For this issue’s profile, EL&P discussed the environment, sustainability and the second wave of industry consolidation with Cinergy’s president and CEO Jim Rogers.
EL&P: You’ve helmed a part of this company, starting with PSI Energy, since 1988. What have been the most significant changes you’ve seen in the utility industry in the nearly two decades since you first took the helm?
Rogers: I think one of the most significant changes is the existence of new regulatory models in both the retail and wholesale segments of the power industry. Today, there are two business models in the retail part of the industry-the traditional regulated business model, as before, and the competitive supply business model where generation is effectively deregulated. Also, a robust competitive wholesale market with independent transmission operators is continuing to develop in most regions of the United States.
The second major event has been the two waves of consolidation that have hit the industry. With the creation of Cinergy back in 1994, we were at the very beginning of the first wave. I believe the new combination of Duke and Cinergy is at the beginning of a second wave of consolidation.
EL&P: On the topic of this current wave of consolidation: Obviously, the merger between Cinergy and Duke is on everyone’s mind. How did this merger develop?
Rogers: The story starts in the fall of 2004 when Paul (Anderson, Duke Energy CEO) and I had an opportunity to sit down and discuss a range of strategic issues. Paul has been the CEO of Duke since late 2003. He was brought into the company by the board to deal with a number of troubling issues the company faced at that time. One was to rationalize the DENA (Duke Energy North America) operation, which is their deregulated generation arm.
At Cinergy, we also have deregulated generation, primarily in the Midwest, and DENA has about 3,600 MW of deregulated generation in the Midwest. Our initial focus was really on whether we could combine the assets of DENA with our deregulated assets in the Midwest and create a much stronger competitive supplier.
As the conversation evolved, we found that it could make more sense to combine the two companies and create not only a stronger competitive supply company, but also a regulated entity that would be much greater in scale and scope. We’re both low-cost companies with high customer satisfaction levels and constructive regulatory regimes in the states where we operate. It occurred to Paul and me that we had complementary cultures in our businesses.
EL&P: What benefits do you see coming from the merger-both for the combined company and for its customers?
Rogers: If you think of it from today’s perspective, it creates immediate value. It’s accretive to earnings for Duke. We have greater earnings predictability from size, scale and critical mass of regulated and merchant portfolios. There is also significant cost savings-about $400 million a year. The other immediate benefit is that DENA, Duke’s merchant portfolio, would be profitable when combined with Cinergy’s commercial business unit from day one.
As you think about the longer term, we create with Duke Power and with the utilities in the Midwest-PSI, CG&E and Union Light-a superior, low-cost platform to meet future challenges. We also have the opportunity as we combine these companies to improve our operations by pursuing best practices and to increase our system optimization. We have a chance to improve both regulated operations. And, to the extent we can focus on reducing cost and improving reliability, that will translate into higher customer satisfaction levels, as well as stronger relationships with our regulators. This merger, in a sense, is a catalyst for us to move to even higher levels of performance than both companies have achieved in the past.
EL&P: The whole is greater than the sum of the parts.
Rogers: Yes. Mergers tend to force you to challenge what has become the conventional wisdom within a company. They force you to rethink how you do business. I look at Cinergy today-the combination of two companies more than 10 years ago-and I think we’re a much better company today. We’re lower cost, we provide more reliable service and we do our business better than when we were stand-alone companies.
I go into this new merger with the belief that this combination will make us stronger. If you just think of it in terms of the larger pool of talent we have to lead the company, there’s almost an automatic increase in IQ and individual commitment as a consequence of combining these two teams.
EL&P: Do you expect job cuts as a result of the merger? It’s been reported that the merger will lead to an expected 1,500 job cuts, or 5 percent of the current combined staff of the two companies.
Rogers: We do expect a reduction in our workforce of roughly 1,500 people. To get that done, we are working today to be prepared for it. I’ve been CEO all this time, and I’ve been blessed to run the company, create significant shareholder value and have never laid anybody off in almost 17 years. That is something I value. I am hopeful we can work our way through this process in a way that doesn’t require us to resort to layoffs.
