When it comes to company-transforming actions like mergers or spinoffs, what you see isn’t necessarily all you’ll get.

That’s certainly the case with two monster transactions hitting utility investors this week: the completion of the merger between AT&T (NYSE: T) and BellSouth and the successful spinoff of SPECTRA ENERGY (NYSE: SE) from DUKE ENERGY (NYSE: DUK).

Consummation of AT&T’s $85 billion courtship of BellSouth followed swiftly after the deal won approval from the Federal Communications Commission (FCC) on December 29. That followed the company’s agreement to concessions sought by the FCC’s two Democrats, which became necessary after the third Republican was forced by legal considerations to recuse himself from the decision.

Former BellSouth shareholders now own 1.325 shares of AT&T for every share of the southeastern Baby Bell they once owned. That’s roughly a value of about $45 per former BellSouth share, far above the value of the deal when it was originally announced, thanks to steady appreciation in the shares of the new Ma Bell.

Duke Energy’s spinoff of Spectra Energy--which is essentially all of Duke’s former natural gas assets in North America--has already generated additional shareholder value. The transaction was completed over the New Year weekend. Spectra shares opened this week above expectations at a price of $28.25 and swiftly rose to over $29 per share.

Shares of the rest of Duke--which represent electric utilities in the Carolinas, Indiana and Ohio, as well as some Latin American power plants--started out at $20 a share after the spinoff. They’ve since traded in the $19 to $20 range.

Under the terms of the spinoff, those who held Duke last month now have one share of Duke Energy and a half share of Spectra per Duke share. Spectra will pay a quarterly dividend at an annual rate of 88 cents a share. That equates to a value of 44 cents per old Duke share. The all-electric Duke now pays 84 cents a share. The aggregate Duke/Spectra dividend is $1.28, the pre-spinoff rate for Duke.

EXTRA TEXTURE

That’s the part you see. What you’ll ultimately get going forward is that both halves of the old Duke should continue to gain value as businesses, increase dividends and rise in the stock market.

After shutting down its Houston trading desk this week and unloading its Midwest trading division in October, Duke is easily the most conservative part of the former company. Utilities in the Carolinas and Indiana enjoy extremely supportive regulation, while the Ohio power company is the lowest cost and most competitive in the state.

Management won’t earn any incentives unless the company earns at least $1.15 per share in 2007 and $1.22 per share in 2008. Hitting those targets means solid dividend growth and steady gains in balance sheet strength--and a higher share price.

This is the part of the company to which Wall Street has chosen to attach a low value. The stock trades at an initial yield of close to

5 percent and a low multiple to book value, despite boasting some of the power industry’s most valuable assets, steady revenue bases and a reputation for running nuclear power plants well.

There are two possibilities for Duke going forward, both very favorable. First, it could continue as an independent company, increasing its fleet of low-cost power plants and boosting its rate base with an estimated $9 billion in new projects over the next decade. There are already a number of environmental cleanup projects slated to go into the rate base, and increase earnings. In fact, the company has been an early and vocal supporter of regulating carbon dioxide, the greenhouse gas blamed for global warming.

The second possibility would probably be less rewarding in the long run, but could be infinitely more lucrative in the near term: a takeover. The logical candidate would be neighboring SOUTHERN COMPANY (NYSE: SO), which dominates Alabama, Georgia, Mississippi and the Florida panhandle. Southern is already rumored to be courting the other major Carolinas utility, PROGRESS ENERGY (NYSE:PGN). It’s also the utility most frequently mentioned as a peer for Duke.

Such a deal would no doubt face some challenges from regulators due to its size. All of the states involved, however, are served by regulators who maintain cooperative relations with Duke and Southern. And given their complementary rather than overlapping service territories, the Federal Energy Regulatory Commission is unlikely to have major objections either. Rather, the biggest risk is they might use the occasion to try to extract concessions from Southern for greater opening of its network.

That risk might be enough to discourage Southern from making an offer, as it could be discouraging the company from seriously going after Progress. But in any case, Duke remains a value in a world where private and public capital alike is seeking cash-generating investments.

As for Spectra, the company’s value is in its many parts. As CEO Fred Fowler stated this week, it takes energy from the producer and brings it to the end users: corporations, governments and individuals. At the company’s core are more than 17,500 miles of natural gas pipelines and 250 billion cubic feet of storage. And it plans to spend $3 billion to expand storage and pipes throughout North America during the next three years.

