Duke Energy Corporation History

Company Perspectives:

Duke Energy Corporation's diverse business units combine natural gas and electric assets in North America, South America and the Pacific Rim. Our engineering, construction and operating skills serve energy producers and consumers around the world. Our portfolio of energy services covers the energy value chain. Our technical, engineering and environmental services are extended to a wide range of energy and research facilities in more than 50 countries. Our diversified operations engage in real estate development, communications and water utility services.

Company History:

The largest publicly owned gas and electric utility in the United States, Duke Energy Corporation serves roughly two million electric customers in North and South Carolina and gathers, processes, and distributes natural gas in the Midwest, Northeast, and Gulf Coast. Duke Energy was the result of the 1997 merger of Duke Power Company and PanEnergy Corporation, a $7.7 billion deal that married Duke Power's electric business to PanEnergy's natural gas business. The merger, which was initiated by Duke Power, tripled revenues and transformed Duke Power from a regional electric utility into the international energy services giant that Duke Energy represented in the late 1990s. On the electric side of the business, Duke Energy served its customers in the Carolinas through coal, gas, and nuclear power-generation plants. The company's natural gas assets included more than 37,000 miles of pipeline. Duke Energy also was involved in a number of joint ventures, which spread the company's interests into a diverse range of businesses, including wireless telecommunications, residential and commercial real estate services, and international energy development projects.

Founder and Company Origins

Duke Power owes its name and origin to James Buchanan (Buck) Duke, the hugely successful founder of The American Tobacco Company. In the tradition of Rockefeller and Carnegie, Duke turned his family's modest business into a vast cartel wielding monopolistic control over the entire tobacco industry, until, like Rockefeller's, his organization was formally dissolved through antitrust action in 1911.

Duke was born in 1856 to a farming family outside Durham, North Carolina. His father's small farm and livestock holdings were ruined during the Civil War, leaving the family no choice but to peddle a barn of tobacco unnoticed by the looting soldiers. The tobacco was of the variety now known as bright leaf, a then-recently developed, mild, golden leaf grown in the Durham area and soon to become widely popular under the Bull Durham label. Young James Duke began selling tobacco with his father at age nine and never stopped; the family's bright leaf sold well, and the Duke business grew rapidly. Along with his father, Washington Duke, brother Benjamin, and half-brother Brodie, Buck Duke worked day and night to make the family's Pro Bono Publico brand of tobacco competitive with the Bull Durham leader, but as late as 1880 the Dukes remained a profitable also-ran in the booming bright leaf business.

James Duke was an ambitious young man, and in 1881 he shifted to the manufacture of cigarettes, a new and not yet fashionable form of tobacco use. Armed with a number of efficient automatic rolling machines and the excellent tobacco of his native area, Duke became a national power in the cigarette business within a few years. Relocating to New York City, Duke gained some 38 percent of the nation's cigarette sales by 1889 and in the following year engineered the formation of The American Tobacco Company, merging W. Duke Sons & Company with the four leading cigarette makers in the country. During the following two decades Duke made American Tobacco the core of what came to be known as the tobacco trust, a network of interlocking corporations controlling about three-fourths of the U.S. tobacco business. Duke became an extremely wealthy, powerful, and well-known figure in U.S. business.

Among his myriad other ventures, Duke became interested in the 1890s in the future of North Carolina hydroelectric power. Electrification was slow in coming to the rural Piedmont, an area of central North Carolina and western South Carolina, but several early investors, including W. Gill Wylie of South Carolina, had begun harnessing the power generated by the many Appalachian mountain rivers coursing through the area. Duke saw the potential value of electricity to the local textile industry, in which he and his brother Ben already had extensive interests, and in 1898 the brothers began buying Piedmont river properties for later development. Duke also met Wylie and agreed to back his existing electric projects, but it was not until 1904 that the tobacco tycoon took a serious interest in the business of power.

