Duke Energy Corp., Charlotte, NC, and Phillips Petroleum Co., Bartlesville, Okla., have reached a definitive agreement to merge Duke's gas gathering and processing business-Duke Energy Field Services (DEFS)-with Phil- lips's gas processing and marketing unit, GPM.
The resulting midstream company will retain the Duke Energy Field Services name. It will be headquartered in Denver and will have an enterprise value of $5-6 billion.
The new company will seek to arrange $2.4 billion of debt financing and, upon closing of the transaction, will make a cash distribution of $1.2 billion to each partner.
The existing NGL arrangements between Phillips Petroleum and its gas processing and marketing unit will be maintained by the new company for 15 years.
Upon completion of the deal-expected by the end of the first quarter-Duke will own about 70% of the new firm and Phillips will own about 30%. Both companies' boards have approved the transaction, and due diligence has been completed, say the companies.
Following completion of the transaction, the new company plans to offer about 20% of its equity to the public in an initial public offering. Proceeds from the IPO will be used to reduce debt incurred by the new company in the transaction.
Duke's and Phillips's post-IPO equity interests will be adjusted according to a formula determined as part of the agreement. The formula is dependent on the public market valuation of the new company, but, assuming a value of $5-6 billion for the new firm, post-IPO equity interests will be Duke, 55-57%, and Phillips, 23-25%.
Duke plans to consolidate the new company for financial reporting purposes, while Phillips will account for its ownership on an equity basis.
Asset portfolio
The new company will operate 67 plants and 57,000 miles of pipelines and have an estimated 17 tcf of contracted gas supply. It will process about 5 bcfd of raw gas and produce 400,000 b/d of NGL.
Duke Energy and Phillips Petroleum expect the new firm to realize synergies, primarily from operating efficiencies. The deal is expected to be immediately accretive to both companies' earnings.
James W. Mogg, president of Duke Energy's gathering and processing business, will become chairman, president, and CEO of the new DEFS. Michael J. Panatier, president and CEO of Phillips GPM, will become vice-chairman.
Mogg said, "This combination represents the latest and most dramatic example of the restructuring and consolidation in the midstream gas businessellipseThis transaction brings together the fastest growing midstream business, DEFS, with one of the most experienced, GPM. [And] Phillips Petroleum's assets and gas contracts provide additional balance to our existing business."
Duke's growth
The merger of the midstream businesses of these two energy majors is, for Duke, the latest in a series of portfolio-expanding and focusing moves. Last year alone, among its many transactions and projects, Duke: acquired Union Pacific Resources Group Inc.'s midstream gas unit; acquired Koch Midstream's South Texas gas gathering, treating, and processing systems; launched a failed bid for control of Chile's Endesa; sold to CMS Energy Corp. its Panhandle Eastern Pipe Line Co., Trunkline Gas Co., and Trunkline LNG Co. subsidiaries; started construction on a 795-km, $450 million gas pipeline project in eastern Australia; bought a 44% stake in Brazilian generator Paranapanema, and later launched a tender offer for the remaining shares; increased its interest in Peru generator Egenor SSA to 90% from 60%; and agreed to buy Dominion Resources Inc.'s Latin America power business.
"This transaction is the most recent and vivid example of Duke Energy's global energy merchant strategy," said Duke Energy Chairman Richard B. Priory.
For Phillips, the deal culminates what was apparently a lengthy, and possibly continuing, search for a joint venture partner.
Phillips announced in late 1998 that it planned to form a refining-marketing company with Ultramar Diamond Shamrock Corp. The two companies were unable to iron out the details of that agreement, however, and broke off negotiations on the JV last March. Following the failed JV talks, speculation was rife that Phillips was continuing to hunt for a suitable partner to spin off one or more of its businesses.
Phillips Chairman James J. Mulva said, "In Duke Energy, we have a company that intends to capture the potential in this business and has an excellent record as both an operator of assets and a builder of valueellipseWe believe the new company will have greater access to capital to grow its business than the GPM unit historically obtained as part of Phillips Petroleum.
"Operationally, we have ensured a continued NGL supply for our downstream businesses," Mulva added.
Following announcement of the transaction, Moody's Investors Service, New York, confirmed the senior unsecured debt ratings of Phillips at A3 but retained its negative outlook.
"Moody's rating confirmation of Phillips' debt obligations recognizes the debt reduction in the short term expected from the transaction but also notes management strategies to use all proceeds from such joint ventures or divestitures in the [exploration and production] sector, primarily international," said Moody's.
"Phillips's goal of joint-venturing its [refining, marketing, and transportation] business as well as its core chemical operations will, over time, shift its risk profile toward a sector with more-variable cash flows and large reinvestment needs. Moody's will continue to monitor the implementation of the company's strategy, including its use of proceeds, aggressiveness of its capital expenditure program, and exposure to commodity cycles."
