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DukeEmployees.com - Duke Energy Employee Advocate

Duke - Page 8 - 2003

"Bloomberg News took note of Priory's gravity-defying pay increases." - Charlotte Business Journal

Strategy Out of Gas

Charlotte Business Journal – by David Mildenberg – October 14, 2003

Priory departs Duke with diversification effort in turmoil

(10/13/03) - Rick Priory bet the ranch on natural gas and deregulation. It wound up putting Duke Energy Corp. in unprecedented financial distress.

Priory's abrupt departure this week marks a stunning end to his roller-coaster tenure as chief executive at Duke, a period of remarkable upheaval for what had been a bedrock of conservative corporate Charlotte for decades.

The Charlotte Business Journal's examination of Duke's decline under Priory's leadership is based on interviews over the past month with analysts, regulators, industry insiders, current and former Duke executives, employees and directors. Priory, 56, who will be replaced Nov. 1 by Paul Anderson in a move announced Tuesday, declined requests for interviews last week and did not respond to written questions.

When he took the helm at Duke in June 1997, the Charlotte-based utility was known internationally for its ability to build and operate nuclear and coal-fired power plants. Its stock price had nearly doubled over the previous five years, and its credit ratings were rock-solid.

Duke Power Co.'s two previous CEOs, Bill Lee and Bill Grigg, had near-iconic status in Charlotte and the Carolinas' state capitals, in the utility industry and on Wall Street. Both drew kudos for their ethics and community involvement.

Priory, however, had bigger ambitions than running the nation's best utility company, presiding over annual dividend hikes and playing civic big man.

"All the companies, including Duke, watched Enron report this incredible growth, and they all got Enron envy," says Art Gelber, a Houston energy consultant. "It was like an infection."

State regulations constrain utility profits, making it impossible to achieve the 15% annual earnings and share-price growth that Wall Street demanded in the 1990s. "They believed they had to decide if they wanted to have an evaluation more like a traditional utility or pipeline or if they wanted to look like a glamorous global energy services company," Gelber says.

Opportunity beckons

Two alluring opportunities to get out of the regulatory box caught the attention of Grigg, who was Duke's CEO from 1994 to 1997, and Priory, his hand-picked successor. Federal deregulation of wholesale energy markets -- the business of selling power to other utilities and large industrial users -- seemed perfectly suited for efficient producers such as Duke Power.

Then there was natural gas, which was experiencing demand growth of 8% in the electricity industry, triple the growth rate of coal and nuclear power. So Grigg and Priory worked out the $7.7 billion purchase of PanEnergy Corp., a Houston-based gas transmission company Anderson had turned around in the early 1990s.

The new Duke Energy could buy, move and store gas, earning regulated pipeline returns. But it also could enter two deregulated businesses: building gas-fired power plants for merchant energy production across the United States, then selling and trading energy as a commodity like soybeans.

The 1997 PanEnergy deal kicked off an expansion spree, bankrolled by Duke Power's steady profits and Duke Energy's rising stock price. As CEO, Priory invested more than $20 billion in 60-plus deals around the world.

About $8 billion involved building 20 natural gas-fired merchant power plants scattered around the United States. Those plants can produce about 16,600 megawatts of power, just slightly less than the 17,660 megawatt capacity developed over decades by Duke Power.

Priory plowed $10 billion more into international power plants, gas distributors and pipelines. In the company's 1999 annual report, Priory noted, "We have moved beyond yesterday's utility model to create a business model that connects assets, markets and customers in new ways .... This new world -- this next generation -- is ours to create and shape."

Wall Street, the media, prominent consultants and business schools praised Priory as a visionary. Duke stock soared to more than $47 in early 2001, and leading analysts were bullish. Money, Fortune and Forbes ran laudatory articles. It was heady stuff for Priory, who grew up in a single-parent household in New Jersey and came to Charlotte to teach engineering at UNC Charlotte. A master's graduate of Princeton University, he joined Duke in 1976 as a nuclear design engineer and rose steadily through the ranks.

Culture shift

Priory, along with PanEnergy executives used to Texas' freewheeling environment, sparked a change in Duke's culture. Long known for a laid-back, bureaucratic environment, Duke now encouraged risk-taking and aggressive action, industry observers say.

"It all comes down to knowledge," Mary Gilbert, former chief financial officer of Duke's merchant power division, stated in the 1999 report. "We know how to site a plant, finance it, permit it, design it, build it and manage it better than anyone. We work smarter, faster and extract greater value from everything we do."

In Raleigh, Progress Energy leaders wondered about their more conservative strategy. "In the early days when Duke and others were doing more trading and having some success, we all kind of scratched our heads and asked, 'Were we sure this is the right thing to do,' " says Goodrich Corp. Chairman David Burner, a Progress director. But Progress stuck to its plan.

Just as quickly as Priory's star rose, his business plan vaporized.

Natural gas prices soared in 2002, sparked partly by high demand caused by the merchant plants built by Duke and its rivals. Meanwhile, electricity demand slumped due to the recession.

The overcapacity problem is most evident in the Memphis suburb of Southaven, Miss., where Duke last year opened a $350 million merchant plant. It shuttered the plant in September.

