U.S.-based diversified energy giant Duke Energy Corp. plans to spin off its natural gas business, including Union Gas Ltd. of Chatham, Ont., and the former Westcoast Energy business in Western Canada.
Duke said yesterday the move would create a separate, publicly traded company at the start of next year to take advantage of the high current valuation of the gas assets.
The gas company, yet to be named, will own 29,000 kilometres of pipelines and sell the fuel to 1.3 million homes and businesses in Ontario and own half of Duke Energy Field Services, the biggest U.S. natural gas processor, Charlotte, N.C.-based Duke said yesterday.
After the spinoff, Duke Energy will be virtually a pure power play and will include its U.S. regulated electric utility businesses, its wholesale power generation unit and international assets. It will also include gas utilities serving 500,000 customers in Kentucky and Ohio and the company's real estate business, Crescent Resources.
"The stock market has been giving higher value to natural gas companies, so they wanted to create a pure play in that space," said Barry Abramson, who helps manage $33-billion (U.S.) at Gamco Investors Inc. in Rye, N.Y., including about 1.5 million Duke shares. "Each one of these segments is large enough and strong enough to stand alone."
Its board of directors has approved the move, which it hopes will take place by Jan. 1.
Duke bought rival Cinergy Corp. in a deal valued at $9-billion (U.S.) in April.
The company has been considering spinning off the business since the Cinergy deal was originally announced in May, 2005, and this spring confirmed that it had hired financial advisers Lazard LLC.
In an interview in April, Duke chief executive officer James Rogers said the company's share price did not reflect the full value of its power and gas businesses and that a spinoff might be one way to extract that value for shareholders.
Sanford Bernstein analyst Hugh Wynne said that regulated pipeline businesses tend to trade at higher valuations than regulated electric utilities. "They are trying to unlock the higher EBITDA multiples of the pipeline business," he said.
The inclusion of the company's oil and gas field services unit will also boost the value of the spinoff attributed to booming commodity prices, he said.
"I would own shares in both these companies, absolutely," said James Halloran, who helps manage $33-billion at National City Private Client Group in Cleveland, including Duke shares said. "They're both good cash-generating companies."
Shares of Duke Energy closed down 14 cents at $28.38 on the New York Stock Exchange.