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Williams Predicts 3Q Earnings Shortfall

September 6, 1999
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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 story.

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 services.

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 It's all a growth story. There's not a big difference here."

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 going forward."

Rocco Canonica

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