Duke's Shrinking Act Having Little Effect

Duke ( DUK) is on a yo-yo diet.

Ever eager to win back Wall Street's faith, Duke has pledged to grow leaner. Indeed, the big energy company has announced major layoffs each of the past two years. But even after shedding thousands of employees, the company has seen its head count barely change. Today, Duke is, in fact, just 5% below its heaviest weight ever.

Duke pointed to a big merger in 2002 -- which added more employees than it has managed to trim -- as a reason for its current size. It also indicated that massive asset sales, carried out since that time, have failed to significantly lighten its load.

Still, Wall Street is counting on Duke to slash costs -- partially through head count reductions -- as part of a recovery plan being carried out by turnaround CEO Paul Anderson.

So far, investors have shown plenty of faith inAnderson's ability to save yet another troubledcompany. They pushed Duke's stock to a 52-week highthe same day that Anderson reassured analysts duringan upbeat meeting in February. One analyst, who isbearish on Duke's stock, actually questioned hisnegative stand after that particular conference.

"We walked away from the events with a greaterlevel of confidence that Mr. Anderson has an accurategrasp of what needs to be done to fully get Duke backon its feet," UBS analyst Ronald Barone wrote in earlyFebruary. "Feeling insecure about our projectionsgiven all the upbeat discussion at these meetings, wereturned to the office to further update our model."

In the end, Barone concluded that his originalprojections looked accurate and kept his reduce ratingand $18 price target on Duke's stock intact. Almost asan aside, he also recalled some company promises inthat same research note.

"Over the last several years," Barone wrote,"management mentioned that Duke's total head count hasbeen reduced by about 4,000 people, with furtherreductions coming."

But the company's own figures look far less flattering. On Wednesday, Duke added 9 cents, to $22.60.

Duke's Drift
Energy giant says it's cutting, but the staff isn't shrinking
Source: SEC filings

Magic Mirror

Duke began trimming away fat the year after itsmerger with PanEnergy -- a company once led byAnderson -- in 1997.

Its staff fell by 1,000 in both 1998 and 1999. Butit began to swell, along with the merchant energybusiness, in 2000. It then reached its most bloatedstate, according to numbers provided by Duke to TheStreet.com, during the merchant energymeltdown of 2002.

The company packed on 5,000 employees through a big merger with Westcoast Energy early that year. Its staff totaled 25,000 -- up 20% in just three years -- as 2002 drew to a close.

But the company itself saw a thinnerfigure in the mirror.

"To manage the impact of the merchant downturn anda sluggish economy, we have cut costs and downsizedacross the enterprise," former CEO Richard Priory toldthe market in January 2003.

The company recorded $70 million in 2002 severancecharges -- including $18 million for executives --even as its overall staff expanded. It then promisedfurther progress in 2003.

"We have realigned our businesses to addresscurrent market realities and restructured ourmanagement team to lead effectively through thesetough times," Priory announced as 2003 kicked off."Our watchword in 2003 is discipline."

Priory reassured the market halfway through theyear.

"We are executing on the strategic directives welaid out in January and operating our businesses withdiscipline and efficiency," he stated. "Duke Energy isbecoming a leaner, stronger and more agilecompetitor."

But the company would have to deliver more. LastOctober it hired Anderson to replace Priory andpromised to cut costs by an additional $200 millionannually. It also announced new severance chargestotaling $138 million to cover expenses for employeesit had already shed.

At the same time, however, Duke still pegged its global workforceat 25,000 -- even after billions of dollars of asset sales. It did, however, promise to cut 2,000 people from that total. And it went on to celebrate its progress in a conference call lastmonth.

"The reduction in employee head count has exceeded4,000 since late 2002," Duke Treasurer Myron Caldwellstated during a recent conference in the company'shome state of North Carolina.

A net reduction of that size should have left Duke with a staff of just 21,000 -- its leanest ever since Duke became the global energy company that it is today. But Duke's latest annual report, filed just a few days after Caldwell repeated his claims in mid-March, shows otherwise. Even after all the past layoffs and severance charges, Duke still needs to trim hundreds of jobs to hit its workforce target of 23,000. (The company said Thursday that its current employment level is 22,200.)

Anderson already knows that investors are countingon him to meet the company's goals.

"He acknowledged that after first working tostabilize the company, the next step is to regain theStreet's confidence by fully delivering on 2004expectations," Barone noted.

Conflicting Views

Some analysts have already detoured away from thebearish majority and chosen to look on the brightside.

Kit Konolige of Morgan Stanley sounded decidedlyupbeat after reading Duke's recent annual report. Hedetermined that some smaller asset sales, coupled withDuke's big divesture in Australia, had already pushedthe company past its goal for all of 2004.

"These sales were not announced and likely presentupside to consensus thinking regarding Duke's 2004debt paydown and its timing," wrote Konolige, who hasan overweight rating and a $24 price target on Duke'sstock.

Last week, CIBC analyst Matthew Akman followed byinitiating coverage on Duke with an outperform rating.Akman, who values Duke at $25 a share, believes thestock deserves to trade at a premium because of the company'sfuture earnings potential, its generous dividend andits "premium" regulated assets. He is, however,banking on a power market recovery that may notmaterialize anytime soon.

"We think that the consensus outlook for U.S.power markets is too negative," Akman explained. "Therapid pace of economic growth and power plantcancellations are accelerating the move back toequilibrium."

Akman is convinced that Duke Energy North America,the company's money-losing merchant division, will atleast break even within the next three years. But hehints that Duke's stock could suffer if he is wrong.

"Upward movement in Duke shares now depends on asignificant earnings recovery," he stated. "DENA holdsthe key to such a recovery, because the regulatedpipeline and utility businesses will probably generaterelatively modest growth."

In the meantime, Barone cannot get excited. Heeven questions why others around him can.

"We believe investor psychology continues to runwell ahead of itself on this name," Barone wrote in February. "We continue to view its shares as overvalued on virtually every valuation parameter and thuscontinue to suggest caution at current levels."

As originally published, this story contained an error. Please see Corrections and Clarifications.

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