DUK - investment strengths and risks
Investment Strengths
 DUK is a major force in the global unregulated market. For 1999, management expects to achieve more than $1-2 billion annual capital expenditures that are targeted for global asset development, thus building for strong future growth. This will allow DUK to truly become a global leader in the unregulated energy arena, where gas and electricity are converging.
 Natural gas acquisitions are a long-term positive. DUK recently announced that it would acquire the natural gas gathering, processing, fractionation, and the natural gas liquids (NGL) pipeline business from Union Pacific Resources (UPR) for $1.35 billion. This deal makes DUK the largest producer of NGL's and one of the largest natural gas gatherers. This move will further position the company in the unregulated energy business.
 Divestiture of regulated pipeline assets for $2.2 billion. DUK will sell a significant part (approximately one-third of the regulated pipeline interests) of the assets acquired in its 1997 acquisition of PanEnergy. DUK will keep the higher growth, unregulated businesses and assets focused on the Northeast, where it is building a major presence. This sale is strategic as it allows the company to focus on higher growth, whereas 85% of its earnings had been coming from regulated assets, of with the pipelines were the slowest growing assets.
 Asset development focus is favorable with deregulation. DUK is positioned to take advantage of the lucrative market niches in the geographic or customer service sector prior to the coming of full-scale competition. DUK's customer focus is the industrial and large commercial sector, which is willing to switch to a supplier that can offer a range of energy products and services.
Investment Risks
 Redeployment of funds from divestiture. The recent pipeline sale will dilute DUK's EPS. Management does not intend to use the proceeds to buy back stock. In addition, with the company's bid for Endesa-Chile (an energy producer in Chile), the company will most likely pursue other acquisitions ($1 billion budget this year for Duke International) in Latin America, Asia-Pacific, and Europe which will entail some uncertain risks.
 Timing of full competition. The timing of the opening of electricity markets to competition is difficult to predict. While virtually all states are now moving forward with deregulation, it will be a phased-in process everywhere, with competitive transition charges loaded onto end-customer bills over a transition period to allow recovery of sunk costs.
 Price competition and customer reaction following deregulation. With DUK's big stake in the non-regulated energy business, greater profitability will probably arrive sooner if the markets open rapidly. In addition, it is unclear how severe the price competition will be in the early years of the open markets.
 Commodity price exposure. Management has warned that the gross margin in the NGL business will actually be slightly worse in 1999 than in 1998, so growth is projected despite adverse commodity markets. |
