El Paso Posts 41% EPS Jump, Denies CA Allegations

Marking the first quarter of record since the completion of its merger with The Coastal Corp. in January, El Paso Corp. reported that its diluted adjusted earnings rose 41% to $0.96 per share, compared with the company's first quarter 2000 level of $0.68 per share. The strong results were led by the closure of its merger as well as a strong contribution from its merchant energy group.

Adjusted net income rose to $500 million from $342 million in 1Q2000. El Paso excluded merger-related costs and extraordinary items totaling $900 million and $86 million in after-tax gains in 2000. Including the extraordinary items and merger charges, El Paso posted an $0.80 loss on the quarter, compared to an $0.85 gain during the first quarter 2000.

"These outstanding first quarter results are directly attributable to the successful integration of the El Paso and Coastal organizations, as well as the combined company's broad presence across all segments of the natural gas-to-power value chain," said Bill Wise, CEO of El Paso. "Each of our business segments achieved record financial results this quarter. We are especially pleased by the tremendous growth of our non-regulated businesses, which delivered 63% of total first quarter EBIT. We are well on our way to achieving better than 20% earnings per share growth in 2001."

With regard to the power crisis in California and recent accusations aimed at his company, Wise said in an investors' conference call, "El Paso has gotten a lot of press with respect to our business in California, and it is not surprising considering the emotions associated with the energy arena in California. Maybe the easiest way to look at it is the California Public Utilities Commission complaint before the FERC that there was improper action between El Paso Natural Gas Co. and El Paso Merchant Energy with respect to the EPNG capacity to California.

"That in large part has been thrown out by FERC," said Wise. "The entirety of all the allegations by the CPUC that there was some sort of bid-rigging or some improper conduct between the two companies has been completely thrown out by the FERC. I am pleased that they have set the market stipulation part of the complaint for hearing. That hearing is going forward at a very expedited schedule with an administrative law judge decision expected by the end of June. We expect the hearing will fully find, as we have been stating, that there has absolutely been no manipulation or improper conduct by any of the El Paso companies, vis-a-vis our natural gas business in California," Wise added.

Responding to FERC's consideration of price mitigation measures for the California power market, another El Paso executive said "it doesn't seem likely to us that FERC is going to move forward with broad-based price caps at this point. I can't predict exactly what they are going to do, but there is some expectation that they may take some actions relatively soon with respect to price caps during Stage Three alert periods. We think that overall, it really is not going to change the dynamics for the gas demand going into California."

The company's merchant energy group, which manages El Paso's wholesale customer business along with its portfolio of natural gas, electricity and other unregulated petroleum assets, contributed the largest earnings increase, posting an adjusted EBIT of $394 million, up from $152 million in the first quarter 2000. El Paso said the strong results were attributable to a number of factors, including substantially higher transaction volumes, higher commodity margins and an increase in risk management and long-term customer solutions.

North American merchant energy activities led the charge, more than quadrupling their EBIT to $271 million from the $62 million posted for last year's first quarter. Total worldwide energy equivalent volumes rose by about 75% to about 274,500 BBtu/d equivalent. El Paso said physical natural gas and power volumes rose 149% and 50%, respectively, while financial volumes increased 78% from 2000 levels. During the conference call, El Paso said 72% of its consolidated gas production is hedged at $3.84/Mcf for 2001, and about 50% of its production is hedged at $4.17 for 2002.

El Paso Production Co. also turned in a sharp increase in adjusted EBIT on the quarter to $248 million from $154 million in 1Q2000. The mammoth increase was attributed to higher gas and oil prices along with increased production levels, the company said. Production volumes averaged 1.7 Bcfe/d, a 7% increase from 1Q2000. El Paso's realized natural gas price rose to $3.48/Mcf from $2.47/Mcf a year ago. The company said it experienced strong drilling results in all of its core areas during the quarter.

Following with an 8% increase, was the company's gas transmission segment, which posted an adjusted EBIT of $422 million, or $32 million more than the first quarter of 2000. The company attributed the rise to higher throughput and increased operating efficiencies. The pipeline system throughput averaged 21,073 BBtu/d, an increase of 7%. The company's field services segment reported a $10 million first quarter EBIT increase over last year's first quarter level to $65 million.

"Every one of our business segments reported record EBIT for the quarter," said Wise.

El Paso also addressed its current LNG operations during the conference call. John W. Somerhalder II, president of El Paso Energy's Pipeline Group, said that the Elba Island LNG facility in Georgia is ahead of schedule and is targeted to come online in October 2001.

Wise said that El Paso is realizing the cost-savings and synergies involved with its two-month-old Coastal merger, which is why the company feels comfortable in raising its forecast. Based on the first quarter results, the company said it has revised its projected earnings to $3.30 per share for full year 2001, a $0.05 increase over its previous guidance. The company said it expects second quarter diluted earnings per share to be in line with the $0.75 First Call consensus estimate.

Ronald Barone with UBS Warburg said in a research note that as a result of El Paso's stronger than expected first quarter, he is edging up his recurring 2001 EPS estimate to $3.40 from $3.35. The current Street consensus is $3.30 for the year. UBS Warburg also raised its preliminary 2002 forecast for the company from $3.85 to $3.90.

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