Electric utility Duke Energy Corporation (NYSE: DUK) is getting ready for a December road show to help institutional investors understand the upcoming spin-off of its regulated operations and the creation of a master limited partnership.
While seemingly complex at first glance, Elliott Gue, editor of The Energy Strategist, gives investors a heads-up on what to expect. Indeed, he sees opportunity for those willing to buy the shares now, as he expects the sum of the parts will be worth more than the current whole.
Duke offers electricity services to 5.5 million customers across the Carolinas, Ohio, Kentucky and Indiana. But, notes Gue, it is "a good deal more than just a utility company." The firm also owns some 17,500 miles of natural gas and natural gas liquids pipelines, making it one of the largest gas pipeline, storage and processing firms in the U.S.
Duke will be separating its business into two parts:
Why split? Gue notes, "Pure-play businesses are easier to value than conglomerates and Duke believes it can highlight the growth prospects of its various divisions more effectively by splitting into parts."
Also of note, he explains, with Kinder Morgan soon going private, Spectra will be one of the only major publicly traded pipeline owners in the country. He adds: "With U.S. gas and storage infrastructure woefully inadequate to handle the coming wave of demand, these assets will be extremely valuable."
Meanwhile, he notes that Duke Energy is attractive "in its own right" as the firm has been investing in clean coal technologies and has been one of the leaders in filing for permits to build new nuclear facilities.
One added note of complexity here: Once Spectra is created, it plans to spin off some of its pipelines into a third company in the first half of 2007. Notes Gue: This will be listed as a Master Limited Partnership (MLP).
He explains, "This is a huge advantage for Spectra and the MLP's high-income structure makes it relatively easy and cheap to raise capital for further expansion." Of note, he adds, Duke has a great track record when it comes to MLP spin-offs. Last year it spun off DCP Midstream Partners, LP (NYSE:DPM), which has since returned 60% to holders.
Summing up the situation, Gue suggests buying Duke now -- before next month's road-show begins. Holders of Duke shares will then get shares of Spectra in January, followed by the spin-off of an MLP in the first half of 2007. Says Gue, "In my view, the sum of these three parts will be worth significantly more than Duke is today."
Steven Halpern is editor of TheStockAdvisors.com, a free daily overview of the latest investment ideas from the financial newsletter community.
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