Within days of the Federal Trade Commission (FTC) accepting aconsent order, Duke Energy Corp. and Phillips Petroleum last weekclosed the transaction combining their natural gas gathering andprocessing businesses under one roof. The agency conditioned itsacceptance on Duke agreeing to sell off nearly 3,000 miles of gasgathering lines in the Midcontinent region.

At the same time, the agency cleared the way for Duke to acquirethe jointly owned gas gathering and processing assets in centralOklahoma of Conoco Inc. and Mitchell Energy & Development Corp.Duke said it will pay Conoco an undisclosed amount of cash for theproducer’s share and will exchange interests in some of itsprocessing and gathering operations in Texas for Mitchell’s assets.The deal is significant, according to Duke and Phillips, because itincludes assets that lie adjacent to and between their existingmidstream operations.

The two transactions cover midstream assets totaling $6 billionthat will be transferred to a newly created company — Duke EnergyField Services L.C. (DEFS) in Denver, CO, making it one of thelargest gathering and processing, and natural gas liquidsproduction companies in the United States. Duke Energy will be amajority owner (56%) in the new company, with Phillips holding a24% share and the public a 20% share. The company filed an initialpublic offering March 15.

The Duke-Phillips transaction “clearly demonstrates DukeEnergy’s ability to maximize value from its existing business unitsand assets,” said Duke Energy Chairman Richard Priory. “We willcontinue to pursue opportunities that propel Duke Energy toward itsgoal of becoming the world’s premier global energy merchant.” Itmakes Phillips’ Gas Gathering, Processing and Marketing (GPM) unit”part of a much larger, more competitive asset base,” notedPhillips Chairman and CEO Jim Vulva.

Duke Energy and Phillips reached an agreement last December totransfer their gathering and processing businesses to DEFS. Shortlythereafter, Duke Energy agreed to acquire Conoco’s and Mitchell’sjointly held gathering and processing assets in Oklahoma.

The FTC consent order, which is subject to final agencyapproval, determined the two transactions would create competitiveconcerns in several counties in Kansas, Oklahoma and Texas. As aremedy, it ordered Duke to divest a total of 2,787 miles ofgathering lines in these markets. The majority of the lines (2,250miles) will be sold to Duke’s joint venture partners, with 800miles in Oklahoma already sold to Western Gas Resources Inc.,co-owner of Westana Gathering Co., and 1,450 miles of gathering inthe 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 toFTC-approved buyers under the terms of the consent order.

Duke will be required to divest these assets within 120 days ofthe final FTC order accepting the deal. In the event Duke fails tosell the 537 miles of gathering lines for which a buyer hasn’t beenidentified, the company would be ordered to sell additionalmidstream assets, according to the agreement. If the additionalassets aren’t sold or if the sale to Mitchell Energy isn’tcompleted by the deadline, the FTC said as a last resort it mayappoint a trustee to sell the assets.

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

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

Jim W. Mogg, previously president and CEO of Duke Energy’sgathering and processing business, has assumed the position ofchairman, president and CEO of the new company. Michael Panatier,president and CEO of Phillips GPM prior to the combinationtransaction, has been appointed vice chairman of the new company.

Susan Parker

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