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Pipeline Earnings in the Plus Column

Pipeline Earnings in the Plus Column

Major pipeline-only companies for the most part turned in "better-than-expected" performances during the first quarter of the year, while integrated pipelines took some big hits - particularly in the oilpatch, gas analysts said. Fortunately for some integrateds, the bigger profits from their unregulated activities helped to offset the losses.

Pipeline-only companies "showed good earnings," said Ron Baron, managing director of natural gas research for PaineWebber. But integrateds with gas distribution operations "were adversely affected by weather," and those with exploration and production operations felt the pain of low oil and gas prices during the first quarter, he noted.

There were some positive influences, analysts said, on the first-quarter earnings of both integrateds and pipeline-only companies: although the weather was unseasonably warm during the first three months, it was colder than last year; unregulated subsidiaries were major contributors to earnings; and gas consumption by electric generators continued to steadily rise.

Overall, the top eight integrated and pipeline-only companies posted first-quarter net income of $1.4 billion, up 36% from $1 billion in the year-earlier period, on revenues of $19 billion (see chart). But from an operating standpoint, income for the pipeline group was down 12% in the quarter largely due to the major red ink ($306 million) reported by Sonat Inc. If Sonat's first-quarter losses were excluded, operating earnings for the group would be up almost 2% compared to the year-earlier period.

On an operating basis, some of the notable standouts during the quarter were Coastal Corp., El Paso Energy and Equitable Resources, according to Donato Eassey, first vice president of Merrill Lynch in Houston. "They [Equitable] were really a shining star. They beat our [per/share operating earnings'] estimate by six cents." Coastal also was "clearly in that mode." It exceeded Merrill Lynch's earnings' projection by two cents per share, while El Paso outperformed it by three cents per share. Coastal also "beat our expectations by a couple of cents a share. As a result, we raised our earnings estimate," PaineWebber's Barone said.

Enron Corp. actually had a good quarter also, Eassey said, even though its income - on a net basis - was down by 43% due to a one-time accounting charge of $133 million. When viewed from an operating perspective, which he believes is a more accurate barometer of financial health, Enron beat out earnings' projections by three cents a share. Barone singled out MCN Energy for its strong performance in the first quarter. It finished ahead of PaineWebber's expectations because of "stronger-than-anticipated" results from its gas distribution arm.

The first-quarter operating results of Columbia Energy and Williams Cos., when compared to what Merrill Lynch had anticipated for them, were seen as the big disappointments, according to Eassey. Columbia "missed the whole boat," coming in more than 20 cents a share below what was expected in the first quarter. It had a "couple of problems on the marketing side. And then they brought in some gains, some reversals of some charges and stuff, which may have hit the numbers, but that's not operating."

Williams fell shy of per-share projections by six cents for the first three months, he noted. The company reported a 26% drop in first-quarter net income primarily due to nearly $52 million in red ink on its communications side, specifically its Solutions operation "which is still trying to get its house in order." But earnings for Williams' gas pipeline operations, which dipped slightly to $187 million for the first quarter, were "where we were expecting."

Looking to the second quarter, Eassey predicts pipeline operating earnings will be up "across the board" due to a colder-than-normal April, firmer gas prices and the increasing bottom-line contributions of unregulated subsidiaries. Barone anticipates that a "dramatic improvement in cash prices in the second quarter" will favorably impact earnings. "We're looking at cash prices now that are very close to where they were last year."

Eassey sees pipeline-only companies and major integrated pipelines exceeding their 1998 second-quarter earnings/share by a wide margin. Based on conservative estimates, he said he's looking for Coastal to be up 7 cents per share in the next quarter; El Paso up 6 cents; Enron up 13 cents; Williams up 6 cents; Equitable up 6 cents; National Fuel Gas Supply up 15 cents and Questar Pipeline up 3 cents.

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