Spectra also owns half of DCP Midstream, a joint venture with CONOCOPHILLIPS (NYSE: COP) that’s North America’s biggest gas processor. It runs a gas distribution utility in Ontario, a holdover from the takeover of a major Canadian utility earlier this decade.

And it owns most of the managing partner of SPECTRA INCOME FUND (TSX: SP.UN, OTC: DUYIF), a Canadian income trust with a vast array of midstream natural gas assets in strategic areas of that country.

Spectra is expected to earn $1.40 per share in 2007, its first full year of operations. That’s plenty to support the expected dividend as well as support much of the projected capital budget of $1.6 billion. A potentially extremely valuable wild card is the planned spinoff of some of Spectra’s assets into a limited partnership. That could raise $300 to $400 million for the company, enabling it to attain an investment-grade credit rating even while financing an aggressive capital growth plan.

The market prices of Duke and Spectra will be determined to a large extent by external factors like the health of the general stock market and economy, as well as what happens with interest rates.

Should rates spike in the spring and summer--as they’ve done the last four years--it would likely drive down the value of both companies, regardless of what kind of numbers they post in the first and second quarters.

Further out, however, I expect strong results at both companies to drive their share prices higher. My 12- to 18-month target for Duke is the low to mid-20s, adding up to a total return of 15 to 20 percent from here. For Spectra, a mid-30s share price is probable, for slightly higher returns, though it’s arguably already pricing in much of its good news.

The bottom line: Both halves of the former Duke Energy are solid and should continue to be core holdings for conservative and aggressive investors alike. BUY DUKE UP TO 20 AND SPECTRA ON DIPS TO THE MID-20S.

THE NEW AT&T

Predictably, the day after AT&T completed its merger with BellSouth, the airwaves and financial pages were filled with stories alternately touting or lamenting the rebirth of Ma Bell. The truth is the new AT&T is far different from the old, in some ways infinitely more challenged, in others far more powerful.

Before the US Supreme Court ordered the breakup of the old AT&T to begin in January 1984, Ma Bell controlled more than 80 percent of total phone traffic in the US. Upstarts like MCI succeeded in carving out a small piece of the long distance telephone service market. And GTE, ALLTEL (NYSE: AT) and others held virtual monopolies in rural areas. But AT&T was the undisputed leader in all things telecom, including technological development through its Bell Labs unit. In fact, AT&T was so prosperous it was able to fund the development of transforming technologies like the microchip and wireless phone.

In contrast, the new AT&T is a user rather than a developer of technology. It does rank first in the country in customers, having absorbed four of the former Baby Bells: Ameritech (Midwest), BellSouth (Southeast), Pacific Telesis (California and Nevada) and Southwestern Bell (mid-south and Texas), as well as Southern New England Telecom, which was never part of the old AT&T. But it faces competition the old Ma Bell never did, steadily losing local phone connections to wireless, computer-based Voice over Internet Protocol (VoIP) and cable television providers. And its credit rating, while still solid, is far below pre-1984 AT&T’s AAA.

On the other hand, the new AT&T has strengths the old could only dream of. Front and center is its industry-leading wireless arm Cingular, the largest in the country by number of customers. Before the merger, Cingular’s ownership was divided between AT&T and BellSouth. As a result, results were not consolidated and operations were conducted at arm’s length.

Now with ownership consolidated solely with AT&T, the new Ma Bell will be able to integrate it more fully with its wireline operations. In contrast, chief rival VERIZON (NYSE: VZ) has been able to consolidate Verizon Wireless’ results. But it’s limited in how far it can integrate operations, since partner VODAFONE (NYSE:VOD) still owns a 45 percent stake.

Being able to integrate wireless with wireline will be increasingly important in coming years. That’s because technology continues to converge, particularly when it comes to providing broadband services. In contrast to Verizon, AT&T has only recently begun to rapidly build out its wireline fiber optic network, announcing major construction in Michigan just last month. Verizon, however, is the only other company with deep enough pockets to build this kind of ultimate wireline network, and it only competes now with AT&T in wireless. As a result, the new AT&T hasn’t lost much by sticking to a slower time table.