In that year Duke, Wylie, and Wylie's chief engineer, William States Lee, met in New York to discuss the future of electric power in the Piedmont. Impressed by Lee's detailed plans for a series of hydroelectric plants along the Catawba and Yadkin Rivers, Duke matched a $50,000 investment of Wylie's, and the two men formed The Southern Power Company in June of 1905. Southern Power, incorporated in New Jersey and capitalized at $7.5 million, would be the holding company for Duke and Wylie's power assets, which at that time included extensive tracts of land, several power stations, and manufacturing facilities. By 1907 Southern Power was operating two full-fledged electric plants, one at India Hook Shoals and the other at Great Falls, both in South Carolina. Three years later the company created a subsidiary, Mill Power Supply Company, to purchase, manufacture, and sell various types of electrical equipment.

Duke's investment in Piedmont power was not limited to the millions he poured into Southern Power, however. As he had in the tobacco business, Duke went into power expecting to change the face of the industry. Not only would he bring electricity to the Piedmont, he and his brother Ben also would bring the textile factories that would buy the electricity, in that way beginning an industrial revolution in the area with Duke power as its indispensable base. He and Ben made countless investments in new and existing textile mills, offering the financial backing of the mighty American Tobacco Company to any mill owner who would buy power from the Dukes. Many of them did, their mills prospering with the efficiencies made possible by electrified spindles. The Dukes would then sell their stock to buy into another mill and thus keep the expansionary cycle rolling. By this method the Dukes were responsible, in large part, for a surge in Piedmont textiles, where, by the early 1920s, fully one-sixth of all U.S. spindles were powered by Duke generators. Duke Power Company, as the firm was known after the mid-1920s, supplied electricity to about 300 cotton mills, in many of which it held large shares of stock, and the Carolinas' textile industry rivaled that of Massachusetts for national leadership.

In 1911 Duke's tobacco trust was broken up by the U.S. Supreme Court (coincidentally, also the year in which Rockefeller's Standard Oil was dissolved), but the change had little impact on either Duke's fortune or the growing success of his power company. Along with its many textile industry customers, Duke Power began supplying electricity to private residences in the area, a source of revenue soon to be considerably expanded by the increasing number of electric appliances in the home. Mill-Power Supply Company, Duke's equipment subsidiary, took a leading role in the appliance revolution in the Piedmont, introducing electric irons, water heaters, and other inventions to the largely rural, conservative homeowners. Together with the universal shift to electric lighting, the growth in appliance use eventually would make residential service one of Duke's three main sources of revenue, the others being industrial and commercial. Once the electrical household was firmly established and most of the modern conveniences introduced, residential sales remained at the level of about 25 percent of total company revenue.

In 1923 W. Gill Wylie died, followed two years later by James Duke, leaving W.S. Lee as the company's leader. At about the same time, Duke Power began adding to its hydroelectric generating stations a series of larger and more powerful steam plants. The company previously had used steam generators only as auxiliaries, but with the increasing demand for electricity in the Piedmont, W.S. Lee decided to embark on a comprehensive program of steam construction. The Buck Steam Station, named after the company's late founder, went on line in 1927, the first of many steam plants that were later to dwarf the original hydroelectric network. In 1989 the latter consisted of 26 units that together generated only two percent of Duke's 13-million-kilowatt capacity.

The Great Depression years were difficult for many utilities, especially those that depended heavily on industrial users for their revenue. W.S. Lee's career as one of the country's top power plant engineers came to an abrupt halt in October of 1929, the crash and ensuing lean years ending all plans for future construction in the Piedmont. With industrial usage down, Duke Power sought to increase its residential sales by once more pushing the acceptance of household appliances and several times cutting its rates. In the midst of these hard times, Lee died in 1934 at the age of 63, bringing to an end the first generation of leaders at Duke Power. Lee's grandson, also called William S. Lee, later became chairman and president of the company. It was not until 1938 that Duke built another power plant, and not until after World War II that it regained its earlier rapid pace of expansion.

