Under Paul Anderson, Duke Energy is down to earth again.
But that's how he's getting it ready to soar.
By Edward Martin

Along the bottomlands, wind rustles millet planted for migrating ducks and geese. A coyote, once a symbol of the Western frontier, lopes off into the underbrush. Jack Mason, a state game biologist, isn’t surprised. “They’re everywhere nowadays. They can adapt to just about anything.”

The Catawba River makes a sharp turn here. On the other side, age has faded the brick walls of a massive industrial building a ruddy brown. This once was frontier, too. By 1929, the industrializing Piedmont had pushed hydroelectric power to its limits, prompting Duke Power Co. to build this, the Riverbend Steam Station in Gaston County. An outpost on the fossil-fuel frontier, it generated its first current the day before Black Tuesday.

During the Depression, Duke Power kept building coal-burning plants, adapting to make more of what factories and homes needed — broad-shouldered, hardworking American electricity. Paul Anderson, 60, can appreciate that. In his Charlotte office, he leans across a table to explain why.

His last job was turning around Australia’s biggest company, molding what’s now BHP Billiton — a mining, petroleum and steel conglomerate — to the demands of a changing global economy. Named Duke Energy Corp. CEO and chairman two years ago, he had to adapt again, this time turning the troubled company on its ear.

Under his predecessor, Duke also had gone global, girding for a new energy market whose revolutionary rules soon proved to be formulas for failure. Anderson hacked it back almost to its roots, slashing new operations like energy trading to concentrate on what the company does best: produce, distribute and sell power.

Now, with its pending merger with Cincinnati-based Cinergy Corp., Duke Energy will have $70.5 billion in assets and spread into the Midwest as the nation’s second-largest utility operator. “What he’s done has been to move the company back to the center, with focus on the basics of how we operated prior to the late 1990s and 2000,” says Cinergy President James Rogers, who will succeed Anderson as CEO once the merger is final.

This is no retreat to the past but a way back to the future. Like the coyote, the company has adapted to a new environment. Now it will be a predator. “My goal,” Anderson says, “is for Duke Energy to become the Bank of America of the utility world.”

He has made a career of sizing up situations and seizing opportunities. “Paul’s got the capability of identifying problems, coming up with solutions and executing them,” Rogers says. “He approaches them almost as triage — start with the big ones and work down to the smaller ones.”

In the fall of 2003, his first task was to yank Duke Energy back from the precipice of illiquidity. Debt was mounting, and the stock price had plunged, down 70% from its all-time high. “There was a crisis of confidence” among board members, customers and Wall Street, Anderson says. “All were questioning whether the company was headed in the right direction. Some were even asking if it could survive.”

It could, and experts credit Anderson, whom Ray Moore, an analyst with the New York brokerage of Shields & Co., calls Mr. Fixit. The company earned $1.5 billion in 2004, reversing its $1 billion loss the year of his arrival. Duke stock, which in early 2003 fell below $13 a share, was recently trading around $26. “It’s a complete reversal for Duke,” says Moore, who has tracked the company for more than 30 years.

Rick Priory, Anderson’s predecessor, had bet that by now electricity would be deregulated nationwide and a competitive market in place. As he began to transform the company into a freewheeling global colossus, with outposts from Lima to London, Duke Power, which supplies regulated electricity to 2.2 million Carolinians, found itself eating at the second table.

But deregulation shorted out, with only about half the states allowing competitive energy markets. In the Carolinas? “It’s dead,” says state Sen. David Hoyle, the Gastonia Democrat who co-chairs the legislature’s electricity study commission. “I don’t think we’ll hear any more about it, certainly in my lifetime.” Under Anderson, he says, Duke Energy “made a 180-degree turn.” As if to emphasize the point, Duke Power announced in October that it wanted to build a $1 billion, two-reactor nuclear plant, which could be on line by 2015. In November, Duke Power told N.C. regulators that growth in its territory threatens to swamp capacity — it wants to maintain a 17% cushion over peak demand — and that it needs to spend hundreds of millions to build coal and gas-turbine plants.

Nuclear’s rebirth pleases Anderson. “You’ve got three scenarios: Just completely destroy the environment; extreme conservation, jacking up the price until people start riding bicycles and not running air conditioners; or you go nuclear generation.” Rep. Danny McComas, a Wilmington Republican who co-chairs the study commission — Anderson also is a member — says, “Three or four years ago, when deregulation was hot, nuclear was never coming back.”

