Musical Chairs for Duke Energy's Board

by Directorship Editors

It’s rare for two companies to merge themselves and their boards, then turn around and spin off a major piece of their business, creating another board in the process. But Jim Rogers, former chief executive officer of Cinergy and now CEO of the merged Duke Energy, has made that happen, along with Duke Chairman Paul Anderson. The spinoff, which combines the two companies’ natural gas distribution assets, is called Spectra Energy and went public on Jan. 2. Directorship talked with Rogers:

 

How did you smash together the management teams and boards when Cinergy and Duke merged?

 

Paul Anderson, who was chairman and CEO of Duke, is chairman of the new company. I’m president and CEO. Ann Maynard Gray is our lead director. Paul and I basically saw eye to eye on talent and a variety of things. Together we’ve built this management team. It’s a true blending.

 

There are 15 people on the board, 10 from Duke and five from Cinergy, including myself. We merged the two boards. Some of the directors will leave and join the gas company, and 10 will stay on Duke Energy.

 

How did you make those decisions?

 

It was basically having the directors decide and then having a discussion among the entire board about who goes and who stays.

 

Aren’t you presiding over a very unusual situation?

 

Yes. From a corporate governance standpoint, think about how unusual it is in one year to do a merger, combine the boards and then spin the gas business off. Some of the directors will be leaving and joining the gas company and then adding new directors to the new gas company, while leaving 10 directors on the existing board with the idea that over time we’ll add new directors.

 

Doesn’t all that completely disrupt your committee structure?

 

Well, it forces you to recast your committee structure, obviously. The head of our audit committee is Phil Cox, who came from Cinergy’s board.

 

Has the audit committee played a significant role in the spinoff decision?

 

They have. The audit committee has reviewed these transactions, and we also created a finance and risk committee, which is chaired by Michael Phelps. That committee has also reviewed all aspects of the spinoff. The workload for the board has been huge this year. They’ve had to integrate two boards, create a new committee structure and then work to make sure we are allocating and spending the right set of assets to the new company and at the same time reconfiguring the committees.

 

What role does Anderson play going forward?

 

Paul Anderson will become chairman of the new company, Spectra. I will be both chairman and CEO of Duke Energy. It’s been complicated, but it’s been a really great opportunity to put businesses together and understand where the value is and at the same time take different businesses apart and find the value there.

 

Certainly, there must have been possibilities for conflicts of interest in all this. How did you avoid them?

 

The way we thought through it was to say, the fiduciary duty is to existing shareholders. Shareholders of Spectra on Day One will be the same as the shareholders of Duke Energy. So our duty to shareholders is to make sure that the spinoff is done in a way that creates two strong companies with two strong balance sheets.

 

Why spin off Spectra as a public company just as Kinder Morgan is going private?

 

There’s a huge demand for stocks like Spectra. That’s why private equity came together to take Kinder Morgan private. There is a scarcity of companies, so there is a scarcity value associated with Spectra.

 

But why take something public rather than private?

 

Part of the reason is that we’re doing a tax-free exchange. From a tax standpoint, this is a more efficient way to get the value into the hands of our shareholders. If you sold to private equity, you’d have to pay taxes. By spinning it to shareholders, as long as you’re in compliance with the Morris Trust rules, it doesn’t trigger any taxation. We had to get an opinion letter from the Internal Revenue Service that said it was a tax-free exchange. And when you do a tax-free exchange, there are limitations on the types of transactions you can do a year later or two years later. There is a very complex set of rules that govern how you do one of these transactions, and we’re making sure we’re in compliance.