Williams Cos. and Dynegy Corp. responded quickly to stories alleging certain activities that appeared last Wednesday in the Wall Street Journal, with spokesmen for both companies calling the two separate stories misleading. Williams reported it was not being investigated by the Securities and Exchange Commission (SEC), noting that a review by the SEC of third quarter results of 2001 found the company did not have to make any financial adjustments. Dynegy, scrutinized for a transaction that was approved by two separate accounting firms, said the Journal had “unfairly mischaracterized the transaction and chose to question its intent.”

The media scrutiny was noted by investors, who hammered the stock prices of both companies the day the stories appeared. By the market’s close on Wednesday, Williams was down 5.38%, while Dynegy, one of the more active stocks, lost 4.89%. The stock market Wednesday generally was down a little over 1%. By Friday, Dynegy’s stock had recovered, and actually climbed. It closed Friday at $28.20. Williams lost a few more cents through the week to close down at $22.38.

In the never-ending saga that has become the Enron Corp. national scandal, the Journal reported that the SEC has increased its investigations of some of the largest U.S. corporations, citing Williams as one of the companies investigated. However, while the SEC did request additional information concerning Williams’ 2001 third quarter results, it decided after a review of the results that Williams did not have to make any financial adjustments.

“We received an informal request for information on Feb. 2 about our third quarter 10-Q,” Williams spokesman Jim Gipson told NGI, which he said was a “normal discourse between the company and regulators.” The request, he said, had “nothing to do with our energy business, and didn’t call into question our accounting principles.”

The SEC in Washington, DC called Williams back on Feb. 22 and thanked the company for the information, Gipson said. “They told us we didn’t need to amend or change the 10-Q from the last quarter, and we believe that we have resolved that issue.” Apparently, he said, the Journal “came across information about the letter, and characterized it the way that they did.”

While noting that the Journal’s implications that Williams was being investigated by the SEC were “puzzling,” Gipson said that Williams “recognizes that the world has changed. In the aftermath of Enron, people want to read the disclosures. We want people to read the disclosures. We pride ourselves on public disclosure.” He said that “fortunately for us, long-term investors believe in our business plan and model.”

Noting that Williams had “worked hard over the last three months to restore investor confidence,” Gipson said the company had “made a lot of great progress.” He said, “we look forward to getting through this and focus more of our efforts on business.” The expansion of the energy infrastructure has been “lost in the debate” in the past few months, he said, “completely lost in all the noise…If investors are not in the game, it will be difficult to get there. We need investors to deploy the capital.”

Gipson said the Journal writers who had done the story were “sticking by their story,” but he said that overall, investors need to read the financials to judge for themselves. “I’d like to see less hysteria. The news media needs to be more precise. It’s a skittish environment…any misspoken word or phrase can cost people money.”

The Journal’s story about Dynegy focused on “some complex accounting designed at least in part to buff its financial profile.” Called “Project Alpha,” the Journal wrote that it was “designed primarily by the company’s tax division”…using “bold accounting maneuvers and a complicated system of gas trades to help address the discrepancy between cash flow and net income.”

Dynegy spokesman John Sousa said Wednesday that in April 2001, Dynegy entered into a long-term physical natural gas supply transaction “that we believe is advantageous to our core energy operations and provides Dynegy with tax benefits.” He said the primary drivers for the transaction — which is not a related-party or partnership deal — is that it provided Dynegy with a long-term physical gas supply source and a significant tax benefit.

“It is an economically sound transaction and no related parties were involved,” said Sousa. “Furthermore, it has been accounted for and appropriately disclosed in our 2001 financial statements, as well as in various other public presentations.” CFO Rob Doty actually explained Project Alpha during a second quarter 2001 earnings conference call in July 2001 with analysts and the media. Dynegy’s former auditor Arthur Andersen LLP and new auditor PriceWaterhouseCoopers LLP both reviewed the transaction and said it was proper.

Sousa said the transaction was “executed in the normal course of business. The strategy is consistent with our objective to secure reliable gas supplies, and we were able to mitigate the company’s tax liability to an appropriate extent.” He reiterated what CEO Chuck Watson has said: “Dynegy has not executed any questionable transactions and has been in the past and remains committed to clear and open financial reporting.”

Dynegy’s credibility was backed by Credit Suisse First Boston analyst Curt Launer, who called Project Alpha a “series of normal deals.” Noting that the transaction was previously disclosed, Launer said it provided a “monetization of contracts to promote a better matching of earnings and cash flow, a proper mark-to-market treatment of long-term contracts and a tax rate reduction that benefited ’01 earnings per share by about $0.05 per share.”

Launer also noted that Dynegy recently switched auditors from Andersen to PriceWaterhouseCoopers LLP. “PWC reviewed the transactions being questioned and found them all to be proper,” he said, reiterating that his rating on Dynegy was a “strong buy.”

Merrill Lynch analyst Carl Kirst also disagreed with the Journal’s allegations that Dynegy attempted to “mislead investors as to the true state of the financials.” He said the article was a “mischaracterization of intent,” and said, “we believe the lasting materiality of the article will have less to do with raising any red flags on Dynegy specifically, and more to do with rekindling concerns about mark-to-market accounting overall for the sector, reminding investors that earnings and cash flow can disconnect over certain periods.” He reiterated his rating of Dynegy as a “strong buy.”

Launer also dismissed the dishing Williams took on Wednesday. “With the SEC request apparently answered and the matter closed, we continue to view WMB as undervalued on the basis of a rebound in its Merchant business, especially in the longer-term contract area later this year,” said the analyst. He also rated Williams a “strong buy.”

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