Anderson achieved much of Duke Energy’s financial turnabout by selling off billions in noncore assets — $3.1 billion last year alone — as far away as New Zealand. Some were centerpieces of Priory’s strategy, including Duke Energy North America, which traded wholesale gas and electricity from a trading floor in a suburb of Houston, Enron’s hometown. Duke put the unit up for sale in September, taking a $1.3 billion charge in the third quarter. That decimated net income, which fell from $387 million in the same quarter the previous year to $38 million. But net income from continuing operations — businesses that were in place the year before — told a different tale. It soared from $381 million to $924 million.

After the merger, Duke’s assets will be within $9 billion of Chicago-based Exelon Corp., the nation’s largest utility owner. The merger is likely to pass regulatory muster next summer, and though attacked by consumer groups that say not enough of its projected $400 million in annual savings will be returned to power users, the marriage by most accounts could have been made in heaven. There’s minimal overlap of geography and operating units — Duke, for example, has three nuclear stations, Cinergy none — and Anderson and Rogers share a bond: They dote on fundamentals.

“We’ve never left the basics,” Rogers says. “In a sense, where Paul’s leading Duke is the path where we’ve always been.” Pay dividends to stockholders. Grow earnings. Reinvest in power plants and gas lines. Produce and sell broad-shouldered, hard-working American gas and electricity.

Sun glinted off water lapping the hull of the 36-foot Hinckley Picnic, a jet-drive boat with the classic lines of a 1950s Chris-Craft, anchored in a Maine harbor. This, Anderson thought, is what I’ve worked for. A native of Richland, Wash., he had earned a bachelor’s in mechanical engineering from the University of Washington and an MBA from Stanford and risen through a succession of executive positions — Ford, Inland Steel, PanEnergy. Now, in the summer of 2002, he had retired from his latest, running BHP Billiton. At 57, he was healthy and, thanks to a performance-based pay package, rich. BHP had been tough. “If I’d sat back and worried about everything, I probably never would have gone,” he says. But the offer had come at a good time.

As CEO of PanEnergy from 1993 until 1997, he had brought the ailing Houston-based natural-gas distributor back to profitability. When it merged with Duke Power in 1997 to form Duke Energy, he had moved to Charlotte as president and chief operating officer, second in command to Priory. Anderson had agreed to stay until Duke stock hit $70 a share — it later split — and the merger was running smoothly. “I’d been CEO of PanEnergy, and when we merged I became the No. 2 guy. I learned a long time ago No. 2 isn’t nearly as much fun as No. 1.” On his desk in the office he inherited from Priory is a paperweight. It was on his desk the day he left seven years ago for BHP. “If you are not the lead dog,” it reads, “the view never changes.”

In Melbourne, the view had been strikingly different. BHP, with operations in 30 countries, had operated nine months without a CEO. “They’d fired him,” Anderson says. “They were losing a couple billion dollars a year. They had huge environmental problems in Zimbabwe and Papua, New Guinea. They had failed projects they weren’t dealing with. They were a rudderless ship but with tremendous resources — a Mercedes covered with mud.” He hacked through bureaucracy — within a few months, more than 60% of managers were gone — and pared $2.5 billion of ill-performing assets. But his days were numbered. “You could get an Australian work visa for four years, but then if you stayed beyond five, at that time, they started taxing you based on your worldwide assets.”

By then, BHP was flush with cash, its stock price at record levels. Anderson hit his stride in 2000. Profits passed $1.1 billion, up fivefold from the previous year. In 2001, he led the merger with London-based Billiton. When he came to BHP, he had agreed to work without salary — his contract as Duke Energy CEO is similar — but for stock options and grants tied to the company’s performance. When he retired in 2002, he departed with $70 million. “Uh, that’s Australian dollars,” he notes. “That would take it down to $40 million or so U.S. They cheered when I took the job. When I left, the cheering stopped, and they said, ‘That son of a bitch walked off with all that money.’”

He was puttering on his boat when the phone rang. It was a Duke Energy director he won’t identify. Would he come back? “I said, ‘Hell, no.’ Well, actually, I eventually said I’d think about it.” After more calls, “I began thinking, ‘This is a company I helped put together. If it’s hurting, its people are hurting and its investors are hurting.’ I felt a certain obligation to come back.”

Within days after returning to Charlotte, he found himself standing before a packed room in Duke Energy’s fortresslike headquarters. The 300-capacity auditorium overflowed, and 500 employees milled in the lobby and packed anterooms to watch on closed-circuit television. Similar meetings were held in Houston, Denver and elsewhere. Employees unloaded. Anderson listened. What he heard here and in meetings with about 50 senior executives such as Rich Osborne, group vice president for public policy, was sobering. Osborne and others told him that North Carolina’s largest utility was flirting with financial disaster, with debt equaling nearly 60% of capital.

