Following a consent order from the Federal Trade Commission(FTC) late Friday, Duke Energy announced yesterday that it andPhillips Petroleum closed the deal merging their natural gasgathering and processing businesses under one roof. The agencyconditioned its acceptance of the consent order on Duke agreeing todivest nearly 3,000 miles of gathering lines in the Midcontinent.

At the same time, the FTC gave the go-ahead for Duke to acquirethe gas gathering and processing assets in central Oklahoma thatcurrently are jointly owned by Conoco Inc. and Mitchell Energy& Development Corp. Duke said it will pay Conoco an undisclosedamount of cash for its share and will exchange its interests inprocessing and gathering operations in Texas for Mitchell’s assets.The deal is significant because it includes assets that lieadjacent to and between existing midstream assets held by DukeEnergy and Phillips.

The two transactions include midstream assets totaling $6billion that will be held by a newly created company — DukeEnergy Field Services L.C. (DEFS) of Denver, CO, making it one ofthe largest gathering and processing, and natural gas liquidsproduction companies in the United States. Duke Energy will be amajority owner (56%) in the new company after the merger becomesfinal, 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 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 of gathering lines in Oklahoma already divested to WesternGas Resources Inc., co-owner of Westana Gathering Co., and 1,450miles of gathering in the Austin Chalk area of Texas to be divestedto Mitchell Energy, which co-owns Ferguson-Burleson County GasGathering System. The remaining 537 miles of gathering lines willbe sold to FTC-approved buyers under the terms of the consentorder.

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, the FTC said as a last resort it may appoint a trusteeto sell the assets.

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.

©Copyright 2000 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.