ChiefExecutive.net

Rick Priory’s Natural Gas

December 1 2000 by Peter Buxbaum

Rick Priory’s tenure at Duke involves a tale of two companies. The first is Duke Power, as the company was known until the late 1990s, a regional $10 billion electric utility. Then came deregulation, a merger with PanEnergy Corp., and the emergence of Duke Energy, a diversified $40 billion empire encompassing energy trading, natural gas dealing, engineer­ing, construction, and international marketing.

As the company has evolved, so, too, has Wall Street’s opinion of its stock. As a traditional utility, Duke Energy was once a classic widows-and-orphans issue. But a recent growth spurt when the energy conglomerate led a charge within the utilities sector alerted investors that burgeoning demand cou­pled with tight capacity yields higher­ than-expected margins.

 In steering Duke Power on its diversification course, Rick Priory-then president and COO-was in hot pursuit of supplies of natural gas. “We realized that natural gas would be the fuel of choice,” says Priory. “We were experi­enced at building power plants, but we didn’t have gas.”

 Duke’s merger with PanEnergy brought the company leading-edge experience in the natural gas trading, marketing, and infrastructure business­es. Eighty-five percent of Duke’s rev­enues now come from the non-regulat­ed sector.

That strategy proved prescient, as the public now agitates for more generating capacity and coal- and nuclear-powered plants face five- and 15-year lead times. Duke Energy can get natural gas plants up and running in less than two years, says Priory, and, in one case, accom­plished that feat in 11 months, when the governor of Connecticut expedited that state’s regulatory cycle.

Bureaucratic delays have exacerbated a shortage of generating capacity, espe­cially in California, which is plagued by widespread brownouts and a restless, overheated population. But Priory makes no apologies for Duke’s failure to add capacity in the Golden State.

 “When California deregulated the energy markets, everyone was talking about the issue of stranded costs,” he says. “In a regulated environment, the company’s costs are built into its rate structure. With the prospect of strand­ed costs, we would have [been] out of our minds to build a power plant at that time.”

But Duke Energy, he adds, now has 2000 megawatt hours of capacity queued up within California’s approval bureaucracy, and can get that capacity online fairly quickly. “We have made efforts to compress time to market by acquiring our own construction com­pany,” he says, noting that the acquisi­tion allows for an 18-month turn­around time. The company’s competi­tors will miss next summer, although there will be flood of new capacity in California by 2002.

Meanwhile, Duke is well positioned to profit from the current higher elec­tricity prices, according to industry ana­lyst Daniele Seitz of UBS Warburg. The nationwide capacity crunch, she says, will not be resolved for another two or three years.

Duke’s international strategy also finds the company at the right place at the right time. Duke Energy entered Latin America just as some other play­ers were pulling out, says Seitz. As it turns out, Latin America, and especially Brazil, is likely to experience a shortage of power much the same as in the U.S.

Politicians in the developing world are under pressure to develop a value-added manufacturing sector, says Prio­ry. But in order to do so, they need to build up the infrastructure. We see a great long-term growth opportunity in Latin America.

Priory says that Duke’s overall strate­gy is to integrate the entire energy value chain into one organization. Such for­ward thinking is one of the company’s calling cards, says Seitz.

 The management style of the compa­ny is to trend very much ahead of the long-term curve, she says. While the stock is selling at a premium right now, it offers one of the best-skilled manage­ment teams in a period of seismic changes within the industry.

But not everything in the industry is changing. Rick Priory is still an execu­tive of a regulated utility, and Duke Energy still provides electricity to households in North and South Caroli­na. “If the lights go out I’m in trouble,” he quips. “In that part of the country, there is a legal obligation to provide service. If the lights go out, I go to jail.”

“Don’t worry,” he adds, “they won’t.”