Stockholders of El Paso Energy and Coastal Corp. Friday approved the merger of the two giants of the natural gas industry, moving the transaction closer to reality.

El Paso Energy stockholders overwhelmingly authorized the company to issue the required shares of common stock to complete the $16 billion pooling of interests transaction, which will merge Coastal into a subsidiary of El Paso. Coastal stockholders endorsed the terms at a separate meeting.

Each share of Coastal common stock and Class A common stock will be converted on a tax-free basis into 1.23 shares of El Paso Energy common stock, with corresponding conversions of preferred shares. Implementation of the exchange will await regulatory approvals and is expected to occur in the fourth quarter.

“With this mandate from our stockholders, we look forward to completing the merger and moving quickly to realize the tremendous breakout opportunities offered by this powerful network of assets,” said William A. Wise, president and CEO of El Paso Energy. “There is tremendous optionality embedded in our combined assets-from our traditional natural gas markets and our emerging LNG business to our new businesses in telecommunications and Europe. We are entering an unparalleled new phase in value creation for our shareholders.”

While El Paso and Coastal stockholders were voting Friday morning El Paso and Coastal attorneys were defending the two companies against charges they conspired to interfere with the financial operations of another Texas energy company, TransAmerican Natural Gas (see related story this issue).

The combined company lays claim to being the only top tier player in every segment of the domestic natural gas value chain, from production, to processing, transmission, wholesale marketing, and merchant power. The natural gas transmission system will consist of 58,000 miles of pipeline, spanning the U.S. from California to New England and from the Gulf of Mexico to Canada. El Paso will have a leading asset position in the fastest growing producing areas in the U.S. and will have ownership in 8,000 net MW of power generation.

El Paso’s original pipeline system runs through the Southwest from Texas to the California border. Tennessee Gas Pipeline, acquired four years ago, delivers from Texas and Louisiana through the East to New England, while the more recently acquired (Oct., 1999) Southern Natural Gas system, spans the Southeast and includes an ownership interest in Florida Gas Transmission (see NGI, Jan. 24, including table of largest gas pipelines, miles and throughput)

The addition of Coastal’s ANR Pipeline and Colorado Interstate Gas will fill in some blanks in the midsection of the country. Coastal also brings with it an interest in Great Lakes Gas Transmission and Alliance Pipeline from Canada to Chicago, scheduled to go into service this November. It also introduces a potential conflict between El Paso’s interest in Florida Gas Transmission and Coastal’s proposed underwater Gulfstream pipeline project into Florida, and lands El Paso in the thick of the debate over the proposed Independence Pipeline (ANR) from Midwest to East.

Still to be completed is El Paso’s purchase of the old Texas intrastate, Valero Natural Gas, from PG&E Corp. which was announced a week after the announcement of the Coastal acquisition. El Paso also has pledged to purchase a portion of the crude oil All American Pipeline, which it will convert to carry natural gas from Texas to California. (See NGI, Feb. 7)

The combined company will be the second largest gatherer of natural gas in the United States and the third largest U.S. producer of natural gas — after BP Amoco and ExxonMobil — with over 5 Tcf of proved gas equivalent reserves, Wise said when announcing the merger last January. El Paso picked up significant E&P operations and properties with the Sonat acquisition which will be augmented by Coastal. At the end of 1999, Coastal said natural gas production was averaging about 870 MMcf/d with total proved reserves of 3.6 Tcfe.

Besides its E&P activities, Coastal operates a number of U.S. oil refineries with a total capacity of about 450,000 b/d. Coastal executives responded to a query about the future of the refineries, saying there were no plans for asset sales at this time. An El Paso spokesman pointed out that earnings from Coastal’s refinery, coal and liquids businesses would represent less than 5% of ebit of the combined companies.

El Paso currently assesses its assets at $16 billion, while Coastal laid claim to $15 billion at the end of 1999. The merger includes approximately $6 billion of assumed debt and preferred equity. Each share of Coastal’s $1.19 Series A convertible preferred stock and $1.83 Series B convertible preferred stock will be converted to 9.133 shares of El Paso Energy common stock, and each share of $5.00 Series C convertible preferred stock will be converted to 17.980 shares of El Paso Energy common stock.

Ellen Beswick

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