Now, what does that mean? We have normal attrition at Cinergy of 5 percent to 6 percent. We’ve already gone to work at Cinergy to look at the number of employees we have today and start to manage this process. It will take about a year to gain regulatory approvals (to complete the merger), and we’ll use that time to streamline some of what we do and achieve some of this workforce reduction through normal attrition. Duke will strive to do the same thing in the areas we have that are similar.
We’re really going to look at how best to integrate the companies. When I look at the integration we did with the Cinergy merger 10 years ago-before e-mail and other technologies we have today-we do business much differently today than we did then. I believe as we work our way through the integration process, we can deal with it better than we could 10 years ago. My aspiration is to do this without layoffs, and I’ll work very hard to achieve that.
EL&P: Once the merger is complete, you’re slated to step in as president and CEO of the combined company. How do you see your job, and the way you go about that job, changing when that happens?
Rogers: The first thing I’m doing is meeting with the top 40 people at Duke-each of them in one-on-one sessions for about an hour-and-a-half-and I’m asking five questions. What are the five most important things about Duke we should be sure to preserve? What are the top three things we need to change? What do you most hope I do? What are you most concerned I might do? And what advice do you have for me? I’ve already met with 35 people. It’s given me a real insight into Duke’s leaders and their culture.
I’ve also sent those same questions to my team at Cinergy-only changing the Duke references to Cinergy-to see what they think. I’m going to try to meld the answers to gain a clearer sense of how to lead going forward. Here’s what I’ve learned to date: The first thing I have to do is pick the right people in key positions, and I’ll do that in consultation with Paul. He’s also meeting with many of the top people at Cinergy, so both of us will have a good understanding of the talents of our people.
The second assignment is to set clear goals with respect to operational excellence. Both companies do a great job in operations. The question is, can we raise that to an even higher level. The third thing is to execute on our integration plans and deliver what we promised in terms of savings. Lastly, my primary mission-because this isn’t just a power company; it’s also a gas pipeline business; it’s a field services business; it’s one of the largest platforms in the gas business-is to make sure, in consultation with Paul, that there is clear strategic direction and “stretch” profitability targets. Of course, we will rely on the leaders in the individual segments of the combined organization to deliver on these goals. Our plan is to keep it simple. In sum, it’s really all about getting the right people in the right jobs and developing a clear vision and strategy.
EL&P: Stepping back from the merger for a moment, global warming was a major focus of Cinergy’s 2004 annual report. What do you have in the works at Cinergy to become a more environmentally conscious company?
Rogers: We’re one of the largest consumers of coal in the country. As a consequence, we have a special responsibility to deal with environmental issues. I’m of the belief that we’re going to live in a carbon-constrained world in the United States someday. The sense of the U.S. Senate is that we should have mandatory caps on emissions of carbon in the future. When CO2 is regulated, it will translate into higher cost for our customers. We have to be prepared for these rising costs and start to prepare our customers and the businesses we serve. The good news is we start with very low rates as we move into this new era of stricter emissions rules.
EL&P: You addressed Congress at the beginning of June on the matter of the environment and greenhouse gas emissions, and you said to Congress that we need more technology funding to combat global warming. What kind of technologies were you referring to and what really needs to be done nationally to combat global warming?
Rogers: With respect to new plants, we believe coal gasification is going to be a critical part of the future. Also, the ability to do carbon sequestration is going to be very important. Those are the kinds of technologies we need to go to work on.
Our goal should be to maintain our quality of life and our standard of living-to actually grow our standard of living-but do it through the development of technologies that allow us to minimize emissions and minimize the waste we create. I have this belief that, if we set reasonable goals with respect to emissions, we will go to work as a country, using our innovative capabilities and entrepreneurial spirit, and find a way to meet those goals.
EL&P: When we read about Cinergy, we read a lot about “sustainability.” Can you tell us what “sustainability” really means in terms of the utility business and what Cinergy’s achievements have been in that area?
Rogers: Sustainability really grows out of a more fundamental concept to me-the concept of stewardship. In many senses of the word, I am the chief steward of our company. My responsibility is to establish policies and practices that allow us to be good stewards of our capital and good stewards of the environment.