The trading business also fell off sharply due to the Enron implosion and the California blackout debacles.

Suddenly, the visionary international energy giant became a company saddled with $21 billion in debt and declining credit ratings. Earnings slumped last year to the lowest level since 1997.

Duke's stock dipped as low as $12.21 per share in March but has since rebounded to the $18 range.

Duke's reputation for ethical conduct was challenged in California, Texas and the Carolinas. Misleading reports of trading by several Houston employees of a Duke joint venture sparked a recent $28 million settlement with the Commodity Futures Trading Commission.

An investigation by independent accountants last year concluded the company unfairly shifted more than $123 million in costs from its deregulated units to Duke Power. While the company contested the audit, it settled by paying $25 million to North Carolina and South Carolina.

Meanwhile, a Charlotte grand jury is reportedly investigating potential violations involving Duke's accounting. With the stream of bad news, Wall Street turned sharply on Duke. None of 24 investment analysts covering the company now rate it as a "buy." Ten rate Duke as a "sell," according to Thomson/First Call.

Citing concerns about Duke's merchant plants, pension funding and tax obligations, "we believe Duke has above average risk of a downgrade to junk credit status," Standard & Poor's analyst Craig Shere wrote Sept. 27.

Some analysts blame Priory for lacking candor. In recent months, he has been virtually invisible, while Chief Operating Officer Fred Fowler spoke at key events.

This year, Duke has sold off more than $1.5 billion in assets to cut debt and is in the process of eliminating up to 1,000 jobs.

"I had always thought of Duke as a blue-chip company," says veteran analyst Kurt Wulff. "But in recent years I have been chagrined because Duke would say something wasn't a problem, then it would turn out to be so. They have a pretty disappointing record with admitting to difficulties they are facing."

Big paydays

While analysts and stockholders grumbled, paychecks for top executives reflected no such concerns.

In his last three years as CEO, Grigg was paid a combined $4.7 million. In comparison, over the past three years, Priory has received $14 million, while Chief Financial Officer Robert Brace earned $11 million. Harvey Padewer, who Priory brought in to head the merchant power division, earned more than $8 million during his three years at Duke before he resigned in 2002.

Benefits consultant Graeff Crystal, in a recent column for Bloomberg News, took note of Priory's gravity-defying pay increases. "Duke's board compensation committee qualifies for the finals for my 'Unclear-on-the-Concept Award.' You're supposed to reward for performance and penalize for non-performance, not the other way around."

Between June 19, 1997, and Sept. 15, 2003, Duke's total return to stockholders was a negative 0.4% per year, Crystal noted. That compares with a positive 3.6% per year return on the Standard & Poor's 500 Index and a positive 1.9% return on the S&P 500 Utilities Index.

Meanwhile, Priory oversaw Duke's board as it lost much of its Charlotte flavor and esteem. Once packed with Carolinas executives, Duke's current board now has only one CEO of a publicly traded, Carolinas-based company -- George Dean Johnson of Spartanburg, S.C.-based Extended Stay America.

Departures have included Charlotte lawyer Russell Robinson, veteran Columbia banker W.W. "Hootie" Johnson and Bill Coley, a gregarious 37-year Duke employee who Priory beat out for the CEO job in 1997.

Directors added since 1998 are Washington, D.C., nuclear power association executive James Rhodes and Michael Phelps, CEO of Westcoast Energy, a Canadian pipeline company Duke acquired for $8 billion last year.

Aside from Priory, Duke's sole Charlotte director is former N.C. Gov. Jim Martin, who works at Carolinas Medical Center.

Duke intentionally trimmed its board's size and sought more international expertise, Martin says. "They are good people, and the board works well together," he says.

But a board shakeup may lie ahead, says investor relations consultant Rusty Page, a former NationsBank Corp. executive. "The board is just as responsible for any bad decisions as Rick is."

Different strategies

Priory has blamed Duke's problems on a "perfect storm" of unexpectedly bad things happening at the same time.

But some rival utilities avoided that storm by eschewing deregulation or making adroit financial maneuvers.

Richmond, Va.-based Dominion Resources and Progress Energy focused on regulated businesses and are now considered star performers.

Georgia-based Southern Co., diversified heavily into merchant power plants and international expansion. Unlike Duke, Southern spun off its deregulated operation into a separate company, Mirant Corp.

Mirant stock initially soared, but it eventually stumbled with the merchant power industry. It has filed for bankruptcy court protection. Southern's stock, meanwhile, has outperformed Duke Energy's over the past five years.

Anderson plans to spend his first weeks meeting with managers before revealing his own plan. But he pledges to try to retain Duke's $1.10 per share dividend, which costs the company nearly $1 billion annually.

When he took over Australia's BHP Ltd. in 1998, Anderson notes he faced similar balance-sheet pressures. BHP eventually raised its dividend and merged with another large company to create the world's largest diversified natural resources business. Anderson, 58, retired last year and says he has "recharged his batteries" since then.

Several Wall Street analysts predict Anderson will shake up Duke's management team, a possibility he doesn't dismiss. "It's very difficult to come into an organization and not make some changes," he says.

