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October 3, 2001 


Williams and Duke Commence Construction
of Gulfstream Project 



By Will McNamara
Director, Electric Industry Analysis 


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[News item from Business Wire] Gulfstream National Gas System announced today that it has received Federal Energy Regulatory Commission (FERC) approval to commence mainline pipeline construction in Florida. With this approval, Gulfstream now has all the major segments of its 753-mile pipeline project under construction and on schedule to deliver natural gas in June 2002. 

Analysis: The Gulfstream Natural Gas System, which is by far the largest pipeline project in the Southeast, has been designed specifically to deliver natural gas into the Florida wholesale market. When finished, the project reportedly will be the largest natural-gas pipeline in the Gulf of Mexico, with capacity to transport approximately 1.1 billion cubic feet of natural gas per day, and the first new transportation system to serve Florida in more than 40 years. Williams (NYSE: WMB) and Duke Energy (NYSE: DUK) jointly own the pipeline, having purchased it from Coastal Corp. last year, a sale that was made possible due to regulatory requirements surrounding Coastal's merger with El Paso Corp. Along with projects still being led by El Paso Corp. (NYSE: EPG), the Gulfstream project highlights the continuing emphasis on pipeline construction, which by some accounts is experiencing the largest wave of expansion since the early 1960s. 

Williams and Duke have provided a current status report regarding construction of the pipeline, including notice that more than 200 of the 431 miles of offshore pipeline have been laid in the Gulf of Mexico. Gulfstream also has already laid pipe in parts of Florida and Alabama, some of the more sensitive regions along the pipeline's path. 

Like other pipeline developments, the Gulfstream project, the construction for which began on June 1, 2001, is being driven by several factors, including demand (which for the most part remains strong), the prominence of natural gas as the fuel source for new power plants and a presidential administration that is supportive of production. What is perhaps most interesting about the boom in pipeline construction is that many of the same companies that own or control natural-gas supplies are also quickly acquiring or partnering with other firms that specialize in pipeline construction. 

For background, subsidiaries of Duke Energy and Williams announced their intent to jointly purchase Coastal Corp.'s 100-percent interest in the Gulfstream Natural Gas System project in November 2000. The project was originally sponsored by a subsidiary of Coastal Corp., a $16 billion Houston-based energy holding company with operations in natural-gas production, distribution and marketing. However, due to regulatory mandates related to Coastal Corp.'s 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 found a good window of opportunity to purchase the pipeline project and its valuable inroad to the Florida market. 

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. 

Duke and Williams have agreed to jointly manage the operation and development of the Gulfstream project. It's not difficult to assess why Duke and Williams would be willing to co-own the project. 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 have acquired 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 in the state of Florida 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 year that Duke's future success would 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. 

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. 

Duke has had a rather difficult time penetrating the Florida market, so this pipeline 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). 

Along with Duke and Williams, El Paso Energy Corp. also is focused on building and acquiring new pipeline capacity. The company is the parent of subsidiaries El Paso Natural Gas, a regulated company that operates pipelines, and El Paso Merchant Energy, an unregulated company that markets natural gas. El Paso Natural Gas owns and manages the Western Division pipeline, which includes 14,604 miles of interstate pipeline, serving markets in California, the southwestern United States and throughout the Rocky Mountains. In fact, El Paso owns and operates the largest natural-gas pipeline in North America, totaling more than 58,000 miles of pipeline reaching all the major growth areas in this country. 


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