Ticker: DUK
Sector:
Utilities
Industry: Multiutilities
Recommendation:
BUY
Pricing
Closing Price $18.76 (09/21/07)
52-wk High
$21.30 (04/24/07)
52-wk Low
$16.91 (08/06/07)
Book Value
$16.21
Stop-Loss
DUKE ENERGY CORPORATION
Profile
Duke Energy was founded 1916 and is headquartered in
Charlotte, North Carolina. Duke Energy Corporation, together
with its subsidiaries, engages in the natural gas and electric
businesses in the Americas. Duke Energy currently supplies and
delivers energy to approximately 3.9 million U.S. customers. In
2006 Duke merged with Cinergy1. Not long after the merge,
they adopted new business segments. The company now
operates in four divisions: U.S. Franchised Electric and Gas,
Commercial Power, International Energy, and Crescent.
$17.00 (recomm.)
Market Data
Market Cap
Total assets
Trading vol
$23.64B
$48.45B
9.52M (3mon avg)
Valuation
EPS (ttm)
P/E (ttm)
PEG
Div Yield
Payout Ratio
$1.42
13.11
2.98
4.70%
75%
Profitability & Effectiveness (ttm)
ROA
4.08%
ROE
9.86%
Profit Margin 10.89%
Oper Margin 18.93%
Gross Margin 33.53%
Justin Scott
Jhstx6@mizzou.edu
U.S. Franchised Electric and Gas, Duke Energy’s primary
division, generates, transmits, distributes, and sells electricity in
central and western North Carolina, western South Carolina,
southwestern Ohio, central and southern Indiana, and northern
Kentucky. US Franchised Electric and Gas supplies electric
service to approximately 3.9 million residential, commercial and
industrial customers over 146,700 miles of distribution lines and
a 20,700-mile transmission system. Electricity is also sold
wholesale to incorporated municipalities and to public and
private utilities. Duke Energy Carolinas’ service area has a
diversified commercial and industrial presence. Manufacturing
continues to be the largest contributor to the Carolinas’
economy. The textile industry, rubber and plastic products,
chemicals and computer products are the most significant
contributors to the area’s manufacturing output and Duke
Energy Carolinas’ industrial sales revenue. Duke Carolinas has
business development strategies to leverage the competitive
advantages of North and South Carolina. The competitive
advantages include quality workforce, strong educational
institutions and superior transportation infrastructure.
The Commercial Power division operates and manages power
plants, and markets electric power, fuel and emission allowances
primarily in the Midwestern United States. Commercial Power
also develops and implements customized energy solutions.
This division’s assets are comprised of approximately 8,100 net
megawatts of power generation.
International Energy operates and manages power generation
1
April 3, 2006, Duke Energy Corporation (Old Duke Energy) and Cinergy merged into wholly owned subsidiaries
of Duke Energy Holding Corp. (Duke Energy HC), resulting in Duke Energy HC becoming the parent entity.
1
facilities, and sells and markets electric power and natural gas outside of the U.S. and Canada. It
conducts operations primarily through Duke Energy International, LLC (DEI) and its activities
target power generation in Latin America. Furthermore, International Energy owns equity
investments in Saudi Arabia, Mexico, and Greece. Customers include retail distributors, electric
utilities, independent power producers, marketers, and large industrial companies. Current
strategy is focused on optimizing the value of its current Latin American portfolio.
Crescent2 develops and manages high-quality commercial, residential, and multifamily real
estate projects and manages land holdings, primarily in the Southeastern and Southwestern
United States. As of Dec 31, 2006, Crescent owned 1.1 million square feet of commercial,
industrial, and retail space, with an additional 0.3 million square feet under construction. This
portfolio included 0.5 million square feet of office space, 0.5 million square feet of warehouse
space, and 0.4 million square feet of retail space. Crescent’s residential developments include
high-end country club and golf course communities, with individual lots sold to custom builders
and tract developments sold to national builders. As of the end of 2006, Crescent managed
approximately 6,217 acres of land.