Now, how do we define sustainability? We think of it, visually, as a child’s handprint within an adult’s outstretched hand. The five fingers are the five goals of sustainability. The first is environmental improvement, reducing our emissions. We’ve spent roughly $1.9 billion since the “Ëœ90s to reduce emissions of SO2, NOx and mercury from our plants. We plan to spend roughly $1.8 billion over the next five years. We’ve made a commitment to reduce our carbon emissions 5 percent off of our 2000 emissions level by 2010.
No. 2 is economic development, encouraging job growth and business development in the regions we serve. One way we can do that is to keep our energy costs low.
No. 3 is social responsibility-working hard to create a safer, more creative, compassionate and better-educated community. If you look at how we spend our dollars in our foundation, which is funded with 1 percent of Cinergy’s pre-tax earnings, you can see we’re putting our money where our mouth is. We have a very innovative program where we make grants each year to non-profit organizations where our employees are volunteers. We allocate dollars to those organizations based on the number of hours our employees spent. We’re following their sweat equity with money.
The fourth area is our workplace quality. It’s all about fair pay and benefits, safe working conditions and providing opportunities for our people to grow and develop within the company, and at the same time make sure we have a very diverse workforce.
Lastly, if you’re going to be a sustainable company, you must have ethics and good governance, demonstrated by integrity, fairness, transparency and honoring the letter as well as the spirit of the law. These five aspirations are not in order of priority, because they are really woven together. When I talk about sustainability, I’m really talking about the mission of stewardship, translated into these five approaches, all of which will assure that our company succeeds not just this quarter, but this decade and for future decades.
EL&P: Do you worry that things like Cinergy’s achievements in the area of sustainability, your positive OSHA record, the work you’re doing with greenhouse gas reduction initiatives and other programs might get knocked off track by the merger with Duke?
Rogers: I have no concern about losing momentum on those programs. One of the things I’ve learned meeting with the top people at Duke is that we share the same values with respect to sustainability. Among other things, they’re very focused on safety, economic development, integrity and dealing with the carbon issue. So, on those issues specifically, we share the same values. I have no fear that this merger will interfere with the commitments we’ve made or the beliefs we have on those specific issues.
EL&P: We talked right off the top about this second wave of consolidation in the power industry. What is driving this new move to consolidation?
Rogers: A couple of things: First and foremost is the recognition that to achieve above-average earnings growth in the future you have to start with achieving significant cost efficiencies. The goal will be top decile in O&M costs per customer. There is also the recognition that this is a very capital intensive industry, and that you must have a large, healthy balance sheet to be able to provide the capital needed to not only reduce emissions from power plants, but at the same time build new plants to serve the next generation of consumers.
One of the things we see is when you combine our companies, Duke and Cinergy, we will be aligning ourselves in a way to be successful in both unregulated and regulated generation markets. When I look at the top 10 companies in regulated generation and I look at the top 10 companies in competitive generation or deregulated generation, we’re the only company on both lists and, in fact, in the top five in both. I believe we will have created the scale, the scope, and the skills to profitably bridge both markets and weather future swings in investor sentiments about these segments as we have seen in the last 10 years. I think that same sense will drive others to do this (consolidate) in the future.
EL&P: So you see the trend toward consolidation continuing?
Rogers: I do. The first wave of mergers started in 1994 with “Ëœ99 being the high water mark. Then they fell off. We had the implosion in the independent power market. We had the implosion of Enron. We had California. The merchant platforms cratered as supply exceeded demand, and many had failed to underpin their investments with contracts with customers. There was a great deal of uncertainty about the future of the merchant power segment. Now, there is increasing clarity-and I think the clarity is that we’re going to live in this hybrid market for the foreseeable future-and investors are moving from the “back to basics” mindset to a greater emphasis on growing earnings as well as the dividend going forward.
EL&P: Along with this most recent wave of mergers, we again hear a lot of discussion about the Public Utility Holding Company Act. What are your views on PUHCA? Does it have relevance in our modern utility landscape?