Duke Crowns New Leader

The Layoff Package

Employee Advocate – DukeEmployees.com – October 9, 2003

There has been much speculating and conflicting information given out about the Duke voluntary (and involuntary) separation package. Executives first put out that only a few areas would be eligible to volunteer to be laid off. In a typical reversal of direction, a voluntary layoff package is being offered to over half of the employees.

There are a few kickers to the deal. Duke has sole discretion to accept or reject any layoff requests. And after the voluntary layoff, some employees may be given an “involuntary layoff opportunity.” At Duke, everything is an opportunity.

Different departments may have different plans. Here is the deal for PN: 545:

a. One (1) week of Base Pay per Year of Service, full and any partial, up to nine (9) Years of service, plus

b. Two (2) weeks of Base Pay per Year of Service, full and any partial, in excess of nine (9) Years of Service, plus

c. One (1) week of Base Pay for each $10,000, full and any partial, of annual Base Pay.

No Free Money from Duke

Employee Advocate – DukeEmployees.com – October 9, 2003

Some workers look at the Duke separation “benefits” as manna from heaven – free money. It may be a good deal for some employees, but recognize that it is not free money. Those who sign the waiver and release form are selling their right to bring a lawsuit against Duke Energy, forever.

In the past, employees have even signed away their right to file for compensation due to asbestos related diseases. Some attorneys have added a clause for employees that stated that claims for asbestos related illnesses would not be waived. That is no longer necessary. The new form does not limit asbestos claims.

But almost every other right to redress will be signed away. A senior employee can get about a year’s salary as a separation benefit. Many employees have suffered huge pension and health care benefit losses. If the corporations give back a small portion of what has been taken, in return for an agreement not to sue, the gain is locked in. Conversely, the worker’s loss is locked in.

Some employee rights are guaranteed by federal law, and cannot be signed away. Still, corporations continue to add these rights to the waiver agreements. If employees read the statement, and believe it, they will never take any action against the company. It this case, the corporations win again, by default. It does not matter if the agreement will not stand up in court as long as the employee believes it is valid, and never contests it.

Some employees will want to know if signing the waiver will preclude them from participating in any future cash balance pension settlements. Only an employment attorney could begin to answer that question. And the opinions would likely vary from attorney to attorney.

If a corporation had followed all the laws, and had never taken advantage of employees, why would such a waiver and release form even be necessary?

Older Workers Claim Discrimination



Social Security Number

[(Note: the term "Company" in this Waiver and Release Form includes Duke Energy Corporation and all subsidiaries and other affiliates of Duke Energy Corporation.

1. I understand that the Company has established "The 2003-2004 Duke Energy Corporation Severance Benefits Plan" (PN: 545) (the "Plan") for eligible employees who satisfy all of the Plan's requirements for entitlement to Plan benefits, including the execution of this Waiver and Release (or other waiver form acceptable to the Company). The Severance Payment and other benefits of this Plan will be provided at Company expense and are in addition to the regular salary and benefits package to which I am otherwise entitled as an employee.

2. I acknowledge that I have received and read a copy of the Plan document and Summary Plan Description. I also acknowledge that the Company has provided me with written information identifying: a) any class, unit, or group of individuals covered by the Plan, any eligibility factors for the Plan, and any time limits applicable to the Plan; and b) the job titles and ages of all individuals eligible or selected for the Plan, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the Plan.

3. I understand that, under the terms of the Plan, if I sign this Waiver and Release, I will receive a Severance Payment in an amount equal to *******************, subject to withholding for taxes and other lawful purposes, as well as outplacement services, up to Two Thousand Six Hundred Dollars ($2,600.00) in education reimbursements, and I will be eligible for COBRA or retiree group health premium payments made on my behalf for up to six (6) months. I understand that in order to receive the Severance Payment, as well as the other benefits described in this paragraph, I must enter into and sign this Waiver and Release.

4. I understand that I have until *******************, 200__, a date that is at least forty-five (45) days from the date I received this form, in which to consider whether to sign and enter into this Waiver and Release. I understand that I may not sign and enter into this Waiver and Release before the termination of my employment with the Company. I understand that in order to become entitled to the benefits under the Plan, I must return this signed Waiver and Release to ______________________________ by that date *******************, 200__.


5. In exchange for my becoming entitled to receive the Severance Payment and other benefits under the Plan, I voluntarily and knowingly waive any and all claims and rights which I might have arising out of or related to my employment with the Company and/or the termination of my employment with the Company. I also voluntarily and knowingly release the Company, its directors, officers, employees, agents, and other representatives from any and all liability and damages arising in any manner whatsoever out of my employment and the termination of that employment. This Waiver and Release includes, but is not limited to, claims and rights under:

a) the Civil Rights Act of 1991 and Title VII of the Civil Rights Act of 1964, as amended;
b) the Age Discrimination in Employment Act of 1967, as amended (29 U.S.C. § 621, et seq., "ADEA");
c) the Older Workers Benefit Protection Act of 1990, as amended;
d) the Americans with Disabilities Act;
e) the Family and Medical Leave Act;
f) (if applicable, list specific state law);
g) any other federal, state, or local law or regulation, including any law or regulation concerning discrimination based on race, sex, color, religion, national origin, citizenship, age, handicapped or disabled status, and Vietnam era veteran's status;
h) the Worker Adjustment and Retraining Notification Act or any other federal, state, or local law or regulation relating to notification of any plant or business closing or employee layoff; and
i) any express or implied term or condition of my employment with the Company, including any claim for wrongful discharge, breach of contract, or claim for compensation.

