I too read the Street.com's Duke bashing and have to say it was somewhat bleak. Unfortunately, I was not able to totally discount it as I would have liked. Forbes ran an article recently [not the present issue but the one before] and unlike Cramer and Street.com, Forbes is anything but Liberal. Also Bank of America recently issued a sell rating saying there are better risk/reward plays out there. BoA also believes that the risk of a rating cut is high.OK that is the bad news, here is the good - as I see it. Roger Conrad - who is editor of Utility Forecaster belives Duke is risky but will be an ultimate winner long term. He is very clear that there are many short term risks here. He cites the possibility of a dividend cut, an equity offering and a rating cut as potential negatives that could push Duke below $10. But he also believes they have quality assets that will make them a leader when the economy recovers. He also is of the belief that the "power glut" is going to end a lot sooner then later. He points to the 4% increase in power usage last year despite a weak economy. Also the new power plant building is being cancelled and several older plants - manly coal and oil - are being taken out of service as they are too inefficient or uneconomical to run. This will soak up the "glut" real fast.Now let me look at what Duke owns. For a more detailed summary go to Duke's website and review the 2003 annual report where they break out their business lines with revenue and profit numbers.Regulated power in NC and SC - no need to do much more then say they run one of the cheapest power suppliers in the country. they make plenty of money here and it is very stable and predictable. When the economy heats up some, these will make even more money.NG assets. Again, stable, reliable cash cow business. These are their pipeline, gas gathering and NG reserves. These are only going to do better when the economy picks up. These last two are what generate most of Duke's earnings right now. They are stable and predictable and are growing interanlly modestly.Then there are their remaining businesses. Merchant power generating and trading and what I call other.Merchant trading and generating is what is killing Duke. They built lots of new plants in the last 5 years, almost all of which are NG fired and they are not getting back enough to pay the debt. This is not in my mind a permanent condition. Most of Duke's new plants are in the west. Everyone but the analists seems to be saying that California and the west is fast becoming short on power despite the so called glut. When the summer heat wave hits, I am willing to bet we are going to see a rash of reports talking about the shortage out west and need for new power and for new plants to be built. If that happens, Duke's stock should increase. Trading: Duke said they are only going to trade what they generate power wise and what they can transport NG wise. I doubt this is permanent either. Once this business is less taboo, they will probably dip their toe back into the power trading business since they will have the infrastructure in place. But for now they won't trade soley as a means to generate earnings. They will only trade as a function of their generating and transporting business.The one problem many people raise for Duke is their reliance on their real estate arm. To be honest I dont really understand what this business does, so if anyone else can help me out I would be obliged. From what I gather, they buy and sell land and buildings. here is what their websites says:Through Crescent Resources, LLC, we develop and manage real estate throughout the southeastern and southwestern United States. Crescent creates award-winning country club communities, neighborhoods, apartment and condominium communities, Class A office space, business/industrial parks and shopping centers.Clearly this is not a utility or energy business line, so I am not sure how to value its worth to Duke as a whole other then to say they make money. Right now there is a mini boom in real estate which could burst at any time. Reliance on this business line is no more stable then on trading and I think this is where analysis see a problem. I am not sure I buy the whole bubble idea but I can say that this business is surely going to suffer when interest rates go up. It won't be so easier for a buyer to finance the property at rates which ensure a profit. That is one reason commerical real estate is hot. You can finance the property are 6-7% or so and make a decent profit from the rents. But when rates go up, profits margins will shrink, reducing the potential buyers. There have been many discussions on this sort of topic on the REIT board and would suggest folks go there for more insight.Finally, my opinion for what it is worth, is that I am still buying. I recognize there are risks to Duke from the economy, but I think a) the power market will firm up, which will strengthen Duke's balance sheet. This would limit the likelihood of a dividend cut or a big dilutive equity offering and probably the ratings cut; b) even if there is a dividend cut, equity offering and ratings cut, the long term effect is not going to drive Duke to bankruptcy or into such dire straights as say Aquila or Mirant. Duke has too many quality assets that generate steady cash flow to remain down. Duke's regulated assets will continue to generate earnings and once the cyclical unregulated business recover, so will the growth to Duke's earnings. I believe management is trying to hold the dividend until the economy recovers. Psychologically, a cut would do a lot to shake investor confidence, especially the individual investors who seek income. If Duke can make it to the recovery without a dividend cut, the stock will soar as it will have increasing earnings growth potential and a decent yeild. But if they need to issue a susbantial amount of equity - say 1.2 billion then I suspect a dividend cut will also happen. Too generate $1.2B they would need to sell about 75 million new shares [ at $16 a share.] This would dilute earnings about 8.5%. Right now if Duke makes the low end of its projected earnings of 1.35-1.60 per share, the dividend coverage ratio is 80%. If they issue 75 million shares, the coverage ratio increases to 90% [meaning it takes 90% of earnings to pay the dividend] That is simply to high to maintain the dividend.But again, I am still buying and holding. Just not doing it blindly - I hope.