Post-World War II Expansion and Nuclear Development

The postwar years brought a resurgence of business and consumer activity in the Piedmont, as it did elsewhere in the United States. Duke immediately began revamping and repairing its system of plants and soon was to spend $200 million developing a number of new and highly efficient steam facilities. The two largest of these, Dan River and Plant Lee, were in service by 1952 and together added 320,000 kilowatts to the Duke Power grid; both plants were praised as being unusually well engineered. Duke Power always excelled at the construction of power stations, doing all of its own design, building, and maintenance. The company attributed to the experience thus gained the consistently high marks its plants have earned from industry analysts. In 1982, for example, six of the eight most efficient generating plants in the United States were owned by Duke Power; as of 1989, Duke Power's team of coal-fired stations had been ranked number one nationally for 15 straight years.

It was no doubt this tradition of engineering excellence that encouraged Duke to join with three other utilities in a 1956 venture called Carolinas-Virginia Nuclear Power Association. Even as they continued adding ever-larger steam plants, more than doubling the company's capacity during the 1950s, Duke Power engineers had become much interested in the long-term potential of nuclear energy as an alternative source of electricity. Carolinas-Virginia was formed to build a small, experimental nuclear generator as a first step toward the eventual construction of complete nuclear stations. Its Parr Shoals, South Carolina plant opened in 1962, the first nuclear facility in the southeastern United States and a generally successful conclusion to the years of planning required. Duke Power officials decided that, despite the evident environmental dangers inherent in the use of nuclear energy, its engineering abilities would allow it to shift its entire power grid over a number of years, from coal and water to nuclear without an unacceptable diminution of safety. Duke Power, like all other nuclear power utilities, often was faced with formidable opposition to its nuclear program. Scientists and the general public were alarmed by the possibility of radiation leaks and the more remote chance of explosion.

Steam construction continued apace, including the world's largest such plant located at Lake Norman, North Carolina, but in 1967 Duke Power received a permit from the Atomic Energy Commission to build the first of its full-scale nuclear units, the Oconee Nuclear Station. The proportion of electricity generated by nuclear energy at Duke rose rapidly, reaching 31 percent as early as 1975, and Duke Power's overall capacity approximately doubled during the same short span. To feed its massive coal system, in 1970 Duke Power bought four coal mines in Harlan County, Kentucky, creating a new subsidiary called Eastover Mining to operate the mines. Eastover soon became embroiled in a prolonged and bitter dispute with the United Mine Workers (UMW) union, which claimed that the Duke Power subsidiary was preventing its workers from joining their ranks. The union took out full-page ads in leading national financial newspapers urging investors to boycott Duke stock for the company's anti-union stance and an assortment of other alleged corporate misdeeds, including pollution and poor worker housing. To make matters worse, the economy was rocked by the OPEC oil embargo of 1973, inducing a recession just as Duke began the most intensive campaign of capital expenditures in its history, a ten-year, $6.6 billion program to run until 1982. In 1974 a belated rate hike approval from the North Carolina Utilities Commission buoyed the company, with sales in that year hitting $823 million and net income $103 million. The dispute with the UMW was settled eventually, and Duke Power later divested itself of the mines.

By 1977 sales again had jumped, to $1.3 billion, but Duke Power already had begun scaling back its plans for a wholesale shift to nuclear power. The 1979 accident at Three Mile Island further darkened the nuclear horizon; although Duke Power continued to bring on line the nuclear plants it had under construction, by 1985 it had canceled or postponed a total of six new units. The rising tide of opposition to nuclear power was especially painful for Duke Power, which had already gained a reputation for outstanding work in the nuclear field and whose chairman, William S. Lee, had been called the leading expert on nuclear power in the utility industry. The company did not initiate new construction on any nuclear units after the early 1980s, confining development to a massive hydroelectric pumped-storage station in South Carolina. Duke Power nevertheless remained an ardent supporter of nuclear power, which in 1989 supplied 63 percent of its total kilowatts. That year Lee was elected president of the new World Association of Nuclear Operators (WANO), an organization he was instrumental in creating. WANO provides a forum in which owner-operators of the world's more than 400 commercial nuclear reactors can meet to discuss safety and related technical issues.

