The man who would be Mr. Clean
Can one of the dirtiest electric-power companies lead the industry's redemption? How David Crane saw the light - and the profit to be made.
(Fortune Magazine) -- NRG Energy's David Crane can seem miscast sometimes in the role of a Fortune 500 CEO. He wears a child's blue Swatch with a shiny plastic band. He settles into a chair - even a boardroom chair - the way a teenager would, with one leg curled up under his body.
If he doesn't understand what you just said, he looks right at you and says, "I have no idea what you just said." His vehicle of choice is a Mini Cooper, blue with white stripes.
Granted, there are two honkin' SUVs in his suburban driveway; he's married, after all, and he has five kids. But for a trip like this one, from NRG headquarters in Princeton, N.J., to the CNBC studio in Englewood Cliffs for an appearance on Jim Cramer's "Mad Money," Crane prefers the Mini.
"One of the reasons I like driving this car," he says, merging into truck traffic on the New Jersey Turnpike, "is because no one takes you seriously. This car is like a microcosm of NRG."
It's a cute metaphor, but it doesn't quite square with the dramatic way NRG has been asserting itself lately in the power industry. Late last year NRG won conditional approval to build a controversial new-generation power plant in Tonawanda, N.Y., that would run on gas made from coal, potentially reducing CO2 emissions 65 percent compared with conventional coal burners.
In September, NRG was the surprise winner in the race to file the first application since 1978 to build and operate a new nuclear reactor in the United States - actually two of them, in Texas. And in November NRG announced plans to host the first large-scale test of a technology designed to capture as much as 90 percent of the carbon dioxide that spews from conventional coal-fired plants. ("Man, I hope that works," Crane says, fairly drooling at the prospect.)
What tops all of Crane's maverick tendencies, however, is his attitude toward Washington. He has been shooting down to D.C. every chance he gets (he takes the train) to lobby passionately for what industry captains are generally against: more government regulation.
Crane was not the first utility executive to get religion on global warming, but he quickly became the most zealous. Today he sounds almost as if he's asking to be punished. "Congress needs to act now to change our ways," Crane wrote recently in the Washington Post under the headline, "We're carboholics. Make us stop."
"Lawmakers should regulate CO2 and other greenhouse gas emissions by introducing a federal cap and trade system, which would put a cap and a market price on CO2 emissions."
NRG's recent actions, including the lobbying, are clearly strategic. They trace the parallel paths - nuclear and clean coal - down which utilities must travel if they're serious about making real cuts in greenhouse gases, and they place NRG and Crane at the center of an intriguing argument that's fast gaining currency in the power industry, one with sexy implications for investors.
The logic goes like this: Global warming is real; utilities, which produce more greenhouse gases (34 percent of the total) than any other U.S. sector, including transportation (28 percent), are largely to blame; but those same utilities, because they have unique leverage, can begin to reverse the damage they have done; and on the journey from sin to salvation - you guessed it - there is big money to be made.
Consider, for example, the carbon-capture technology NRG will test at its W.A. Parish facility in Fort Bend County, Texas. The Parish plant is a world-class environmental pariah, the fifth-largest generator of CO2 emissions in the United States and therefore a prime showcase for a promising technology with potential global applications.
Powerspan, a New Hampshire company, developed the technology that captures CO2 from flue gas, but NRG expects to have equity, and therefore a stake in the upside. "That's a multibillion-dollar business," says Crane. "Can you imagine retrofitting 600 coal plants?"
As investment stories go, reimagining the world's power infrastructure according to principles of sustainability, much less following through on the reconstruction, is one that will unfold over decades, not quarters. But the opportunity is enormous.
"We can save the world," says Crane. "We are the heart of the problem, but we are also the heart of the solution. This industry is based on being cautious and reliable - and that's important because you've never seen anger until you've seen a governor when the lights go out - but we have to fundamentally change the way we do business, and we have to start now. I think that's just incredibly exciting. The first one that leads that way - we're not talking about three yards and a cloud of dust to get $1 per share extra. We're talking about a whole different dimension."
Crane, 48, took this job in late 2003, just as NRG was emerging from bankruptcy. He came from International Power in Britain, where he was CEO for only 11 months - long enough to lift the stock 46 percent and make International Power sorry to lose him. Before that he spent a decade doing project finance for the Swiss engineering firm ABB and for Lehman Brothers. +++
A lawyer, not an engineer, Crane admits he's as baffled as the next guy by how modern power plants actually, you know, make power. Yet he has pulled off a stunning turnaround at NRG.
NRG isn't a traditional regulated utility; it doesn't even pay a dividend on its common stock. Rather, it's an electricity wholesaler, producing power at 47 plants concentrated in Texas and the Northeast and selling it over the grid on the open market.
NRG ran into trouble in the late 1990s when it bought too much capacity and took on too much debt - a strategy Crane once described as the "mindless pursuit of megawatts."