In addition, Duke Energy owns and operates a fiber optic communications network in the
Carolinas serving wireless, local, and long distance communications companies; Internet service
providers; and other businesses and organizations. The company also provides insurance and
reinsurance of various business risks and losses.
Risk Factors

General Economic Conditions
Sustained downturns or sluggishness in the economy, including low levels in the market
prices of commodities, negatively influence operations. Declines in demand for
electricity will lessen cash flows, especially as Duke Energy’s industrial customers
reduce production and consumption of electricity and gas.

Weather Conditions
Electric power generation is generally a seasonal business. Demand for power peaks
during the hot summer months, with market prices also peaking at that time. In other
areas, such as natural gas, demand for power peaks during the winter. Furthermore,
extreme weather conditions could cause these seasonal fluctuations to be more
pronounced.

Credit Rating
If rating agencies were to rate Duke Energy or its rated subsidiaries below investment
grade, the entity’s borrowing costs would increase. Also, the entity would likely be
required to pay a higher interest rate in future financings, and its potential pool of
investors and funding sources would likely decrease.
2
On September 7, 2006, an indirect wholly owned subsidiary of Duke Energy closed an agreement to create a joint
venture of Crescent (the Crescent JV) with Morgan Stanley Real Estate Fund V U.S., L.P. (MSREF) and other funds
controlled by Morgan Stanley (collectively the MS Members).
2

Laws and Regulations
Duke Energy is subject to regulation by FERC and the NRC, by federal, state and local
authorities under environmental laws and by state public utility commissions. Regulation
affects almost every aspect of Duke Energy’s businesses. These regulations can increase
cost of operations, and may impact or limit business plans, or expose Duke Energy to
environmental liabilities. Changes in these regulations are ongoing, and difficult to
predict.
Significant Changes
Natural Gas Spin-off
January 2, 2007
In June 2006, the Board of Directors of Duke Energy authorized management to pursue a plan to
create two separate publicly traded companies by spinning off Duke Energy’s natural gas
businesses to shareholders. On January 2, 2007, Duke Energy completed the spin-off of its
natural gas businesses. The new natural gas business, Spectra Energy, excludes certain
operations which were transferred from Spectra Energy to Duke Energy in December 2006,
primarily International Energy and Duke Energy’s effective 50% interest in the Crescent JV.
The decision to spin off the natural gas business is expected to deliver long-term value to
shareholders. The primary businesses remaining in Duke Energy post-spin are the U.S.
Franchised Electric and Gas business division, the Commercial Power business division, the
International Energy business segment and Duke Energy’s 50% interest in the Crescent division.
Approximately $20.5 billion of assets, $14.9 billion of liabilities (around $8.6 billion of debt)
and $5.6 billion of common stockholders’ equity (includes about $1 billion of accumulated other
comprehensive income) were distributed from Duke Energy as of the date of January 2, 2007.
The "narrowed management focus, more efficient use of capital, and removal of what appears to
be a conglomerate discount on Duke's price will fuel expansion [for both companies]," says
Daniel Ford of Lehman Brothers (LEH), which was the adviser on the spin-off. He says
investment opportunities and strong balance sheets at both Duke Energy and the gas company
"should provide steady earnings growth through the end of the decade."
Inventory
(in millions)
Materials and supplies
Natural gas
Coal held for electric generation
Petroleum products
Total
Assets
June 30, 2007
$
535
60
432
$
1,027
December 31, 2006
$
586
372
383
17
$
1,358
June 30, 2007
$
34,550
6,669
3,458
192
$
44,869
December 31, 2006
$
34,346
19,002
1,233
6,826
3,332
180
$
64,919
(in millions)
U.S. Franchised Electric and Gas
Natural Gas Transmission
Field Services
Commercial Power
International Energy
Crescent
Total
3
Cinergy Merger
April 1, 2006
On April 3, 2006, Old Duke Energy and Cinergy merged into wholly-owned subsidiaries of
Duke Holding Corp. After close of transaction, Duke Energy HC changed its name to Duke
Energy Corporation. The merger combined the Duke Energy and Cinergy franchises as well as
deregulated generation in the Midwestern United States. Duke Energy issued 1.56 shares for
each outstanding share of Cinergy, resulting in an issuance of approximately 313 million shares
of Duke Energy common stock. The transaction was valued at approximately $9.1 billion and
has resulted in incremental goodwill of around $4.5 billion.