Further evidence of Duke Power's continued commitment to nuclear power was its 1989 formation, with four other companies, of Louisiana Energy Services, a joint venture to build the nation's first privately owned uranium enrichment facility, capable of supplying 15 percent of the U.S. nuclear industry's uranium needs. Also that year, Hurricane Hugo swept through the Carolinas, interrupting service to 700,000 of Duke Power's customers and causing extensive damage to transmission lines and other company equipment. Repairs took up to two weeks of nonstop work by a crew of 9,000, but Duke Power's response to the crisis seemed to have been generally well received and the effect on its financial performance was negligible. In 1990 construction proceeded&mdashead of schedule--on Duke's $1.1 billion Bad Creek Hydroelectric Station. Also that year, Duke Power split its common stock two-for-one, to make the shares more accessible to individual investors, and sold Mill-Power Supply, whose business was too small to have a significant impact on corporate earnings.

1990s: Deregulation and PanEnergy Merger

Ranked in 1990 as the country's seventh largest public utility, Duke Power appeared to be situated to prosper in any future energy environment, which was a decided advantage given the fundamental changes that would sweep through its industry during the decade. The electric utility industry, like the airline, trucking, and telecommunications industries before it, was slated for deregulation. The common fear was that it would be a fitful transition, aping the trend established by other industries as they struggled to move from regulation to deregulation. The trucking industry, for example, provided justifiable cause for the concern among electric utilities facing deregulation. Of the 100 largest trucking companies in the country at the time of deregulation in 1978, only 38 were still in existence by the beginning of the 1990s, a precedent large utility companies such as Duke Power feared would be repeated. With history serving as a nagging reminder, the question of how a company responded to the forces ignited by deregulation loomed as a crucible for the future, and at Duke Power the responsibility for formulating an answer to that question fell to a new leader. The era of Lee's leadership was over.

Lee was succeeded in 1994 by William H. Grigg, a Duke employee since 1963 and the company's chief financial officer for the previous two decades. In several important respects, Grigg was the opposite of Lee. Lee was charismatic, possessing the type of personality that shined at social functions. Grigg was described as detail-oriented, known for spending 14 to 16 hours a day in his office, devoting his time to pouring over the practical details of business and pondering pragmatic solutions. Grigg was only four years away from Duke's mandatory retirement age of 65 when he was named chief executive officer, leading observers to speculate that the replacement of the visionary Lee with the more myopic Grigg merely gave the company time to groom a younger, more dynamic leader from within its executive ranks. Grigg surprised outside observers, however, by dispelling the perception that he was a caretaker appointed to maintain the status quo. Under Grigg's leadership, Duke Power made the boldest move in its history, completing an acquisition that ranked as the largest of its kind in the history of business. Grigg, few could disclaim, had inherited the scepter of a visionary and wielded it like no other before him.

The inexorable approach of deregulation prompted Grigg's uncharacteristic response. "I really believe," he stated, "that any electric utility that keeps doing what it's been doing is in a slow, downward spiral." From his vantage point, Grigg saw a need to consolidate to avoid the fate the majority of large trucking companies suffered in their postderegulation era. He declared to Forbes magazine in early 1995: "We plan to expand our business through acquisitions." He then attempted to follow through on that statement by examining a series of other electric utilities as acquisition candidates before considering a more profound move. In July 1996 he approached executives of Houston-based PanEnergy Corp. about working together, without specifically stating his intentions. PanEnergy officials surmised Duke Power was interested in a possible joint venture, but Grigg was envisioning a deal on a much grander scale. PanEnergy was the third largest natural gas company in North America, operating in 33 states through more than 37,000 miles of pipeline stretching as far west as Montana and north to Massachusetts. Grigg wanted all of PanEnergy, and he began working toward his goal of uniting the two companies to create an energy giant.

