Monday's two proposals -- the $6.3 billion combination of Dominion Resources (D) - Get Report with Consolidated Natural Gas (CNG) and the $1.9 billion deal between Sempra Energy (SRE) - Get Report and KN Energy (KNE) -- were happily accepted by both the courting and courted. But the deals beg two questions: Why gas and why now?

The answers are simple: deregulation and convergence.

A Fundamental Attraction

As deregulation grips both industries, mergers become attractive. "Natural gas has become the fuel of choice for electric generators," says Mark Gabriel of

EPRI

, a utility think tank. "Alliances make a lot of sense as deregulation moves forward."

Monday's merger news prompts some historical reflection. Electric companies pioneered the natural gas business and commonly delivered both electricity and natural gas service to their customers. As the industry matured, it gained its independence.

With deregulation, recombination is natural. "It's been something people in the BTU world have been clamoring about for some time," says one utility insider. "

Monday seems to be another indication that the confluence of gas and electricity continues to move from fantasy to reality, from theory into practice."

Ownership of both gas supplies and distribution facilities aids this convergence. "You need the assets to be a major player in the trading and marketing business," says the industry insider. "It reduces the risk of your trading operations and improves your credit standing. That's why you're likely to see big energy trading companies snap up both gas and electric assets in the months to come."

Who's Next

Analysts believe Monday's mergers are just the beginning. "This is a clear illustration of a trend between electric and gas utilities," says

Schroders'

Ray Niles. "The way to succeed in deregulation is to build critical scale in both electricity and gas. You won't be a player in one without becoming a player in the other."

With that in mind, many large electrics are on the prowl for gas assets. Last week,

Natural Gas Week

reported that

Southern Company

(SO) - Get Report

and

El Paso Energy

(EPG)

are in advanced merger talks. The deal could be worth in excess of $8 billion, making it the largest combination to date. A Southern Company spokeswoman said it is company policy not to comment on speculation.

Southern is currently the nation's largest electric utility but has no gas assets. Its marketing subsidiary, Southern Company Energy Marketing, is the second-largest power marketer, behind

Enron

(ENE)

, but only the eighth-largest gas marketer. Southern's lack of gas assets is often cited as the reason for lack of growth in gas trading and marketing. El Paso would give Southern a nationwide gas operation, providing fuel for its growing generation assets as well as supply for its trading and marketing efforts.

While a Southern-El Paso merger makes sense for both, price may be an issue. Southern appeared poised to offer about $32 per share for El Paso. However, with El Paso's stock now trading above $34, Southern may be forced to sweeten the pot.

"Most of the recent deals appear to be at pretty good premiums," says Niles, who has no rating on either stock. (Schroders has done no investment banking for either company.) Ironically, premium deals in the utility business are something new. Most electric deals have been completed with little positive impact for shareholders of the targeted company.

Other gas companies appear ripe for the taking by electric utilities.

Merrill Lynch

gas analyst Donato Eassey listed his "sumptuous six" gas utilities in a November report chronicling the convergence of gas and electric companies. So far, his track record is pretty good: two of his six -- KN Energy and CNG -- were taken out Monday.

The four others are

Columbia Energy

(CG) - Get Report

,

Equitable Resources

(EQT) - Get Report

,

National Fuel Gas

(NFG) - Get Report

and

Questar Corporation

(STR)

. All provide broad distribution and pipeline systems and a significant supply of gas. Eassey has a buy rating outstanding on National Fuel Gas and Questar and an accumulate rating on Columbia Energy and Equitable Resources. Merrill was an advisor to KN Energy on its deal with Sempra, and advised CNG on its deal with Dominion Resources. He has performed no other investment banking for any of the "sumptuous six."

In addition to Eassey's remaining four and El Paso Energy, other targets ripe for electrification, according to several industry analysts, include

MCN Energy

(MCN) - Get Report

and

Kaneb Pipe Lines

(KPP)

. Also on the short list is

Keyspan

(KSE)

, the result of the merger between

Brooklyn Union Gas

and

Long Island Lighting

.

As for the buyers, consider industry consolidators the likely suspects. Companies such as

Texas Utilities

(TXU)

,

PGE

(PCG) - Get Report

and

Duke

(DUK) - Get Report

, as well as Southern Company, appear likely buyers. In addition, diversified energy company Enron makes the list. Says one buy-side manager, "Duke, Southern and Enron could buy just about anyone. That's where the smart money is when talking acquirers."

Also, a group of the larger gas companies could be buyers or sellers. Companies like

Sonat

(SNT)

,

Williams Companies

(WMB) - Get Report

and

Coastal

(CGP)

have major gas assets and are beginning to explore opportunities in electricity. "A merger of equals between a major gas and major electric company is not out of the question," says the buy-sider.

Both Good, One Better

While both the Dominion-CNG and Sempra-KN mergers will provide good long-term benefits, the Sempra deal gets better faster. "Sempra-KN looks like a better deal near-term," says our buy-sider. "It appears to be accretive in the first year."

Conversely, the Dominion-CNG merger is a bet on what's to come. "A number of people questioned the merger benefits to CNG," the buy-sider says. CNG is poised to grow at about 10% vs. Dominion's growth rate of only about 4%. In the conference call Monday morning, Dominion CEO Tom Capps said the deal is dilutive in the first two years. Prior to the merger,

First Call

estimated Dominion would earn $3.30 per share in the coming year; Capps talked the number down to the $3.05 to $3.10 range as a result of the merger.

While reaction to Monday's news is mixed, one thing is certain: Mergers are once again chic among utilities. "1997 was a big year for electric-gas mergers and 1998 tailed off a bit," says Schroders' Niles. "It appears the pace will quicken again in 1999."

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At the time of publication, Edmonds' firm was long Southern Company and Enron, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.