This Waiver and Release does not waive rights and claims that may arise after the date I sign this form, nor does it waive any rights and claims which I might have against the Company arising out of my possible exposure during my employment with the Company to asbestos at a facility or facilities owned by the Company.

6. I understand that by signing this Waiver and Release, I do not waive and release any rights and claims to any benefits under the terms of any employee retirement benefit plan in which I am a participant and in which I have vested. I further understand and acknowledge that any distributions to which I might be entitled by virtue of being vested in any employee retirement benefit plan in which I am a participant shall be made in accordance with the terms of the respective plan.

7. I understand that nothing in this Waiver and Release prohibits me from reporting any suspected instance of illegal activity of any nature, any nuclear safety concern, any workplace safety concern, or any public safety concern to the United States Nuclear Regulatory Commission, the United States Department of Labor, or any other federal or state governmental agency. I further understand that this Waiver and Release does not prohibit me from participating in any way in any state or federal administrative, judicial, or legislative proceeding or investigation.



10. I sign this form signifying my agreement with the understandings and acknowledgments listed and with the intent to be bound by this Waiver and Release and with the intent that this Waiver and Release will be binding upon me, my executors, administrators, heirs, successors, and assigns.

Date signed Signature

Print Name


____________________________________ __________________________________ Date received by Person receiving on behalf of Duke Energy Corporation Duke Energy Corporation

Duke Crowns New Leader

TheStreet.com – by Melissa Davis – October 8, 2003

(10/7/03) - Duke's disgraced ruler has been toppled from his throne.

After six years at the helm -- the final two under fire -- CEO Richard Priory is passing the crown to a former colleague.

Paul Anderson, who briefly served as Duke's president and operating chief after a big merger in 1997, has been tapped to serve as Duke's turnaround CEO. Anderson has already been credited with rebuilding PanEnergy, the company that merged with Duke, and a foreign natural resources group.

"I'm very excited about coming home to Duke Energy," Anderson during a conference call with reporters late Tuesday. "I still believe it's the best energy company out there. I'm confident Duke has the resources ... to lead the energy industry out of the [current] slump."

Anderson has spent the past five years rebuilding BHP Bilton, an Australian company that ranks as the largest diversified natural resources group in the world. He declined to offer a turnaround plan yet for Duke -- saying he needs a few months to study the company first -- but he did pledge to focus on strengthening the balance sheet and the company's portfolio of assets, as he has done at other troubled firms in the past.

"I've been away for five years," he reminded. "I don't know the current situation nearly well enough to comment" on specifics.

Starting at the Top

Anderson did point to his own strategy at BHP as a possible road map, however.

There, Anderson began his reign by meeting extensively with other members of senior management before launching major changes. He hinted that management itself may be subject to change.

"It's very difficult to come into an organization and not make some changes" to personnel," he said. "But [the changes] will be thought out, and they'll be done without a lot of trauma."

News of Anderson's own appointment came just one day after TheStreet.com raised the possibility of a looming shake-up in Duke's executive suite. Before then, TheStreet.com began noting Priory's unusual absence from recent public events. It went on to report that Priory -- and, to an even greater extent, CFO Robert Brace -- had become huge liabilities in the eyes of some investors.

Darkness on the Edge of Town

Meanwhile, Duke kept its employees in the dark about the coming change. Questioned by a worker about Priory's absence from the company's latest conference call -- which according to many accounts was mishandled by Brace and President Fred Fowler -- Duke offered only a vague response.

"Since being named president and chief operating officer last year, Fred Fowler regularly shares employee meetings and other communication opportunities with Rick Priory," management replied. "This was one of those instances."

Duke went on to defend senior management -- and Brace in particular -- as recently as last week.

As it turns out, Priory had apparently been planning to step down for a while. Anderson told reporters Tuesday that Duke's board first approached him about taking over "some time back" and seriously began negotiating with him at least a month ago.

Still, Duke continued to publicly support senior management -- and Brace in particular -- as recently as last week. "Robert Brace has played a leading role in developing and executing on [Duke's] plans, and is a key part of the Duke Energy senior management team that is committed to achieving future growth," Duke said in response to questions raised by TheStreet.com about Brace's performance.

Clock's Ticking

Although Brace remains employed, some Duke insiders believe his time is about to run out. Brace's contract could expire as early as year's end, when Priory himself will be packing up to leave. Priory is officially retiring Nov. 1 at the relatively young age of 56. But he has agreed to assist the new CEO during a transition period scheduled to end early next year.

Some insiders believe both Priory and Brace could hit the door simultaneously. And they point to Priory's management picks -- particularly Brace and former merchant energy leader Harvey Padewer -- as major failures that helped boot him from the company.

The trio, led by Priory, took Duke down a disastrous path that left the company with huge sums of debt instead of the soaring unregulated profits the company had expected. For months, Duke has been in "survival mode" as it scrambles to rebuild its balance sheet and its tattered reputation.

