Duke Energy Field Services Assigned `BBB' Rating by Fitch.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 1, 2000

Fitch has assigned a long-term rating of `BBB' to Duke Energy Field Services LLC's (DEF) $2 billion shelf registration and affirmed its commercial paper program at `F2'. DEF represents the midstream combination of Phillips' (`BBB' senior unsecured) highly efficient, low cost assets with DUK's (`A+` senior unsecured) growing base of North American midstream natural gas assets.

DEF was formed on March 31, 2000. At that time, the company completed a full draw under its $2.8 billion commercial paper program to make one-time cash distributions to Duke Energy Corp. (DUK) and Phillips Petroleum Co. (Phillips) in exchange for their contribution of their respective midstream assets to DEF. The company intends to issue senior unsecured debt with proceeds used to pay down commercial paper balances. Going forward, DEF intends to maintain its commercial paper program to fund working capital needs.

DEF postponed its scheduled IPO that was slated for 2Q'00 due to a number of adverse market events. As a near-term bridge for additional equity capital, DUK and Phillips have agreed to purchase approximately $300 million of DEF preferred membership interests issued by DEF. The preferred interests will carry a 9.5% coupon, a 30-year maturity and will rank pari passu to DEF's common with respect to liquidation. Affording full-equity credit to the preferred securities, DEF's projected leverage is in-line with desired levels for the `BBB' category; debt/capitalization is expected to average 45% over the next three years. The issuance of the preferred securities benefits DEF in the form of additional equity capital for debt reduction. As soon as the market conditions permit, DEF intends to redeem the preferred securities with proceeds from an IPO.

DEF is the largest gatherer of natural gas and the largest producer of NGLs in North America. The company's business model intends to capitalize on the size and breadth of its diversified, well-positioned asset base to capture the cost synergies associated with economies of scale. In an otherwise fragmented, highly cyclical segment of the energy sector, DEF intends to streamline its cost structure to position itself to capture margin during periods of depressed pricing. Prior to the combination, Phillips undertook a rigorous cost reduction program consolidating 80 plants down to 16 while producing the same volumes of natural gas.

Cash flows are diversified both in geographic location, as well as asset position along all points of midstream value chain, minimizing the degree of basis risk. DEF's assets enjoy the benefits of good locational value, as roughly 90% of the raw natural gas produced in the Unites States is produced in regions where DEF has significant market presence. With significant asset positions in seven major natural gas producing regions, DEF enjoys a well-balanced asset base between its high growth Onshore Gulf Coast, Rocky Mountains, Offshore Gulf Coast and Canadian assets and the more stable producing basins in the mid-continent, East Texas and Permian Basin. Over time, this balance is expected to become more heavily weighted toward the high growth production areas in Western Canada, Onshore/Offshore Gulf of Mexico and Rocky Mountains. Processing cash flows are also well-diversified and spread over DEF's 70 owned and operated processing plants and 13 other plants in which it holds equity interest.

To grow in excess of the expected demand growth of natural gas, DEF intends to optimize its operations and add complimentary assets to its already strong asset base through greenfield build-outs and bolt-on acquisitions. Since 1996, DEF and GPM combined have made more than 20 acquisitions, which have increased processing capacity by more than 275%. DEF intends to continue its strategy and proven track record of adding complimentary assets during periods of relatively low commodity prices and integrating acquired assets into its operations.

DEF's stable of fee-based keep whole and percent of proceeds contracts provides good cash flow diversity. Considering the short-gas based keep-whole and long-gas percent of proceeds nature of processing contracts, the company enjoys a nearly neutral exposure to natural gas price swings. Given the company's bullish position of natural gas prices, over time this balance will likely become more heavily weighted toward percent of proceeds contracts as the company capitalizes on its demand driven perspective on prices for natural gas.

The primary macro-driver of DEF's volume growth is the expectation for increasing levels of natural gas demand in North America, which is being driven by the explosive nationwide build-out of new gas fired generation facilities and strong retail demand. The build-out of new gas fired units is being driven by the low comparative capital cost of these units, short lead time for in-service and the superior environmental aspects of natural gas versus other fossil fuels. The EIA projects that natural gas consumption will grow from 22 Tcf/year to 32 Tcf/year by 2020.

NGL prices have rebounded after the 1998 early 1999 period realized the weakest margins in 20 years. This recent weakness was largely attributable to excessive worldwide supply of NGLs and crude oil, which was driven by the weakened demand in Asia following the regional economic crises. This weak price period effectively screened out smaller producers through the direct erosion of their equity base and lack of access to the capital markets to help fund operations. As prices have rebounded, year-over-year drilling activity has increased, which has had a positive effect on the raw natural gas gathered and processed.

Both revenues and cash flow margins will remain highly dependent on the realized prices for NGLs, which is highly correlated to the price of crude oil. More than two-thirds of company's revenues were derived from its natural gas operations in 1999, including gathering, processing, transportation and storage with the remainder tied to its NGL fractionation, transportation, marketing and trading operations. During 1999, approximately 57%, 28%, and 15% of DEF's gross margins were derived from percent of proceeds, fee based and keep whole contracts, respectively.

Given the company's strategy of maintaining a low cost structure and improving the operational efficiency of its operations, DEF is well-positioned to withstand reasonable periods of weak pricing without incurring material credit erosion. Considering the combined companies' stable of contracts in 1999, a $.01 decrease in $/Gal of NGLs and $.10 in $/MMBtu of natural gas would have decreased/increased operating income by $24 million and $1 million, respectively.

The company benefits from a low projected dividend payout policy and relatively modest maintenance and volume replacement based cash capital expenditure outlays, DEF is projected to have substantial free cash flow. It is important to note this free cash flow is tied to discretionary/growth investments and will likely be invested back into DEF's operations on an opportunistic basis. Still, this organic cash sourced acquisition activity will be largely tied to the price deck at the time affording the company a good degree of liquidity and cash flow cushion. To maintain a strong credit-enhancing component of fee based cash flows, the company has targeted 25% of its growth capital expenditures into fee based gathering and processing.

Importantly, the company has committed to engage in a hedging strategy that helps ensure that cash on cash outlays will be sufficiently covered and locked in via an actively managed hedging policy. While these hedged price "floors" provide some degree of credit comfort by hedging fixed obligations for up to three years, the company will have sufficient flexibility to capture the upside commodity opportunities. This, in conjunction with the company's diversified portfolio of gathering and processing contracts, provides a good degree of cash flow support for its fixed obligations.

Of its total debt, DEF has targeted a short-term/floating rate debt component at reasonable levels of approximately 10-20%. Given the volatile nature of crude oil, natural gas and NGLs that players in the midstream segment endure, the company's balance sheet is subject to a somewhat higher degree of equity eroding write-down risk than less commodity sensitive operations. Still, DEF has exhibited a strong track record of making acquisitions during periods of depressed pricing lowering the probability of write-downs.

Fitch is an international rating agency that provides global capital market investors with the highest quality ratings and research. Dual headquartered in New York and London with a major office in Chicago, Fitch rates entities in 75 countries and has some 1,100 employees in more than 40 local offices worldwide. The agency, which is a combination of Fitch IBCA and Duff & Phelps Credit Rating Co., provides ratings for Financial Institutions, Corporates, Structured Finance, Insurance, Sovereigns and Public Finance Markets worldwide.