When it became apparent to PanEnergy officials that Grigg's "appetite was a little bigger than just a discussion of a potential joint venture," as one PanEnergy official termed it, a series of meetings ensued. As representatives from the two companies labored over the details of a merger, the negotiations were kept a close secret at Duke Power, referred to only as "Project Venus" or "Wayne." The last detail to be negotiated was the most staggering--the price--agreed to by both parties in late November 1996. The deal was valued at $7.7 billion according to a stock-swap to be completed once the merger was announced. With this last stumbling block cleared, Duke Power and PanEnergy executives checked into New York City hotels under assumed names, and then the secret became public knowledge. It was the largest merger of an electric utility and a gas company ever. The announcement stirred investor interest, with one analyst's comments characterizing the reaction: "Duke saw the future and realized it couldn't remain one of the world's best utilities by staying in the Carolinas. To grow earnings, they had to go out and become a big factor in the North American market. To succeed you have to be a complete player."

The merged companies became Duke Energy Corporation, a company with three times the revenue volume of Duke Power. Overnight, the old Duke Power was transformed from an electric utility with 1.8 million customers along the Interstate 85 corridor in North and South Carolina into a national energy services company--the "complete player" to which the analyst had referred. Grigg stepped down as chief executive officer once the merger was completed, paving the way for Duke Energy's first chief executive officer, Richard B. Priory. During the first six months of Priory's leadership, Duke Energy continued to move forward on the acquisition front, though on a far less ambitious scale. The company acquired three West Coast power plants from San Francisco's PG&E Corp. for $500 million. Although Priory was not planning on another multibillion deal before the end of the 1990s, he did intend to acquire parts of other companies, both domestically and abroad. As Duke Energy prepared for the 21st century, therefore, future acquisitions seemed highly likely.

Principal Subsidiaries: Duke Energy Group Inc.; Duke Energy Power SVC; DukeSolutions, Inc.; Duke Energy International; Duke Energy Trading and Marketing L.L.C.; Duke Energy Marketing Limited Partnership (Canada); Duke/Louis/Dreyfus L.L.C.; Algonquin Gas Transmission Co.; Nantahala Power and Light Company; Crescent Resources, Inc.; Duke Energy Corp.; Duke Engineering & Services, Inc.; Duke/Fluor Daniel, Inc.

Further Reading:

• Baldwin, William, "They Got the Power," Forbes, February 9, 1998, p. 14.
• "BHP Sells Stake in Eastern Gas Pipeline to US Giant," AsiaPulse News, December 23, 1998, p. 10.
• "CMS Energy to Buy Gas Pipeline Assets from Duke for $2.2 Billion," The Oil Daily, November 3, 1998, p. 3.
• Gray, Tim, "Energy to Burn: Though Never Considered a Visionary, Bill Grigg Pulls Off a Megadeal that Puts Duke Power in Whole New Light," Business North Carolina, July 1997, p. 32.
• Johnson, Leslie Williams, "Expansion into New England Gives Duke Energy a Competitive Edge," Knight-Ridder/Tribune Business News, October 17, 1997, p. 10.
• Maynor, Joe, Duke Power: The First 75 Years, Charlotte, N.C.: Duke Power Company, 1979.
• Shook, Barbara, "Duke Power; PanEnergy Plan Merger in $7.7 Billion Stock-Swap Agreement," Oil Daily, November 26, 1996, p. 1.
• Winkler, John K., Tobacco Tycoon, New York: Random House, 1942.

Source: International Directory of Company Histories, Vol. 27. St. James Press, 1999.

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