Williams Predicts 3Q Earnings Shortfall
Williams share prices slid 5% but then rebounded late last week
and analysts adjusted their earnings forecasts following an
announcement that the company expects third quarter earnings per
share to be "substantially below" current Wall Street estimates of
20 cents/share. The company said a change in accounting standards
and cooler than normal temperatures in Southern California, its
major power sales area, were to blame. But that's just half the
With its capital expenditure program this year at $5 billion "we
are executing the most aggressive capital expansion program that we
have ever done, half in communications and half in energy
projects," said spokesman Jim Gipson. "Every day our earnings
capacity gets more robust and as soon as the markets turn, which
they will, we have a bigger platform across which to leverage
better market conditions. We're not blinking. I think everyone
still feels pretty good."
Last week's announcement was made partly in preparation for
Williams Communications' initial public offering next month.
CEO Keith E. Bailey said the majority of Williams' financial
setback came from an accounting change related to revenues from
fiber optic network sales/leases. In June, a new accounting
interpretation by the Financial Accounting Standards Board became
effective. It requires that sales of "dark fiber," or surplus fiber
optic cable, be treated as leases and that the revenues be spread
out over the terms of the leases rather than booked during the
quarter in which they occur. Gipson said the change affects about
$120 million in revenues Williams expected to book this year from
dark fiber sales.
The lesser impact came from 6% cooler than normal temperatures
in Los Angeles, where Williams has a tolling agreement with AES.
Under the agreement, Williams supplies gas to and markets power
from 3,954 MW of power generation from AES' sites in Long Beach
(2,083 MW), Huntington Beach (563 MW), and Redondo Beach (1,310
MW). What made matters worse was that second quarter temperatures
were 24% warmer than normal and led to a $50 million gain, leading
Wall Street to expect a strong performance again during the third
quarter, said Gipson.
During the second quarter, earnings were down 72% to $17 million
(4 cents per share) from $60.7 million (14 cents/share) primarily
because of a $35 million after-tax loss related to the sale of its
conferencing business and continued steep costs related to the new
fiber optic network construction. Operating income was up for the
pipeline segment but was down slightly for the energy services
segment, which includes marketing, processing and petroleum
PaineWebber's Ronald J. Barone said last week he is lowering
earnings estimates to $0.06/share from $0.17/share for the third
quarter and to $0.50 from $0.70/share for the year; Wall Street is
at $0.76/share. In addition, Barone lowered 2000 earnings estimates
to $0.65 from $1 because of the accounting change.
"With [Williams] Energy worth roughly $21/share and an implied
$22 per Williams Corp. share valuation on Communications, Williams
Corp. is trading right about where it should be given this latest
pre-announcement," PaineWebber said in an investment summary. "Any
further downside potential from other analysts lowering their
estimates should be mitigated by this rough sum-of-the-parts
valuation and the pending Communications IPO roadshow."
Gipson significantly discounted the problems, saying they would
have no long term impact on Williams operations. "From our
perspective, our energy business has performed terrifically in the
face of some pretty tough market conditions. We think operationally
the company has done great.
"We are ramping up expenses faster then we're ramping up
[revenues] because the [fiber optic] network is in a start-up mode,
but it's certainly within our expectations.
Merrill Lynch's Donator Eassey certainly feels good about this
company, particularly the communications/fiber optic side. "No one
gives two hoots about whether AOL is going to make money sooner or
later or Amazon.com. It's all a growth story. There's not a big
The energy segment has suffered from not having Williams'
management's full attention, but that will change soon, he said.
"The energy business in 1999 is in the [expletive] well you might
not want to put that in. It's in the tank anyway. So you might as
well do everything you can to get everything in order as we
approach 2000, which I think will be a home-run year provided
winter shows up.
"There's nothing wrong with any of these companies that have hit
hard times, like MCN, [Williams] and KNE, that weather won't cure.
I've got a lot of confidence [Williams'] management is getting its
act together on what their doing and will carry their torch just as
nicely as they have in the past.
"I would be disappointed if they didn't continually review where
they stand in their investment strategy on the assets they have
employed, and the things that aren't performing or aren't expected
to perform they should think about disposing of. Certainly there's
is part of that business [that could fit into that category]," said
Eassey, "but right now so much has been in the tank it's hard to
sell an asset and get fair value for it. You wait until the market
turns a little bit and then you decide on a different strategy