The one problem many people raise for Duke is their reliance on their real estate arm. To be honest I dont really understand what this business does, so if anyone else can help me out I would be obliged.Andy,Very nice note on Duke; thanks for your insight. Let me try to give some input on their real estate business.When Duke built a nuclear power plant in Western Carolina, they also built several lakes to control the cooling water. They also generate electricity when water falls through the dams. The land surrounding the lakes is beautiful. So, they built some condominiums, golf resorts, and other recreational facilities. I have been on the lakes (in a boat) and in some of the restaurants and condos. Everything I have seen is strictly first class.I am sure that they have made good money from these developments, a secondary benefit from building plants to generate electricity.Hope this helps,Red
"""I too read the Street.com's Duke bashing and have to say it was somewhat bleak. Unfortunately, I was not able to totally discount it as I would have liked. Forbes ran an article recently [not the present issue but the one before] and unlike Cramer and Street.com, Forbes is anything but Liberal. Also Bank of America recently issued a sell rating saying there are better risk/reward plays out there. BoA also believes that the risk of a rating cut is high.OK that is the bad news, ""Wrong planetsusan, I suppose,but how isall that " bad news "a brokerage downgrade canbe more likely to be ,, GOOD news.Most brokerages opinions have their genesis in trying to nt look bad ,vs trying to be right, thus are oft very wrong.2If the stk deserves a rating cut, it probably knows it and once complete, its a positive, atonement to reality is a positive.re the street, Kramer is a vcomplete blowhard, pure entertainment,read the book his exemployee wrote.the stains match his mentality.
The land surrounding the lakes is beautiful. So, they built some condominiums, golf resorts, and other recreational facilities. I have been on the lakes (in a boat) and in some of the restaurants and condos. Everything I have seen is strictly first class.This is true. In fact, from what I've seen there is a large amount of undeveloped real estate along some of those lakes. The potential is there for smart, consistent growth if it is managed correctly.
"Clearly this is not a utility or energy business line, so I am not sure how to value its worth to Duke as a whole other then to say they make money."In order that Duke could build it's nuclear plants in the early 60's, the land for the cooling lakes had to be acquired. Duke bought many hundreds of thousands of acres of low cost farm land at $200 to $500 per acre. By the law, Duke had to control 60% of the projected shoreline before they could get the State's help in condemning the remainder of the land affected. Today, Duke still owns hundreds of thousands of acres of this land. They have developed a very small portion so far. Their most famous development is The Peninsula on Lake Norman where homes typically sell for multi-millions each on the waterfront. Since most of Duke's land is waterfront property, the total asset value is in the billions of dollars...if developed. On paper, the land is worth $200 to $500 per acre...in reality it is worth many, many times that.I understand this very intimately. In 1960, my family learned of the purchase of these huge tracts by Duke. We figured out what was going on and we bought all of the land we could afford before Duke's behind-the-scenes-buyers (Now known as Crescent Land) could get it. We often actually had to pay up to double the going rate at $500 to $1000/acre knowing Duke would either have to later condemn it all and pay us back or let us keep some of our land and force us to sell the rights to just the underwater land. The key was in knowing where the 360 foot elevation line would put the lake front after the dam was in place. Anyway, we did it right. That is exactly what happened. We got to keep the waterfront...Duke got the underwater land only. It was great! I sold some of this waterfront land in 1990 for $45,000 per acre. Today the land is bringing close to $80,000/acre...undeveloped. Developed, half-acre lots sell for $150,000 to $750,000 each depending on the location, the view and the water depth. Duke is sitting on a secure gold mine here!Anyway, you can do some calculations if you can figure out how much waterfront and waterview acreage Duke owns. The waterview goes for about $40,000 per acre. I have spent considerable time trying to value DUK's land assets. Duke seems to keep this pretty well concealed but I believe it is a very significant number and worth our consideration as stockholders.Crescent Land controls the supply very carefully to maintain the per acre value. They sell some to other developers but keep the best for their own development projects. Meanwhile Crescent is always buying more land for future power plants and future cooling water needs. This means more waterfront property to develop later when those beautiful lakeside areas are "discovered". I look at Duke more as a developer of expensive property than a power company. The power is just a nice cash producer. The real value is in the waterfront land they continue to produce for us. I just wish I knew what it is really worth in dollars.