With profits falling and regulators probing, Duke faces clear hurdles as Anderson takes over the reins.

"We must ... reassure the regulators that we value our franchise and appreciate the attendant obligations," Anderson acknowledged. "Our challenge is to regain the confidence of our employees, our investors, our customers and the communities in which we operate."

But Anderson views Duke's situation as manageable. Unlike the market in general, he still has faith in the unregulated businesses that have landed Duke in hot water. He also supports the dividend that makes Duke so attractive to some. Although he stopped short of promising that the rich dividend will continue -- saying he needs to evaluate the company first -- he pointed out that BHP planned to cuts its dividend upon his arrival but wound up raising it in the end.

"I need to get the facts around me before I make a definitive comment," he said. But "I feel dividends are pretty important."

He's a Rich Man

Priory, for one, shouldn't need the dividends going forward.

By now, he's a multimillionaire. Just last year -- Duke's worst in recent history -- Priory picked up $5.94 million in total compensation. And he could be entitled to as much as twice his salary and target bonus, as well as other severance perks, when he departs the company.

Rick Priory is Out!

Previous TheStreet.com article:

Duke's Decline Sours Some on Executive Suite

Rick Priory is Out!

Employee Advocate – DukeEmployees.com – October 7, 2003

Duke Energy announced to employees today that Rick Priory is out and Paul Anderson is in.

Paul M. Anderson will become the new Chairman and CEO of Duke Energy. Mr. Anderson came with the package when the old Duke Power purchased PanEnergy in 1997. He became the President and COO of the newly formed Duke Energy.

One could get the impression that he did not relish being second banana to Rick Priory. At any rate, he left the company in 1998 for greener pastures. Now, he is back as top banana, and Rick Priory is being put out to pasture. Mr. Priory is retiring in early 2004.

Mr. Anderson assumes his new role on November 1, 2003. He was the chairman, president, and CEO of PanEnergy when the companies merged. He has a history of pulling companies from the jaws of death. Is there any wonder why he is now heading Duke?

Mr. Anderson said “I am honored to be returning home to Duke Energy. 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.”

He is starting out on the right foot. In talking of regaining confidence, he mentioned the employees first. Employees have been disregarded for almost seven years. Perhaps Mr. Anderson has the wisdom to know that without the employees behind him, he will go nowhere, fast.

Mr. Priory stated that he was going to retire at age 55, but “stayed for an additional two and a half years to help the company through a difficult period.”

The sentiment is appreciated. But really, he shouldn’t have!

It is interesting that Mr. Priory intended to retire at 55, while ensuring that most employees would have to work to 65 to regain their pension losses.

Mr. Priory said “I am proud that thanks to the diligent work of our employees, the business has established a solid foundation for the future. The energy marketplace has been tough, but I am confident that Duke Energy has the resources – hard assets, talented people and a respected history – to lead the industry forward.”

Duke does have a respected history, if the past seven years are disregarded.

The Employee Advocate hopes that Mr. Priory enjoys his belated retirement.

Duke's Decline Sours Some on Executive Suite

TheStreet.com – by Melissa Davis – October 6, 2003

Some people say Duke's biggest liabilities aren't the ones you'll find listed on the balance sheet. Instead, critics point to Duke's senior executive team as the major drag on the company. CEO Richard Priory's recent fade from the public scene has only added to the enthusiastic rumors about top management's possible demise.

But if Priory isn't a favorite among investors who have seen Duke shares lose half their value over the last two years, another senior leader is positively despised. The company's financial chief, Robert Brace, has become persona non grata to the point that his opponents claim his exit would lift a huge weight from Duke -- and generate an immediate bounce in the downtrodden stock.

If that sounds far-fetched, Duke watchers point out that that's just what happened when Brace left his last job. And they say hopefully that even if the company doesn't decide to shake up the executive suite from top to bottom in coming weeks, Brace's tenure could soon be over.

"Internally, people have always said that Brace was given a three-year contract when he was hired," said one corporate insider. "If that's the case, then his contract is about to run out."

Duke pointed to its latest proxy statement for information about Brace's contract, but the filing excludes any mention of the contract's length. The company did, however, offer words of support for its embattled CFO.

"Duke Energy is taking the tough financial actions that will enable the company to persevere through extremely difficult industry conditions and position the company for future success," Duke said in a prepared response for this story. "The actions include significant cost reductions throughout the enterprise and strengthening the balance sheet through asset sales and debt reduction. Robert Brace has played a leading role in developing and executing on those plans, and is a key part of the Duke Energy senior management team that is committed to achieving future growth."

Whatever happens, the current chatter points out the hurdles Duke faces as it seeks to win over anxious investors. On Friday, the stock added 7 cents to $18.07.

Straightening Things Out

Brace joined Duke at the end of 2000, a year before Enron's bankruptcy sent the entire merchant energy sector into a tailspin. At that time, Duke was still spending huge sums -- much of it borrowed -- to expand its unregulated operations as a way to rev up profits. Indeed, the CFO position came open that year only because Duke decided to shift long-timer Richard Osborn out of the post and into the newly created role of chief risk officer as the company tilted its focus heavily toward the deregulated side of the business.

