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
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.