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Analysts: El Paso-Southern Merger Dead for Now

Analysts: El Paso-Southern Merger Dead for Now

It's been all talk but no action and as a result industry analysts are starting to back away from rampant rumors of a potential merger between Southern Co. and El Paso Energy.

Merrill Lynch energy analyst Donato Eassey told NGI El Paso all but killed the potential merger at a midweek company meeting when CEO William Wise told employees El Paso was not for sale. Neither El Paso nor Southern would comment on the merger or the meetings.

"I wasn't at the meetings so I'm paraphrasing, but basically El Paso's CEO said he wasn't shopping the company around. It would be detrimental, from a PR standpoint, to say this and then go through with the merger," Eassey said. "It turns out that all that speculation that sprung up Wednesday was just speculation after all."

The rumor mill fired up after the Monday announcements from Dominion Resources/Consolidated Natural Gas and Sempra Energy/KN Energy. Industry observers began to speculate that a Southern purchase of El Paso Energy would be the next mega-gas-and-electric combination. The rumors gained steam on Wednesday morning when El Paso's stock price opened at a 52-week high of $39 per share after closing the night before at $35.125 per share.

One source said the reason the merger was not carried out was because El Paso's management was asking too much. "The top executive at El Paso is making two to three times what he would make at Southern. Call it social issues or whatever you want, but this type of thing is usually a deal breaker."

Merrill Lynch's Eassey did, however, leave the door slightly open. "I'm not saying it won't ever happen, but the opportunity hasn't manifested itself and it doesn't look like it will." Southern is probably not done in its bid to gain significant gas assets. "Southern Co., however, would serve itself well to acquire a gas asset like an El Paso, a Sonat, or a Coastal. With the onset of electric deregulation, major electric companies are realizing one-trick ponies have no chance, and are therefore trying to reinvent themselves by acquiring gas assets."

Ed Tirello, an analyst for BT Alex. Brown, said the two companies had been in negotiations long before breaking off this week. "Now the rumor is the negotiations are off, but I'm still holding out hope because I think the move makes such good sense. El Paso is Southern's best fit. Both companies have coast-to coast operations, as well as similar international settings. The economics of this deal are not hard to figure out."

ElÿPaso, headquartered in Houston, owns the nation's only integrated coast-to-coast natural gas pipeline system, with more than 26,000 miles of transmission lines. It has more than $9.5 billion in assets, also including 10,000 miles of gas gathering and 25 processing plants, international infrastructure development, and energy marketing. El Paso's wholesale marketing operation sold 3.77 Bcf/d of gas in 1998, which put the company at No. 17 in NGI's ranking of the top-20 largest gas marketers based on physical sales volume.

Southern is an international energy company with $35 billion in assets through regional utilities and operations around the world. It is the largest producer of electricity in the United States and one of the world's largest independent power producers. Based in Atlanta, Southern Company is the parent firm of Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric. Through its Southern Energy Inc. subsidiary, Southern Company supplies electricity in 10 countries on four continents. It also provides energy-related marketing, trading and technical services and Southern LINC wireless telecommunications. In 1998, Southern Company Energy Marketing, a partnership with Vastar, sold 5.3 Bcf/d of gas, putting it at No.9 in NGI's ranking of the Top-20 largest gas marketers based on volume sold. The marketing operation also sold 185.1 million MWh in 1998 making it the second largest power marketer in the nation behind only Enron Corp. For the nine months ended 9/98, revenues fell 5% to $8.88 billion. Net income applicable to Common rose 32% to $1.03 billion.

John Norris

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