Duke's New CEO Is Turning Up The Juice

In olden days, maybe even as far back as 10 or 11 years, utility stocks paid healthy dividends and rarely sent investors' hearts fluttering. Then came the "new" utilities. They went easy on dividends, plowing cash instead into deregulated markets. But along came California's energy crisis, a scam called Enron (ENRNQ ), and stock-market losses grave enough to have sent any number of shareholders to an early reward.

A prime example is venerable Duke Energy (DUK ), whose stock had slid 74% at one point from a peak above $47. Now near $21, the stock is still hated on Wall Street, where just 3 of 31 analysts recommend it. But if you look out beyond this year, you may find the Charlotte (N.C.)-based company worth your while. Duke, it turns out, is fast becoming a new old utility.

RICHARD PRIORY, WHO LED DUKE into so-called merchant sales and trading of energy, gave way last fall to a new CEO, Paul Anderson. This is Anderson's second stop at Duke, which in 1997 bought the natural-gas company he headed, PanEnergy. He left the next year to lead BHP, Australia's natural-resources giant, which in 2001 merged with London-based Billiton. Anderson, who is 58, rejoined Duke in November. By Jan. 7 he had outlined its fresh start, including $3.3 billion in write-offs, debt reduction this year of at least $3.5 billion, and, to raise cash, the sale of some assets, notably power plants outside Duke's regulated service area. Is Duke fleeing these deregulated markets just as they scrape bottom? Perhaps, but after tax benefits, Anderson reckons these "assets are worth more dead than alive."

The tax losses are cash in the bank because Duke's mainstay units remain nicely profitable. As an electric utility in the Carolinas, Duke through 2003's first nine months posted $1.2 billion in operating earnings on $3.7 billion in revenue. With most of its generating capacity from either coal, nuclear, or hydro plants, the utility is little affected by rising oil or natural-gas costs. Yet higher natural-gas prices are benefiting Duke's gas-field services arm, which through Sept. 30 saw revenue jump 62%, to $6.2 billion. Earnings rose a bit faster, to $162 million. Likewise, Duke's extensive gas pipelines advanced smartly, delivering $1 billion in operating earnings on revenue of $2.3 billion. Overall, Anderson told me he thinks Duke may in the future grow at a sedate 4% to 6%. On top of that, Duke's $1.10-a-share dividend makes for a positively healthy 5.1% yield.

How secure is the payout? Anderson swears by it, noting that Moody's Investors Service recently affirmed Duke's credit ratings. More comforting may be two other considerations. First, there's Anderson's record. In his revival of PanEnergy, investors made out handsomely. From May, 1993, when PanEnergy sold stock to the public at $21.25, to November, 1996, when it agreed to merge with Duke for stock worth $48.17, its dividend rose 18%. BHP investors did even better.

Then there's Anderson's compensation package. Duke pays him no salary, just stock and options. Some are tied to performance goals and vest at various points, but Anderson agreed not to sell any before January, 2007. Meantime, the only cash he gets from Duke will be in dividends on his stock. Add it all up, and Anderson has lots of reasons to maintain the dividend, and ensure investors share his eventual reward.

By Robert Barker

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