BMW-Thanks for the detailed information. It does alot to put this in context. Reading what the reporters say sort of made it seem like it was strictly a commercial developement arm with no bearing on the utility business. In reality it seems like Duke is making a liability into an asset by turning the lands they were forced to buy and cover with water just to build the power plants into serious profit machines.Thanks again.Andy
"I look at Duke more as a developer of expensive property than a power company. The power is just a nice cash producer. The real value is in the waterfront land they continue to produce for us."Hmm, I suspect that is backwards. My reasoning is simple: if waterfront property creation was the real moneymaker, I suspect you would see companies out there that would create lakes for their own sake. Why sully the view with a powerplant, and why limit it to the likes of DUK? Given that DUK has built a few lakes anyway for powerplants, it's nice that they make money from it.
"Reading what the reporters say sort of made it seem like it was strictly a commercial developement arm with no bearing on the utility business." Andy, If you read what Duke says in the annual report, you would believe Crescent land Development is nothing but a commercial development arm with no bearing on the utility business too. No wonder the reporters think this is the case also. That is what Duke wants everyone to think.Until 1988, that is exactly what I thought. In that year, I borrowed approximately $700,000 and began a small residential development on some of the land I described in my earlier post. In November, the project was finished and I had a number of interested buyers for my lots. In fact, I had 10 of my 24 lots pre-sold to builders; 4 waterfront lots to one guy for $455,000 and 6 off-water lots to another builder for $385,000. In other words, I had pre-sales enough to pay off the construction loan plus leave me some cash and 14 lots free and clear! Then, I discovered that Duke, through Crescent Land was in the land development business. They opened up "The Peninsula" that very month, dropped their offering prices by 30% to get builders in and left me screwed to the wall. The second builder stiffed me and moved to "The Peninsula" to build. Instead of cash plus 14 free and clear lots, I had 20 lots to sell plus a debt of $350,000 that was growing by about $3000 per month in interest payments. The bank was not unhappy, the land I put up was worth about $800,000 on paper and the total sales were supposed to bring in $2.3 million less sales commissions, interest, upkeep on the property, property taxes and lots of other costs that I learned about in doing that damned development. The most important lesson I learned was Duke Power, through Crescent Land is one heck of a money maker and land developer. Everyone wanted to build in "The Peninsula"...not at "Chapel Pointe," my piddly little development. When I started my development there were very few lots available on the lake and the ones that were available were going for $150,000 plus for lots inferior to the ones I was developing. That was before Duke got into the act.Since then, Duke has expanded "The Peninsula" about three times, started several other developments and controlled the lake real estate business. At first, I hated Duke with a passion! Every month I had to pay those bastards 7 cents for very Kilowatt I used plus they were costing me $3000/month in lost dollars due to my inability to sell lots in my development. So, I cut my prices, sold at a much lower price than I wanted to, but came out with 6 lots clear plus a little cash. By 2000, I had built houses on the remaining lots and actually made some nice money. I forgave Duke and waited! I knew I would get back even eventually.Last year did it for me. I took much of my profit and began buying Duke stock at $17, then at $14, and a pile at $12.75. By GOD, I will get my money back from Duke...one way or the other! I learned, if you can't beat them...join them! I know what they can do and I am not going to be on the opposite side any longer. Why fight a sure winner?Anyway, that is my story. Duke is one heck of a fine company. They hide their real estate business because they hurt the little guy over and over again. They are not supposed to be in that business but they are because they have to be in order to continue to build power plants. I believe they fell into the real estate thing because their lakes suddenly became the place to live! People realized that nuclear plants are small, they are not real obvious and the lakes that go with them are terrific. The land can be bought for a song, developed into lots selling for half a million each and all in the name of progress. But, you never broadcast that fact...the bad guys would hold it against you. They hate profits almost as much as they hate nuclear power.But, take my word for it, don't