Despite our reservations regarding the broader US stockmarket, we believe there remain a number of outstanding investment opportunities waiting to be uncovered by astute sector and stock analysis. Utility companies, for example, typically offer sound investment fundamentals yet are all too often overlooked by investors in favour of more "exciting" sectors such as high tech. We believe this to be the case with the regional energy services company Duquesne Light Holdings (US:DQE). In our opinion the company's "Back-to-Basics" business strategy will provide the platform for enhanced earnings growth for years to come.

In the early 1980s Pittsburgh-based DQE underperformed the market following the steel industry's abandonment of the region. However as the 1990s drew near, DQE benefited from a resurgence in local industry. From the late 1980s and through the 1990s, the shares were one of the best and most consistent performing stocks on the New York Stock Exchange. Starting from US$7.08 in 1987, the shares increased close to seven fold - reaching an all time high of US$53 in January 2000.

While it is not unusual for out-performance to persist for many years, at some point market conditions always turn, with the result often being a deep correction. This has certainly proven true with respect to DQE, as a protracted bear market wreaked havoc with the share price. In the two and a half years that followed, net income declined substantially as the company was forced to write off US$200 million in impaired assets. During this period stockmarkets around the world were also suffering losses as a result of corporate malfeasance and the tech market crash. DQE did not escape the carnage as the shares lost almost 80 percent of their value.

In July 2002 the stock finally reached a bearish extreme after touching a 13-year low of US$10.90. Since 2002, DQE has recovered a small portion of the ground lost during the previous decline. Notwithstanding the gains to date, DQE remains well below levels traded only a few years ago. With a lasting low in place, we believe that an enduring recovery is now underway, underpinned by a corporate reorganisation which commenced in 2000.

Duquesne Light, the principle transmission and distribution business, has a long and proud history in south-western Pennsylvania. The origins of the company date back to 1880 when local entrepreneurs formed the Allegheny County Light Company (ACLC), one of the country's first commercial lighting firms.

Three decades later in 1912, the Duquesne Light Company was formed when ACLC consolidated with two other local firms as the industry's growth picked up pace. By 1924 the company was servicing over 200,000 customers and only Chicago and New York were using more electricity than Pittsburgh. Thirty years later, Duquesne Light was awarded the contract to construct and operate the nation's first full scale nuclear power plant.

As the 1980's began, Duquesne Light was providing electricity for over 550,000 customers. However, major regional transformation was taking place - in 1982-83 the local steel industry slashed operations in the Pittsburgh area. Duquesne's industrial sales fell 50 percent as electricity use by steel customers declined a staggering 70 percent. By the end of the decade the region's economy was diversifying as a result of the steel industry's exodus and in 1989 Duquesne Light Holdings was formed.

Today, Duquesne Light is still the core of the company, providing for the electrical needs of nearly 600,000 customers. Other businesses include Duquesne Light Energy (DLE), a non-regulated electricity supplier, and Duquesne Energy Solutions, an energy facilities management company. Also in the group are DQE Financial, which operates landfill gas collection/processing systems, and fibre optic network owner DQE Communications.

DQE has been an industry pioneer in introducing a 'Back-to Basics' business strategy, tightening the focus on the core electricity business. Non-core businesses have been shed and traditional business values such as operational excellence, corporate governance, customer service and environmental responsibility reinforced. Management believe that this exercise has created the foundations necessary to ensure sufficient cash flow to support dividend payments in the future. This outlook is encouraging as dividend payments form one of the fundamental must "haves" when investing in any utility. Last year, Duquesne's dividend yield was 5.3 percent.

'Building on the Basics' constitutes the next step in Duquesne's business strategy. Here the company has identified three initiatives that will maintain focus while enhancing financial performance. The first is increased investment in transmission and distribution (T&D) infrastructure to meet regional needs. Duquesne plans to invest US$500 to US$600 million in the next three years. Since 1996, rate caps had prevented DQE from recovering new investment costs in T&D infrastructure. However, with these caps no longer in effect, the company will be able to pursue recovery plus an agreed return on these investments. We believe this will significantly bolster long-term turnover and earnings growth.

The second initiative concentrates on the retention of power customers following the industry's deregulation which now allows the consumer to choose a supplier. Last year, DQE was successful in retaining 74 percent of small customers in the fixed price energy market, however large commercial users have steadily declined due to increasing competition. Duquesne has taken this challenge and turned it into an opportunity by forming DLE at the end of last year. This non-regulated energy supplier has been able to compete successfully and is now the leading supplier to this segment of the market in the Pittsburgh area.

The last initiative seeks to address environmental challenges through the group's landfill gas collection and processing business. Although last year's earnings at DQE Financial, which houses this subsidiary, declined US$6.8 million to US$26.4 million, we are highly encouraged by the potential in the gas business where profitability rose by US$8.2 million.

At the heart of DQE, is a solid traditional utility company with stable earnings. While 2004 operating profit was flat at US$151 million, this year holds much promise. First quarter operating profits have risen 34 percent on last year to US$47 million due primarily to lower purchased power costs. Full year net income is forecast to be 15 percent higher at US$100 million.

Robust operating cash flows of US$178 million have strengthened Duquesne's balance sheet. Cash increased by US$29 million and debt declined by 7 percent to US$958 million, aided by the issuance of US$73 million in preferred stock and proceeds from the 2003 sale of AquaSource. As a result interest cover has risen from a respectable 2.0 to 2.4 times operating earnings. We also note that none of the company's long-term debt is scheduled to expire before 2008. Accordingly, DQE has a significant degree of financial flexibility.

We believe that DQE is poised for future out-performance. The company's focus, 'Building on the Basics', has identified three initiatives that we are confident will underpin future earnings growth. Solid financial foundations will aid the pursuit of these opportunities by ensuring the necessary funding is available.

In our opinion, DQE offers compelling value with the shares trading on a prospective price earnings ratio of less than 15 times, while offering a dividend yield in excess of 5 percent. Despite gains made since 2002, DQE holds excellent upside potential from current levels in our opinion. Accordingly, we recommend the NYSE listed stock to all Members as a buy up to US$19.00.