Rogers: If you go back to the 1980s, you’ll find studies by the SEC, both under Republicans and Democrats, that found that the Public Utility Holding Company Act was unnecessary. In fact, if you go back to the 1930s when it was passed, you would find that it was passed primarily to protect investors. Subsequently, laws were passed in the securities area that effectively superseded PUHCA. The laws that followed were actually more rigorous than PUHCA. As a matter of fact, the SEC has recognized for over 20 years that PUHCA is unnecessary, but for a variety of reasons we have not been able to get it reformed or repealed. With the energy legislation that’s coming out of the House and Senate, my judgment is that you’ll see a change in the Public Utility Holding Company Act, and it’s long overdue. I also believe that change will spur additional consolidation.
EL&P: On the topic of legislation, what do you think are the chances we’ll get an energy bill passed this year?
Rogers: I think now that both the House and Senate have acted, they’ll find common ground and put a bill on the President’s desk. It’s more likely than not that we’ll get a bill.
EL&P: What effects would passage of the bill have on the power industry over the next few years?
Rogers: The passage of a bill, particularly if they keep the Senate’s provisions, will signal to the industry that we have to deal with climate change in the future. I think that’s the first thing that grows out of this bill. The second thing is that FERC is probably going to have a stronger role in approving mergers as well as in the wholesale market, assuming that the Senate provisions survive conference committee.
There are also tax provisions in the bill for clean coal technologies, including coal gasification. I think there are many incentives, as well as requirements, for our industry to move forward and produce electricity with an even smaller environmental footprint in the future.
EL&P: What do you see as the top challenges, both for yourself and your company, going forward over the next few years?
Rogers: First of all, we need to get regulatory approvals to be able to close the merger. That’s one of the top challenges over the next year. The second challenge, while we’re getting those approvals, is to continue to deliver on our earnings and on the commitments we’ve made to the financial community. Thirdly, is to build an integration plan that delivers the promises of the merger. Those are things we have to do over the next year.
From a personal standpoint, I need to continue to listen, continue to learn, continue to re-invent myself in terms of how I think about the business and the future. One of the things I believe has helped me as a CEO is that I continuously challenge myself to rethink not only prior decisions, but to rethink my view of how the industry is going to evolve. It’s difficult for people to challenge the conventional wisdoms they learned to live by in the past. I believe that the way the world is changing today, the greatest individual challenge a leader has, in any company, is the challenge of reinventing the business, reinventing how they think about it.
Dàƒ©jàƒ vu is the sense that you’ve done something before. I think the greatest ability is to be able to do the same thing, but see it with different eyes every day and to wake up excited about the business, excited about working with your team, excited about the mission you have. I have been blessed with the ability to do some of the same things over and over and still be excited about them and see them in different ways.
I’ve started a practice of meeting with the top thousand people in the company every year. I start with first-line supervisors and work up to managers, general managers and the senior leaders. I do it in groups of 90 to 110. I meet with them for three hours, and they ask me questions. I do nothing but answer. I don’t give a speech; I just answer their questions.
This year, at one of those meetings, a supervisor said to me, “ËœJim why don’t you ask people how you’re doing-to grade your performance?’ With some trepidation, I went into the next meeting, and toward the end I asked those gathered to grade my performance over the last five years as a CEO-actual grades, A, B, C, D and F. We gave them the ability to vote anonymously, and they graded my performance. I’m happy to report that my grade point on that score was higher than my grade point in college.
I also asked them to write down one thing I could do to be a better CEO. I collected their suggestions, and they gave me a lot of insight into things I ought to do and the role I should have within the company. It was a very valuable experience to me.
EL&P: It begs the question, what were some of your employee’s suggestions on how you could be a CEO?
Rogers: They wanted me to spend more time communicating with employees one-on-one or in small groups. They also wanted me to create an even higher level of accountability within our organization.
EL&P: And you’ll work toward implementing some of their suggestions?
Rogers: Yes. I’m all about continuous learning. I learn not just from the board of directors, not just from people I meet in the industry, but I learn a lot from the people in our company. Someone once said there’s a reason God gave us two ears and only one mouth. It energizes me to listen to people, to understand what they are saying and to use their comments to shape my decisions.