With the exception of some utilities, energy companies were notspared during the stock market’s free-fall early last week. Thevolatile market, foreign exposure, depressed oil and natural gasprices and plenty of gas in storage all served to drive some shareprices to new 52-week lows. While one analyst bemoaned themarket-lagging performance of the utility stocks he follows, someutilities did live up to their reputation for providing arelatively safe haven in a stormy market. Looking ahead, though,investors should note some electric and gas utilities already havebeen burned in the increasingly deregulated market, and others areheading into rougher territory as the march of deregulation pushesthem further into non-regulated businesses.

Although The Coastal Corp. enjoyed second-quarter earnings pershare that were 23% higher than 1997’s second quarter, thecompany’s stock last week set a new 52-week low and was tradingnear the bottom of its 52-week range in the mid- to high-20s. The52-week high is 38 ¬. Coastal’s earnings have increased everyquarter since 1993, said Stirling D. Pack Jr., director of investorrelations, but that momentum is apparently being ignored by a stockmarket where many energy company share prices are foundering.

“I think that we’re caught up in this market downturn, andparticularly the downturn in natural gas prices,” Pack said. “I’vespoken with a lot of our big [share]holders who are as confused aswe are about this.” There has been no change in Coastal’sfundamental outlook that would precipitate a share price decline,he said. Foreign exposure is minimal as well. “The only place thatwe’re exposed is in Pakistan, and we look for a favorable outcomethere as well with the two power projects that we have.”

Pack chalked up the decline to profit-taking. In talks with fundmanagers over the last week, he said he’s heard of forcedredemptions from individual shareholders and research directorspulling out of equities to strengthen cash positions. “You’re hitby that kind of market sentiment as opposed to any change infundamentals.” Also, lower gas prices of late have caught theattention of investors focused on the short-term.

El Paso Energy’s fortunes also have waned, at least for the timebeing. El Paso also set a new 52-week low last week, diving fromaround 28 Monday to about 24. The stock worked its way back uplater in the week, trading in the mid- to high-20s. The 52-weekhigh is 38 15/16. “We are still comfortable with our earningsestimate for the quarter which is right now at 42 cents, and we’realso comfortable with the estimate for the year at $1.85,” saidScott Vonderheide in the company’s investor relations department.”All of our projects are on track. Our peer group is down in themarket, down 500 points. It’s just been a very, very tough market.”Like Coastal, El Paso had strong second quarter results. ElÿPasohad record second quarter earnings of 45 cents per diluted share,an increase of 22% from 37 cents per share in 1997.

Williams hit a new 52-week low of 20. The stock’s 52-week highis 36 15/16. The company rebounded later in the week and wastrading in the mid-20s. The company refused to comment on its stockperformance. In addition to its gas pipeline business, the companyhas exposure to the oil market through its oil pipelines and to thetelecommunications market with its fiber optics division. For thesecond quarter, Williams reported unaudited net income of $60.7million, compared with unaudited restated net income of $118.5million for the same quarter of 1997.

Enron was trading around the middle of its 52-week range,finishing the week in the low- to mid-40s after taking a dive alongwith the rest of the stock market last Monday. The 52-week range is35 5/16 to 58 7/16. In a report released late last month, FitchIBCA called attention to Enron’s significant internationalexposure, pointing out many of the company’s overseas deals havebelow-investment-grade stand-alone profiles (See NGI Aug. 31,1998). Enron did not make anyone available to comment last week.

Also not commenting on its stock price last week was Dynegy,which was trading at the bottom of its 52-week range of 9 « to 20.The stock has trended down since November. Dynegy, which hasexposure to oil prices through its gas liquids business, reportednet income for the second quarter of $23.4 million, $17.5 millionon a normalized basis. Results for the 1997 period were $32.1million which included adjustments totaling $14.6 million.

E&ampP Under a Cloud

Stocks of exploration and production companies could be in forcontinued tough times according to Salomon Smith Barney. Theinvestment firm concedes its earlier predictions of $2.15/MMBtu gasand $17/barrel oil now seem somewhat optimistic. “We believe thatit will be very difficult for investors to justify investments onthat basis over the next several months. We think that the sharescould fall another 15% in the near term, and that a buyingopportunity could be created at some point – but we are not readyto step up yet.”