Almost immediately, Duke placed heavy bets on a scenario -- relying on solid economic growth and high power demands -- that never really materialized. At the time, even Priory acknowledged that Duke could run into trouble. "If we get the cycles right, we're successful," he told The Wall Street Journal in July 2000. "If we get the cycles wrong, we're less successful or unsuccessful."

Still, Duke marched ahead with its bold bet on the future.

"You want to be long electricity for at least the next two years," James Donnell, former president of unregulated Duke Energy North America, told The Wall Street Journal at the time.

But the trading boom ended the following year. And the sector had succumbed to an unprecedented meltdown by 2002. Clearly, Duke gambled big and lost. By now, the company has sunk some $8 billion -- equal to roughly one-third of its total debt load -- into power plants that have only glutted some markets with capacity.

For a while -- as companies like Dynegy and Williams skidded toward bankruptcy -- Duke did seem to have its own problems under control. But Duke couldn't avoid the backlash forever.

"Up through the second quarter of 2002, we basically were saying, 'All is well, and we're well-diversified, and what happened to the others won't happen to us,'" a Duke insider said. "Then all of a sudden, in September of 2002, we come out with revised earnings guidance. And then Priory & Co. declares things aren't great, and they don't know when they will improve."

Unlike many in the sector, both Priory and Osborn have managed to overcome huge missteps -- costing the company billions -- with their fancy jobs intact. Nevertheless, some critics have taken even heavier aim at an executive who was an ocean away when Duke first adopted its failed strategy.

But then, Brace has been a favorite target before.

Target Practice

In the fall of 2000, British Telecom's battered shares suddenly jumped from near a two-year low.

Brace had just quit his job as longtime finance director of the far-flung telecom. News of his departure added a quick 7% to BT's share price. But Brace -- who'd escaped repeated calls for his ouster before finally stepping down -- left behind a weakened company that scarcely resembled the solid BT of old.

Just a year before his departure, Brace was bragging about a BT finance division that Finance Director described as "highly regarded around the world." But Brace's popularity -- which had already taken a huge hit for BT's failed merger with MCI -- was headed for a fatal blow. In 2000, following a frenetic spending spree, BT seemed puzzled to find itself horribly in debt. During the final 18 months of Brace's decade-long stay as finance chief, BT in fact saw its nominal debt load explode to a staggering $40 billion. The company was now faced with shelling out more than $1 billion a year just to make interest payments at a time when profits were falling.

Brace fielded much of the blame.

"What a blow to Robert Brace," The Times of London wrote in October 2000. "The news that he is to be replaced as British Telecom's finance director had an instant, and dramatically uplifting, effect on the company's share price." Still, Brace quickly bounced back. Just three short months later, he'd landed the top finance post at a nontelecom company that was nevertheless about to follow a familiar telecom path into the deregulated world.

Braced for Change

In December 2000, Priory told the local North Carolina that Brace "helped lead BT's evolution from a slow-growth enterprise to a high-growth company that has expanded into new markets, not unlike the transition Duke Energy has made."

Unfortunately, the similarities between BT and Duke did not end there. Like BT, Duke has seen its profits slide -- and its debt load surge -- with Brace in charge of finances.

Recently, Brace even stumbled badly when just explaining the company's finances. Duke's own employees cringed at Brace's performance on the company's second-quarter conference call.

"This is very disturbing to me as an employee and a stock owner that our own leadership doesn't even know what's going on inside the company, especially when the company is in 'survival mode,'" an employee wrote to management last month. "Aren't these folks paid enough money to know what's going on around here, and aren't they accountable for not knowing? The rest of us are."

Brace ranks as the company's second most highly paid executive, trailing only the CEO. Although Duke withheld performance bonuses last year, the company did give Brace a $30,000 raise -- to nearly $580,000 -- in base pay. Meanwhile, Duke continues to back Brace's performance despite grumbling from within the company's own ranks.

"Robert Brace has expanded Duke Energy's disclosures to Wall Street during a period of intense scrutiny of the industry," the company stated. "Since his arrival in late 2000, Duke Energy has been a leader in disclosures regarding its merchant energy portfolio, sources of cash flow and projections of cash flow."

Still, even Duke seemed to recognize that Brace mishandled the latest earnings call. In a reply to the concerned employee, management acknowledged that Duke had tripped up when questioned about earnings guidance that seemed to include gains from asset sales.

"We recognized very quickly that we missed the mark on that call and didn't adequately answer some questions," management responded.

The reply went on to state that Duke had followed up with analysts to clarify its guidance. But at least one Duke insider expects more flubs to come.

"It's not just that we mucked up some earnings call," he said. "There's some fundamental reason why we're doing this sort of thing."

Previous TheStreet.com article on Duke:

Duke Dons Flip-Flops to Crush Costs

Voluntary/Involuntary Separations

Employee Advocate – DukeEmployees.com – October 1, 2003

Duke executives continue to mumble about voluntary and involuntary separations. They keep talking about focus. Never mind that your head is going to be whacked off; just keep working hard.

Executives have said that employees have not retired at the expected rate, and therefore a layoff is necessary. Employees have not been retiring because the reduced cash balance pension amounts are not enough to live on. Many employees will have to work until their last wheeze, or until they are involuntarily retired.

