Duke

(DUK) - Get Report

faces a long journey back to nobility.

Once a blue-chip company known for its reliable profits and dividends, Duke has regained some measure of stability since crowning Paul Anderson as its turnaround CEO. Most notably, the North Carolina energy giant has managed to keep its rich dividends intact while shedding billions of dollars worth of assets to pay down debt. But the company isn't exactly strolling on red carpet anymore.

After getting the royal treatment for months, Duke has seen its stock falter as investors fumble for new reasons to celebrate. By now, Duke has already sold its most troubled assets -- at a huge loss -- in an effort to reduce the risk profile of the entire company. But Anderson has promised investors more than "a sleepy utility" in the end.

Indeed, he actually suggested last month in announcing an earnings miss that Duke could soon begin to "selectively pursue growth opportunities." But one fixed-income analyst quickly sounded an alarm.

"The idea that Duke is considering growth, before undertaking the full 2004 as a year to solidify

as much as possible the balance sheet, is not a particularly positive development in our opinion," wrote Deutsche Bank analyst Robert Rubin. "Any move toward growth with the current cash build will lead us to an immediate downgrade."

Indeed, Duke has found itself in a peculiar position. It is far more leveraged -- and therefore riskier -- than the safe utilities that once appealed to income-minded investors. Yet it faces serious backlash from credit analysts if it tries to become a growth company again.

Duke's stock, down 45 cents Monday to $19.35, has fallen 14% since it set a 52-week high early last month.

Score Card

In recent weeks, Duke has delivered some big -- but not necessarily good -- news to investors.

It reported a 48% surge in first-quarter earnings that was due primarily to asset sale gains in Australia. But operating profits actually fell. Unlike some neighboring utilities, such as

Scana

(SCG)

and

Southern

(SO) - Get Report

, Duke saw demand for its regulated power decline as the economic slump continued, unabated, in the company's Carolina markets. Meanwhile, Duke Energy North America -- the company's unregulated arm -- swung to a huge loss in the quarter.

The unit, hit by yet another writedown of distressed power plants, posted a $521 million pretax loss in the latest period. All told, DENA reduced the value of its plants in the glutted Southeastern market three separate times before finally agreeing to sell them on the cheap earlier this month. The company expects to generate just $475 million in cash -- plus a little more than that in tax benefits -- for the eight merchant energy plants.

During a frenetic building boom, Duke spent between $500 and $700 per kilowatt to construct its merchant power plants. It now stands to collect less than $90 per kilowatt, however, for its Southeastern generation assets.

One Duke insider says he's not impressed.

"I think anybody could have sold those assets for 10 cents on the dollar and gotten the tax benefit," he said. "I'm not sure we're significantly better off than we were when Paul Anderson arrived. ... At the end of the day, we're basically a regulated company with a huge amount of debt."

Growing Pains

On Monday, however, Duke confirmed that it will seek out growth opportunities when appropriate. Spokesman Peter Sheffield pointed to Duke's "strongest businesses" -- regulated power, field services and gas transmission -- as possible areas of expansion. But he didn't rule out growth in the company's weaker divisions, either.

"Where there are opportunities for growth at DENA or in the international space, I'm sure those would be considered as well," Sheffield told

TheStreet.com

. But the decision -- for any portfolio changes -- will be "driven by whether it makes sound business sense."

Duke has already shed nearly all of the assets that it had targeted for sale this year. It sold its Australian assets -- at a nice premium -- and then followed up with the sale of its most distressed merchant plants this month. It has no plans for other major divestures, Sheffield said, although it might entertain reasonable offers for three mothballed power plants in the western U.S.

In the meantime, Duke expects to reap $2.5 billion for the assets it has already agreed to sell. Rubin, for one, hopes to see Duke use that cash to pay down debt and retain its "capital discipline" going forward.

For now, Rubin is willing to give Duke some credit for the company's recent progress. He pointed to "several positive developments," in fact, following the company's latest earnings release. He noted that the company had managed to pay down debt with cash from operations. He said Duke had already exceeded its asset sale goals -- even before shedding the eight merchant plants. And he even applauded the company's enhanced disclosures as it broke out, for the first time ever, profits from its real estate division.

But Rubin also fretted over two major issues. He said that DENA remains a significant drain on the company. And he challenged Anderson's assessment that Duke is now positioned for growth.

"We could not disagree more," Rubin stated. "While the company made some progress in the first quarter of 2004 from a debt-reduction standpoint, DENA remains a disaster, Duke Capital

DENA's parent remains over-leveraged and debt reduction/conservative capital deployment needs to stay the focus."

Rubin warned that Duke Capital's credit rating, in particular, could be at risk.

"We have continued to hold the view that being patient at Duke Capital made sense due to the changes in management and the issues at the unit," he wrote. But "only a continued focus on debt reduction at the Duke Capital unit ... will allow us to keep our lower BBB rating."

In contrast, Fitch actually raised its outlook on both Duke and Duke Capital from negative to stable following recent news of the company's asset sales. It currently rates Duke BBB-plus and Duke Capital BBB-minus -- or just one notch above junk status.

Meanwhile, most equity analysts remain cool on the company's stock. Although two analysts now recommend buying Duke, most continue to suggest holding -- or even selling -- the shares.