provides diversity: Cinergy was heavily dependent on coal-fired plants, and Duke has been a pioneer in nuclear generation, which is expected to make a comeback amid concerns over coal’s contribution to global warming. The company’s shares are up 5 percent, to $29.93, since the April 3 merger announcement. It has yet to report combined second-quarter results.

With its new scale, Duke hopes to lead the next wave of investment in new power plants, including a planned nuclear operation in North Carolina and a proposed facility in Indiana that will run on coal that is first converted to gas, to minimize carbon dioxide emissions.

Rogers, 59, hasn’t forgotten his roots in public service. He is pushing his industry to reduce greenhouse gas emissions, an issue he plans to press as the newly elected chairman of the Edison Electric Institute trade group. The CEO recently chatted with Institutional Investor Senior Editor Justin Schack.

You’ve surely seen the studies that say most mergers destroy value. Will this deal be different?

For this deal, we’ve created something called a merger scorecard. It shows not only the financial milestones that we plan to achieve but also other metrics, like safety, reliability, employee engagement and availability of our generating units. We’re measuring them quarterly. When we announce third-quarter earnings, we will share that scorecard with Wall Street. And at the appropriate time we will also share it with our regulators. We want to ensure that we do well financially, while maintaining or improving the other things that make us a great company.

Don’t you run the risk that external concerns about your short-term progress might keep you from sticking to your long-term strategy?

Well, sometimes in life, to climb over a wall, you have to throw your hat over and then go get it. We’re basically saying that we’re confident we can do these things. And if we don’t, you’ll know and we’ll have an explanation. For instance, I can see the possibility of our units’ not being as available as they were the prior year because we’re in the middle of adding a significant number of scrubbers to reduce sulfur dioxide from these facilities. But if that’s what happens, we need to get up and say so. If you’re taking the risk of doing a deal this big, then you need to take the risk of telling the story of the results.

How important to your future is the development of new nuclear plants?

It’s going to be one of the key parts of our company. I am cautiously optimistic that we will be able to proceed with the new nuclear plant. There’s a lot of uncertainty with respect to what you do with spent fuel in this country. That’s a very important issue to resolve before we build a new generation of nuclear plants. But we’ve found that many of the communities where we’ve had nuclear operating for many years are receptive to us building new plants. A lot of people might say, “Not in my backyard.” But we’ve found a lot of support because it creates a great tax base and a lot of jobs.

Why is your industry consolidating?

The industry is fragmented, and we have huge demand for capital, especially given the type of expenditures we have to make for environmental compliance, building new plants and reinvesting in existing transmission and distribution. Having a low risk profile, a strong balance sheet and good credit ratings is critical. Mergers are one way to achieve those things.

Why do you support the creation of a greenhouse-gas-emissions control program, even though it’s not clear that Congress will mandate one?

I’m not a scientist. I only know what I read. But my understanding of where we are today is that the earth is getting warmer and that man-made emissions are contributing to it. There are differences of opinion about what the impact on the planet will be. But as I understand the scientific conclusions, and knowing that the power plant industry in this country produces 35 percent of all CO2 emissions in the U.S., I think it’s incumbent upon us to address the issue. I’m convinced that the sooner we go to work on it, the higher the probability that we can find new technologies to allow us to reduce emissions.

A cynic might think that you’ll also benefit from that stance because you’re heavily invested in nuclear energy.

Nationally, about 50 percent of electricity generation comes from the burning of coal. And about 23 percent comes from nuclear. With this merger our mix is almost a mirror image of the national picture. Another important consideration is that all of our nuclear facilities are regulated. So we won’t benefit in the same way as companies like Exelon [Corp.], whose nuclear units have been deregulated. We can only charge a regulated price for our nukes, whereas they can charge a market price.

What’s the biggest challenge facing the combined company?

Rising prices, not only for our products but for the inputs that generate electricity — specifically natural gas and coal. A big challenge is helping our customers deal with that. Another is that our stock price does not reflect the sum of our various businesses, be they gas, power or real estate operations. So we’re looking at whether to spin off some part of these businesses, perhaps to create more of a pure play on the gas side and on the electric side. We’re also thinking about whether we should reduce our ownership in real estate and field services, whose prices are generally tied to the price of crude oil.

What can you do about rising prices?

Put in place programs that help our customers use energy more efficiently. This is the first time since the ’70s that we’ve seen such a dramatic increase in these prices. I think you could see a rebirth of interest in conservation. With the evolution of technology, there’s a very exciting set of opportunities for the industry to help people use energy more efficiently.

Such as?

One is something called direct load control, or DLC, where a homeowner can actually turn down usage during peak hours in return for a rebate. There are also simple things like making sure we have building codes right, so that homes are built in a more energy-efficient manner.

Why isn’t the market giving you the valuation you think you deserve?

There’s a bias on Wall Street toward companies that do not have a business mix that is too complex for any one analyst to understand. That’s true especially for sell-side analysts. They don’t know how to classify us. The buy-side people handle seven or eight different industries. They’re far more sophisticated. Our challenge is to articulate the value of each of the parts well enough so that the buy-side guys can put it together and realize that there’s real value there. Our company is not being fully valued because the sell side doesn’t have the capability to do it.

Will that change as investors increasingly rely on their own research?

We have lots of friends on the sell side, so I don’t want to undermine their future. But I believe that you’re going to see more large companies develop investor-relations programs that are targeted solely to the buy side.

Will you do that?

We are in the process of rethinking that. It’s clearly something on my agenda.

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