Power Player

SATSOP, Wash. -- Amid towering evergreens, a continent away from its Carolinas Piedmont birthplace, Duke Energy Corp. is building a $300 million power plant - one of 16 this year.

Half a world away, Duke is building an undersea natural gas pipeline from Australia's mainland to Tasmania. In the Netherlands - emerging as Europe's energy-trading hub - Duke is the largest natural gas dealer.

Duke is the nation's largest marketer of natural gas, and also ships gas through 12,000 miles of U.S. pipeline. Duke traders sold enough electricity nationwide last year to keep the lights on in 23 million homes.

This is the new Duke, born of a little Southern utility that transformed itself - in a mere five years and largely out of public sight - into a global energy titan. In an industry undergoing the biggest changes since Edison invented the light bulb, Duke is emerging as a world leader, much as its founders pulled the Piedmont from rural poverty into the Industrial Age.

"It is a remarkable story - an undertold story," said Ed Crutchfield, a retired First Union Corp. chairman.

Well before most of the industry, Duke recognized change was coming, he said. The Catawba River alone couldn't power it through another century.

"What you've got now is the most respected energy company in the world," Crutchfield said.

Now Duke is growing again, extending its reach across Canada with the acquisition of gas giant Westcoast Energy, to be complete by March. Duke also picks up customers and possibly assets following the collapse of energy vanguard Enron Corp., which last Sunday filed for bankruptcy protection.

This year, Duke is on track to be Charlotte's biggest Fortune 500 company. Bank of America Corp., the largest U.S. consumer bank, has held the honor, last year ranking 13th to Duke's No. 17. Five years ago, Duke was deep in the pack at No. 300.

Duke's rise last year from the 69th spot made Charlotte the only city besides New York with more than one company in the top 20.

"It's incredible - a metaphor for vibrant business," said Crutchfield, who built First Union into the nation's No. 6 bank, which merged with Wachovia to become No. 4. "It's as remarkable to me as that we've got two of the top four banks in Charlotte."

Duke's ascent - tarnished only by California's deregulation disaster - has won favor on Wall Street and with investors. In the past five years, Duke's stock outperformed both the Dow Jones and the broader S&P 500.

The old Duke - Duke Power - started in 1904, remains the Carolinas largest utility. The company that fueled the economic evolution of the Carolinas heartland also ranks among the top five creators of the modern Queen City.

But Duke Energy's growth dwarfs its utility origins: Duke Power accounts for only one-tenth of the new Duke's sales.

Bill Grigg, who joined Duke Power in 1963, engineered the gutsy 1997 deal that sparked the transformation. As chief executive, he led the $9.8 billion acquisition of PanEnergy Corp., a Houston natural gas supplier. With that deal, Duke became Duke Energy.

Triumph is bittersweet.

"You'd love to be able to walk down the hall and know everybody by name," said Grigg, who retired after the deal. "One of the prices you pay for growth is, you leave some things behind.

"The alternative would be to stand still and gradually die."

Duke's evolution would have seemed unlikely in the 1970s. High interest rates and rising fuel costs eroded profits. The company's stock price plummeted, and Duke sold assets to raise cash.

"I was thinking we were just not going to make it," Grigg said.

In the 1980s, Duke became part of a wrenching change sweeping Corporate America. Like IBM, AT&T and other mainstays, Duke cut thousands of jobs - the painful end of a long-cherished job-for-life security.

Duke also began looking for new ways to grow.

Since its start, Duke was the only major utility to build its own power plants. So, as Duke looked for new businesses, building power plants for other utilities was a natural. Other ventures included telecommunications and real estate development.

In 1992, electric utilities got a new rulebook. The Energy Policy Act undid decades of electric regulation, prodding utilities to compete and unleashing a power market loaded with risk.

"Bigness was key to get the critical mass to play in this game," said Rick Priory, who succeeded Grigg as top boss. "You need to be big enough to take risks."

For Duke Power, natural gas was the enemy energy, snatching customers from electric heat. Grigg recalled that around Duke, a popular criticism used to be: "Go gas, go boom."

But natural gas, deregulated in the 1980s, was a good growth industry. Gas was - and still is - the fuel of choice for the nation's new power plants. Other uses, such as home heating, also were growing.

By 1996, reversing its long aversion, Duke wanted to be a natural gas player. Company executives envisioned gas pipelines feeding Duke plants nationwide - and they wanted PanEnergy.

The Houston company had miles of gas pipeline, cavernous gas storage and a bigger power-trading business.

"We could put Duke and natural gas and power trading together, then earnings would go up, and the stock price would go up," Grigg said. "It looked like a royal flush to me."

It was a winning hand.

Duke sales exploded to $49 billion last year from $4.76 billion in 1996. Through September, revenues have nearly matched full-year results for 2000. The Fortune 500 list ranks by revenues. On that basis, Duke was ahead of Bank of America's $40 billion in revenues at Sept. 30.

Duke earnings more than doubled to $1.76 billion last year from $686 million in 1996.