Local gas and electric utility stocks followed by Merrill Lynchgas analyst Donato Eassey have lagged the S&ampP 500 so far thisyear. Gas distribution and integrated companies Eassey follows wereoff about 13.7% from July 17 to Aug. 31 compared to an S&ampP 500index that was down 5.6% for the period. From the beginning of theyear through Aug. 31, Eassey’s group was off an average of 18.4%while the S&ampP 500 was off 1.3%.

“Our group has been, relative to the market, oversold. My beliefis as I look at this particular market, I haven’t seen these kindsof opportunities for upside since 1994.” Over the next 12 to 18months, Eassey said the group has upside potential of about 15%. Headds that to the group’s 5% yield for a prediction of 20% trendedtotal return. “Fundamentally, the industry is in a very goodposition.” Eassey predicted competition, spawned by deregulation,will push further consolidation of utilities.

During the market’s violent downturn, domestically-centeredutility stocks with little exposure to either oil or natural gasprices, served investors well compared with other energy companies.

Duke Energy was trading last week in the low-60s, not too faroff from its 52-week high of 64 5/16 when compared with the 52-weeklow of 44 9/16. “We have a pretty strong dividend. We have someinternational risk but basically not in the countries that arebeing talked about,” said Duke spokesman Randy Wheeless. “I thinkover the last year some utility stocks have been seen as betterinvestments, and we’d like to think that Duke is one of those.”Duke Energy reported 1998 second quarter basic earnings of 76 centsper share, up 77% from 43 cents per share for the same quarter in1997.

Southern Company was off from a high around 29 Monday and wastrading around 26 later in the week, still above its 52-week low of21 1/16. PacifiCorp, on the other hand, was trading near the bottomof its range of 20 5/16 to 27 5/16. The end of the week saw thecompany trading in the low-20s. The low stock price could beattributed – at least in part – to volatility in the electric powermarket rather than the stock market.

PacifiCorp reported sharply lower second quarter earnings. Thecompany had second quarter 1998 earnings on common stock of $36million, or $0.12 per share, compared to $89 million, or $0.30 pershare, reported in 1997. Second quarter 1997 results included $19million, or $0.06 per share, from the company’s telecommunicationsoperations, which were sold in December of 1997. Second quarter1998 earnings were reduced by losses from unregulated electricitytrading totaling $32 million, or $0.11 per share. Losses includedcharges for known and probable future trading losses totaling $6million, or $0.02 per share, and reserves for potential creditlosses totaling $20 million, or $0.07 per share.

PG&ampE Stays Up

Houston Industries was down Monday but still not far from thetop of its range at around 28 later in the week. The 52-week highis 32, and the low is 20 ¬. “We trade kind of as a surrogate tobonds and treasury bills,” said Randy Burkhalter, director ofinvestor relations. “We’re regarded as a yield stock even thoughwe’re getting away from that.” Another company focusing more on itsnon-regulated businesses is PG&ampE Corp., parent of Pacific Gas&amp Electric and several non-regulated businesses.

PG&ampE Corp. was trading near the top of its range of 33 9/16.The 52-week low is 22 11/16. “We still trade in line with a lot ofbig-cap utility companies, and because we have a large dividendcomponent to our return, you get insulated a bit in these volatilemarkets,” said Mike Rescoe, chief financial officer. He also saidfund managers seeking to avoid large cash positions will move moneyinto utilities at the end of a quarter. PG&ampE Corp. also is inthe midst of a stock buy-back program, which gives buoyancy to itsshare price.

PG&ampE Corp. and other companies that have been viewed asutility safe havens for investors are changing, though. The companyis focusing more on non-regulated lines of business where there areno guaranteed returns. As a result, PG&ampE Corp. is attractingmore growth-oriented investors who traditionally have not investedin utilities. Investors seeking share price stability need to beaware of the shift. “The folks that accept [share price stability]as a given, need to be better understanding of what the underlyingstrategies are of these companies,” Rescoe said. “We wouldn’texpect them to be viewed the way they have in the past very muchlonger.”

Joe Fisher, Houston

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