El Paso, Coastal Earnings Beat the Street

El Paso Energy Corp. saw its fourth quarter profit lifted 55% last week, driven by strong growth in unregulated businesses, while merger partner Coastal also outperformed expectations, with fourth quarter earnings up 21%.

Another complicating factor for El Paso --- at the moment anyway --- is the $50 million debt owed to it by its two California customers, Southern California Edison and Pacific Gas & Electric. However, during an analysts' conference call last week, El Paso executives said they actually had "no significant exposure" to the California crisis, supplying only about 400 MW of electricity generation capacity, which is a smaller amount than many of the other companies operating in the state.

What El Paso wanted to focus on were its strong earnings growth, both for the fourth quarter and the entire 2000. El Paso reported that adjusted fourth quarter operating earnings were $456 million, or 73 cents a share, up from $295 million, or 48 cents a share for the same period of 1999. First Call/Thomson Financial had expected El Paso to earn an average of 67 cents a share in the fourth quarter.

Most impressive was the trading activity in the El Paso Merchant Energy division, which posted income of $211 million, up from $45 million a year ago. The increase was attributed to the higher trading margins, volume increases for physical gas and power deliveries of 41% and 47%, and a rise of more than 86% in financial settlements.

Hedges on El Paso's natural gas production kept the company from profiting in the natural gas market, and earnings before interest and taxes fell 20% to $37 million. However, earnings in the regulated pipeline group, which delivers to California and the Northeast, also saw its profit rise 9%, to $201 million, up from $184 million.

Overall, 2000 earnings for El Paso made it a "break-out year," said CEO William A. Wise. El Paso reported that diluted earnings per share rose 49% for the year to a record $2.69, up from $1.80 in 1999. Wise said each of the business segments had record earnings "reflecting our strong competitive position in all of our businesses."

Justin D.P. Craib-Cox of Morningstar said that the growth in El Paso's unregulated businesses "was stronger than expected, which we think lends credence to the company's goal of a 15% long-term growth rate." He said the "main drivers" for future growth are new operations in energy trading and natural gas exploration and production," because its pipelines are a "slow-growing, albeit profitable, business."

Coastal had its 23rd consecutive record quarter for operating earnings, beating analysts' expectations, posting $208.3 million, or 93 cents a share, on revenue of $6.1 billion in the fourth quarter. That compares with $169 million or 78 cents a share on revenue of $3.2 billion for the fourth quarter of 1999. First Call had predicted earnings of 91 cents a share.

For the year, the company recorded annual net earnings of $654.4 million, or $2.96 per share for 2000, up 29% from 1999 earnings of $498.9 million, or $2.30 per share.

"All segments involved in Coastal's integrated natural gas strategy generated higher earnings before one-time items for the year and fourth quarter of 2000," said CEO David A. Arledge.

Of note for 2000 were Coastal's exploration and production earnings, up 129% and 11% in the fourth quarter. Natural gas production increased by 42% for the year and 16% for the quarter. Natural gas segment earnings increased 12% for the year and 32% for the quarter, with a "growing contribution from non-regulated operations." Coastal's power earnings also jumped, increasing 42% in 2000 and 74% in the fourth quarter.

Carolyn Davis, Houston

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