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El Paso reports record earnings before charges for Coastal merger

HOUSTON, Apr. 25, 2001—With Coastal Corp. incorporated into operations, El Paso Corp. reported first quarter income before interest and taxes and adjusted for nonrecurring items of $1.09 billion, up 42% from $769 million in last year’s comparable quarter.

Charges for the merger completed in the 2001 quarter, took $890 million after tax from earnings this quarter and are expected to lop off another $400 million from income after tax in the second or third quarter.

Including other charges for losses on the disposition of assets, the company reported a first quarter loss of $400 million on revenue of $17.8 billion, compared with income of $428 million on revenue of $9 billion for the comparable 2000 period.

But the company reported cost savings from the merger were coming in better than expected. CEO Bill Wise said the company raised its 2001 earnings projections by 5&cent to $3.30/share.

Coastal Corp. became El Paso Production Co. and reported increased production helped boost income before interest and taxes to $248 million from $154 million in the 2000 first quarter. But El Paso conceded expenses are increasing for the production company because of industry conditions.

“We have delays in completing wells because some of the rigs in service now were stacked and less efficient,” said Rodney Erskine, president of El Paso Production Co. in a conference call. Erskine explained it takes about 60 days to “spud and complete” a development well or about 25% longer usual.

“The service industry is simply overloaded causing the rig delays,” he said.

Costs are also rising because the company has to drill more just to maintain flat production year over year in some areas, Erskine said. In the San Juan Basin, the company put twice as many rigs to work but gas production has remained flat, he said.

Merchant energy is a bright spot. Income before interest and taxes for the quarter was $394 million, up from $152 million in the comparable 2000 quarter. Ralph Eads, president of the merchant energy group, attributed the improvement to higher transaction volumes, risk management and customer solutions, higher margins, and increasing fee-based income from power assets and financial services.

“With all the volatility in the market, the company is dedicated to strong discipline around value risk limits and credit standards,” Eads said. “The outlook is excellent.”

Regarding the company’s California exposure at the end of the quarter, Wise said El Paso’s total exposure amounted to about $50 million. Other market risks include the outcome of a Federal Energy Regulatory Commission hearing on a California Public Utilities Commission complaint about market manipulation by El Paso of pipeline capacity.

The PUC claims the huge gas price differential between California and the rest of the country was caused by El Paso’s market power since it owned most of the capacity. “We expect them to find no improper conduct,” said Wise.

Thirty new players will be taking over capacity on the El Paso Natural Gas Interstate Pipeline capacity starting June 1. Wise said the basis differential has expanded since an open season for the capacity was completed. Owning a block of capacity does not alter the cost of gas, he said.

The pipeline segment of El Paso reported an 8% increase in income before interest and taxes to $422 million in the 2001 first quarter, compared with $390 million in the comparable period last year. But the growth rate was “unique” to the quarter, said John Somerhalder president of the pipeline group.

Looking forward he projected income from pipelines will increase 2-5%.