Williams share prices slid 5% but then rebounded late last weekand analysts adjusted their earnings forecasts following anannouncement that the company expects third quarter earnings pershare to be “substantially below” current Wall Street estimates of20 cents/share. The company said a change in accounting standardsand cooler than normal temperatures in Southern California, itsmajor power sales area, were to blame. But that’s just half thestory.

With its capital expenditure program this year at $5 billion “weare executing the most aggressive capital expansion program that wehave ever done, half in communications and half in energyprojects,” said spokesman Jim Gipson. “Every day our earningscapacity gets more robust and as soon as the markets turn, whichthey will, we have a bigger platform across which to leveragebetter market conditions. We’re not blinking. I think everyonestill feels pretty good.”

Last week’s announcement was made partly in preparation forWilliams Communications’ initial public offering next month.

CEO Keith E. Bailey said the majority of Williams’ financialsetback came from an accounting change related to revenues fromfiber optic network sales/leases. In June, a new accountinginterpretation by the Financial Accounting Standards Board becameeffective. It requires that sales of “dark fiber,” or surplus fiberoptic cable, be treated as leases and that the revenues be spreadout over the terms of the leases rather than booked during thequarter in which they occur. Gipson said the change affects about$120 million in revenues Williams expected to book this year fromdark fiber sales.

The lesser impact came from 6% cooler than normal temperaturesin Los Angeles, where Williams has a tolling agreement with AES.Under the agreement, Williams supplies gas to and markets powerfrom 3,954 MW of power generation from AES’ sites in Long Beach(2,083 MW), Huntington Beach (563 MW), and Redondo Beach (1,310MW). What made matters worse was that second quarter temperatureswere 24% warmer than normal and led to a $50 million gain, leadingWall Street to expect a strong performance again during the thirdquarter, said Gipson.

During the second quarter, earnings were down 72% to $17 million(4 cents per share) from $60.7 million (14 cents/share) primarilybecause of a $35 million after-tax loss related to the sale of itsconferencing business and continued steep costs related to the newfiber optic network construction. Operating income was up for thepipeline segment but was down slightly for the energy servicessegment, which includes marketing, processing and petroleumservices.

PaineWebber’s Ronald J. Barone said last week he is loweringearnings estimates to $0.06/share from $0.17/share for the thirdquarter and to $0.50 from $0.70/share for the year; Wall Street isat $0.76/share. In addition, Barone lowered 2000 earnings estimatesto $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, WilliamsCorp. is trading right about where it should be given this latestpre-announcement,” PaineWebber said in an investment summary. “Anyfurther downside potential from other analysts lowering theirestimates should be mitigated by this rough sum-of-the-partsvaluation and the pending Communications IPO roadshow.”

Gipson significantly discounted the problems, saying they wouldhave no long term impact on Williams operations. “From ourperspective, our energy business has performed terrifically in theface of some pretty tough market conditions. We think operationallythe 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 thiscompany, particularly the communications/fiber optic side. “No onegives two hoots about whether AOL is going to make money sooner orlater or Amazon.com. It’s all a growth story. There’s not a bigdifference 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 mightnot want to put that in. It’s in the tank anyway. So you might aswell do everything you can to get everything in order as weapproach 2000, which I think will be a home-run year providedwinter shows up.

“There’s nothing wrong with any of these companies that have hithard times, like MCN, [Williams] and KNE, that weather won’t cure.I’ve got a lot of confidence [Williams’] management is getting itsact together on what their doing and will carry their torch just asnicely as they have in the past.

“I would be disappointed if they didn’t continually review wherethey stand in their investment strategy on the assets they haveemployed, and the things that aren’t performing or aren’t expectedto perform they should think about disposing of. Certainly there’sis part of that business [that could fit into that category],” saidEassey, “but right now so much has been in the tank it’s hard tosell an asset and get fair value for it. You wait until the marketturns a little bit and then you decide on a different strategygoing forward.”

Rocco Canonica

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