Much has been made of competition faced by Big Telecom from cable television companies, particularly COMCAST (NSDQ: CMCSA). The latter has enjoyed some success snaring local phone connections. The bottom line, however, is plain old telephone service is still an enormous cash cow for AT&T, and will be even more so after the BellSouth merger. Moreover, actual line losses are dwarfed by continued robust growth in wireless and broadband, as well as the company’s growing business unit.

In any case, there seem to be plenty of profits to go around for both Big Cable and Big Telecom. The evidence is in the robust third quarter results from both sectors, which are virtually certain to be repeated in fourth quarter results slated to be announced later this month. And they’re likely to continue throughout 2007 and beyond as well.

Commentary following the FCC’s approval of the merger also concentrated on the alleged concessions made by the companies. Chief among these was in the area of so-called net neutrality, which holds that no broadband service provider should be able to discriminate between Internet content providers in terms of speed or quality of service.

To win approval of the merger by the FCC’s two Democrats, AT&T agreed not to charge companies like GOOGLE (NSDQ: GOOG) premium fees to provide faster subscriber access. That agreement, however, will expire in two years, after which the company will apparently be able to do whatever it wants.

The FCC’s two Democrats hailed the condition on net neutrality as historic and better protection for consumers “than anybody thought possible when this got started.” The two Republicans who voted wrote, “Some of the conditions impose burdens that have nothing to do with the transaction, are discriminatory, and run contrary to commission policy and precedent.” Chairman Kevin Martin also stated that he remained fervently opposed to FCC adoption of any standard for net neutrality, asserting it was undue, unnecessary and ultimately counterproductive interference in a market that’s already working.

In the final analysis, Martin’s follow-up statement is probably the most important part of the FCC’s decision. For one thing, the Democrats won concessions only because of miscues by the Bush White House. First, it failed to properly vet its most recent appointment to the FCC--Republican Robert McDowell, a former lobbyist at the FCC--to ensure he could vote the administration’s way on issues the FCC would soon have to decide. Then it failed to give him an adequate legal defense in order to vote on the merger, forcing him to recuse himself permanently.

With McDowell free to vote on other issues, it’s unlikely we’ll see the FCC spearhead anything on net neutrality in the future. Nor is it likely the fears of some telecom perma-bears will be realized that Democrats in Congress will use the agreement as a template to impose some kind of permanent network neutrality regulation. Similar rules were opposed by many Democrats in the last House of Representatives, and no incumbent members of the Blue Party lost in November. And Republicans are overwhelmingly opposed, particularly President Bush.

Finally, even if some form of network neutrality legislation passes muster it will have no impact on AT&T. The new Ma Bell hasn’t ever charged for multi-tiered access to its network and it would have faced stiff resistance had it attempted to do so in the current market. Instead, the company’s strategy for the foreseeable future is going to be to attract as many users to its network as possible, a goal that would have been thwarted by even the hint of fees.

As for the other conditions, they seem to be face-saving measures, at best, for the FCC’s Democrats and do nothing to threaten AT&T’s potential dominance. Divesting a handful of wireless licenses in the Southeast may even enhance Cingular’s performance by freeing up cash for the urgent task of improving service quality. Similarly, a concession to offer low-cost broadband access separate from communications service may hurt revenue near term as some switch to VoIP service. But it will also arguably drive users to its broadband service, and ensures that it will continue to collect checks even from defecting customers.

The company also agreed to cap prices on large capacity telecommunications lines that provide phone and data services to large business for four years. But again, this seems to dovetail with its drive to beef up its business services division, a strong performer in recent quarters.

Obviously, AT&T would have preferred to win FCC approval without conditions, as was the case with the US Justice Dept. In the long run, however, it probably wins from making a few, virtually painless concessions now, rather than letting the issues fester and be taken up as a political issue by the just-sworn-in Democratic Congress.

In any case, the new Ma Bell looks set to post strong results for 2007 and beyond and to build on the share price gains it posted last year. Cost reductions from the BellSouth deal, continued growth at Cingular, increasing numbers of broadband users and robust business operations will be the drivers. Moreover, Wall Street expectations are still low, just as they’ve been for years in the rest of the communications sector. That leaves a lot of room for positive surprises, a relative rarity in the stock market of early 2007.

