Major pipeline-only companies for the most part turned in”better-than-expected” performances during the first quarter of theyear, while integrated pipelines took some big hits – particularlyin the oilpatch, gas analysts said. Fortunately for someintegrateds, the bigger profits from their unregulated activitieshelped to offset the losses.

Pipeline-only companies “showed good earnings,” said Ron Barone,managing director of natural gas research for PaineWebber. Butintegrateds with gas distribution operations “were adverselyaffected by weather,” and those with exploration and productionoperations felt the pain of low oil and gas prices during the firstquarter, he noted.

There were some positive influences, analysts said, on thefirst-quarter earnings of both integrateds and pipeline-onlycompanies: although the weather was unseasonably warm during thefirst three months, it was colder than last year; unregulatedsubsidiaries were major contributors to earnings; and gasconsumption by electric generators continued to steadily rise.

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

On an operating basis, some of the notable standouts during thequarter were Coastal Corp., El Paso Energy and Equitable Resources,according to Donato Eassey, first vice president of Merrill Lynchin Houston. “They [Equitable] were really a shining star. They beatour [per/share operating earnings’] estimate by six cents.” Coastalalso was “clearly in that mode.” It exceeded Merrill Lynch’searnings’ projection for the company by two cents per share, whileEl 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, eventhough its income – on a net basis – was down by 43% due to aone-time accounting charge of $133 million. When viewed from anoperating perspective, which he believes is a more accuratebarometer of a company’s financial health, Enron beat out earnings’projections for the company by three cents a share, he noted.Barone singled out MCN Energy for its strong performance in thefirst quarter. The company finished out the first quarter ahead ofPaineWebber’s expectations because of “stronger-than-anticipated”results from its gas distribution arm, he said.

The first-quarter operating results of Columbia Energy andWilliams Cos., when compared to what Merrill Lynch had anticipatedfor the companies, were seen as the big disappointments, accordingto Eassey. Columbia “missed the whole boat,” coming in more than 20cents a share below what was expected in the first quarter, hesaid. It had a “couple of problems on the marketing side. And thenthey brought in some gains, some reversals of some charges andstuff, which may have [enabled them to] hit the numbers but that’snot operating.”

Williams fell shy of per-share projections by six cents for thefirst three months, he noted. The company reported a 26% drop infirst-quarter net income primarily due to nearly $52 million in redink on its communications side, specifically its Solutionsoperation “which is still trying to get its house in order,” Easseytold NGI. But earnings for Williams’ gas pipeline operations, whichdipped slightly to $187 million for the first quarter, “came inright about on target from where we were expecting.”

Sonat, which is involved in acquisition talks with El Paso, wasthe big loser in the first quarter no matter which yardstick wasused to assess its performance – operating income or net income. Itposted a $306 million loss in operating income compared to $60million a year ago, and a $212 million loss in net income versus$28 million in the first quarter of 1998.

Looking to the second quarter, Eassey predicts pipelineoperating earnings will be up “across the board” due to acolder-than-normal April, firmer gas prices and the increasingbottom-line contributions of unregulated subsidiaries. Baroneanticipates that a “dramatic improvement in cash prices in thesecond quarter” will favorably impact earnings. “We’re looking atcash prices now that are very close to where they were last year.”

Eassey sees pipeline-only companies and major integratedpipelines exceeding their 1998 second-quarter earnings/share by awide margin. Based on conservative estimates, he said he’s lookingfor Coastal to be up 7 cents per share in the next quarter; El Pasoup 6 cents; Enron up 13 cents; Williams up 6 cents; Equitable up 6cents; National Fuel Gas Supply up 15 cents and Questar Pipeline up3 cents.

Susan Parker

* Includes $660M from sale of Panhandle, Trunklineto CMS.

** Enron’s 1Q99 results included a $133M one-timecharge related to an accounting change.

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