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

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

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

“With this mandate from our stockholders, we look forward tocompleting the merger and moving quickly to realize the tremendousbreakout opportunities offered by this powerful network of assets,”said William A. Wise, president and CEO of El Paso Energy. “Thereis tremendous optionality embedded in our combined assets-from ourtraditional natural gas markets and our emerging LNG business toour new businesses in telecommunications and Europe. We areentering an unparalleled new phase in value creation for ourshareholders.”

While El Paso and Coastal stockholders were voting Friday morning,El Paso and Coastal attorneys were defending the two companies againstcharges they conspired to interfere with the financial operations ofanother Texas energy company, TransAmerican Natural Gas (See DailyGPI, May 5).

The combined company lays claim to being the only top tierplayer 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 willconsist of 58,000 miles of pipeline, spanning the U.S. fromCalifornia to New England and from the Gulf of Mexico to Canada. ElPaso will have a leading asset position in the fastest growingproducing areas in the U.S. and will have ownership in 8,000 net MWof power generation.

El Paso’s original pipeline system runs through the Southwest fromTexas to the California border. Tennessee Gas Pipeline, acquired fouryears ago, delivers from Texas and Louisiana through the East to NewEngland, while the more recently acquired (Oct., 1999) SouthernNatural Gas system, spans the Southeast and includes an ownershipinterest in Florida Gas Transmission. (See Daily GPI, Jan. 19)

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

Still to be completed is El Paso’s purchase of the old Texasintrastate, Valero Natural Gas, from PG&E Corp. which wasannounced a week after the announcement of the Coastal acquisition.El Paso also has pledged to purchase a portion of the crude oil AllAmerican Pipeline, which it will convert to carry natural gas fromTexas to California. (See Daily GPI, Feb. 1)

The combined company will be the second largest gatherer ofnatural gas in the United States and the third largest U.S.producer of natural gas – after BP Amoco and ExxonMobil – with over5 Tcf of proved gas equivalent reserves, Wise said when announcingthe merger last January. El Paso picked up significant E&Poperations and properties with the Sonat acquisition which will beaugmented by Coastal. At the end of 1999, Coastal said natural gasproduction was averaging about 870 MMcf/d with total provedreserves of 3.6 Tcfe.

Besides its E&P activities, Coastal operates a number ofU.S. oil refineries with a total capacity of about 450,000 barrelsper day. Coastal executives responded to a query about the futureof the refineries, saying there were no plans for asset sales atthis time. An El Paso spokesman pointed out that earnings fromCoastal’s refinery, coal and liquids businesses would representless than 5% of ebit of the combined companies.

El Paso currently assesses its assets at $16 billion, whileCoastal laid claim to $15 billion at the end of 1999. The mergerincludes approximately $6 billion of assumed debt and preferredequity. Each share of Coastal’s $1.19 Series A convertiblepreferred stock and $1.83 Series B convertible preferred stock willbe converted to 9.133 shares of El Paso Energy common stock, andeach share of $5.00 Series C convertible preferred stock will beconverted to 17.980 shares of El Paso Energy common stock.

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