Federal authorities have pulled the plug on their investigation of Duke ( DUK) Power.

The Justice Department ended a yearlong probe of the giant utility without filing any charges against the unit or its employees. The government, which alerted Duke to its decision late Wednesday, began probing the utility after two state utility commissions determined the company had underreported regulated profits that -- when excessive -- can trigger a rate review.

The commissions, located in Duke's core markets of North and South Carolina, began questioning Duke's profits three years ago after a company accountant blew the whistle on bookkeeping practices that significantly lowered regulated earnings. Following an independent audit by Grant Thornton, Duke agreed to pay both commissions a relatively modest sum to settle the disagreement.

More than a full year after that settlement, Duke Power expressed relief on Thursday that the ordeal is finally over.

"We are pleased that this review is complete and that this issue is now behind us," said Duke Power President Ruth Shaw. "The U.S. Attorney and grand jury have done a thorough and professional review of the regulatory issues, spanning more than a year and over 110,000 pages of Duke Power documents. We are gratified that they concluded there was no basis for further action or review."

Defying a sectorwide slide, Duke inched up 11 cents to $21.71 on the decision.

Despite the ruling, Duke whistleblower F. Barron Stone still believes the company engaged in questionable behavior. He nevertheless expressed little surprise that the government had decided to drop its case.

"As I understand it, they needed to have irrefutable evidence -- and be certain of a conviction -- in order to move forward," Stone told TheStreet.com on Thursday. "I don't think the FBI opened up an investigation and examined 110,000 documents for kicks and giggles. But the question they had to ask was, 'Does this rise to the level of fraud?' Apparently, they weren't sure."

Still, Stone believes some justice still has been served.

"They had to give back some money," he pointed out. "Plus, they'll be watched with a much closer eye going forward. They shouldn't be able to pull any more shenanigans like they did before."

Led by turnaround CEO Paul Anderson, Duke is attempting to resolve old problems -- triggered in large part by a meltdown in the merchant energy industry -- and rebuild itself as a stable utility. It has, so far, delighted investors by keeping its rich dividend intact and promising to cut its merchant portfolio in particularly unattractive markets. To be sure, however, the company still faces hurdles.

Like many, Bernstein analyst Hugh Wynne questions whether Duke can realistically hit its earnings target this year. In fact, he predicts that Duke may not generate annual profits of $1.20 a share until 2006. Nevertheless, he says, the market is valuing Duke's stock as if the company might actually top its profit goal immediately.

"We note, moreover that Duke's aggressive price-to-earnings multiple rests on the assumptions that Duke's asset disposal and cost-reduction plans are executed successfully, and that shareholders suffer no dividend reduction or equity dilution as a result of rating agency pressure," wrote Wynne, who has an underperform rating and $18 target price on Duke's stock. "Based on our projections of earnings and dividends for the next three years, it appears Duke will remain unattractively valued relative to other utilities with lesser risk."

Banc of America Securities analyst Shelby Tucker has a higher rating -- but a similar opinion -- on the stock. He calls Duke his "least favorite" name in the utility sector and warns that challenges will continue for some time. He remains concerned about Duke's merchant energy business, in particular, even if the company manages to shed its money-losing power plants in the glutted southeastern U.S. market.

Like Wynne, Tucker expects Duke to miss its earnings target this year. He does, however, leave the door open for a positive surprise.

"The key assumption here is that the Southeast plants, which were recently put on the block, are maintained in the portfolio for the duration of the year," wrote Tucker, who has a neutral rating on the stock. "The timing of the sale would have significant ramifications for earnings, as the plants are a large drag, according to our analysis."

In the meantime, Tucker does expect management to hit its $1.20 profit target -- and possibly inch past it -- in 2005. Even Wynne sees profits rising, possibly hitting $1.40 a share, by 2007. But he remains cool on the stock for now.

"We continue to view the upside potential for Duke stock as limited in the medium term," he concluded.