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Duke Energy Moves to Sell Off Assets to Buy Back Stock

Duke Energy's board of directors last Thursday said it approved a plan to buy back up to $2.5 billion in common stock over the next three years, which will be funded in part by the sell-off of nearly 20% of the company's ownership interest in Duke Energy Field Services LLC (DEFS) to partner ConocoPhillips, the sale by DEFS of the general partner of TEPPCO Partners LP to EPCO Inc. subsidiary Enterprise GP Holdings LP, and the sale of 2.5 million TEPPCO limited partner units to EPCO and affiliates.

Charlotte, NC-based Duke Energy reported that it and ConocoPhillips reached an agreement to reduce Duke's ownership share of DEFS to 50% from 69.7%, resulting in a 50-50 joint venture between Duke Energy and ConocoPhillips. Under the terms of the deal, the Houston-based producer has agreed to pledge to Duke Energy approximately $1.1 billion in cash and assets in exchange for upping its share in DEFS to 50% from 30.3%. About 50% of the transaction will be in cash, said Duke Energy.

The transaction includes the transfer of DEFS's gathering and processing facilities in Alberta and British Columbia to Duke Energy Gas Transmission (DEGT). In addition, ConocoPhillips will transfer its interest in the Empress System into DEGT's operations in western Canada. The Empress System operations include natural gas liquids extraction and fractionation facilities in Alberta and related liquids transportation and storage operations. The addition of these assets is designed to strengthen DEGT's position in western Canada, the company said.

Duke Energy and ConocoPhillips have discussed moving to a 50-50 structure for some time now, it noted. "The time is now right for both parties," said Duke Energy CEO Paul Anderson.

The Duke Energy board also approved the sale by DEFS of the TEPPCO general partner (Texas Eastern Products Pipeline Co. LLC) to EPCO for $1.1 billion and the sale by Duke Energy of its 2.5 million limited partner units in TEPPCO to EPCO at last Tuesday's closing price of $41.58 per share, for a total of about $100 million.

TEPPCO operates 11,600 miles of pipeline facilities that transport natural gas, crude oil, liquefied petroleum gas, natural gas liquids (NGLs), petrochemicals and refined products. It also has gathering, storage, fractionation and marketing assets. Houston-based EPCO is a privately held company owned by Houston billionaire Dan Duncan. EPCO's assets include the general partnership of Enterprise Products Partners LP and ownership of about 34% of Enterprise, which operates natural gas, NGL, petrochemical and offshore crude oil pipelines, and owns storage, production, fractionation and gas processing assets.

Despite the proposed sell-down of its ownership interest in DEFS, Duke Energy said its earnings target for 2005 remains at $1.60 a share. It noted that the DEFS sell-down would be offset by its share buyback and transfer of additional assets to DEGT. To support continued growth, Anderson noted that DEFS is mulling over the prospect of forming a new master limited partnership.

The sale of TEPPCO's general partner to EPCO closed last Thursday, the company said. The sale of Duke Energy's limited partner units in TEPPCO is expected to close on or before March 1. The restructuring of Duke Energy's DEFS venture with ConocoPhillips is subject to customary regulatory approvals in the U.S. and Canada, and is due to be completed either late in the second quarter or early in the third quarter of this year, it noted.

Together, the multiple transactions are expected to result in a one-time gain that will be recognized by Duke Energy at the closing of the sales. Those gains will likely be in the range of 80 cents to 90 cents per share.

The impact of the transactions on the company's future earnings per share will be virtually offset by the planned stock buyback, Duke Energy said. The share buyback will be funded with the proceeds from the transactions along with current cash balances and future gas generation. Duke Energy said it ended 2004 with $1.85 billion in cash, cash equivalents and short-term investments.

The share buyback program is expected to begin this year and last for three years, according to the company. It indicated that there will be more shares repurchased in the near term than in the long term.

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