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With Merger Done, Duke Energy Mulls Prospect of Shedding its Gas Operations

With the merger of energy powerhouses Duke Energy and Cinergy Corp. completed last Monday, Chairman Paul Anderson said the company would turn its attention to the issue of whether or not to spin off the new company's natural gas operations.

The issue had been "put on hold" over the past 11 months while the two companies worked to integrate their energy operations, he told a group of New York financial analysts shortly after Duke Energy and Cinergy closed the merger. The focus will be on "addressing the question [of] whether or not it will create more value to separate our gas and electric businesses," Anderson said.

"This now becomes one of our key strategic objectives." As chairman of the merged company's board of directors, he said the central issue will be "what pieces make sense to keep [and] what pieces might be more valuable to someone else." Duke Energy has hired a strategic adviser to explore options related to its gas business, Reuters reported.

Anderson said the new Duke Energy company expects to reach a decision on the possible spin-off "certainly by the end of the year, hopefully sometime in the next few months."

Anderson and other Duke Energy officials declined to say which way the company was leaning on the issue of spinning off its natural gas operations. "If we do a spin, it probably would be a spin of Duke Capital, but we probably would take some things out of it," such as international and Crescent Resources' operations, said David Hauser, group executive and chief financial officer.

Duke Capital is the financing arm for the key gas operations of Duke Energy Gas Transmission, Duke Energy Field Services, Westcoast Energy Inc. and Union Gas Ltd, according to a Duke spokesman.

Anderson also dismissed reports that the company was already eyeing another merger. "While we are looking and will be opportunistic...we are not starting down [that] path" at this time, he said.

Anderson was hand picked by Duke's board in late 2003 to get the troubled energy company "out of the ditch," he said. The company accomplished the objective a year later by coming up with a new business model for its electric business that set the stage for stand-alone growth of that segment, and it made the decision to exit Duke Energy North America in the West and Northeast. Anderson's mission also was to find a successor for the company to take it to the next level.

Last Monday, Anderson officially turned over the CEO reins to James E. Rogers. He is "one of the longest sitting CEOs in the energy business," Anderson told financial analysts, adding that he was "very confident in handing" the company over to Rogers.

"We're reviewing every part of our portfolio" to determine which assets will stay with Duke Energy and which assets will be sold, Rogers said. He noted that his first 100 days as head of the combined Duke Energy-Cinergy will be "internally focused."

He touted the company's diverse fuel mix -- coal, nuclear and hydro -- for generating electric power. Rogers said that 90% of Duke Energy's actual energy production comes solely from coal and nuclear, which he believes helps to minimize "price shocks" to its customers. "The blend of coal and nuclear puts us in a strong position to smooth out" price hikes.

"We're doing everything we can to protect our customers from price increases in the future." Rogers further noted that Duke Energy plans to invest $2.4 billion through 2008 to install 25 scrubbers. By 2009, when the scrubbers are online, "we believe [that] we will have the industry's cleanest coal," he said.

In the near-term, the merged company anticipates growth of 4% to 6% per share, according to Hauser.

For the time being, the combined Duke-Cinergy company will be the largest utility in the nation, at least until the proposed merger of Exelon and Public Service Enterprise Group is completed, Anderson said. The new company has more than $70 billion in assets, a market capitalization of $36 billion, 5.5 million retail gas and electric customers in five states, and more than 40,000 MW of net generation capacity, according to Rogers.

With the completion of the merger, the combined company is a registered holding company and will maintain its corporate headquarters in Charlotte, NC. The local headquarters of the operating utilities will remain unchanged by the transaction. However, as of last Monday, Duke Energy's U.S. franchised electric and gas utilities -- formerly Duke Power in the Carolinas, Cincinnati Gas & Electric in Ohio, Union Light, Heat and Power in Kentucky, and PSI Energy in Indiana -- became Duke Energy.

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