Duke ( DUK) relaxed its purse strings last year.

The giant energy company found money for executive bonuses, even after posting a massive $1.3 billion loss. As promised, however, it did pay turnaround CEO Paul Anderson entirely in stock.

But the company, which paid no bonuses during a profitable 2002, generously rewarded its former CEO. Richard Priory picked up a $4.83 million severance package on top of nearly $2.3 million in salary and bonuses. He collected a handsome bonus despite the company's money-losing year.

"Based upon 2003 earnings-per-share performance, which was below the threshold level, and cash-flow performance, which was above the maximum performance level, Mr. Priory received a payment of $1,090,011, representing 100% of his target opportunity," Duke's proxy statement explains. The company says he got his whole cash-flow bonus but none of his EPS-based bonus.

Priory enjoyed other perks as well. He's entitled to $65,000 for any legal fees resulting from his separation agreement. And he will continue to have access to office space and secretarial help, both at Duke's expense, until he takes another full-time job or the company decides to halt such benefits altogether.

Duke offered smaller packages for two other former executives. It gave ousted CFO Robert Brace $700,000 in severance, $10,000 for legal fees and desktop and laptop computers stripped of confidential company information. Brace also collected nearly $1 million in salary and bonuses last year.

Richard Blackburn, who recently resigned from his post as legal counsel, has so far collected $644,406 in severance pay. According to the proxy, however, Blackburn is pursuing legal action that could bring twice that amount in additional severance. He earned $850,000 in regular pay last year.

Meanwhile, Duke President Fred Fowler picked up $1.27 million in cash and bonuses. Duke Vice President Richard Osborne earned $945,000. And Duke Power President Ruth Shaw collected $723,000.

Bas Relief

In sharp contrast, the company's new CEO pocketed no paycheck at all last year. Instead, Anderson collected nonqualified stock options for 1.1 million shares of Duke stock and awards for additional performance shares and phantom stock. His stock options, representing 13% of all employee options granted last year, were valued at $5.5 million at the end of 2003. His performance shares were worth $7.36 million, and his phantom stock was valued at $5.8 million.

Paul Hodgson, a senior research associate at The Corporate Library, has already praised Anderson's compensation arrangement.

"While the potential rewards from the package could be substantial, this will largely depend on the performance of the company over the next three years," Hodgson wrote after Anderson agreed to become Duke's new CEO late last year. "In any case, with mediocre performance, the company will likely make considerable cost savings. Anderson's predecessor at Duke, Richard Priory, earned a total of $5.94 million in fiscal 2002, despite not receiving an annual bonus because the company's EPS target was not met."

Hodgson also applauded the lack of severance promises in Anderson's contract. He did see a couple of flaws in the overall arrangement, however. He said that Anderson's market-priced stock options gained $130,000 just three days after their grant date and should have, instead, been priced at a premium or tied to performance. He also felt that Anderson should not be allowed to collect Duke's generous $1.10 dividend on performance shares that have not yet vested.

It's also true that Duke doesn't count the cost of market-priced stock options against its earnings, though it does expense "restricted stock grants, phantom stock awards and certain stock-based performance awards," according to its 2003 10-K. The disclosure comes as public companies come under increasing pressure to reflect the cost of options on their quarterly earnings statements. According to Duke's annual filing, expensing all stock-based compensation would have added $30 million to the company's 2003 loss.

Overall, however, Hodgson was pleased with Anderson's arrangement.

"The new package for Anderson has some extremely positive aspects," Hodgson wrote. "The replacement of cash pay with the award of stock units, and the payment of dividends on these, tie his compensation closely to the performance of the company and align his interests precisely with those of stockholders."

Duke's stock, which rose 21 cents to $22.81 on Thursday, has already rocketed 30% since Anderson was hired last October.

Rough Road

Even so, most analysts have remained cautious. Robert Rubin, who conducts fixed-income research at Deutsche Bank, this week reiterated his negative outlook on the debt-laden Duke Capital subsidiary in particular.

"Investors continue to play wait-and-see with Duke and Duke Capital, as there are still many questions that need to be answered beyond 2004" and strategically solved in 2004, Rubin wrote on Wednesday. "We believe new management must continue to execute on promises, send a consistent message to the investing community and remain conservative (and within the company's means) in order to lift the caution with which most fixed-income investors view the Duke enterprise."

Still, Rubin was quick to highlight the progress Duke has made so far. He pointed out that Duke has already hit its asset sales target for the year and still expects to sell its distressed power plants in the Southeast before 2004 closes. He also said the company believes it could exceed its cash-flow target "should the weather cooperate and a few other items work out." In addition, he said that Duke feels that the credit downgrades may finally come to an end.

Duke CFO David Hauser "expressed optimism that the company is over the hump with the agencies, and the prospect of the enterprise falling further especially at Duke Capital, where the consequences would be serious and could cause all-in capital triggers of $1 billion is not anticipated," Rubin noted.

Rubin went on to conclude that bonds at both Duke and Duke Capital are fairly valued. He remains neutral on both names but expects to maintain a negative outlook on the latter, which is currently rated just a notch above junk, until he evaluates the company's progress at the end of the year.

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