Other energy wholesalers (you've heard of Enron?) fell into the same trap. Crane saved NRG with a restructuring deal that wiped out $6.5 billion in debt and a promise to forgo future expansion without first securing long-term contracts with electricity buyers.
Today NRG (NRG, Fortune 500) is profitable again, and since Crane arrived, the stock has risen more than 300 percent. The more recent performance, however, is less thrilling - NRG took a hit when Credit Suisse analyst Dan Eggers downgraded the stock in early November. What the setback underscores is that NRG has probably come about as far as it can on financial reengineering and macro trends in the utility industry. Now comes the hard part: building value by changing the world.
Eggers worries about NRG's unusually heavy reliance on coal when Congress, at long last, seems ready to enact some sort of climate-change legislation. No matter what form is taken by America's Climate Security Act - co-sponsored in the Senate by Connecticut's Joe Lieberman, an independent, and Virginia Republican Mark Warner - one thing is certain: Utilities will no longer be free to pump limitless tons of carbon dioxide into the atmosphere.
NRG, Eggers warns, is "the most disadvantaged stock in our coverage universe to potential carbon legislation based on its current fleet configuration."
Crane worries too, as well he should. For no one can deny that NRG is a ferocious polluter, responsible for generating more than 70 million tons of atmospheric carbon annually, according to CARMA.org, an independent carbon-monitoring site. That ties NRG for eighth place among the heaviest CO2 polluters in the U.S.
Especially troubling is NRG's 81 percent reliance on fossil fuels, compared with 73 percent for much larger Southern Co (SO, Fortune 500)., the country's heaviest CO2 polluter, and 60 percent for Duke Energy (DUK, Fortune 500), which ranks fourth. Both Southern and Duke make a lot of electricity with nuclear, which emits no greenhouse gases.
NRG, for its part, has a 44 percent stake in the South Texas Project, a massive nuclear facility 90 miles south of Houston, where it hopes to build two more big reactors by 2017. It also owns a California wind-farm development company, Padoma. But those are trifling contributions to the mix.
NRG overall is fundamentally about coal, and given the long lead time required to add new capacity, that won't change for years to come.
You could argue that so far that's been a good thing for NRG, thanks to a quirk in the wholesale electricity market. The simple explanation is that natural gas, which power companies rely on to meet demand during peak hours, exerts a disproportionate influence on spot prices for electricity.
Because natural gas is so expensive, the more baseload power a company generates with coal, the fatter its margins. But that's not a viable long-term strategy, given the clamor for climate-change legislation in Washington. Nor, Crane has come to believe, is it morally justifiable.
While at International Power, Crane took part in preparations for the first phase of the European Union's mandatory carbon-trading scheme. The EU aims to reduce greenhouse gas emissions 30 percent below 1990 levels by 2020. Upon arriving at NRG, however, he found that CO2 was not the most pressing item on his agenda.
The bankruptcy mess was all he had time for. His focus was strictly quarter-to-quarter. He admits he had not yet grasped that CO2 posed a fundamentally more serious challenge than SOx and NOx (that's sulphur oxide and nitrous oxide, the components of acid rain) or even mercury - issues that the industry had addressed under pressure from governments and environmentalists and, by the end of the 20th century, had gone a long way toward resolving.
But then Steven Corneli, NRG's studious VP for climate and regulatory policy, started whispering in Crane's ear about what might be brewing in Washington in the wake of the Democratic takeover of Congress. About the same time, Crane saw a chart produced by the McKinsey consulting firm that made a strong case for why a rational-thinking power company executive would act now, ahead of the curve, rather than wait for the regulators.
That was the economic piece. The moral piece came a little later, after Crane started reading up on global warming. "What suddenly dawned on me was the stakes were not the same" as in other environmental crises," Crane says.
"Acid rain was bad, but this was potentially cataclysmic. Then the more I looked at the centrality of our position in the whole thing as a company, as an industry, I was thinking, 'Well ...' I looked for a way to rationalize it: 'I got enough things to worry about.' Took me about three or four weeks, but it was just, 'Man, there is no getting around this.'"
What sealed it for him, Crane says, was the sheer hypocrisy of it all: the fact that while the Edison Electric Institute (EEI), the industry's trade group, was banging the drum for voluntary, not mandatory, restraints on carbon dioxide emissions, U.S. utilities were busy making plans to add a staggering 150,000 megawatts of traditional coal-fired generation.
That represents about a $400 billion investment. It equals nearly 40 percent of the existing coal-fired capacity in the United States and would produce annually about 1.2 billion tons of CO2, roughly equal to the total industrial emissions of Spain and France combined.
"The cynicism of that just drove me wild," Crane says. "And I thought, 'This makes me angry, and I'm in the industry. Do we actually think we're going to get away with this?'"
At a power industry conference sponsored by Merrill Lynch in September 2006, the recently converted Crane showed off a PowerPoint cartoon titled "Carbon and the Power Industry: When Will the Balance Shift?" On the light end of the seesaw, the side up in the air, he put allies Peter Darbee, CEO of California's PG&E; Jeff Sterba, CEO of New Mexico's PNM Resources; and James Rogers, CEO of North Carolina's Duke Energy.