ENERGY BREAKDOWN

A record mild winter in the Northeast has knocked natural gas prices for a loop during the past few weeks. This week, oil prices joined them on the downside, breaking decisively below the long-held $60 per barrel mark and slipping into the mid-50s.

The decline has dramatically raised the volume of bearish voices, many of whom have predicted a drop in black gold to $40 or lower for several years now. For their part, stocks of oil and gas producers have responded with one of their worst weeks in a long time, despite being open for just three trading days.

Based on the example of the last prolonged rally in energy prices, this bull market is unlikely to end until we see at least some of the factors that ended the run of the 1970s: a decided move to more conservation, the mass adoption of alternatives to using oil and gas by consumers and industry, the discovery and exploitation of at least one major new reserve of oil and gas on par with the North Sea and a major global recession that ultimately killed off demand, particularly in the developing world.

Here in early 2007, we’re seeing at least some vestiges of one of these factors. According to figures from Autodata Corp, five of the top 10 selling cars in December were hybrid vehicles. Meanwhile, sales of small cars were up 13.9 percent, light duty trucks were down 9.3 percent, pickups were off 15.6 percent, minivans were down 15.6 percent and mid-sized SUVs skidded 24 percent from December 2005 levels. Even popular brands like the Honda Accord were outsold by that company’s hybrid offerings.

Whether these figures represent a real change in consumer behavior or a blip along the lines we’ve seen before remains to be seen.

Today’s hybrids use batteries that will require replacing in six years and at a cost likely greater than what the car itself will then be worth. But with gasoline prices at the pump again on the rise, there’s every incentive for the trend to continue and possibly even accelerate. In fact, if fuel efficient cars retain leadership, it will be the clearest sign yet that consumer behavior is changing, removing at least one of the pillars of this bull market in energy.

On the other hand, the increase in hybrid car drivers is definitely not what’s behind the rising inventories of oil and natural gas.

Blame for that lies squarely on the weather, which remains historically mild in the country’s key winter energy-consuming regions. In fact, weather has been the mildest on record, depressing demand for natural gas and oil distillates used for heating. That’s far offset the drop in gas production we’ve seen in Canada, as well as cutbacks by the Organization of Petroleum Exporting Countries.

It’s entirely possible we’ve entered an era of perpetually mild weather, and that an historically tepid summer will follow what’s shaping up as the warmest winter on record. That would follow the pattern of last year. And we just might have another season of no hurricanes in the Gulf of Mexico, as well as continue to avoid supply cutoffs of oil from increasingly politically volatile producing regions of the world.

What we do know, however, is the current drop in energy prices reflects pretty much a worst-case for demand, which is being caused by a series of extremely unusual factors. We also know that production is being curtailed as companies suspend or postpone drilling plans in North America and producer nations try to protect prices for oil.

Finally, while we’ve seen the typical hype about alleged new bonanzas of oil and gas, the only significant new sources coming on the market are non-conventional, such as oil sands. These, by definition, require high oil and gas prices to be economic, and won’t come to market if they’re not. And proposed taxes and subsidy removals by Congress will only discourage potential new development.

The only thing replacing oil and gas to any significant extent is coal burned for electricity, which itself is coming under scrutiny for producing greenhouse gases. Wind is popular politically but only capable of meeting a portion of incremental demand, not displacing baseload power. Finally, no new nuclear power plants are likely in the US for at least a decade, even as several now in operation are candidates to be shut down. And while global growth in 2007 may be slower than in 2006, there’s no sign of an early-1980s-style recession such as the one that crushed developing world demand then.

In short, the weight of evidence is still that the ongoing pullback in oil and gas will be temporary. In fact, all it would take for a dramatic reversal is a return to what have been normal temperatures.

Alternatively, if global warming has made cold winters a thing of the past, a record hot summer that soaks up all excess energy inventories and then some is only a matter of time.

Energy stocks, including quite conservative ones, have taken it on the chin in the early days of 2007, just as they did for much of 2006. And it’s possible the selling will go on a while longer. But with this much bearish sentiment, investors so willing to dump good stocks and still little evidence anything fundamental has changed--other than the weather--it’s not going to take much to reverse this market.

This isn’t the time to dump conservative energy stocks, be they good Super Oils, utility/producers or even solid Canadian trusts like ARC ENERGY (TSX: AET.UN, OTC: AETUF) and ENERPLUS RESOURCES (NYSE: ERF).