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Duke, Phillips Merge Midstream Gas Assets

Duke, Phillips Merge Midstream Gas Assets

Within days of the Federal Trade Commission (FTC) accepting a consent order, Duke Energy Corp. and Phillips Petroleum last week closed the transaction combining their natural gas gathering and processing businesses under one roof. The agency conditioned its acceptance on Duke agreeing to sell off nearly 3,000 miles of gas gathering lines in the Midcontinent region.

At the same time, the agency cleared the way for Duke to acquire the jointly owned gas gathering and processing assets in central Oklahoma of Conoco Inc. and Mitchell Energy & Development Corp. Duke said it will pay Conoco an undisclosed amount of cash for the producer's share and will exchange interests in some of its processing and gathering operations in Texas for Mitchell's assets. The deal is significant, according to Duke and Phillips, because it includes assets that lie adjacent to and between their existing midstream operations.

The two transactions cover midstream assets totaling $6 billion that will be transferred to a newly created company --- Duke Energy Field Services L.C. (DEFS) in Denver, CO, making it one of the largest gathering and processing, and natural gas liquids production companies in the United States. Duke Energy will be a majority owner (56%) in the new company, with Phillips holding a 24% share and the public a 20% share. The company filed an initial public offering March 15.

The Duke-Phillips transaction "clearly demonstrates Duke Energy's ability to maximize value from its existing business units and assets," said Duke Energy Chairman Richard Priory. "We will continue to pursue opportunities that propel Duke Energy toward its goal of becoming the world's premier global energy merchant." It makes Phillips' Gas Gathering, Processing and Marketing (GPM) unit "part of a much larger, more competitive asset base," noted Phillips Chairman and CEO Jim Vulva.

Duke Energy and Phillips reached an agreement last December to transfer their gathering and processing businesses to DEFS. Shortly thereafter, Duke Energy agreed to acquire Conoco's and Mitchell's jointly held gathering and processing assets in Oklahoma.

The FTC consent order, which is subject to final agency approval, determined the two transactions would create competitive concerns in several counties in Kansas, Oklahoma and Texas. As a remedy, it ordered Duke to divest a total of 2,787 miles of gathering lines in these markets. The majority of the lines (2,250 miles) will be sold to Duke's joint venture partners, with 800 miles in Oklahoma already sold to Western Gas Resources Inc., co-owner of Westana Gathering Co., and 1,450 miles of gathering in the Austin Chalk area of Texas to be divested to Mitchell Energy, which co-owns the Ferguson-Burleson County Gas Gathering System. The remaining 537 miles of gathering lines are to be sold to FTC-approved buyers under the terms of the consent order.

Duke will be required to divest these assets within 120 days of the final FTC order accepting the deal. In the event Duke fails to sell the 537 miles of gathering lines for which a buyer hasn't been identified, the company would be ordered to sell additional midstream assets, according to the agreement. If the additional assets aren't sold or if the sale to Mitchell Energy isn't completed by the deadline, the FTC said as a last resort it may appoint a trustee to sell the assets.

As part of the consent order, Duke has agreed to maintain the assets being divested in their current condition, and provide gas gathering services under the same terms and conditions available to customers on March of this year until the assets are sold.

DEFS will have to borrow about $2.75 billion of short-term debt to carry out the merger of Duke Energy's and Phillip's processing and gathering operations. The proceeds of the debt will be used to make one-time cash distributions of about $1.2 billion to Duke Energy and Phillips each. Also, Duke Energy will be reimbursed $325 million and Phillips $20 million for costs associated with acquiring additional assets since December.

Jim W. Mogg, previously president and CEO of Duke Energy's gathering and processing business, has assumed the position of chairman, president and CEO of the new company. Michael Panatier, president and CEO of Phillips GPM prior to the combination transaction, has been appointed vice chairman of the new company.

Susan Parker

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