Other Acquisitions

In May 2007, Duke Energy acquired the wind power development assets of Energy
Investor Funds from Tierra Energy. The purchase includes more than 1,000 megawatts
of wind assets in various stages of development in the Western and Southwestern U.S.
and supports Duke Energy’s strategy to increase its investment in renewable energy.
Three of the development projects, totaling approximately 240 megawatts (MW), are
located in Texas and Wyoming and are anticipated to be in commercial operation in late
2008 or early 2009. Duke Energy anticipates capital expenditures of around $400 million
through 2009 to complete the first three projects.

Commercial Power acquired two additional synthetic fuel facilities for an immaterial
amount during the second quarter of 2007. These synfuel facilities, along with existing
facilities, generated approximately $23 million and $49 million of tax credits during the
three and six months ended June 30, 2007.

During first quarter 2006, International Energy closed on two transactions which resulted
in the acquisition of an additional 27.1% interest in the Aguaytia Integrated Energy
Project (Aguaytia), located in Peru, for approximately $31 million. The project’s scope
includes the production and processing of natural gas, sale of liquefied petroleum gas and
natural gas liquids and the generation, transmission and sale of electricity from a 177megawatt (MW) power plant. These acquisitions increased International Energy’s
ownership in Aguaytia to approximately 65%.
Recent News
Duke could raise residential rates more than industrial
(9/18/07)
http://www.newsobserver.com/business/story/709927.html
The utility has asked regulators for permission to raise industrial rates by about 2 percent as it
seeks to boost residential rates by 6.8 percent.
The difference is necessary to achieve more equity among rate payers, Ellen Ruff, president of
Duke Energy Carolinas said Wednesday. And it's important to ensure that North Carolina
remains competitive and attractive to new and existing businesses, she said. Between 1990 and
4
2006, Duke's revenue from industrial companies declined by 6 percent. Meanwhile, the
residential customer base has been growing.
"The issue of economic development is a very broad one and a very important one," she said. "It
creates jobs, it creates growth, it creates benefits for these residential customers."
Duke is adding 40,000 to 60,000 customers a year, most of them households, in the Carolinas,
Ruff said. By 2017, it projects that 34.9 percent of sales will come from residential customers
and 27.1 percent from industrial consumers.
"As we look to the future, we see the need for significant amounts of infrastructure development"
and with that, rate "rebalancing," Ruff said. The last time Duke increased its base rate was 1991.
This could potentially hurt short term revenues, but will help build the economy. If the economy
is healthy, utilities will be strong.
Duke Energy Increases Quarterly Dividend
(6/26/07)
Duke Energy announced that it has declared a quarterly cash dividend on its common stock of
$0.22 per share, an increase of $0.01 over the previous level. The dividend is payable on
September 17, 2007, to shareholders of record on the close of business August 17, 2007.
Comparison
Industry3
During Past:
3 Months
6 Months
Year-to-Date
12 Months
2 Years
5 Years
DUK
Multiutilities
2.85%
-8.13%
-2.97%
6.98%
12.98%
57.95%
2.66%
-5.26%
-0.42%
10.32%
13.87%
0.00%
DJ U.S. Total
Market Index
1.15%
5.98%
7.97%
16.38%
26.89%
88.75%
*WSJ Online
3
Compares DUK to Multiutilties and Dow Jones US Market Index
5
As you can see from the table above, DUK has only recently outperformed both the DJ US Total
Market Index and Multiutilities Industry. This may not be the best Industry comparison, because
Duke Energy is mainly an Electric Utilities company.
