Once United, Now Separate and Thriving

12/10/2009 11:00 am EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

Roger Conrad, editor of Utility Forecaster, says Duke Energy split off Spectra Energy a few years ago, and now both are in different businesses but doing well.

With one of America’s largest fleets of coal power plants, Duke Energy (NYSE: DUK) would seem endangered by Washington’s plans to control carbon dioxide emissions. In reality, Duke stands to be a major beneficiary, thanks to a multiyear effort to shape prospective legislation.

Chief executive officer Jim Rogers’s efforts have already produced free emission credits until 2025 under legislation out of the US House of Representatives. The company will win again from [the Senate’s] addition of incentives for nuclear power development. And House Financial Services Committee Chairman Barney Frank (D-Mass.) has exempted it as an “end user” from his derivatives legislation.

Duke is already prospering from state and federal renewable-energy mandates. The company has 634 megawatts (MW) of wind capacity in Pennsylvania, Texas, and Wyoming, with another 350 MW scheduled for start up by the end of 2010.

It’s also forged an alliance with the University of North Carolina to expand wind power to its regulated utility customers in the state and is ramping up spending on solar power and the smart grid as well.

Duke’s industrial sales took a hit during the recession, and regulatory scrutiny has increased. A solid 4.3% summer dividend increase and positive outlook from Standard & Poor’s, however, show clearly the company has weathered the downturn [and is] positioned for powerful growth.

Yielding 5.5% and selling [slightly above] book value, Duke Energy is a buy up to $18. (It traded near $17.50 Wednesday—Editor.)

It’s been three years since Spectra Energy (NYSE: SE) and Duke went [their] separate ways. Thus far, gas-focused Spectra has had the rougher ride, as its field services unit (10.8% third-quarter profits) has been buffeted by the ups and downs of energy prices.

The company’s core fee-based energy storage, transmission, distribution, and Canadian gathering and processing operations, however, all scored strong growth over the past year. And management is investing $1 billion-plus annually in these businesses, at a hefty average return on capital of 12%.

The upshot: Spectra Energy is poised to generate robust and extremely reliable profit growth [averaging] 9% a year through 2014. That projection would prove conservative if energy prices strengthen, particularly for natural gas liquids.

Spectra’s Field Services unit is basically a 50% interest in DCP Midstream Partners LP (NYSE: DPM), which continues to build assets. Higher energy prices would also boost Canadian operations’ income (20% profit) because they’d boost the Canadian dollar.

Even the lowest Street estimate of 2010 earnings covers the distribution by a 1.33-to-1 margin. And the balance sheet is healthy, with interest expense and debt to capital falling this year despite aggressive capital spending.

The stock is up 60% from its lows, but is still a third off its mid-2007 high, despite proving its worth by growing value in an extremely difficult environment. Buy Spectra Energy up to $22, preferably through the direct investment plan. (It traded below $20 Wednesday—Editor.)

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