NGI The Weekly Gas Market Report
Williams share prices dipped nearly 5% to $40.88/share yesterdayfollowing an announcement that the company expects third quarterearnings per share to be “substantially below” current Wall Streetestimates of 20 cents/share. The company said a change inaccounting standards and cooler than normal temperatures inSouthern California, its major power sales area, were to blame. Theannouncement was made partly in preparation for WilliamsCommunications’ 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. Williams spokesman Jim Gipson said thechange affects about $120 million in revenues Williams expected tobook this year from dark 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, saidGipson, boosting Wall Street expectations.
PaineWebber’s Ronald J. Barone said he has lowered earningsestimates for Williams to $0.06/share from $0.17/share and droppedannual earnings estimates to $0.50 from $0.70; the 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 WilliamsCorp. share valuation on Communications, Williams Corp. is tradingright about where it should be given this latest pre-announcement,”PaineWebber said in an investment summary. “Any further downsidepotential from other analysts lowering their estimates should bemitigated by this rough sum-of-the-parts valuation and the pendingCommunications 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 modebut it’s certainly within our expectations.” During the secondquarter, earnings were down 72% to $17 million (4 cents per share)primarily because of a $35 million after-tax loss related to thesale of Williams’ conferencing business and continued steep costsrelated to Williams’ new fiber optic network construction. Butoperating income was up for the pipeline segment and basically flatfor the energy services segment.
“We are executing the most aggressive capital expansion programthat we have ever done,” said Gipson. “It’s a little over $5billion this year, half in communications and half in energyprojects. Every day our earnings capacity gets more robust and assoon as the markets turn, which they will, we have a biggerplatform across which to leverage better market conditions. We’renot blinking. I think everyone still feels pretty good.”
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