As Duke Energy moves forward with the spin-off of its natural gas operations, the new gas company is positioning itself to aggressively continue expansion of its pipeline system and develop new growth opportunities within its midstream operations, CEO Jim Rogers said last week.

Duke officially launched the spin-off of the temporarily named Gas SpinCo Inc. (GasCo) earlier this month (see NGI, Sept. 11). Rogers, who has been making the rounds to speak to energy analysts about the spin-off, spoke Wednesday at the 36th Annual Bank of America Investment Conference in San Francisco. He remains optimistic that the transaction will be completed by Jan. 1, which in turn will allow Duke to focus solely on its utility operations.

“When one becomes two, what can you expect from a separate company?” Rogers asked. “We expect the separation to create value from day one. We have a vision to be the premier pure-play gas company. There are significant long-term opportunities in respective industries as pure plays.”

GasCo will be officially renamed sometime in the fourth quarter, but with a new name and clear focus, the entity is expected to hit the ground running, with more than 17,500 miles of natural gas transmission pipeline, 250 Bcf of gas storage capacity and 1.3 million retail gas customers in Ontario. Through Duke Energy Field Services (DEFS), its 50-50 joint venture with ConocoPhillips, GasCo also will be the largest domestic producer of natural gas liquids.

The new company won’t be one to rest on its laurels. In each of the next five years, GasCo is expected to spend about $1.5 billion in expansion capital, said Rogers.

“Different dynamics are emerging in the gas business today, which are creating expansion opportunities,” Rogers said. Among other things, GasCo will be able to use a “variety” of financial vehicles, including a possible master limited partnership (MLP), to generate cash for new investments.

“Duke anticipates setting up a new MLP focused on pipeline assets,” Rogers said. He did not offer a time line on when the MLP may be set up. “Fred Fowler likes to say we’re in an ‘opportunity-rich environment.’ And the changing industry dynamics are bringing new expansion opportunities.” Fowler is currently president of Duke Energy Gas and future CEO of GasCo.

Duke’s gas division now has about two dozen expansion projects under way, Rogers noted. “The open seasons have gotten a lot of positive market feedback, and the conditions in the industry have brought about expansion opportunities.

“When you think back with me to 2000, since that time, many of the largest infrastructure players have spent very little time on pipeline expansions,” Rogers noted. “They were concentrating on problems in California, the [downfall] of the [energy] trading markets. Meanwhile, as commodity prices increased, so has the drilling. And liquefied natural gas is coming…and new pipeline capacity is needed to get new supplies to market. Add to that the wake-up call from the hurricanes last year, and the market is ripe for development.”

Besides pipeline expansions, Rogers said DEFS is “also robust and ready for development. In addition, there is growing demand for gas treating and processing.”

Earnings forecasts for Duke and GasCo are expected in the next few months because the allocation of cash has not been finalized, Rogers noted. “Based on significant investment opportunities for both companies, it is expected each company will have negative free cash flow between 2007 and 2009.”

GasCo’s debt-to-capitalization ratio is expected to be in the 60% range, with about $9 billion in debt, and a targeted dividend payout ratio of about 60%. Rogers is slated to remain chairman and CEO of Duke Energy; Paul Anderson has been named chairman of GasCo.

Rogers also told analysts that he expects the next U.S. nuclear plant to gain approval will be located in the South, either in North Carolina or South Carolina. Duke currently operates seven nuclear reactors in three power plants in the Carolinas. He said enthusiasm for nuclear power is once again gaining momentum, but there are a lot of hurdles to jump before Duke moves forward.

Costs are a “very important hurdle,” and without offering specifics, he said Duke won’t consider moving forward even with regulatory approvals until it has recovery cost guarantees in the state where a proposed plant would be built.

Duke on Wednesday filed with North Carolina regulators seeking permission to recover nuclear power plant development costs, Rogers told attendees. And he said Westinghouse Electric Co. is now working on a nuclear plant design. However, resolving regulatory issues trumps all other plans on the table.

Rogers also was quizzed about mergers and acquisitions within the utility industry. Although Duke’s merger with Cinergy Corp. was completed quickly and with little fanfare, Rogers was asked whether future mergers were “dead” after the proposed merger of Exelon Corp. and PSEG fell apart.

Successful mergers, said Rogers, depend on “pure market power.” Utilities considering mergers “have to look at what’s going on at the state commission at the time. If a company is merging with a company that has a significant rate increase on the table, it’s probably a bad time to do a merger…; it would destroy the value in the merger. Pick the time that you do it; the regulatory environment is important. If a company is predominantly regulated, sometimes you can’t afford to pay high premiums for that. You have to focus on low premium exchange ratios or you destroy the value…”

“People have to earn the right to do deals,” said Rogers. “We need to earn the right. Getting our merger [with Cinergy] completed in five months in five states, that’s a tick in the box. We want to be able to demonstrate to you that not only are we getting our nonlabor savings, we’re getting labor savings…[and] maintaining reliability… It’s important for regulators to hear that story…, [that we’re] not jeopardizing the quality of our service, and we’re not. The scorecard allows us to demonstrate that.”

Rogers also was asked about carbon emissions policies being considered in the states. Is a national policy in the offing?

“All the sign posts indicate we are on the road to carbon policy in this country,” said Rogers. The most “probable” window is between 2009 and 2010. “The Kyoto Protocol expires in 2012, and I do think that ’09-10 is the best time to think about it. Every power company in this country is analyzing this,” with each company taking a “different look at it.”

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