While much of the gas industry is busy preparing for a period of low prices and declining demand due to the weakening economy, Duke Energy is showing great confidence in future gas market growth. The company announced plans late Thursday to buy Westcoast Energy in a cash and stock transaction valued at US$8.5 billion, including $4 billion in debt assumption. The move greatly expands Duke’s North American natural gas pipeline holdings and positions it for a strong role in future gas infrastructure expansions.

“This is the first large cross-border infrastructure transaction, and it reflects an economic reality,” said Michael Phelps, CEO of Westcoast. “In North America today we have the most dynamic economy in the world. It’s obviously going to have its degree of short-term pressures, but it is the most dynamic economy…and energy is what fuels that. Gas is really the most important part of that energy growth… In the North American context, two of the most prospective new supply sources around the continent are on the Scotian Shelf off the East Coast and in the new areas of western Canada and the far north. Westcoast is the only pipeline that serves those new basins and connects them to the market.

“When you marry that to the existing well-established Duke infrastructure and our joint market presence in a lot of key markets, it is the most powerful combination in our infrastructure business today,” said Phelps. “Size is very important in terms of efficient access to capital and this transaction will certainly help us there.”

The combined natural gas-related assets will include about 18,900 miles of transmission pipeline, 241 Bcf of gas storage, 58,700 miles of gathering, 84 processing facilities, and 16,500 miles of distribution pipeline. The combination puts under one roof Duke Energy Gas Transmission’s interstate pipelines, including Texas Eastern Transmission, Algonquin Gas Transmission and East Tennessee Natural Gas, and Westcoast’s BC Pipeline, Empire State Pipeline and Union Gas Transmission. The company also will have a large ownership interests in Maritimes & Northeast Pipeline (75%), Gulfstream Natural Gas System (50%), Foothills Pipe Lines (50%), Vector Pipeline (30%) and Alliance Pipeline/Aux Sable (23.6%).

Duke will buy all outstanding common shares of Westcoast in exchange for a combination of cash, Duke Energy common shares and exchangeable shares of a Canadian subsidiary of Duke Energy such that 50% of the consideration will be paid in cash and 50% will be paid in stock. The deal will provide Westcoast shareholders with C$43.80 per share in value, subject to a collar. Duke believes that the acquisition can be completed during first quarter 2002.

“Since the company was created from the evolution of the combination of Duke Power and PanEnergy some four and a half years ago, we’ve been firmly focused on executing our strategy, growing a world-leading integrated energy business,” said Duke CEO Richard Priory. “This greatly improves the balance and diversity of our energy assets. We see a tremendous need to expand the natural gas infrastructure across North America. Much of this will be to simply move incremental gas supply from expanding sources in Canada to fast growing markets in both Canada and the United States. We’re convinced that this combination…will position us to take a lead role in development of that infrastructure.”

Priory said the transaction would be “immediately accretive upon closing. It is an important investment in our competitive energy businesses, expected to provide the opportunity for increased earnings growth from our gas transmission business, while also providing new growth opportunities for our other businesses. Duke Energy continues to expect earnings per share (EPS) growth of 10-15% per year from a base of $2.10 EPS in 2000,” he said. Fred J. Fowler, group president of Duke’s energy transmission business, said the deal would increase DEGT’s projected annual growth earnings before interest and taxes (EBIT) from 5-7% to 7-9%.

The deal shows the confidence the companies have in the growth of the gas market. “We just came off some pretty high gas prices last winter, which drove off a good deal of demand, we think, temporarily,” said Priory. “There are a dramatic amount of new gas facilities to convert gas to electricity being installed around the country. Those will be installed. They are being connected to the grid now. The rapid development of gas fired power unquestionably is going to require us to expand our infrastructure to supply that fuel… We are very confident that this market will continue to grow. We may see 1 Bcf/year [of growth] for the next 10 years or so.”

Phelps said the companies have “billions of dollars of assets tied up in the bet that gas is going to find an appropriate equilibrium level and it’s somewhere higher than today’s price and lower than the prices that we saw this winter. I’m very confident that’s what we will see.”

Duke CFO Robert Brace said it was too early to predict potential employee reductions from the transaction, but he said the deal was not designed as a cost cutting maneuver.

Phelps added that the deal represents a “significant premium” to Westcoast’s recent share price at a time when Westcoast Energy shares are trading at record highs. Westcoast shares closed at $24.30 on the Toronto Stock Exchange yesterday prior to the announcement. The 52-week high for Westcoast shares is $24.56.

When the transaction is completed, Westcoast Energy’s natural gas assets will be operated by Houston-based Duke Energy Gas Transmission (DEGT). Westcoast Energy’s energy services and international businesses will be operated by Duke Energy’s Energy Services’ business units. At closing, Phelps will become a member of Duke Energy’s board and chairman of an advisory board for DEGT’s Canadian operations. DEGT’s Canadian operations will be headquartered in Vancouver. The agreement contains non-solicitation and termination fee provisions.

The transaction requires the approval of Westcoast shareholders and multiple regulatory agencies in the United States and Canada.

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