Three-for-One

11/24/2006 12:00 am EST

Focus:

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

An old standby is reinventing itself. And energy expert Elliot Gue tells subscribers why the time is right to take a flyer on this chance to invest in three companies for the price of just one utility.

"Duke Energy (DUK NYSE) is a utility and one of the largest midstream gas players-pipelines, storage and processing-in the US.

"Duke is separating its business into two parts: the mainly regulated utility operations as Duke Energy and its midstream gas business to be called Spectra. Owners of 100 current Duke shares will have 100 shares in Duke Energy (DUK) paying an annualized distribution of $0.84 per share and 50 shares of Spectra paying $0.88 per share, a 4.1% yield, based on current price. But the potential of the deal goes far beyond immediate dividend income.

"Duke believes it can highlight the growth prospects of its various divisions more effectively by splitting into parts. Spectra will be one of the only major publicly traded pipeline owners in the country, at least of its size. In addition to its already extensive Spectra has plans for at least two dozen major pipeline expansion projects in the next three years, extremely valuable assets in the wake of the woefully inadequate US gas and storage infrastructure. And with many of its pipelines regulated by the government, Spectra receives a stable return on capital invested in infrastructure.

"Duke Energy has been investing big time in scrubbers for its coal plants and in new clean coal technologies that will vastly reduce the company's emissions of pollutants. And Duke has been one of the leaders in filing for permits to build new nuclear facilities, another advantage. Finally, the company's core market in the Carolinas is attractive, with regulators traditionally allowing the company a fair return on its investment.

"Spectra is planning to spin off some of its pipelines into a third company--a Master Limited Partnership (MLP)--in the first half of 2007. This is a huge advantage for Spectra because it has very attractive cash-generating assets and the MLP's high-income structure makes it relatively easy and cheap to raise capital for further expansion.

"Duke plans to spin off Spectra in January 2007 and is now getting ready to sell this idea and the new company to shareholders and institutional investors, in what's known as a "road show," which should be a key catalyst for the stock.

"Buy Duke, hold and accept the spinoff of Spectra in January, followed by the spinoff of an MLP in the first half. The sum of these three parts will be worth significantly more than Duke is today."

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