Against the Flow at Duke Energy

CEO Priory is making an integrated utility pay off big

On September 11, Richard B. Priory, chief executive at Duke Energy Corp. (DUK ), had just started a staff meeting to discuss a bid for Westcoast Energy Inc. (WE )--a deal he had sought for more than three years--when a secretary slipped him a note: A plane had crashed into the World Trade Center. Priory ducked outside to get details of the attack and to order stepped-up security at Duke's nuclear plants. Then, he and his managers quickly voted to proceed with the bid for the Vancouver gas-pipeline company.

During the next week, Priory worried about making an $8.5 billion bid amid so much uncertainty. But on Sept. 20, he announced the deal, the first major merger after the terrorist attacks. "Even if the timing might not seem right to others, Rick's not afraid to go for it," says Fred J. Fowler, group president for Duke's energy-transmission business. Or as Priory puts it: "We didn't want to wait another month or two and lose the deal."

The decision was vintage Priory. In his four years at the helm of Duke, in Charlotte, N.C., the 55-year-old New Jersey native has made many high-stakes bets in fields that other energy executives shied away from. Priory has aggressively moved Duke beyond its beginnings as a regulated electric utility serving the Carolinas. He got the company into the largely unregulated business of producing and reselling energy to smaller utilities throughout the country. And he was among the first to buy into natural gas.

"A CASH-FLOW MACHINE." Since then, Duke has become one of the most integrated energy players around: It controls everything from gas reserves to pipelines to power plants. And it has massive, but conservative, trading operations that have supported it all. Owning pipelines gives the $66 billion company the flexibility to exploit the ups and downs of the energy chain. Gas prices up? Sell more to customers. Gas prices down? Burn it for electricity. "He took a company with a regional franchise and made it into arguably the biggest and best of the integrated energy companies," says Kit Konolige, an analyst at Morgan Stanley Dean Witter & Co.

While rivals such as AES Corp. (AES ) and Exelon Corp. (EXC ) have watched their fortunes fall along with energy prices, Duke announced on Oct. 16 that its third-quarter income rose 46%, to $796 million--or one-third more than Wall Street was expecting. For the year, profits should be $2.08 billion, on revenues of $65 billion. Earnings per share could increase by about 30%, outpacing the industry, which should average 15%. While few energy companies have seen their stock rise this year, Duke's has held up better than most: It is down 11%, compared with an average industry drop of 24%. And after closing the Westcoast deal, Duke will have access to critical Canadian reserves to feed through its new gas-fired plants--many of which will be built out West. "They can turn Westcoast into a cash-flow machine," says Banc of America Securities analyst Daniel L. Tulis.

Indeed, this is a pretty good time to be a hybrid energy company. Since there is little financing available through Wall Street, companies like Duke and Dynegy Inc. (DYN ) can still expand by spending the cash their regulated businesses generate. At this point, 30% of Duke's revenues come from such operations. Enron Corp. (ENE ), by contrast, has agreed to sell its regulated business, which would leave it without such a reliable source of funds.

If Priory isn't your typical utility executive, that may be because he backed into the business. Priory's passion was baseball: In high school, he won a tryout with the New York Mets, just missing a slot on the farm team. While his classmates headed off to college, Priory worked as a carpenter and bricklayer. After a few years of knocking ice off his tools in the dead of winter, however, Priory reconsidered. He decided to study engineering, first at West Virginia University Institute of Technology and then at Princeton University.

After teaching engineering at the University of North Carolina at Charlotte and consulting on the side, Priory in 1976 accepted an engineering job at one of his clients: Duke. In no time, he developed a reputation as an up-and-comer: "Most of Duke's engineers were still using slide rules, and in comes Rick knowing how to write computer code in Fortran," recalls Vince Sorrentino, a retired engineer at the company. Priory helped design several of Duke's nuclear plants, and by 1984 he was in charge of design engineering. By the mid-'90s, he was heir apparent to then-CEO William H. Grigg.

"REGULAR GUYS." When Priory took over the company, he knew two things for sure: Deregulation was coming, and Duke wasn't ready. For starters, he says, employees had a civil-service mentality. "If you lived long enough, you got promoted," he says. To build a more entrepreneurial culture, Priory eased out many senior managers, replacing them with executives who had lived through deregulation in banking and telecommunications.

Priory is still very much the engineer. He's deeply analytical and usually seeks a consensus among his managers. And his head isn't turned by the perks of the job. He traded a penthouse office for a modest space on the third floor of Duke's 13-story building, saying only that it saves him five minutes travel time. Friends say that Priory doesn't usually golf with other CEOs or Duke executives. "Rick is more comfortable hanging out with regular guys," says Peter Loper, a Charlotte physician.

Priory has swung more than 80 deals, most of them contrarian, and most successful. His 1996 bid for PanEnergy Corp. was one of the first deals between an electric utility and a natural-gas supplier. He bought into South America in 1999, when other U.S. companies were bailing out, scooped up a liquid-gas business two years ago that no one else would touch, and sold a Texas plant he had just built because he figured new projects from rivals would create a supply glut. "I'm always more concerned about the companies on the other end of a deal with Duke," says Tulis. So far, Priory has done well for himself by zigging when others zag.

By Dean Foust in Charlotte, N.C., with Christopher Palmeri in Los Angeles

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