Plans for a new publicly traded energy giant were revealedyesterday, as Duke Energy and Phillips Petroleum announced theirintentions to form a midstream company called Duke Energy FieldServices (DEFS). Expected to have an enterprise value of between $5and $6 billion, DEFS will be the result of a merger of Duke’sgathering and processing businesses (also called Duke Energy FieldServices) with Phillip’s Gas Processing and Marketing (GPM) unit.Subject to approval by the FTC under the Hart-Scott-Rodino act, thedeal is expected to close by the first quarter 2000.

The new company, lauded by its two creators as the largestmidstream gas liquids business in the country, will have a strongposition in most of the significant hydrocarbon basins in thecontinental United States. The combined revenues and EBITDA for thetwo businesses in the third quarter of 1999 were $1.6 billion and$183 million, respectively.

The new company will be based in Denver, CO, operate 67 plants,57,000 miles of pipelines and have an estimated 17 Tcf ofcontracted supply. It will process 5 Bcf/d of raw gas, and produce400,000 b/d of gas liquids. Duke Energy and Phillips said theybelieve that the new company will realize synergies, primarily fromoperating efficiencies.

“This combination represents the latest and most dramaticexample of the restructuring and consolidation in the midstream gasbusiness. It immediately creates shareholder value for both DukeEnergy and Phillips Petroleum. By combining DEFS and GPM’sbusinesses, we will have the best collection of people and assetsin the gathering and processing industry. This transaction bringstogether the fastest growing midstream business, DEFS, with one ofthe most experienced, GPM. Additionally, Phillips Petroleum’sassets and gas contracts provide additional balance to our existingbusiness,” said James Mogg, current president of the old DukeEnergy Field Services and future president of the new company.

Both Duke and Phillips stand to gain immediate and significantcash flow once the new company meets its FTC approval. Under theterms of the agreement, DEFS will seek to arrange $2.4 billion ofdebt financing and will make one-time cash distributions of $1.2billion to both Duke and Phillips. Duke said the money will helpreduce its need to issue equity to cover its capital expenditures.Phillips said it plans to retain $1.15 billion after taxes, whichit will put toward debt and “other corporate purposes.” As aresult, Phillips expects its net debt-to-capital ratio to declinefrom 47% to near 40%.

The public will get a chance to get in on the action. During thefirst half of 2000, following completion of the deal and if marketconditions permit, the new DEFS is expected to offer 20% of itsequity in an initial public offering (IPO). The proceeds will beused to reduce debt incurred by the transaction creating thecompany.

Initially, Duke will own 70% of DEFS and Phillips will own 30%.After the IPO, it is expected that Duke’s interest will fallbetween 57% and 55%, while Phillip’s will drop to the 25% to 23%range.

Given the company’s size and access to the capital markets, itwill immediately have the flexibility to pursue its growthopportunities. In a conference call after the announcement, thecompany said it has a list of four transactions it hopes totrigger. Although none of them were disclosed, the companies didreveal all of the deals on the list are big enough to require FTCapproval under the Hart-Scott-Rodino act. One company mentioned wasDynegy Midstream Services, but neither Duke nor Phillips wouldcomment.

The new company will be governed by a board of directors whichwill initially consist of three directors to be chosen by DukeEnergy and two directors to be selected by Phillips Petroleum.Following the IPO, the board will be expanded from five to 11; DukeEnergy will choose seven members (two of whom will be independent)and Phillips Petroleum will choose four (one of whom will beindependent).

Last quarter, DEFS reported EBIT of $49 million, up from $9 millionin 3Q98. By itself, it is one of the largest U.S. producer of NGL, oneof the largest gas gatherers and marketers and one of the largest NGLmarketers. In 1999, DEFS became the industry’s top NGL producer byacquiring UPR’s natural gas gathering, processing, fractionation andNGL pipelines for $1.35 billion (see Daily GPI, April 1). The company operates 52 plantstoday in Wyoming, Colorado, Kansas, Oklahoma, New Mexico, Texas, alongthe Gulf Coast and in northwestern Alberta, Canada.

GPM reported a net income of $39 million last quarter, up from $11million in 3Q98. The Phillips subsidiary, however, has been on theauction block for the past few months (see Daily GPI, Oct. 29). GPM operates 15 plants in Texas,New Mexico and Oklahoma.

James J. Mulva, CEO of Phillips Petroleum, said the transaction”monetizes a substantial portion of the value of one of PhillipsPetroleum’s key non-E&P assets, thereby increasing PhillipsPetroleum’s financial flexibility to pursue attractive explorationand production growth opportunities. It also enhances and makesmore transparent the value of our GPM asset.”

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