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Arkla's big scare.

The Gas Company Survived An Analyst, But Industry's Future Remains Uncertain

Friday the 13th came a day early at Arkla Inc.

It was Thursday, Dec. 12, when the Little Rock and Shreveport, La.-based company was thrust into the national investment and media spotlight.

And the story was not supposed to have a happy ending.

During a segment titled "Moneywheel" on cable television's Consumer News & Business Channel/Financial News Network, correspondent Dan Dorfman reported on a prediction by analyst Alan Gaines.

All Gaines did was to predict the demise of Arkla.

From his Manhattan office, Dorfman told viewers that Gaines, a frequent source, had predicted that Arkla had a 20 to 25 percent chance of going into Chapter 11 bankruptcy in six to nine months.

Gaines also predicted a dividend cut or the elimination of a dividend entirely.

"So the bottom line from Gaines is if you own stock, sell it," Dorfman told thousands of viewers nationwide. "There are lots of problems in store."

Thomas F. "Mack" McLarty III, the chairman, president and chief executive officer of Arkla, did not spend his Thursday watching television.

While Dorfman and Gaines was forecasting tough times for Arkla, McLarty was in St. Louis attending a Federal Reserve Board meeting. The Hope native had a meeting scheduled for later that afternoon at Shreveport.

Back in downtown Little Rock, Arkla's headquarters on Capitol Avenue was buzzing with activity.

James L. "Skip" Rutherford III, vice president of public and governmental affairs, was scheduled to be a judge for the Arkansas Business of the Year Awards competition the next day.

Soon after he reached his office that Thursday, Rutherford knew he would have to cancel.

"Unwarranted" Report

Local and regional media representatives were calling Rutherford by the dozens. And they wanted answers.

"It was just one telephone call after another," Rutherford recalls.

He was reminded of the day more than a decade earlier when a Titan II missile exploded near Damascus. At the time, Rutherford ran Sen. David Pryor's Little Rock operations.

"We were overwhelmed with calls," he says.

On Dec. 12, it was as if another missile had exploded.

"We were trying to get the facts," Rutherford says. "There were lots of rumors. People had heard parts of the story. So we wanted to get the facts and get a response out."

McLarty's response?

"Questioning the solvency of Arkla is unwarranted and not supported by fact."

Yet more than a month after Dorfman's segment aired, Gaines stands by his prediction.

"The timing is the only thing that's suspect," Gaines says.

In almost 10 years as an analyst at the New York firm Gaines Berlin, Gaines has maintained a high profile. He is, at times, a controversial figure. His claim to fame was an on-the-mark prediction that Columbia Gas System would go bankrupt. Gaines also correctly forecast dividend cuts for Panhandle Eastern Corp., Tenneco Inc. and Pacific Enterprises.

His roundhouse right at Arkla seemingly came out of the blue. But Gaines and Arkla had crossed paths before.

During a 1985 state Public Service Commission hearing, Gaines was mentioned as being involved in a possibly unfriendly--and ultimately unsuccessful--takeover attempt of Arkla.

Reportedly, Gaines purchased 2 to 3 percent of Arkla's stock.

"We go back awhile, and we don't get along," Gaines says of Arkla.

Because of that, Gaines admits he did not contact Arkla officials before his comments were aired by Dorfman.

That in itself damages Gaines' credibility, says analyst Ellis Sloan of Little Rock's Meridian Management Co.

"There's a lot to be said for being an independent thinker and doing your own analysis," Sloan says. "But as an analyst, it is impossible to do an adequate job without talking to management. You take the publicly available information and look at what a company is doing. Then, you ask management to present its story."

In this case, management has a completely different story.

Of course, Gaines probably wouldn't buy it even if he were to hear it.

"Nothing those guys can tell me is going to change my mind," says Gaines, who claims his relationship with Dorfman is nothing more than a reporter-source relationship.

Dorfman, who also has a nationally syndicated newspaper column, says he uses Gaines because Gaines frequently goes against the investment tide.

"I deal with a lot of institutional investors," says Dorfman, who has appeared regularly on CNBC/FNN since October 1990. "If everyone is thinking one way and another guy is iconoclastic with legitimacy to it ... Here's a guy who predicted Columbia Gas |would go bankrupt~.

"I find he's a man of very strong views. Generally, they are views that differ with the majority. What gives them legitimacy are the number of people I know who have high regard for him."

Still, there are plenty who sit on the other side of the fence.


Within hours of the Gaines-induced scare -- the backlash of which dropped the price of Arkla stock from 12 7/8 to 11 1/2 during a two-day period -- other analysts were coming to Arkla's defense.

