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SCIENTECH IssueAlert, November 20, 2000
Duke, Williams to Buy Gulfstream from Coastal Corporation
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

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 conditioned
upon completion of the Coastal / El Paso Energy Corporation merger. Financial
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 
Houston-based
energy holding company with operations in natural-gas production, distribution
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 develop
and market Gulfstream.

According to Coastal, the $1.6 billion Gulfstream project has already achieved
two important milestones in its FERC approval process: preliminary 
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 
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 Florida
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 
collaborative
relationship, already own significant amounts of interstate natural-gas
pipeline capacity. Between its two subsidiaries involved in natural-gas
production*Duke Energy Field Services and Duke Energy Gas Transmission*Duke
Energy owns and operates about 57,000 miles of pipeline and 12,000 interstate
miles of capacity. Williams' five interstate natural gas pipelines reportedly
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 Gulfstream
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 
together,
Williams and Duke can both capitalize on the high-growth state as it 
eventually
becomes competitive. First among the priorities for the project is to ensure
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 merchant
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 
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 trillion
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 merchant
plants were not allowed under state law. The Florida Supreme Court overturned
the decision of the state PSC, blocking Duke's entry into the state. 
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 
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 deadline
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, combined
cycle unit. If California history repeats itself in Florida, Duke and Williams
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.
===============================================================
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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
Feedback regarding SCIENTECH's IssueAlert should be sent to 
wmcnamara@scientech.com
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SCIENTECH's IssueAlerts are compiled based on independent analysis by 
SCIENTECH
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