fight DUK...bet on them. They talk about competition in every other part of their business but they have no competition in the waterfront land development game here. They make all of our best waterfront property from scratch! Just a quick aside here. I sold one of my properties to a German couple who were moving here to support the new BMW plant in Spartanburg, South Carolina. He loved the house and wanted me to make about $80,000 in additions to the upper level of the three car garage. He was going to use the garage for his "Manservant". He and his wife would only be in the main house two or three weeks every year. The rest of the time he was going to offer it to BMW executives for weekend entertainment. He had several small sailboats, a very nice larger cabin sailboat, a power boat with skis plus lots of rafts and inner tubes that he expected his manservant to maintain for the guests to use as well as to keep the house in tip-top shape at all times. The guy had lots of class...he knew how to do things right.As we got close to the closing date, he took me aside and asked me in complete confidence, "What is really wrong with this house? Surely it has some major defects...yah?"I was flabbergasted...the house was perfect! I asked him why he would ask such a question of me?"In Germany, this property would sell for well over $6 million German Marks...about $2.5 million American. Why would you sell it to me for under $700,000," was his response? Anyway, that is how the World views the assets of Duke Power. Duke has made a lake that is tremendously undervalued by World standards and they can make another one anytime the power demands require it. Here in America, we take things like Lake Norman for granted but other people know value when they see it.I look at Duke Power stock and I see that same great value the German businessman saw in Duke's lake. Some day the rest of the investors will see it too. Right now they are blind to the real values...they take Duke for granted because it looks too much like Enron or Global Crossing. They fail to see the real company and what it can, and does, actually do. Value is truly in the eye of the beholder. Of course Duke doesn't help the picture by hiding what it does best. But, that is exactly what Duke does. They leave it to others to spot the real value.
"Why sully the view with a powerplant, and why limit it to the likes of DUK? Given that DUK has built a few lakes anyway for powerplants, it's nice that they make money from it."I thought I explained that side. No one has the money to do it on their own. They cannot get the land without the help of the State. The land must be condemned for the public good before it can be had.Power companies can get the help they need. Bill Gates could not get the land if he wanted it. It takes environmental approval, the support of the State utilities commission, the resources of giant engineeringg staffs and lots of political savvy. Duke has it and they can get it done where no one else can because they would be doing it for profit! Don't you know that profit is bad in America? Who would give anyone else the approval for a huge dam just to make money?Nope, can't be done in America. Too much red tape. Look how hard it has become to build a simple power plant for goodness sake.
Great post BMW. It's amazing that Duke has been doing this since the 60's with so little public attention paid to it. Thanks for your insight.JAB285
BMW hits the nail better than Kramer. Lake Hickory the same way. I just didn't realize DUK owned all the land to begin with. The upper end, Rutherford College/Valdese area is just begining development, I deer hunted the areas 30 years ago, they were posted as owned by Duke Power and part of the NC Gamelands program at that time. Since the only thing I hunt nowdays are paper targets and tin cans, I don't know their status (city limits), other than I doubt hunting is allowed there now. Goober
BMW - thanks for the excellent posts. My son graduated from Davidson College which is close to Lake Norman. - Ned
In general I concur with your opinion as well as with your calculations. Even with a reduced dividend it would be a rather good value for one's money. Regarding the R/E division, about which you plead ignorance,they are probably in one of the most profitable R/E markets in the country, hold some prime property, and are very clever in managing it. This should assuage your doubts of which you seem anyhow to have few. Hereabout (in NC) they have made only a few new friends lately, because too many people depended on them as a core investment in their portfolios (a solid local utility, no less). There is a moral to the story, but I just forgot it.Good luckMarcute
a German that thinks land is cheap and buys it ,doesn't make it a bargain. only to him.There are all kinds of German RE disasters unfolding as we speak.FWIW
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