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Williams Shares Hit by the 'Enron Effect'

Energy: Wall Street responds negatively to company statement that its financial obligations are under review.

January 30, 2002|From Times Staff Reports and Bloomberg News

Williams Cos., a major natural gas production and pipeline company that has often been compared to Enron Corp., suffered from the "Enron effect" Tuesday as its stock fell 22% after it announced a delay in the release of fourth-quarter and year-end earnings.

The delay will allow Williams executives to assess financial obligations related to the spinoff of its Williams Communications Group fiber-optic network operation in April. Williams said it might have more than $2 billion in liability relating to the spinoff.

Investors reacted severely to the Tulsa, Okla.-based company's disclosure, analysts said, because in the wake of Enron's collapse they fear hidden problems at firms disclosing contingent liabilities or complex accounting.

Also, Williams' troubles came a day after Global Crossing Ltd. filed for Chapter 11 bankruptcy protection amid investor anxiety over the telecommunications business, analysts said.

But one analyst, Carl Kirst of Merrill Lynch, put out a research report Tuesday that said "the current pressure [on Williams] is an overreaction."

Williams operates a sizable energy-trading business and is an operator of electric power plants in California. It was seen as another Enron in better times because of its growth in energy trading and innovations in communications.

Starting in the 1980s, Williams built a 33,000-mile fiber-optic network that sold telephone and data transmission services to other companies.

But in April, the gas pipeline firm spun off Williams Communications as a separate company, guaranteeing some of the new firm's debts in order to complete the spinoff.

Until Tuesday, the gas pipeline firm had stated the liability relating to Williams Communications at zero, saying theoretically that it wasn't much of a liability. But the communications company suffered a decline in business last year and now faces possible downgrade of its credit rating.

That possibility triggers very specific liabilities for Williams Cos., its chief executive, Steven Malcolm, said Tuesday.

If Williams Communications' debt rating is downgraded, Malcolm said, the gas pipeline firm might have to pay almost $1.4 billion in the communications firm's debt. It also could owe $750 million in the communications company's leases and $250 million for other expenses.

His firm was delaying report of its quarterly and annual earnings because of the review of the communications firm's debts and the uncertainty of Williams Cos.' liability, Malcolm said. The sudden disclosure of contingent liability, the delay of an earnings report and the imagined echo of Enron combined to hit Williams shares hard.

Williams stock declined $5.36 to $18.78 on the New York Stock Exchange. "With the collapse of the telecom sector and panic enveloping anything remotely connected with Enron, Williams has been brought into the maelstrom," said Fredric Russell, president of Fredric E. Russell Investment Management, which owns 95,000 shares of Williams.

"Obviously the market is wondering what the ultimate financial impact will be," Malcolm said. "The worst case is $2.4 billion, though I don't think that is at all likely to be the case."

Analyst Kirst of Merrill Lynch, however, said in his analysis that the gas pipeline firm is well-financed and able to meet any of the contingencies now before it.

"A worst-case funding need would call on $2.15 billion," Kirst wrote. Williams Cos. could fund that "immediately if [Williams Communications] went bankrupt tomorrow."

If Williams has to issue new shares to finance liabilities, the "maximum earnings dilution would be limited to 10%," Kirst wrote.

Shares of other energy traders also declined sharply Tuesday.

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