Peers4
Market Cap:
Employees:
Qtrly Rev Growth (yoy):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Oper Margins (ttm):
Net Income (ttm):
EPS (ttm):
P/E (ttm):
PEG (5 yr expected):
P/S (ttm):
DUK
23.64B
25,600
4.90%
16.52B
37.58%
5.25B
18.93%
2.27B
1.423
13.18
2.98
1.43
AEP
18.39B
20,442
7.20%
12.89B
34.44%
3.77B
16.92%
970.00M
2.252
20.46
2.7
1.42
CEG
15.99B
9,645
10.10%
19.92B
11.49%
1.96B
6.99%
886.60M
5.706
15.53
1.36
0.80
PGN
12.34B
11,000
4.70%
9.79B
30.50%
2.51B
14.49%
761.00M
2.581
18.47
3.84
1.25
AEP = American Electric Power Co. Inc.
CEG = Constellation Energy Group, Inc.
4
Compares DUK to Electric Utilities Industry and key competitors (within this industry)
6
Industry
3.40B
3.12K
6.50%
3.23B
31.66%
665.80M
12.81%
100.66M
1.44
17.22
2.34
1.40
PGN = Progress Energy Inc.
Industry = Electric Utilities
*Yahoo! Finance
Valuation:
Price/Earnings
Industry
DUK
AEP
CEG
PGN
17.95
13.11
20.46
15.53
18.47
The TTM (Trailing Twelve Month) Price/Earnings (P/E) ratio shows how much you pay for
every dollar of earnings the company makes. It is calculated by dividing the price per share by
earnings per share. The lower the P/E, the less you have to pay for the stock, relative to what
you can expect to earn from it. DUK has the lowest P/E of 13.11.
Price/Earnings to Growth (PEG)
Industry
DUK
AEP
CEG
PGN
2.34
2.98
2.7
1.36
3.48
Formula: P/E Ratio / 5-Yr Expected EPS Growth
PEG is a widely used indicator of a stock's potential value. It is favored by many over the
price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG
means that the stock is more undervalued. DUK has the highest PEG ratio compared to its peers
and the Industry. Backing out of the equation, DUK’s assumed EPS growth = 4.4% (Yahoo!).
Management Effectiveness:
ROA
Industry
DUK
AEP
CEG
PGN
N/A
3.29%
3.62%
4.25%
3.44%
Formula: Net Profits / Assets
The Return on Assets (ROA) percentage shows how profitable a company's assets are in
generating revenue. A high ROA is a good profitability measure since it reflects the ability of
management to produce profits from each dollar of company assets.
ROE
Industry
DUK
AEP
CEG
PGN
10.8%
9.86%
10.17%
18.93%
9.46%
Formula: Net Profits / Equity
The Return on Equity (ROE) percentage measures the rate of return on the ownership interest of
the common stock owners. It is calculated by dividing Net Profits by Equity. It measures a firm's
efficiency at generating profits from every dollar of net assets, and shows how well a company
uses investment dollars to generate earnings growth.
Financial Strength:
Total Debt/Equity
Industry
DUK
AEP
CEG
7
PGN
2.4
0.586
1.556
0.964
1.135
Formula: Total Liabilities / Shareholder’s Equity
This indication of financial leverage measures the extent of a firm’s capital that is provided by
lenders. This value computes the proportion of a company's debt compared to its available
capital. By using this ratio, investors can identify the amount of leverage utilized by a specific
company and compare it to others to help analyze the company's risk exposure. If a lot of debt
is used to finance increased operations (high debt to equity), the company could potentially
generate more earnings than it would have without this outside financing. Generally, companies
who finance a greater portion of their capital via debt (higher %) are considered riskier than
those with lower leverage ratios.
Discounted Cash Flow Valuation
For all of the valuations, I used Warren Buffet’s Owners Earnings Valuation Model. This model
required four inputs: discount rate (k), first stage growth rate (add), second stage growth rate (g)
and number of shares. I derived the discount rate using the CAPM equation. I used an average
market return of 10.23% and the current 90-day T-bill rate (risk-free rate) of 3.76%. This gave a
market risk premium of 6.47%. The first stage growth rate was estimated by an average of
analyst recommendations. I used a Beta of 0.17, provided by Yahoo! Finance. The Beta used is
Beta of Equity. Beta is the monthly price change of a particular company relative to the monthly
price change of the S&P500. The time period for Beta is 3 years (36 months) when available.