“The company was overextended,” Anderson says. “Its debt had been downgraded, stock analysts were predicting its dividend was going to be cut, and every analyst had us on hold or sell — no buys.” He started cutting debt, trimming it to 51% — a $4.6 billion reduction. He began rebuilding morale. “Management had become paralyzed. When the world falls apart, anywhere you go you get hit. Sooner or later, you just stop because you don’t want to get hit any more. Their hearts were in the right place, but they were just in the middle of this storm, and we needed someone to get things off dead center.”

Part of the malaise was Duke’s fault. Under Priory, it had plunged into California’s deregulated market, only to be sucked into scandal in 2001 when rolling blackouts and shortages swept the state and regulators and prosecutors accused Duke, Enron and other companies of manipulating the power market to force up prices. Duke was exonerated, but the aftertaste was bitter.

As for energy trading, Duke Energy North America provided $1.49 billion, 31% of earnings before interest and taxes in 2001. In 2002, Duke had nobody to trade with. “We’d invested billions in merchant generating and trading and gotten pretty far removed from assets,” Anderson says. “Everything had hit the wall. Even the liquidity of the company had become a question. We bet on trading, but you have to have trading partners. The Enrons, Williamses, El Pasos were all in bankruptcy or had liquidity crises of their own.”

The final blow to deregulation may have come in August 2003. An overloaded Ohio generating plant owned by FirstEnergy Corp. shut down, setting off a chain-reaction blackout that raced through the Midwest and Northeast and into Canada, causing $6 billion in economic losses. “That was pretty much the end of it,” McComas, the legislator, says. “It looked like areas that hadn’t deregulated fared a lot better.”

Soon Anderson was selling off pieces — domestic merchant plants intended to generate electricity to sell on the open market and other weak-performing assets that had been billed as its stars as recently as 2001. “We asked ourselves, basically, what are we? We are an American energy company. So we said, ‘Gee, if that’s the case, what were we doing with all these operations in Europe, in France, Germany, Asia?’ It takes a very different kind of company to be a global company versus one that’s in only five time zones.” Anderson and Duke Energy reset their watches.

The smell of bratwurst from street vendors fills the lunch-hour air on South Tryon Street. Six blocks from Duke headquarters stands the 60-story Bank of America corporate tower. Almost 500 miles away in a new 30-story building in downtown Cincinnati is the headquarters of Cinergy. Anderson wants Duke to resemble the bank up the street, and getting the power company in Ohio is a big step in that direction.

He traces figures on a table with his finger. “The intent is to create a platform for the future. There’s going to be consolidation in the power industry, although probably not as much so with gas as we once anticipated. But if you look at what happened in banking, you went through a period when there was a lot of inefficiency.”

BofA, he says, grew to be the nation’s second-largest bank by being an acquirer in a consolidating industry, then eliminating inefficiencies. Merging with Cinergy will have similar results, cutting about 1,500 jobs — the combined work force will total nearly 30,000 — and creating a company with about 3.7 million electric customers and 1.7 million natural-gas users. Cinergy provides electricity to portions of Ohio — most of those sales are unregulated — but also to nearly two-thirds of Indiana and eight counties in Kentucky, where regulations are similar to North Carolina’s. About 80% of Duke’s revenue will come from regulated sales of gas and electricity.

It will also be poised to pounce. The U.S. utilities industry is still dominated by small players — about 100 investor-owned companies with market capitalizations of less than $3 billion, Anderson estimates. Experts predict the Duke-Cinergy merger will trigger a wave. Anderson’s plan relies little on organic growth — the natural expansion of population and industry — and a lot on acquisitions, wringing efficiencies from them.

Another little-noticed factor could accelerate consolidation. When Congress passed the Energy Policy Act of 2005, it repealed a law on the books since 1935 prohibiting nonutility holding companies from acquiring utilities and barring merger of noncontiguous utilities such as Duke and Cinergy without waivers from federal regulators.

Anderson does have doubters. “A lot of little companies are going to be taken over, but that doesn’t mean you’re going to make any money off of them,” Moore says. “And the repeal of the holding-company act means you’ll see some big companies being taken over.” He includes Duke Energy as a possible takeover target, along with Atlanta-based Southern Co., which provides electricity to Georgia, Alabama and parts of Florida and Mississippi. Robert Rubin, New York-based analyst with Deutsche Bank, cites studies that show size doesn’t enhance efficiency in utilities.

But for now, across the Catawba, steam rises from the Riverbend plant. Thousands of tons of coal form black mountains on its grounds. The new Duke Energy will adapt different sources of energy — gas, the atom, cleaner coal — to fuel its future. “I’d say the company went on an adventure, and now we’ve come back,” Anderson says. Back to broad-shouldered, hardworking energy.