On the heavy end were three monkeys labeled See No Carbon, Speak No Carbon, and Hear No Carbon. Not everybody laughed. "We were the people who sort of got it," says Darbee. "Other members of the industry did not."
In fact the balance was already beginning to shift. In February 2007 the EEI, under then-chairman Rogers, published a set of principles that supports "federal action or legislation to reduce greenhouse gas emissions." There were caveats, of course, one of the major ones being that the feds don't single out the power industry.
That's hardly unreasonable. The U.S. Climate Action Partnership (USCAP), an alliance of unlikely bedfellows from business and the environmental movement that is lobbying hard to influence climate-change legislation, is on the same page. Officially, as a member of USCAP, Crane is too.
But individually he goes way beyond EEI and USCAP. Crane says, basically, Bring it on. Put the power industry on a low-carbon diet. Leave Detroit alone if you must. We'll deal.
"If we clean up our carbon situation over the next 20 years," Crane told Fortune magazine last summer, "principally with nuclear, then we will be seen as clean. And Detroit will have to go to plug-in hybrids." And that, says Crane, would be the best thing for the power industry since the electric air conditioner.
"You're going to Florida tomorrow," Crane's assistant tells her boss on the way to the train station in Trenton. Crane sounds surprised: "What?" Long weekend with family. Apparently he forgot. Which is understandable, since he's been running pretty hard lately.
The day after he appears on "Mad Money," Crane heads to Washington for meetings with two Republican Senators, each with a keen interest in energy legislation: George Voinovich of Ohio and Bob Corker of Tennessee. Between appointments on the Hill he has coffee at the Fairmont with Fred Krupp, president of the powerful green advocacy group Environmental Defense.
In the evening he attends a dinner at the Swedish Embassy with economist Jeffrey Sachs, Senator Lieberman, and the King of Sweden, sponsored by Combat Climate Change, an international initiative whose signatories include GE, Dow Chemical, India's Tata Power, and China National Offshore Oil.
All in all an exhausting day, not as glamorous as it sounds. Lunch is at McDonald's (he told the driver to pull over and took orders for everyone in the cab). Before dinner with His Majesty, he ducks into the men's room, squares up to the urinal, pulls an electric razor out of his pocket, and starts shaving. "What?" he asks, but only when it dawns on him that people are staring.
Crane divides the world into two kinds of climate-change activists. "I call them the Gore camp and the Schwarzenegger camp," he says. The Gore camp, to his mind, is all about conservation, efficiency, and making radical changes in the American way of life. Crane doesn't think that approach will fly.
Conservation and efficiency are no more than "Band-Aids," he believes. They may help keep things from getting too much worse, but they won't solve the problem, and forcibly redefining the energy-consumption habits of the American consumer is a nonstarter.
"I don't think any American politician has the appetite to try to get Americans to go back to the pre-Industrial Age," is how he puts it.
That leaves the Schwarzenegger camp, populated by those who insist, says Crane, "Look, I want to still have my G4 and my Hummer, but I want my Hummer to be plug-in, and I don't want to give up my American Dream because of global warming." Here is where politicians such as the coal-district Democrats (of which there are at least 40 in the House) are staking their tents.
And Republicans like Senator Corker, who says he cares about the environment, of course, but tells Crane (while Crane nods in agreement) that he wants a bill that won't "take us backwards." "We need a policy that is right even if we are wrong on the science," Corker says. "And the reason it's right is it would stimulate the economy."
Crane doesn't waste time anymore worrying about whether the science is right; that's where he parts with the climate skeptics. He knows full well what's at stake. But neither is he willing to abandon coal, much less nuclear; that's where he parts with the hard-core environmentalists who think we can solve this problem with wind and solar.
"I still come back to the fact that even just in this country, forget about China and India, you're going to need baseload power," Crane says. "The industry's baseload fleet was all built in the '60s and '70s; it's going to be replaced by 2020, 2030. As we sit here in 2007, if we were to replace it today, we'd replace it with the exact same stuff we built in the '60s and '70s. No one can allow that to happen."
Crane is asking for a lot. He wants a cap and trade system that will gradually eliminate the economic rationale for pumping CO2 into the atmosphere and transform the economics of the power industry.
He needs that certainty, he says, so that he will know where to focus his investment dollars and can decide what to build next. He needs incentives to bet on futuristic coal plants like the integrated gasification combined cycle (IGCC) facility NRG hopes to build near Buffalo.
He needs scissors to cut through red tape so that NRG can get permits to bury sequestered carbon in vast underground caverns. He needs support for his burgeoning nuclear program: tax credits, loan guarantees, insurance to cover licensing delays, and federal dollars to educate nuclear engineers, train skilled workers, and rebuild America's manufacturing base so that we don't have to rely entirely on Japan for large-scale nuclear components. It's a long list, he admits, but it's all good. Good for the planet, good for America, and good for NRG.