CAPM = Rf + βU*(RM-Rf)
= 3.76% + 0.17*(10.23%-3.76%)
= 0.0486 = 4.86%
assuming discount rate (k) of
Owner Earnings in 2006:
Net Income
Depreciation
Amortization
Capital Expenditures
Owner Earnings
4.86%
$
$
$
$
$
1,863,000,000.00
2,215,000,000.00
(3,470,000,000.00)
608,000,000.00
Year:
Prior Year Owner Earnings
First Stage Growth Rate (add)
Owner Earnings
Discounted Value per annum
2006
608,000,000.0
5.0%
638,400,000.0
$638,400,000.0
$
$
Sum of present value of owner earnings
Residual Value
Owner Earnings in year 10
Second Stage Growth Rate (g) (add)
$6,422,492,015.7
$
990,367,933.1
3.00%
8
Owner Earnings in year 11
Capitalization rate (k-g)
Value at end of year 10
$
$
1,020,078,971.1
1.86%
54,842,955,434.04
Present Value of Residual
Intrinsic Value of Company
$34,121,044,463.18
$40,543,536,478.85
Shares outstanding assuming dilution
1188000000
Intrinsic Value per share
$34.13
2nd Stage
k=4.86
Growth
2%
3%
4%
1st Stage
5%
23.9
34.13
68.13
4%
21.94
31.23
62.13
6%
26.03
37.28
74.66
I also ran the model assuming the previous 90-day T-bill (Rf = 4.19%) because of the Fed’s
recent cut in rates. The table below shows the effect on DUK’s intrinsic value.
2nd Stage
k=5.17
Growth
2%
3%
4%
1st Stage
4%
19.79
26.78
45.74
5%
21.54
29.24
50.1
6%
23.44
31.9
54.83
Recommendation
With the recent changes in the company it is difficult to say what will happen in the future. I
believe the spin-off raises focus on less items thereby increasing management effectiveness. I
also think because of the spin-off the company has more room for growth. Additionally, DUK
appears undervalued after running the Buffet Discount Model. Given this information, I
recommend we BUY 930 more shares. This would double our existing stake in Duke Energy.
Stop Loss price = $17.00
Risk to Capital = (Current share price – Stop Loss price) * Shares / IFM Total Value
= (18.76 – 17) * 1860 / 1,391,745.80
= 0.232% or $3,273.60
Current Snapshot
(1.25% of portfolio)
Shares
DUKE ENERGY
CORP
Cost
930
Post-purchase Snapshot
18,068.84
18.76
Current Value
17,446.80
Gain/Loss
-622.04
% Gain/Loss
-3.44%
(2.5% of portfolio)
Shares
DUKE ENERGY
CORP
Current Price
1,860
Cost
Current Price
Current Value
Gain/Loss
% Gain/Loss
35,515.64
18.76
34,893.60
-622.04
-1.75%
%Gain/Loss based solely on the stock itself, not on the portfolio as a whole
9
Exhibits
I. Spinoff Effect
A. Inventory
Materials and supplies, Natural gas, Coal held for electric generation, Petroleum products
June 30, 2007
December 31, 2006
1%
28%
42%
44%
52%
6%
27%
B. Asset Allocation by Segment
U.S. Franchised Electric and Gas, Natural Gas Transmission, Field Services, Commercial Power,
International Energy, Crescent
Assets - December 31, 2006
(in millions)
Assets - June 30, 2007
(in millions)
$34,346
(53%)
$180
(0%)
$192
0%
$3,332
(5%)
$34,550
77%
$3,458
8%
$6,826
(11%)
$1,233
(2%)
$6,669
15%
$19,002
(29%)
-
10
C. Discontinued Operations (sold in spin-off)
II. Cinergy Merger
IIA. Purchase Price Allocation
III. Performance
(2006 10-K & 2007 10-Q)
11
IIIA. U.S. Franchised Electric and Gas
IIIAi. Duke Energy Carolinas, LLC
IIIAii. Duke Energy Midwest
IIIB. Commercial Power
IIIC. International Energy
IIID. Crescent
12
IV. Maps
13
14