Pipeline & Gas Journal
March issue 2000:

Creates 58,000-Mile System

by Jeff Share, Editor Pipeline & Gas Journal

l Paso Energy President and CEO William A. Wise couldn’t restrain himself from chuckling. On this Tuesday morning in mid-January the Northeast was in its first deepfreeze of the winter while air conditioners were working overtime to cool off Texans sweltering in 85-degree heat. So it was with a smile that Wise was announcing the latest blockbuster deal to hit the Energy Patch: a merger with Coastal Corporation valued at $16 billion that will propel El Paso into a world-class integrated gas and power company second to none.

“This is creating absolutely the best natural gas company in North America,” Wise declared. “These assets complement each other and there is very little overlap.”

With the merger, El Paso Energy will become the only company that is one of the top five companies in every sector of the wholesale natural gas and power arena, including natural gas transmission, production, gathering and processing, marketing and power generation. “As power generation becomes the largest consumer of natural gas, we believe integration along the full value chain will enhance the profitability in each segment of our business,” Wise said.

The numbers are staggering. The combined interstate transmission system will consist of more than 58,000 miles of pipeline reaching all of the major growth areas in the country, accessing every key supply source in North America, and moving more gas than any other energy company in the world. It will be the second-largest gatherer of natural gas in the U.S., third-largest marketer, and the third-largest domestic producer of natural gas, trailing only BP Amoco and ExxonMobil, with more than 5 Tcf of proved gas equivalent reserves. The combined company, which will have assets of $32 billion, will also have control over 12,000 net megawatts of power generation worldwide and the fifth-largest power company in the U.S. Once completed, El Paso expects to realize at least $200 million in cost savings annually, Wise said.

Houston energy consultant and P&GJ Contributing Editor Carol Freedenthal says the merger is indicative of the ongoing trend to supply energy whether the original company was oil, gas or electric. This has made the need for the competing companies to increase in size to have the value and holding power to grow, he said.

“The combined new company is a result of two relatively mid-size, energy companies seeking to expand their capitalization significantly to ensure continued growth in the energy industries. The individual companies were, and now the merged company is well placed in the top of each sector of the energy business that make up the industry from wellhead to burnertip and electron for electricity. The combination makes an excellent match and strengthens not only the strong points of the current companies but also diminishes some of the weaknesses of the individual companies. The financial strength of the combined companies puts it in a much higher capitalization bracket, allowing it greater latitude in other acquisitions as well as protection from smaller companies acquiring it.”

El Paso will pay $10 billion for Coastal in addition to $6 billion in assumed debt and preferred equity. The merger is expected to be completed by the fourth quarter of 2000. It will be the culmination of three major El Paso deals that have helped reshape the nation’s pipeline industry in less than four years, beginning with El Paso’s $4 billion purchase of Tenneco Energy in 1996. That deal more than doubled El Paso’s size and gave it the only coast-to-coast natural gas pipeline in the nation.

Just recently, El Paso paid $6 billion to acquire Sonat, which gave it a major pipeline presence in the Southeast along with a marketing unit and an exploration and production subsidiary. Between the Tenneco and Sonat deals, El Paso bought DeepTech International and a share of the Leviathan Gas Pipeline, which is the biggest independent gas gatherer in the Gulf of Mexico. As part of its strategy, El Paso has been adding power plants along its vast pipeline network and bought 14 independent power plants from MidAmerican Energy. Coastal’s pipelines, which include ANR and Colorado Interstate Pipeline, will give El Paso a big presence in the upper Midwest and Midwest, the Great Lakes region and in the Rockies.

After the Coastal deal was announced, El Paso continued on its spending spree, agreeing to buy the natural gas and liquids businesses owned by PG&E for $840 million, including $561 million in assumed debt. PG&E Gas Transmission, Texas and PG&E Gas Transmission Teco are the divisions being sold and would give El Paso extensive natural gas gathering, processing, transmission and storage operations in Texas. That sale is expected to close by mid-year. El Paso will be acquiring 8,500 miles of pipelines that transport 2.8 Bcf/d in Texas from PG&E subsidiaries. PG&E, an energy holding company in San Francisco, had previously purchased the assets from Valero Energy in San Antonio. Valero, ironically, was formed through a divestiture of Coastal more than 20 years ago.

El Paso Natural Gas, the company’s pipeline to California, entered into an agreement with Plains All American Pipeline, L.P. for the purchase of a portion of the All American Pipeline for $129 million. The 1,223-mile, 30-inch pipeline was built in the mid-1980s as a crude oil transportation system and runs from McCamey, TX to Santa Barbara, CA. El Paso will buy the portion of the pipeline from McCamey to Emidio Station, near Bakersfield, CA, a total of 1,088 miles. The purchase also includes any fiber optic rights that All American possesses for the entire 1,223 miles of pipe.

El Paso plans to invest $75 million to convert a segment of the pipeline, from McCamey to the California border, from an oil pipeline to a natural gas pipeline upon FERC approval. The conversion will allow El Paso Natural Gas to replace existing natural gas compression facilities with more efficient pipeline looping, reducing operating, maintenance and fuel costs for its customers. On the east end of El Paso’s system, the pipeline will allow greater inlet capability in response to the increasing flows on the southern system. The converted pipeline is planned to go into service during the first quarter 2001.

While El Paso has been putting together deal after deal, Coastal Corporation stood by quietly. The company, which is considered to be a “minor major” because of its global mix of refineries, power plants, E&P, pipelines and service stations, was founded in Corpus Christi by the legendary Oscar Wyatt, Jr. nearly 50 years ago, literally from the backseat of his 1949 Ford. Controversy dogged Coastal for many years, periodically for its dealings with unfriendly Middle East nations, and legal disputes.

On Dec. 31, 2000, Wise will become president, CEO and chairman of the combined company. David A. Arledge, president, CEO and chairman of Coastal, will become vice chairman and will oversee the non-regulated operations of the combined company. Both have long experience with each company. Both are lawyers by training, having moved into the top position through varied experience over the last quarter century. El Paso will have seven seats on the new board, Coastal will have five.

Arledge said Coastal’s growth strategies are in place to deliver double-digit earnings growth for the next several years. “By combining Coastal’s assets with those of El Paso, we provide a unique company for future growth in the North America natural gas operation. P&GJ