Gas-industry analysts at Kidder Peabody & Co., Dean Witter Reynolds Inc., Prudential Securities Inc. and elsewhere remained bullish on Arkla. Some said the Dorfman report was a typical grandstand play by the reporter and his outspoken source.

"I have been told Dorfman was in cahoots with Gaines on this," says one Little Rock analyst. "Both stood to gain. They skirt the line. It's probably legal, but it's definitely not ethical."

Dorfman takes offense at that, noting that he has used Gaines as a source for more than four years.

A Prudential publication recently called Gaines "a noted short seller."

Selling short is the sale of a security or a commodity futures contract not owned by the seller. The technique is used to take advantage of an anticipated decline in price.

An investor borrows stock certificates for delivery at the time of a short sale. If the seller can buy that stock later at a lower price, a profit results.

"There is a definite need for someone to look at both sides of the story," Dorfman says of Gaines. "You need people to give you a sense of both |views~. At least then, the investor gets a fair assessment.

"At times, |Gaines~ is right on. At other times, he's not."

Alex Lieblong, an analyst at Paine Webber Inc.'s Little Rock office, likens the Gaines report to someone who goes into a crowded theater, lights a match and yells "fire."

"He's smart enough to get his name in the paper all the time," says Lieblong, who does not buy Gaines' Arkla prediction. "All Arkla needs is a good, cold winter."

If that's the case, last week should have had company officials smiling.

What is really the state of Arkla?

It depends on whom you ask.

Gaines will tell you Arkla may go the way of Columbia Gas. But there is plenty of room on his bandwagon.

In fact, many analysts see Arkla as one of the few well-positioned natural gas companies in a deeply troubled industry.

Industry Factors

Steven Parla of New York's First Boston Corp. has followed Arkla for several years. When the Gaines prediction came out, Parla issued a lengthy report on Arkla.

He dismissed Gaines' speculation as "self-serving hyperbole."

"Based on its current stock price, Arkla should provide long-term value to investors," Parla says. "... The company is well-positioned in each of its basic businesses, has addressed its cost structure and is due to benefit from a return to normal weather patterns."

Throughout the country, winter had been mild prior to last week. Warmer weather, of course, means less use of gas as a heating source.

Another factor contributing to industry instability is "take or pay," a phrase that send chills up the spines of gas executives.
Acquisition Segment Rationale
MRT Transmission Access market/
 capture synergies
ENTEX Distribution Build stable earnings
 with Entex/
 increase gas flow
LIG Transmission Capture industrial
ARKOMA E&P Build "value-added"
LINE A/C Transmission "Link" Arkoma/create
 gateway to East
DEI Distribution Build earnings/settle
 TOP with Samson (via

A take-or-pay contract obligates the buyer to pay a minimum amount of money for a product or service, even if the product or service is not delivered.

In the gas industry, take or pay usually refers to long-term commitments made by companies years ago to buy gas from producers at higher prices than the companies can sell the gas for today. Many companies were forced to settle their contracts with producers in order to ensure their viability, Ron Barone of Kidder Peabody points out. Nationally, he says, the industry absorbed almost $3.5 billion of take-or-pay settlements.

Arkansans are well aware of take-or-pay contracts Sheffield Nelson entered into with Dallas Cowboys' owner Jerry Jones when Nelson was Arkla's chairman. Those contracts became a major issue in Nelson's unsuccessful 1990 gubernatorial campaign.

The take-or-pay contracts and an overabundance of natural gas left Arkla with problems similar to those facing other gas companies.

"Ask them how they're going to deal with take or pay," Gaines says.

McLarty says the company began seeking new markets some time ago. During a five-year period, Arkla embarked on an aggressive acquisition program, stretching its territory north through Minnesota with the addition of Minnegasco in November 1990 and south to Houston through the addition of Entex.

Barone says the acquisitions enabled Arkla to "build its higher return businesses |distribution~, while weathering the storm in its pipeline, exploration and production segments."

He writes, "By positioning itself appropriately as a cost-effective, midcontinent pipeline, Arkla's pipeline segment should benefit as the overall natural gas transmission business emerges from its current traumatic environment."

Those words are aimed at investors.

McLarty puts it more simply for Arkla consumers, who have seen residential rates increase 2.2 percent annually since 1984.

"If we had not found the new markets and resolved the take or pay ... our gas bills would be at least twice what they are today," he says. "Instead of having among the lowest bills in the nation, which we do, we would have among the highest."

Some gas companies pass on take-or-pay costs to the consumers and eat the rest.

"When they internalize ... without the acquisitions, they have gotten in severe financial trouble, cut their dividend or completely suspended it," McLarty says. "They had two results -- high bills, tough finances -- all exacerbated by the weather."

