Duke Energy took another major step in its back-to-the-future strategy Wednesday, announcing it would spin off its natural gas business just one day after it told of plans to sell its newly acquired gas and power marketing unit (see Daily GPI, June 28). That will put Duke just about back in the pure power and utility business, circa 1997, before its foray into the natural gas and high risk commodities trading arenas.

Duke said shareholders will own 100% of the equity in both Duke Energy and a new gas company yet to be named. Duke officials had hinted they might spin off the gas business at the time they announced plans for their $9 billion stock deal to acquire Cinergy Corp. (see Daily GPI, May 10, 2005), an acquisition that was completed just three months ago. Tuesday’s divestiture was the sale of Cinergy’s trading unit to the European merchant banking firm Fortis for $415 million. Duke, burned in the energy marketer collapse several years back, already had eased out of its own trading business.

If Duke gets the spin-off done by Jan. 1, 2007 as it plans, the separation of the gas business will come almost 10 years after the 1997 merger that united Duke Power and PanEnergy. The spin-off will mark one more step away from the gas-power double-bill strategy so popular around the turn of the century. It doesn’t seem all that long ago when pure-play merchant generator Dynegy was called Natural Gas Clearninghouse and El Paso touted itself with the tagline “pipelines and power.” Plans change.

“This decision has been our top strategic priority in recent months and we expect to deliver significant long-term value to our shareholders by pursuing this transaction,” said CEO James E. Rogers, who was Cinergy chairman prior to its merger with Duke. “As stand-alone companies, our electric and gas businesses will be extremely well positioned to meet the energy challenges facing our country and the growing needs of our customers, as well as to provide strong growth for shareholders.”

Charlotte, NC-based Duke’s board approved the deal Tuesday and authorized management to create two publicly traded companies. The new gas company will consist of the Duke Energy Gas Transmission (DEGT) business unit, which includes Union Gas, and Duke Energy’s 50% ownership interest in Duke Energy Field Services (DEFS). The businesses remaining in Duke Energy will be the U.S. Franchised Electric & Gas business unit, the Commercial Power business unit, the International business unit and Crescent Resources.

The transaction is expected to qualify for tax-free treatment for U.S. federal income tax purposes to both Duke Energy and its shareholders. Duke shares closed down 14 cents Wednesday but were heading up in early after-hours trading.

“Today’s announcement is the culmination of a thoughtful strategic review,” said Duke Chairman Paul M. Anderson. “It puts in motion a plan that we believe will unlock shareholder value in the near term, as well as position the two companies to create more value for our investors over the long haul. As two market-leading companies, the stand-alone electric and gas businesses will have increased flexibility to seize expansion opportunities and grow at a higher rate.”

When the spin-off is completed, Anderson will be going back to where he came from, sort of. The Duke board said he will be named nonexecutive chairman of the gas company’s board of directors. Anderson was CEO of PanEnergy at the time of the Duke Power-PanEnergy merger. He then served as president and COO of Duke Energy. He left Duke Energy in 1998 to become managing director and CEO of BHP Ltd., which later merged with Billiton PLC to create BHP Billiton, the world’s largest diversified natural resources group, which Anderson led until retiring in 2002. Then in October 2003, it was announced that Anderson would return and take over for Duke Energy’s retiring Chairman Richard B. Priory as chairman and CEO (see Daily GPI, Oct. 13, 2003). At the time of the hard-fought Cinergy merger it was decided that Rogers would lead the company as CEO and Anderson would be chairman.

Wednesday the Duke board also announced that Fred Fowler, currently group executive and president of DEGT, will serve as president and CEO; Greg Ebel, currently president of Union Gas, will be chief financial officer (CFO); Alan Harris, currently group vice president and CFO of DEGT, will serve as chief development officer; Bill Garner, currently group vice president for corporate development at DEGT, will be general counsel; Martha Wyrsch, currently president of DEGT, will serve as president and CEO of the new gas company’s transmission business, which will include natural gas transmission, storage, the Western Canadian gathering, processing and natural gas liquids operations, and Union Gas; and Bill Easter will continue as president and CEO of DEFS, reporting to the DEFS board of directors.

Upon completion of the gas company spin-off, Anderson will resign from the Duke Energy board and Rogers will be appointed chairman. Rogers will also continue in his role as president and CEO. David Hauser, currently group executive and CFO, will also continue in his role.

Duke Energy currently ranks 117th in the 2006 Fortune 500 ranking of America’s largest companies. As stand-alone entities, it is anticipated that both Duke Energy and the new gas company would continue to be Fortune 500 companies.

The gas company will be one of the largest gas transmission, storage, gathering, processing and distribution businesses in North America, with more than 18,500 miles of natural gas transmission pipeline, 250 Bcf of gas storage capacity and 1.3 million retail gas customers in Ontario, Canada. Through its 50-50 joint venture with ConocoPhillips, it will also be the largest producer of natural gas liquids in the United States. Duke Energy expects the gas company, which will be headquartered in Houston, to have ongoing earnings per share (EPS) growth on average in the range of 5% to 7% annually over the next five years.

“We’re excited about becoming the leading pure-play gas transmission, storage, gathering, processing and distribution business in North America,” said Fowler. “With premier assets in strategic locations, a strong and experienced leadership team and a target-rich environment, we see ample opportunities to grow the gas business in the years ahead.”

Upon completion of the spin-off, Duke Energy will be one of the five largest electric utilities in the United States, consisting of the U.S. Franchised Electric & Gas business unit, operating as Duke Energy Carolinas, Duke Energy Indiana, Duke Energy Ohio and Duke Energy Kentucky. These utility businesses will continue to rely on approximately 28,000 MW of nuclear, coal, natural gas and hydroelectric power generation to serve 3.8 million retail electric customers in five states across 47,000 square miles of service area. The company will also continue to serve 500,000 retail gas customers in Ohio and Kentucky.

The Duke Energy portfolio will also include Duke Energy’s International business unit, with operations in eight Latin American countries; Duke Energy’s Commercial Power business unit, with approximately 8,700 MW of nonregulated electric generation primarily in the Midwest; and Crescent Resources, a real estate company.

Duke Energy expects that after completion of the spin-off, Duke Energy’s ongoing EPS will grow on average by 4% to 6% annually over the next five years. The company will continue to be headquartered in Charlotte.

“Duke Energy’s focus going forward will be to continue to deliver competitively priced electricity and superior reliability to satisfy the needs of our customers,” said Rogers. “We see solid opportunities in the years ahead that should ensure steady, stable earnings and dividend growth for our investors.”

Duke Energy and the new gas company will be capitalized to provide financial flexibility to take advantage of growth opportunities. After completion of the spin-off, both companies are expected to have financial policies, balance sheets and credit metrics commensurate with solid investment-grade credit ratings. At the time of the separation, the sum of the two companies’ dividends will be equal to the current Duke Energy dividend. The specific dividend allocation between the two companies will be determined closer to the date of the spin-off.

The final terms of the spin-off transaction are subject to subsequent approval of the Duke Energy board of directors. Consummation of the proposed transaction is subject to certain conditions, including final approval of the Duke Energy board, receipt of confirmation of the tax-free treatment of the spin-off, receipt of certain regulatory approvals, and the filing with the Securities and Exchange Commission (SEC) and the effectiveness of a registration statement on Form 10. The registration statement on Form 10 is expected to be filed with SEC in third quarter 2006. Shareholder approval is not required.

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