Fresh off its purchase of Sonat Inc., El Paso Energy Corp.re-entered the consolidation game by merging with Coastal Corp. ina $16 billion deal announced Tuesday. The potential union wouldcreate a pipeline empire capable of serving almost all of the majormarkets in the country. The companies expect the transaction,accounted for as a pooling of interest, to be completed by thefourth quarter of this year.

The total value of the transaction includes $6 billion ofassumed debt and preferred equity. Each share of Coastal commonstock and Class A common stock will be converted on a tax-freebasis into 1.23 shares of El Paso Energy common stock. Under thisratio, the deal values Coastal’s stock at $45.66 per share based onlast Friday’s closing price, representing a premium of 27%.

The move will vault the company into the top five of everywholesale gas and power standard, according to El Paso CEO WilliamWise.

“The merger is expected to be accretive to El Paso’s earningsper share (EPS) immediately and add more than 5% to EPS in both2001 and 2002,” said Wise. “With this merger, El Paso Energy willbecome the only company that is one of the top five companies inevery sector of the wholesale natural gas and power arena,including natural gas transmission, production, gathering andprocessing, marketing, and power generation. As power generationbecomes the largest consumer of natural gas, we believe integrationalong the full value chain will enhance profitability in eachsegment of our business.”

Wise said the combined interstate transmission system of the newcompany will consist of over 58,000 miles of pipeline reaching allthe major growth areas in the country. The combined company will bethe second largest gatherer of natural gas in the United States andthe third largest U.S. producer of natural gas — after BP Amocoand ExxonMobil — with over 5 Tcf of proved gas equivalentreserves and approximately 20.7 Bcf/d of transportation. Togetherthe companies control over 12,000 net MW of power generationworldwide, 5,500 of which is in the U.S.

The addition of Coastal would elongate El Paso’s reach as thetop company in terms of mileage of pipeline. The El Paso-Sonatmerger created a company with 38,000 miles of pipe and 12.7 Bcf/dof transportation. Coastal would add 18,000 miles and 8 Bcf/d.Enron would lose ground, but maintain second place with 32,000miles and 9 Bcf/d of transport. Williams would be third, with27,000 miles and 10.1 Bcf/d and Duke would be fourth with 11,500miles and 3.9 Bcf/d.

“Our two companies complement each other in strategicallycompelling ways. El Paso Energy’s coast-to-coast pipeline systemreaches from the West Coast to the southeastern United States andthen moves upward along the eastern seaboard to key markets in theNortheast; Coastal’s ANR pipeline system covers strategic areasacross the Midwest and Great Lakes regions, and its ColoradoInterstate Gas system traverses the Rockies,” Wise added.

The original El Paso Pipeline stretches from Texas to California,while Southern Natural Gas — acquired when the Sonat deal wasfinalized last October (See Daily GPI, Oct. 25) — serves much of the Southeast andincludes an interest in the main pipeline into Florida. El Paso’sTennessee Gas Pipeline, acquired four years ago from Tenneco Inc.,travels from Texas and Louisiana into New England.

For Coastal, joining with El Paso represented the best chance toaccelerate growth. “Both companies had very achievable andrealistic growth strategies in place, but from Coastal perspectivewe could see this had the benefit of accelerating our growth,”David Arledge, CEO of Coastal, said. “It will also provide a betterbalance of earnings by lessening the commodity risk and refiningmargin risk we have.”

John Olson, a consultant with Sanders, Morris & Mundy saidit was no dark secret that Coastal was looking for a way to lessenthe impact of its oil refining and marketing business. “[Coastal]has said for a long time that its focus was moving toward naturalgas. By implication, that meant moving away from the refiningbusiness.” He estimated the value of the refining business at $4billion.

Overall, Olson approved of the deal. “It’s a fortunate merger.Clearly, three heads are better than one. The three heads in thiscase are Sonat, El Paso, and Coastal. Combined, they will have amore enhanced business than if they stood alone. Coastal is gettinga good price, but not a great price. And because of that, El Pasowill still have room to grow into some exciting possibilities.”

Besides its existing pipeline infrastructure, Coastal is anattractive pick-up for El Paso because of the pipeline projectsCoastal’s subsidiary, ANR Pipeline, is involved in. ANR has itshands on some of the most talked-about pipeline projects going ontoday including the Alliance Pipeline and the Gulfstream project.Alliance currently is under construction and is designed to carry1.3 Bcf/d of gas from western Canada to the Chicago-area fordistribution throughout North America. The 1,900-mile pipeline isscheduled to be in service Oct. 1, 2000 and ANR owns 14.4% of it.The 744-mile, 1.1 Bcf/d Gulfstream would originate near Mobile, AL,and cross the Gulf of Mexico with more than 400 miles of 36-inchdiameter pipeline to Manatee County, FL.

“The involvement with these projects is definitely a part ofthis deal,” said Ed Tirello, an analyst for Deutsche Banc Alex.Brown. “If you’re not getting bigger somehow, you’re not going tolast long. The deal also adds 5% to earnings per share growth. Sonow you’re looking at 20% growth instead of 15%, which is veryattractive.”

If the merger is approved, El Paso would also be getting involvedin one of the most highly debated pipeline projects in the U.S. rightnow; the Independence and related MarketLink and SupplyLinkproject. The $678 million proposed pipeline would run about 400 milesfrom Defiance, OH, to the hub in Leidy, PA, where it would intersectwith up to six different pipelines capable of delivering gas to theentire eastern seaboard. However, the project has run into a wall oflandowner and political confrontation. The project has attracted somuch attention that New Jersey Gov. Christine Todd Whitman haslaunched a campaign against it (see Daily GPI, Nov. 23).

Both Wise and Arledge said it was too early to discuss layoffs.Although they acknowledged that some cutbacks are probable, theysaid many of them will be achieved through early retirement.Overall, the two companies expect $200 million in cost savings. Bycomparison, the El Paso-Sonat merger caused more than $100 millionin savings and more than 600 people to lose their jobs.

Despite the volume of assets involved, management for bothcompanies expressed confidence that the deal will be done on time.”These are very complementary assets,” Wise said in a conferencecall. “We do not expect any significant problems.” He added thatany required asset sell-off would be “proportionately,significantly less than the Sonat deal.” The FTC required El Pasoto sell the Sea Robin and East Tennessee pipelines, as well as itsshare of the Destin Pipeline. The deals were performed earlier thismonth.

“I think the mix of assets is just right,” Tirello said. “Butthen you have the government saying it is going to take a longerlook at these big mergers, so we’ll have to wait and see.”

The merger needs SEC, FERC, shareholder and FTC approval. Nostates are required to ratify the transaction.

Once approved, Wise said the new El Paso will explore manygrowth opportunities, while keeping the exploration and productionbusiness stable. “The E&P business is not a growth driver forus,” he said. Two areas where Wise said El Paso would focus on forgrowth are telecommunications — thanks to its nearly 60,000 milesof right-of-way — and electricity asset acquisition.

But don’t count on any major purchases or sales in the nearfuture. The management teams stressed the pooling restrictionsinvolved in the merger, which prohibit additions and sales by ElPaso or Coastal for a two year period.

The combined company will be headquartered in Houston. On oraround Dec. 31, 2000, Wise will assume the position of chairman inaddition to continuing as president and CEO of the new El Paso.Arledge, will become the vice chairman and will oversee thenon-regulated operations of the combined company. The board ofdirectors for the combined company will consist of twelve directors— seven designated by El Paso Energy and five designated byCoastal.

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