Duke Energy made the surprise announcement last Tuesday that Paul M. Anderson, former CEO of PanEnergy and more recently the Australian firm BHP Billiton, will take over from Duke’s retiring Chairman Richard B. Priory as chairman and CEO of the company, effective Nov. 1, 2003.

Anderson served as president and COO of Duke Energy immediately following the 1997 merger of Duke Power and PanEnergy. At the time of the merger, he was chairman, president and CEO of PanEnergy and was instrumental in the recovery and growth of PanEnergy after becoming its president in 1993.

Anderson left Duke Energy in 1998 to become managing director and chief executive officer of BHP Ltd. and succeeded in returning that company to profitability. BHP later merged with Billiton PLC to create BHP Billiton, the world’s largest diversified natural resources group, which he led as CEO until his retirement in 2002. BHP Billiton is a diversified resources group.

The surprise announcement said the company’s board of directors had voted Tuesday to replace Priory with Anderson. In a telenews briefing from Australia, where he currently is living, Anderson said he had understood that Priory had some time ago told the board that he was interested in early retirement. Anderson said he had been approached by the board earlier, after he had retired from BHP Billiton, but only signaled his interest in the last month or so.

“I am honored to be returning home to Duke Energy,” Anderson said. “I am passionate about the company and optimistic that we will grow and prosper. The energy industry has gone through a crisis of confidence. Our challenge is to regain the confidence of our employees, our investors, our customers and the communities in which we operate. We must also reassure the regulators that we value our franchise and appreciate the attendant obligations.”

This was the first public indication that Priory, 57, would retire in early 2004. Anderson officially takes over Nov. 1 and Priory will work with him in an advisory role during a transition period.

Anderson, who helped to forge the merger that created Duke Energy, said he is “very excited about coming home.” He noted that it had taken him a long time to decide, “but it was the right thing to do at the right time. The industry is going through a very difficult time and is casting about for leadership.”

Anderson said he had gotten a lot of calls from headhunters; “there are a lot of opportunities.” After leaving BHP Billiton he had “taken time to recharge my batteries.” He enjoyed his “Melbourne to Maine” lifestyle and wouldn’t have come back to the business “if it had been any company other than Duke Energy.”

Queried as to whether he leaned toward development of Duke’s regulated or unregulated businesses, Anderson said, “I firmly believe there is a great opportunity to get a balance between the two sides. The whole industry went overboard” for a time into the merchant power generation and trading businesses, but he still believes there is a role for deregulated businesses.

Besides his 20 years with Duke and predecessor companies, starting with Texas Eastern Transmission, Anderson pointed out he has been involved in numerous turnarounds of businesses, most notably PanEnergy and Billiton. He also has played a major role in four multi-billion-dollar mergers.

Anderson said he would take some time to assess Duke’s position before taking any action. He plans on sitting down with every member of management, and has “no preconceived notions.”

His biggest challenge will be “to get Duke’s portfolio on a firmer basis.” He said the company, along with the rest of the industry, “probably invested too heavily in merchant generation.” The “tremendous overbuilding of capacity” has lowered returns and stressed balance sheets. His goal will be to build a portfolio of energy properties that earn an adequate return to “rebuild the balance sheet.”

Duke Energy has suffered along with other energy companies from the collapse of the merchant trading business and the decline in power prices for independent generators. Its stock price, which hovered between $30 and $40 a share in recent years through mid-2002, has stayed mainly below $20 a share through 2003. Duke’s stock price opened Tuesday at $17.77 and jumped to $18 a share by the close of trading, spiking in the last hour when the changeover became known.

Anderson has his work cut out for him. Duke’s COO Fred Fowler noted recently that “the energy markets are a pretty tough place to play right now. Our entire sector continues to struggle with issues.” Business has been stung by Enron Corp.’s bankruptcy, the California energy crisis, ongoing litigation and regulatory scrutiny as well as a “fairly anemic economic recovery” that was exacerbated by the August blackout in the Northeast. However, even with the many challenges, Duke is making steady progress, said Fowler (see NGI, Sept. 19).

“We’ve made a lot of tough decisions this year,” Fowler said, referring to hundreds of companywide layoffs and canceled building projects. “Much of the scaling back has been in the merchant energy business. But across the board, we have been looking to streamline our costs and make sound business decisions that didn’t compromise our competitive positions.

“We’re not waiting out this current cycle; we are working through it,” and “taking appropriate short-term actions” that include focusing on positive net-cash generation. “We are on plan and in many cases, we are exceeding plan.” However, Fowler noted that above all, the most important issue for Duke this year is debt reduction. Its target this year is $1.8 billion, and by 2005, the company hopes to reduce its debt by $5.5 billion.

In mid-August the company told employees that poor market conditions affecting its merchant energy operations and milder weather that has negatively impacted its North Carolina utility sales will force the company to take additional cost cutting measures this year, including possible job reductions and project delays, in order to meet its earnings per share target of $1.35-60 in 2003 (see NGI, Aug. 18).

Merrill Lynch upgraded its rating from “sell” to “neutral” based on the management change, “which we see as a positive catalyst for the stock longer-term,” even though it sees continued hard times in the short term and a possible dividend cut.

“On the earnings front we would not be surprised to see the company’s outlook for 2003 ($1.35-$1.60) revised down after Q3, given mild summer weather and continued lackluster conditions in wholesale markets. With favorable hedges unwinding (hedged margin drops $240M in 2004) the deterioration in the merchant business is expected to further pressure Duke’s results.” The Merrill Lynch analysts suggested that the $1.10 per share dividend could be lowered, possibly as much as 35 cents.

“The merchant earnings pressures leave new management with a deep hole to climb out of that will likely require tough actions (i.e. cost-cutting, potential dividend cut, etc.) and a fair amount of time.”

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