El Paso, Coastal Complete Merger After FTC OK
El Paso Energy Corp. completed its $24 billion acquisition of The Coastal Corp. last Monday within hours of the Federal Trade Commission (FTC) giving its blessing to the mega-deal, creating the fourth largest energy company in the United States after ExxonMobil, a combined Texaco-Chevron and Enron Corp.
As a condition to the merger, the FTC ordered the combined company to divest its interests in 11 natural gas pipeline and gathering facilities in the Midwest, Florida, New York and Gulf of Mexico offshore areas. Seven of the assets are located in the offshore.
But even after allowing for the divestitures, the union of the two energy powerhouses creates a pipeline empire (five major interstate lines) capable of serving almost all of the key gas markets in the U.S. --- the West, South, Rocky Mountain, Midwest and Northeast regions.
The company's total enterprise value was pegged at $50 billion. El Paso Energy projected the combined company would achieve 20% earnings-per-share growth in 2001, and would see cost savings of more than $200 million a year as a result of re-engineering activities and operational streamlining.
Within two days of announcing the merger's completion, El Paso Energy moved quickly to cut its work force by more than 3,285. A total of 1,650 workers were terminated, 1,635 opted for early retirement and others left voluntarily, according to the company.
"This merger is a transforming event for both El Paso Energy and Coastal," said William A. Wise, chairman of the energy giant. "The scale we now possess opens an even wider range of extraordinary opportunities. Our combination of assets, intellectual capital and financial resources creates the largest and most broadly based natural gas company in the world." Former Coastal chairman, David A. Arledge, will be vice chairman of El Paso Energy's board of directors.
Top officials of El Paso Energy plan to basically introduce the combined company to analysts during two days of meetings in Houston, TX, that get underway at 3 p.m. today. There will be "a lot of announcements," said a spokeswoman. The closure of the merger comes almost a year after it was first announced by El Paso (See NGI, Jan. 24, 2000).
In authorizing the merger last week, the FTC issued a consent order that directs the merged company to sell off more than 2,500 miles of pipeline and gathering assets. "The series of divestitures required by this order address the very real competitive concerns that have resulted from the recent and rapid consolidation in the U.S. market for natural gas transportation," said Molly S. Boast, acting director of the FTC's Bureau of Competition. "Appropriately, the order goes even further [than divestitures] by requiring competitive protections for future pipeline construction and extensions in key parts of the country."
Specifically, the consent order requires El Paso and Coastal, within 10 days of the closure of their merger, to divest their interests in Gulfstream Natural Gas System (a proposed pipeline in Florida) to Duke Energy and Williams Gas Pipeline; the Empire State Pipeline (which serves Buffalo, Rochester and Syracuse, NY) to Westcoast Energy; the Green Canyon and Tarpon gathering systems (located in the Gulf of Mexico) to Williams Field Services; the offshore Manta Ray, Nautilus and Nemo gathering systems to Enterprise Products; and the Stingray Pipeline (also in the Gulf of Mexico) to Shell Gas Transmission and Enterprise Products. The merged company completed the sales of several of the assets last week, including Gulfstream.
Within four months, the merger partners also are required to divest their ownership interests in the Midwestern Gas Transmission (MGT), U-T Offshore System (UTOS) and Iroquois Gas Transmission systems. The MGT system extends from the Kentucky-Tennessee border to Chicago; the UTOS is located in the Gulf; and Iroquois extends from the Canadian border to major cities in the Northeast, such as New York City and Albany, NY.
The merged company estimated it would receive approximately $243 million from the sale of its ownership interests in five pipelines --- El Paso's MGT, Coastal's 50% stake in the Empire State pipeline, Coastal's 16% stake in Iroquois, Coastal's 50% interest in Stingray, and Coastal's 50% interest in the UTOS system --- and Coastal's Gulfstream project in Florida. The money will be used to pay down debt and to fund growth opportunities for the merged company, it said.