By this spring, its stock price had nearly doubled from its pre-PanEnergy close of $23.94, adjusted for this year's stock split. Since then, the stock has backed off, closing Friday at $36.81.

Thursday night, at the Financial Times Global Energy Awards, Duke was named Energy Company of the Year, the top honor in a respected industry ranking of oil, gas and electric companies worldwide.

A nagging question - one Priory won't even address anymore - followed Duke's meteoric rise: Would the headquarters move?

The repeated answer is no.

"Charlotte has been our home for almost 100 years," Duke spokesman Randy Wheeless said. "We're not going anywhere."

But a long-rumored new headquarters on an uptown site Duke owns is far from a sure thing. Priory is an engineer who paid his way through college working construction and painting houses. He works from a spacious but plain third-floor office. He's focused on building a company, not a skyline.

"We have no shortage of office space," Wheeless said. "There's no rush to make a decision."

Embedded in the new Duke is a tradition of civic generosity. In 1924, founder James "Buck" Duke started the Duke Endowment with a whopping $40 million. This year, the Charlotte endowment's biggest gift - $10 million - went to spur rural Carolinas development.

Every June - to mark the creation of the new Duke - thousands of employees worldwide undertake volunteer projects, from raising money for cancer research to entertaining retirees.

In Charlotte, they outfitted a band trailer for South Mecklenburg High and repaired housing for the needy.

"We were very poor," John Belk, a former Charlotte mayor, said of the Carolinas a century ago. "They brought electricity here. They brought textiles here. They gave us leadership we never had. We couldn't get along without them.

"Duke Power put Charlotte on the map."

Priory - part of the PanEnergy deal team - joined Duke in 1976, and in 1994, Grigg appointed him to run Duke's utility arm. Priory ascended to the top in June 1997, after the PanEnergy acquisition.

Priory is Duke's deal man, with more than 80 to his credit in five years. His strategy takes what he calls the "long view" - looking for acquisitions that will pay off long term, not just today's fad. He is an aggressive suitor but doesn't force deals.

He can be contrarian, spending $405 million for Latin American power plants in 1999 when the region was out of favor. Last month, Duke bought two Guatemalan power plants.

The PanEnergy deal - one of the first unions of power and natural gas - reflects sweeping industry consolidation. Priory continued that pioneering path with the $1.35 billion acquisition of Union Pacific Resources Group, a gas processor, in 1999.

Last year, Duke added 1,100 miles to its network of natural gas pipelines with the $386 million acquisition of East Tennessee Pipeline.

"I didn't know I'd get so far ahead and get such a competitive advantage, but competitive advantage is a fleeting thing," Priory said of PanEnergy. "We have to constantly re-engineer ourselves to regain the advantage."

Duke's ascension has not been flawless. Perhaps the company's worst black eye came during California's energy crisis.

Duke entered the market in 1998, buying three power plants as the state deregulated.

Last year, unexpected demand, unusually hot weather and a dire shortage of power plants combined to produce blackouts. Tight supplies drove wholesale power prices to hundreds of dollars per megawatt hour. An average Carolinas home uses one megawatt hour a month - at a cost of $73.

Duke's average California power prices were among the lowest, but in one small deal, Duke charged the highest known price: $3,880 per megawatt hour. Duke later cut the bill more than 90 percent.

As Californians' electric bills skyrocketed, politicians and regulators accused Duke and other power marketers of price gouging and market manipulation. In Duke's case, one of the most serious charges, of withholding power, proved unfounded.

In May, word of Duke's confidential negotiations with Gov. Gray Davis brought the company national criticism. While offering to provide reasonable power prices, Duke - admitting no wrongdoing - asked for an end to state investigations and settlement of private lawsuits.

By this summer, Duke and others were the target of lawsuits and investigations by the California Senate, a state grand jury and California regulators.

This year, as an unseasonably cool summer, conservation, federal price caps and new power plants pushed down wholesale prices, the crisis waned. In recent months, criticism has shifted to politicians and state officials involved in the disaster.

Duke always maintained it had done no wrong, and Priory said the company has been vindicated.

On a site ringed by Douglas firs rising 200 feet, Duke started construction in October on a power plant near Washington's coast.

This year, Duke opened six U.S. power plants. Next year, the company expects to finish seven more and a $500 million expansion at a California plant. Duke Power, which has 11 main Carolinas plants, also plans a new one in South Carolina.

Buying Westcoast, based in Vancouver, British Columbia, will give Duke an arc of pipelines stretching across Canada to rich natural gas reserves.

Enron's fall could put its 25,000-mile U.S. pipeline network on the market - and Duke ranks high among the potential bidders. Enron's European, Latin American and Asian assets, including power plants and pipelines, also could interest Duke, which is aggressively building its international business.

What will Duke look like five years from now?

"It's hard to tell," Priory said of the quickly changing industry. But of one thing he's sure: "Duke Energy will continue to grow."

So, during their monthly socials, retired Duke Power executives will have more reasons to yearn for the old days.

"They say it was a family back then," Grigg said. But he has no regrets. "It's changed for the better."