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

Merrill Lynch energy analyst Donato Eassey told NGI El Paso allbut killed the potential merger at a midweek company meeting whenCEO William Wise told employees El Paso was not for sale. NeitherEl Paso nor Southern would comment on the merger or the meetings.

“I wasn’t at the meetings so I’m paraphrasing, but basically ElPaso’s CEO said he wasn’t shopping the company around. It would bedetrimental, from a PR standpoint, to say this and then go throughwith the merger,” Eassey said. “It turns out that all thatspeculation that sprung up Wednesday was just speculation afterall.”

The rumor mill fired up after the Monday announcements fromDominion Resources/Consolidated Natural Gas and Sempra Energy/KNEnergy. Industry observers began to speculate that a Southernpurchase of El Paso Energy would be the next mega-gas-and-electriccombination. The rumors gained steam on Wednesday morning when ElPaso’s stock price opened at a 52-week high of $39 per share afterclosing the night before at $35.125 per share.

One source said the reason the merger was not carried out wasbecause El Paso’s management was asking too much. “The topexecutive at El Paso is making two to three times what he wouldmake at Southern. Call it social issues or whatever you want, butthis type of thing is usually a deal breaker.”

Merrill Lynch’s Eassey did, however, leave the door slightlyopen. “I’m not saying it won’t ever happen, but the opportunityhasn’t manifested itself and it doesn’t look like it will.”Southern is probably not done in its bid to gain significant gasassets. “Southern Co., however, would serve itself well to acquirea gas asset like an El Paso, a Sonat, or a Coastal. With the onsetof electric deregulation, major electric companies are realizingone-trick ponies have no chance, and are therefore trying toreinvent themselves by acquiring gas assets.”

Ed Tirello, an analyst for BT Alex. Brown, said the twocompanies had been in negotiations long before breaking off thisweek. “Now the rumor is the negotiations are off, but I’m stillholding out hope because I think the move makes such good sense. ElPaso is Southern’s best fit. Both companies have coast-to coastoperations, as well as similar international settings. Theeconomics of this deal are not hard to figure out.”

ElÿPaso, headquartered in Houston, owns the nation’s onlyintegrated coast-to-coast natural gas pipeline system, with morethan 26,000 miles of transmission lines. It has more than $9.5billion in assets, also including 10,000 miles of gas gathering and25 processing plants, international infrastructure development, andenergy marketing. El Paso’s wholesale marketing operation sold 3.77Bcf/d of gas in 1998, which put the company at No. 17 in NGI’sranking of the top-20 largest gas marketers based on physical salesvolume.

Southern is an international energy company with $35 billion inassets through regional utilities and operations around the world.It is the largest producer of electricity in the United States andone of the world’s largest independent power producers. Based inAtlanta, 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 Companysupplies electricity in 10 countries on four continents. It alsoprovides energy-related marketing, trading and technical servicesand Southern LINC wireless telecommunications. In 1998, SouthernCompany Energy Marketing, a partnership with Vastar, sold 5.3 Bcf/dof gas, putting it at No.9 in NGI’s ranking of the Top-20 largestgas marketers based on volume sold. The marketing operation alsosold 185.1 million MWh in 1998 making it the second largest powermarketer in the nation behind only Enron Corp. For the nine monthsended 9/98, revenues fell 5% to $8.88 billion. Net incomeapplicable to Common rose 32% to $1.03 billion.

John Norris

©Copyright 1999 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.