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********************************************************************* Miss last week? Catch up on the latest in the energy industry at: http://www.consultrci.com/web/infostore.nsf/Products/IssuesWatch ********************************************************************* =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, November 20, 2000 Duke, Williams to Buy Gulfstream from Coastal Corporation By: Will McNamara, Director, Electric Industry Analysis =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Subsidiaries of Duke Energy and Williams announced their intent to jointly purchase The Coastal Corporation's 100-percent interest in the Gulfstream Natural Gas System project. The purchase, expected to be finalized by the end of this year, is subject to federal regulatory approvals and conditione= d upon completion of the Coastal / El Paso Energy Corporation merger. Financi= al terms of the purchase were not disclosed. ANALYSIS: The Gulfstream project is a proposed 744-mile steel pipeline designed specifically to deliver natural gas into Florida. The project has been sponsored by a subsidiary of Coastal Corp., a $16 billion=20 Houston-based energy holding company with operations in natural-gas production, distribut= ion and marketing. Coastal Corp. is presently waiting for FERC's approval to build and operate the system. However, due to regulatory mandates related to Coastal Corp.'s pending merger with El Paso Energy Corp., Coastal Corp. was forced by the Federal Trade Commission to divest the project. As a result, Duke Energy and Williams have found a good window of opportunity to purchase the pipeline project and its valuable inroad to the Florida market. Until the merger is complete, Coastal Corp. will continue to develo= p and market Gulfstream. According to Coastal, the $1.6 billion Gulfstream project has already achie= ved two important milestones in its FERC approval process: preliminary=20 determination on non-environmental issues and a favorable draft environmental impact statement. The company anticipates that the project will receive full FERC approval in the first quarter 2001 and that Gulfstream will become fully operational in June 2002. Approximately 400 miles of the route, which=20 originates in Mobile, Ala., crosses the Gulf of Mexico and will be located in federal offshore waters. Gulfstream offers 1.2 billion cubic feet of natural-gas capacity per day, and is designed to primarily serve Florida utilities and power-generation facilities that plan on using high-efficiency natural-= gas turbines. Already, the project has precedent agreements with 10 large Flori= da utilities and power generation facilities. Upon completion of the purchase, Duke and Williams will proceed with the jointly managed operation and development of the Gulfstream project. It's not difficult to assess why Duke and Williams would be interested in making the acquisition. The two companies, which have historically had a=20 collaborative relationship, already own significant amounts of interstate natural-gas pipeline capacity. Between its two subsidiaries involved in natural-gas production=01*Duke Energy Field Services and Duke Energy Gas Transmission= =01*Duke Energy owns and operates about 57,000 miles of pipeline and 12,000 intersta= te miles of capacity. Williams' five interstate natural gas pipelines reported= ly deliver about 16 percent of the natural gas consumed in the United States. The company's vast 27,300-mile pipeline network stretches from coast to coast and from Mexico to Canada, serving more than 48 million residential, commercial and industrial natural gas users. In fact, the two companies already were planning the Buccaneer Gas Pipeline project in Florida, a 674-mile pipeline that would have followed a similar route as the Gulfstrea= m project will follow. Duke and Williams are no longer planning the Buccaneer project now that they are acquiring the Gulfstream project. The addition of Gulfstream should benefit both companies and offer a prime position for them to expand their independent operations in Florida. The CEO of Williams' gas pipeline group stated that the Florida market would support only one new pipeline coming into the state. By joining=20 together, Williams and Duke can both capitalize on the high-growth state as it=20 eventually becomes competitive. First among the priorities for the project is to ensur= e adequate pipeline capacity by June 2002, and meeting the projected 10,000 MW electric generation growth that is expected by 2007. Duke Energy also confirmed that the purchase of the Gulfstream project accelerates its own entry into Florida. In fact, Richard Priory, Duke's CEO, conceded at a conference last September that much of Duke's future success will result from its natural-gas operations. Specifically, Duke has been focused on merchant plant and natural-gas pipeline construction for some time. As of this summer, Duke was rated third in announced merchan= t plants (behind Calpine and Panda), and has made no bones about the fact that its strategy is centered around building additional merchant plants and acquiring natural-gas pipelines. Thus, the acquisition of Gulfstream is a perfectly appropriate move for the company to make. And the strategy is resulting in some significant payoffs for the company. Duke's third-quarter earnings rose 75 percent. Duke attributed the higher results to the continued expansion of its unregulated energy businesses, specifically natural-gas gathering and foreign energy sales. Duke's shares, which had been trading at 52-week peaks, are currently trading at $88 15/16 (as of the opening of the market on Nov. 20). Current market conditions certainly validate Duke's growth in this direction. For starters, current data indicate that natural gas is the fuel of choice for approximately 90 percent of all new electric generation that is being built. Most=20 projections place natural gas as the ongoing fuel of choice for new generation as the demand for natural gas is expected to increase from 23 trillion to 30 trill= ion cubic feet per year by 2010. In addition, coal and nuclear generation came under environmental and public scrutiny over the last two decades, at a time when natural-gas prices were comparatively low. All of these factors have created a strong market for natural-gas generation, despite the fact that data from the Department of Energy suggests a shortage of natural gas and heating oil for this winter. Duke has had a rather difficult time penetrating the Florida market, so this purchase could facilitate easier expansion in the state. About a year ago, the Florida Public Service Commission had approved the construction of a Duke merchant plant in New Smyrna Beach. However, the state's three IOUs appealed the decision to the Florida Supreme Court, arguing that merch= ant plants were not allowed under state law. The Florida Supreme Court overturn= ed the decision of the state PSC, blocking Duke's entry into the state.=20 Consequently, Duke is wisely using the acquisition of the Gulfstream project as another way to get into the Florida market (and one that is potentially more=20 profitable). Florida has not yet passed restructuring legislation, and it is unclear when the state will become competitive. Bills have been introduced into the state legislature, but thorny issues such as stranded cost recovery and unbundling charges have caused the bills to be removed. Presently, Governor Jeb Bush has created a 19-member commission to develop an energy plan for the state. The commission must submit a report to the governor and the legislature by December 1, 2001. Among the issues that must be addressed are power reliability, energy supply and delivery, and the fiscal impacts of deregulation. However, it is clear from the commission's deadlin= e that competition will not take effect in Florida during 2001. Yet, looking forward, if the California experience is any indication, the natural-gas shortage should work to Duke's advantage. As wholesale prices skyrocketed this summer, Duke and other generators were in a prime position to reap large gains. Duke is still following this tactic on the West Coast. California regulators just gave approval to the construction of a proposed 1,060-MW unit in Monterey County, which again is natural-gas fired, combine= d cycle unit. If California history repeats itself in Florida, Duke and Willi= ams will be the co-owners of the only new gas pipeline coming into the state at a time when natural-gas supplies remain quite low. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH can help you find the answers you need. From simple questions to complex problems, our experts and consultants will get results. Learn more about our six service areas at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/About_RCI.html =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Feedback regarding SCIENTECH's IssueAlert should be sent to=20 wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH's IssueAlerts are compiled based on independent analysis by=20 SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpos= e in publishing its IssueAlerts is to offer an independent perspective regard= ing the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e reply to this message and in the body of the email type "remove."
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