Proceeds from the divestures of El Paso Energy Partners L.P.'s interests in certain offshore assets --- its 50% stake in the UTOS and Stingray pipeline systems, its 100% ownership of the Green Canyon and Tarpon gathering systems, its 25.67% interest in the Nautilus pipeline system, its 25.67% ownership in the Manta Ray Offshore gathering system, and its 33.92% stake in the Nemo gathering project --- will be reinvested (along with a $29 million cash infusion from El Paso Energy) in new businesses and assets, the merged company said.
The FTC has required the merged energy giant to take actions over and above the ordered divestitures. With respect to the Gulfstream Natural Gas project, a proposed 744-mile pipeline that would run from Mobile Bay, AL, under the Gulf of Mexico and come ashore on the west coast of Florida, the agency has ordered El Paso Energy to provide consulting services to the new project sponsors at a reasonable rate until June 2002 to ensure that the targeted in-service date of June 1, 2002 is met. It further barred the merged company from acquiring any long-term capacity on the Gulfstream pipeline, and from disclosing or making available any confidential information about the project to competitors.
The FTC called for the sale of Gulfstream because El Paso Energy already is a joint owner in Florida Gas Transmission, the only pipeline system currently serving the Sunshine State.
As for MGT, the FTC consent order directed the merged company "to include and enforce a provision in the sales agreement" that would require the purchaser of the MGT system to connect to the proposed Guardian Pipeline, which seeks to offer competition to Coastal's ANR Pipeline in the Milwaukee, WI, area by late 2002. The combined energy company also is barred from "taking.any unfair or deceptive action that would prevent, hinder or delay the completion of the Guardian Interconnection."
The agency further prohibited El Paso Energy from serving on any committee of Iroquois Gas Transmission, attending any committee meetings or receiving any information about the pipeline that isn't available to all shippers or the public. It also required El Paso Energy --- until it is removed from the Iroquois Management Committee --- to vote in favor of expanding the pipeline, if such a vote should take place. These measures are to ensure the merged company "[does] not gain access to competitively sensitive information that could be used to prevent competition between [itself] and Iroquois, or limit the ability of Iroquois to expand into the Albany, NY, market."
Additionally, the agency ordered El Paso Energy to create a $40 million fund for the purchaser of the Green Canyon and Tarpon systems to cover the costs of extending these pipelines to specified areas in the Gulf where El Paso lines are significant competitors. The purpose of the fund is to restore pipeline competition in certain areas of the Gulf, the agency said.
Until all of the divestitures occur, the FTC directed El Paso Energy to "maintain the assets in substantial the same condition" as they are now.
The combined company has been organized into four reporting segments --- the Pipeline Group, the Merchant Energy Group, Production and Field Services, according to El Paso Energy. The Pipeline Group will manage more miles of interstate natural gas pipelines (58,000 to be exact) than any other energy company in the world. It will have five interstate pipelines --- ANR, Colorado Interstate Gas, El Paso Natural Gas, Southern Natural Gas and Tennessee Gas Pipeline. John W. Somerhalder II, formerly executive vice president of this business segment, has been named president.
The Merchant Energy Group will manage the company's growing wholesale customer business and its extensive portfolio of natural gas, power and petroleum assets on a worldwide basis. This segment has experienced 250% growth over the last three years on a pro forma basis, according to El Paso Energy. Ralph Eads, formerly executive vice president of El Paso Production and Merchant Energy, has now be president of the Merchant Energy Group.
The Production business unit will be one of the largest gas and oil producers in the nation, controlling more than 6 trillion cubic feet equivalent (Tcfe) of natural gas reserves. Last year, the company added approximately 1.9 Tcfe of reserves at a reserve replacement cost of about $1.07/Tcfe. Rod Erskine, former senior vice president of Coastal's Supply, Marketing and Marine Transportation activities, has been appointed president of the production segment.
El Paso Field Services --- with its combined El Paso, Coastal and recently acquired South Texas assets --- holds interests in 24,000 miles of intrastate pipeline and gathering systems, 35 processing and treating plants, and eight offshore platforms. Robert G. Phillips will continue as president of this unit.
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