Some executives are implying that present conditions are the fault of employees. They claim that health and other benefit costs are increasing. Even after drastically cutting pensions and cutting off promised health care at a certain age, Duke is still whining about the cost of benefits.

The cost of labor is the only cost that Duke ever seems to identify. Duke is always oblivious to management costs. When lamenting about cost, the executives never mention the millions of dollars that they have taken out of the company, in the form of stock options. Executive county club memberships, $100,000 moving bills, and the cost of maintaining a fleet of corporate jets are never mentioned as contributing to costs. Millions of dollars blown while chasing deregulation and trying to be like Enron is never mentioned. The staggering debt from buying plants all over the world is never mentioned as a cost contributor.

There are refueling outages going on at some Duke nuclear plants. Some worker are in refrigerated areas of the plants that are so cold that arctic suits must be worn. Others are working in steaming hot areas. Some are doing dangerous work with heavy loads suspended over their heads. Many are exposed to radioactive particles, and are scrubbed repeatedly in an effort to decontaminate them. Some are working in areas so tight that they must crawl to get into them. Other must climb to reach the work areas. Some people are working 12 hour night shifts. The 12 hours shifts often turns into 16 hour shifts, or more.

During all of this, executives keep harping on various kinds of separations and preaching about remaining focused. Management expects employees to give their all to Duke, even as the executives scheme to reduce their benefits even more, and layoff even more employees.

A horror movie once showed a mad doctor who continued to drain blood from a man. His experiment was to see just how much blood could be drained from him before he died. It appears that Duke is conducting the same experiment with the company – and the employees.

Management cannot understand why there is a morale problem.

Duke and the California Recall Election

Employee Advocate – DukeEmployees.com - September 27, 2003

A Duke Energy power plant has become an issue in the California recall election circus, according to the San Luis Obispo Tribune. If there is controversy, Duke can usually be found in it somewhere.

Lt. Gov. Cruz Bustamante is one of 135, or so, contenders for governor. He opposes using seawater to cool the Morro Bay Power Plant. Mr. Bustamante sent a letter to the Energy Commission, urging it not to allow Duke to use seawater for cooling. He stated “As chair of the State Lands Commission, I fear allowing Duke Energy to water-cool the Morro Bay plant will set the precedent for other future projects throughout the state…California should not allow the corporate interests of out-of-state companies to use inefficient and outdated technology -- like the once-through seawater cooling -- to make a profit at the peril of our environment and economy.”

Several state agencies and environmental groups also oppose Duke Energy’s plan to use ocean water to cool the plant.

Duke’s position is that if it cannot run things the way it wants, then the plant will not be upgraded. There are other ways to cool the plant, but they cost more money.

People are opposing the cooling plans, because of the damage to aquatic life.

Previous Morro Bay article:

Duke California Plant Controversy

A Chance to Lay Yourself Off

Employee Advocate – DukeEmployees.com - September 25, 2003

Duke Energy is seeking employees to voluntarily resign their jobs, according to the Charlotte Business Journal. Duke wants to cut costs to cover for executive blunders. Whacking off employees’ heads is an all time favorite cost cutting method. Duke is soliciting employees to stick their own heads into the guillotine.

You know what will happen if enough workers do not volunteer for decapitation. Heads will likely be forcibly removed. A Duke spokesperson would not say how many jobs would be eliminated.

The carrot for head severance is, quite naturally, a severance package. Employees that are eager to leave Duke, may be disappointed. Only some sections of the company will be offered a voluntary separation package. Duke once opened voluntary separation to all employees and some whole department were wiped out. Duke lost workers in areas that it could not afford to lose people. Duke quickly rescinded that offer. Now, only selected groups have the chance to volunteer to leave the company.

Corporate staff and human resources employees will be offered a chance to volunteer.

The program went into effect last week. It will be open for two more weeks. The goal is to eliminate $100 million in cost during the next year.

Duke to Pay for Damage to Customer

Employee Advocate – DukeEmployees.com - September 25, 2003

The Charlotte Observer reported that Duke Power customer, Tom Ozment, is outraged by power spikes. He said the spikes damaged two air conditioners in his home.

He filed a claim with Duke for the equipment damage. Duke settled for $1,700, after three months of haggling.

Mr. Ozment is on a mission to locate others who could be victims of power spikes. He wants to share information on how to collect for the damage. He said “I want everyone to know.”

A Duke spokesperson refused to reveal how much Duke pays annually in power surge claims.

If you have a power spike claim against Duke Power in Charlotte, call (704) 594-9400. If you live outside of Charlotte, call the customer service number in the phone book.

If you do not file a claim, Duke will pay you nothing for the power spike damage to your equipment.

Duke Energy's CEO's Pay Heads North

Bloomberg.com – by Graef Crystal - September 20, 2003

Graef Crystal is a columnist for Bloomberg News. The opinions expressed are his own.

Sept. 17 (Bloomberg) -- It seems as though the pay of Richard Priory, chief executive officer of Duke Energy Corp., is heading North on I-77, one of the interstate highways that services his Charlotte, North Carolina, headquarters, while his performance is heading South, just across the median strip.

