Both El Paso Energy and Coastal Corp. wracked up recordfirst-quarter earnings last week, but for completely differentreasons.

El Paso’s record quarterly per-share earnings – the ninthstraight since the company acquired Tenneco Energy in late 1996 -were largely owing to strong results from its pipeline operationsand a partial offset of lower natural gas and gas liquids’ pricesby its acquisition of interests in Leviathan Gas Pipeline Partnerslast year.

In contrast, Coastal attributed its record first-quarter resultsto its refining, marketing and chemical operations, as well as toits power plant unit. These helped to offset the drastic hit thatits exploration and production (E&P) operations took due tolower prices realized for natural gas and crude oil during thethree-month period.

El Paso posted 1999 first-quarter diluted earnings/share of 58cents compared to 48 cents one year ago, excluding the cumulativeeffect of an accounting change.

Its consolidated earnings before interest, expense and incometaxes (EBIT) for the first quarter were $190 million, up 17% from$163 million a year ago, on revenues of $1.5 billion. ChairmanWilliam A. Wise credited these “exceptional results” to TennesseeGas Pipeline and El Paso Natural Gas, “notwithstanding thegenerally mild temperatures this past winter.” Tennessee’sfirst-quarter EBIT results were $113 million compared to $98million for the same period in 1998, while El Paso’s earningsinched upwards to $56 million from $52 million a year ago.

Due to depressed gas and liquids prices in the first quarter, ElPaso Field Services turned in the worst performance for thecompany, with its EBIT falling to $16 million from $24 million inthe year-earlier period. But the drop would have been far moresignificant if it hadn’t have been partially offset by a 10%increase in gathering and treating volumes and the contributionfrom El Paso’s interest in Leviathan Gas, El Paso said. PaineWebberpredicts that Leviathan’s impact on Field Services will continue tobe favorable as it targets sizable new deep-water projects.

Another key contributor to the company’s bottom line was El PasoEnergy Marketing, which posted an EBIT of $8 million in the firstquarter compared to $200,000 for the same period in 1998. Averagemarketed gas volumes in the quarter were 4,443 BBtu/d, while powermarketed volumes were 13,213 thousand MW hours, according to ElPaso. PaineWebber sees the marketing unit being a bigger earnings’contributor in the future due to El Paso’s acquisition of a 50%interest in CE Generation LLC from CalEnergy Co. El Paso’sinternational unit also reported a favorable EBIT of $3 million forthe quarter, up from $2 million in 1998.

El Paso officials said the company is ahead of schedule withplans to merge with Sonat Inc. It noted it already has receivedapproval from the Securities Exchange Commission, is in discussionswith the Federal Trade Commission and is preparing to send FERC itsapplication to merge the two companies’ power licenses. “Managementbelieves the deal could close by the end of 3Q99,” according to aPaineWebber Research Note.

Coastal posted record net earnings from continuing operations of$134.5 million, or 62 cents per share, against $124.8 million, or56 cents/share, in the same period in 1998. The first-quarter 1999earnings were on operating revenues of $1.7 billion, down from$1.96 billion a year ago.

The refining, marketing and chemicals unit alone accounted formore than half of Coastal’s first-quarter EBIT. The unit’scontribution was almost $70 million, up 46% over its 1998first-quarter EBIT of $47.6 million. This was followed by Coastal’spower plant segment, whose EBIT rose 60% to $18.9 million from$11.6 million during the first quarter of 1998.

The first-quarter 1999 EBIT of the company’s natural gassegment, which includes its pipeline operations and Engage Energy(a marketing joint venture), dropped slightly to $187 million from$194 million a year ago. The lower first-quarter earnings for thisunit are due to lower rates on ANR Pipeline and red ink at EngageEnergy, which totaled $1 million in the quarter compared to $4.4million a year ago. PaineWebber believes that Coastal’sparticipation in growth projects, such as the proposed AlliancePipeline and the Florida-bound Gulfstream project, will put thisdivision back on its feet. “In short, this division will continueto serve as the company’s backbone for growth in other higherreturn unregulated areas.”

Due to depressed energy prices, the biggest hit in the firstquarter 1999 was taken by Coastal’s E&P unit. Its EBIT fellmore than two-fold to $11.4 million from $25.5 million in the firstquarter of 1998. Despite this, Coastal said it increasedfirst-quarter gas production by 8% over its 1998 first-quarterlevel of 490 MMcf/d.

But PaineWebber expects to see a turnaround in the E&Pdivision. “With expectations for incremental acquisitions [of gasproperties], a greater than 20% increase in production in 1999 andthe stage set for favorable gas market fundamentals over thebalance of the year and into 2000, Coastal’s E&P division ispoised to generate significantly higher earnings in the quartersand years ahead.”

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