Weathering The Storm

Under the leadership of McLarty and Arkla Executive Vice President Milt Honea, the company also instituted a number of cost-cutting measures. Honea was president and chief operating officer of Arkansas Louisiana Gas Co., Arkla's largest distribution subsidiary, from 1984 until October of last year. That job is now held by Michael Means.

The Arkla management team:

* Reduced the amount of lost or unaccounted-for gas from 13 percent to 3 percent, resulting in an annual savings of $20 million.

* Reduced by 500 the number of people who work at Arkansas Louisiana Gas through an early-out program, resulting in smaller payroll costs in 1990 than in 1985.

"We also reduced our gas contracts through negotiations," McLarty says.

So company officials and a majority of analysts agree Arkla is standing on firmer ground than some gas companies.

Analysts also say the Enron Corp. of Houston and The Williams Cos. of Tulsa are surviving the trying times. Enron and The Williams Cos. have the same investment grade rating as Arkla.

Meanwhile, others in the industry have had to restructure through asset sales, severe employee layoffs and dividend cuts. Among them are Panhandle Eastern, Tenneco and Transco Energy Co.

The future for natural gas looks bleak.

"Nearer term, they look very poor," says Timothy Curro, energy analyst at UBS Securities Inc. of New York.

"To say we are immune to what has been a very difficult period that has taken a stout hold on even the strongest in our industry would not be realistic," McLarty says. "And that's essentially what Mr. Gaines and Mr. Dorfman are speculating about."

But Gaines also questioned Arkla's ability to withstand a "mega-NOPR," the term for a major Notice Of Proposed Rulemaking from the Federal Energy Regulatory Commission. In essence, it is deregulation that will increase competition.

Still, McLarty says, "We think we have a better ability than most to manage our destiny."

Analysts seem to agree.

With the exception of Alan Gaines.

What does the future hold for Arkla?

Is there a future for Arkla?

Again, it depends on whom you talk to.

And in whom you believe.

Key Arkla Players

Thomas F. "Mack" McLarty III Chairman, President and Chief Executive Officer Arkla Inc.

McLarty, 45, has been a member of the Arkla board since 1976. He has been chairman and CEO since 1988.

McLarty also serves on the board of the University of Arkansas at Little Rock and First Commercial Bank's National Advisory Board. In 1988, McLarty was elected to the board of the Federal Reserve Bank of St. Louis. Recently, he was elected to the board of TCBY Enterprises Inc. of Little Rock.

McLarty is a past president of the Greater Little Rock Chamber of Commerce.

T. Milton "Milt" Honea Executive Vice President Arkla Inc.

Honea, 59, was president and chief operating officer of Arkansas Louisiana Gas Co. from 1984 until October 1991. Prior to joining Arkla, Honea was president and CEO of American Transportation Corp. of Conway, assuming that position in 1980 upon Ward Bus Co.'s bankruptcy.

Honea serves on the UALR board and was chairman of the UALR Foundation Fund. He is a member of the boards of St. Vincent Infirmary Medical Center, the St. Vincent Foundation and Little Rock's Worthen National Bank of Arkansas.

Michael H. Means President Arkansas Louisiana Gas Co.

Means, 43, joined Arkla as a management trainee in 1968. He has held several positions during his 24 years with the company. Before being named president and COO of Arkansas Louisiana Gas, Means was vice president of operations for Arkla's Arkansas division.

Means, a UALR graduate, is a past president of the Arkansas Easter Seal Society board and past vice president of membership for the Greater Little Rock Chamber of Commerce.

James L. "Skip" Rutherford Vice President Public and Governmental Affairs Arkla Inc.

Rutherford, 41, joined Arkla in 1984. Prior to that, he was an administrative assistant to Sen. David Pryor, D-Ark.

Rutherford is chairman of the advisory board for the Arkansas School of Mathematics and Science, which will be the state's first residential high school when it opens in the fall of 1993. He also was a member of the Little Rock School Board from 1987-91.

A past chairman of the Arkansas Democratic Party, Rutherford recently served as chairman of the Clinton for President fund-raising event in Little Rock.

Kathleen Gardner Vice President and General Counsel Arkansas Louisiana Gas Co.

Gardner, 44, was a corporate officer with Southwestern Energy Co. at Fayetteville before joining Arkla.

Gardner serves as a board member for the American Lung Association of Arkansas, the Arkansas Museum of Science and History, the Central Arkansas Area Agency on Aging and the Keep Arkansas Beautiful Commission.
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Title Annotation:bankruptcy forecast; includes related article
Author:Webb, Kane
Publication:Arkansas Business
Date:Jan 20, 1992
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