For the year 2000, according to my estimation, Priory earned total pay of $4.9 million. That ranked him No. 5 on the pay chart compared with the chief executives of seven other major power utilities with 2002 total revenue in the $10 billion to $30 billion range. (Duke's 2002 total revenue was $15.7 billion.) The company's total return for that year was a whopping 76 percent, sufficient to rank it as the third best performer in the group. So for the year 2000, pay lagged performance.

Duke's board quickly made up for that imbalance by catapulting Priory's pay to $8.5 million in 2001, a 74 percent increase. That moved Prior's pay ranking among the utilities to No. 3 from No. 5 the year before.

Unhappily for shareholders, Duke's total return for 2001 sagged to negative 5.4 percent, ranking the company six out of eight.

Up to No. 1

Now we come to 2002. Here, Priory's pay rose to $9.1 million, a relatively small 7.6 percent increase for a CEO (though an awesome increase for your average U.S. worker). Still, that was sufficient to propel him into the No. 1 pay spot, where he earned 39 percent more than the median pay and 17 percent more than the pay of the second highest-paid CEO. But 2002 was another bad year for shareholders, with total return plummeting to negative 48.2 percent and ranking Duke No. 7 out of eight.

Based on this pattern, Duke's board compensation committee qualifies for the finals for my ``Unclear-on-the-Concept Award.'' You're supposed to reward for performance and penalize for non- performance, not the other way around. Or, to put it another way, your pay and performance should be travelling on the same side of I-77 and more or less at the same speed.

Viewing his performance over his entire tenure as CEO, which began on June 19, 1997, Priory delivered a total return of negative 0.4 percent a year between June 18, 1997, and this Sept. 15. That compares with a positive 3.6 percent a year return on the Standard & Poor's 500 Index and a positive 1.9 percent return on the S&P 500 Utilities Index.

Bonus Goes to Zero

In 2002, there was some recognition given to Priory's non- performance, because his bonus dropped to zero from $2.2 million the year before.

That cut was more than counterbalanced by an award of $1.7 million in free shares and by a payout of $2.2 million under a long-term incentive plan.

It seems, unfortunately, that the compensation committee is busy at work again. In February 2003, less than two months after the fiscal year began, Priory was handed new options on 490,800 shares, as well as 155,710 free shares. Depending on when in the month the grants were made, they have given him a bang-up start to 2003, with estimated present value ranging from $3.4 million to $4.2 million.

Priory Versus Other CEOs

I also compared Priory's pay in 2002 to that earned by 45 CEOs running non-utility U.S. companies in the $13 billion to $19 billion range. Here, Priory ranked at the:

-- 61st percentile in base salary, meaning that his salary was higher than all but 39 percent of the companies in the database;

-- 14th percentile in the sum of salary and bonus, a ranking mainly brought about by his zero bonus for 2002;

-- 73rd percentile in the sum of all pay elements, except for stock options and

-- 45th percentile in the sum of all pay elements, including the estimated present value of stock options.

(Data for the above industry and non-industry comparisons were obtained from Equilar Inc., an independent provider of executive pay information.)

Deregulation's Impact

Before utility deregulation commenced, a CEO in that industry earned only a base salary and the opportunity to receive a decent pension when he retired.

But after deregulation was introduced, utility industry CEOs began to see themselves as Errol Flynn-like swashbucklers, and started to move their pay up smartly.

My examination of Duke's 2002 annual report suggests that 31 percent of the company's revenue was derived from regulated activities, as well as 56 percent of the company's earnings before income taxes.

So Duke is still fairly heavily regulated, which raises the question of whether Priory's pay rankings against non-regulated companies of similar size are too high.

Duke's proxy statement filed this past March 28 contains one other nugget: The company paid Priory $100,001 in connection with a cross-town relocation that was ``required, as directed and approved by the Board of Directors for security purposes.''

A $1 Move?

Duke spokesman Terry Francisco told me that Priory was ``instructed by the board of directors to move to a more secure location. He was earlier living on a main thoroughfare that didn't provide the level of security he is receiving right now.'' He went on to say that there had no been no threats to Priory's security, but that after Sept. 11, the board ``felt we needed to ramp up security for the chairman.''

My first thought was that Priory had moved in with Vice President Dick Cheney. I could just see the two couples playing Bridge every evening after dinner.

My second thought was that Priory's move was made to protect him from customers or shareholders, more likely, both.

Bloomberg News reporter Chris Burritt travelled from his home base in Greensboro, N.C., to Charlotte to inspect Priory's new digs. There is no 24/7 human guard; there is, rather, a gate and a card reader. Francisco says the company itself made some further enhancements to Priory's security.

As to that $100,001, it sounds like a lot for a cross-town move. Francisco explained that company policy is to provide a relocating employee with one month's salary for ``miscellaneous expenses.'' In Priory's case, that would have been at least $92,000. I bet you can do a lot of miscellaneous things for $92,000.

The members of Duke Energy's board compensation committee are:

-- Leo Linbeck, chair, chairman, Linbeck Corp., a holding company for four construction firms

-- William Esrey, former CEO, Sprint Corp.

-- George Johnson, CEO, Extended Stay America Inc.

-- James Martin, corporate VP, Carolinas HealthCare System

Duke - Page 7 - 2003