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Pipeline to recovery: Honea fuels effort to lead Arkla Inc. back from disaster in post-McLarty era.

Before anyone could save the ailing Arkla Inc., they had to decide just what it had become over a decade of tinkering and expansion.

By 1992, the natural gas corporation had grown more awkward appendages than a volunteer at a mad scientist convention as its stricken stock value slipped from $28 to $7 a share.

When Arkla Chief Executive Officer Thomas F. "Mack" McLarty became White House chief of staff, the company began a new era under the leadership of corporate turnaround specialist Milt Honea.

To date, Honea's task has been to cut off the extra corporate limbs, stop the bleeding and stabilize the patient. Now he will teach it to walk again.

Because of McLarty's stature, the company has endured more national scrutiny than ever. The attention came at the worst possible time as the once-thriving utility found itself defending against speculation of bankruptcy by one national television analyst.

Depending on the source, several factors are blamed for the decline of Arkla: McLarty, industry deregulation, mild winter weather or a combination of the three. Everyone, however, seems to agree that the trimmed-down company is on its way back.

"They have clearly bottomed out and are on the recovery leg," says John E. Olson, first vice president of securities research at Merrill Lynch Pierce Fenner & Smith Inc. and one of country's most avid Arkla observers. "I am very impressed with the new management team. They have gotten religion, and they will turn this company around."

A more modest but equally hopeful assessment comes from Stephens Inc. senior analyst Richard Straley.

"I think we're really in kind of a period where there won't be a lot happening at Arkla," Straley says.

That, in itself, could be good news.

In the pit of despair in 1992, the company's debt soared to a record $2.5 billion. The ratio of debt to total invested capital increased that year to a terrible 70 percent -- Honea says 55 percent is more like it -- as Arkla borrowed to settle many of its most nagging obligations.

Furthermore, two major debt-rating agencies cut Arkla's rating to the sub-investment-grade level, which increases the cost of borrowing money.
QUARTERLY INCOME BY BUSINESS UNIT (UNAUDITED)
(MILLIONS OF DOLLARS)
Quarter Ended March 31 FIRST QUARTER
 1993 1992
Pipeline Group $34.5 $30.7
Distribution
Entex 34.6 35.2
ALG 36.6 22.8
Minnegasco 39.3 31.9
 110.5 89.9
Corporate (5.4) (3.5)
Total $139.6 $117.1
Source: Arkla Inc. () = loss


It was late in coming, but by mid-1992, McLarty, Honea and others had developed a road map out of the morass. Most of the plan already has been executed.

Cutting to the Bone

Arkla sharply cut its dividend to save $98 million a year, then eliminated 600 positions and changed operations to cut another $50 million a year. Next, the company shaved off $187 million a year in capital spending.

Arkla then sold peripheral assets such as its radio and gas grill plants to raise $150 million for debt reduction. The company took advantage of lower interest rates to convert $425 million in short-term bank loans into long-term bonds, which were sold to the public.

At year's end, Arkla sold off Arkla Exploration Co. to Seagull Entergy Corp. for about $400 million. And just weeks ago, a pipeline concern -- Louisiana Intrastate Gas -- was sold for $91 million.

For the year, Arkla reduced its debt by almost $430 million, which is on the way to a goal of $700 million by the end of 1993.

Operationally, Arkla's three regional gas distribution companies had a good year, receiving rate increases in Arkansas and Minnesota totaling about $25.3 million a year. Entex Inc., Arkla's Texas-based distributor, added almost 20,000 new customers along the Texas Gulf Coast.

The real drag on the company has been the pipeline operations, where annual operating income fell by 32 percent in 1992. That's why the most recent company development was so interesting: After Arkla considered selling all its pipelines, the company announced two weeks ago that it planned to stay in the pipeline business.

Straley says Arkla's decision likely reflects a soft market for the pipeline operations rather than a strong company conviction to stay the course.

"I think if they would have gotten an offer that was reasonable, they probably would have taken it," he says.

He expects progress in the pipeline side of the business, but not for another two or three years. Both he and Olson commend Honea for choosing a proven pipeline turnaround specialist in Dan Dienstbier to run the Houston-based operations.

Where did Arkla go wrong?

"The No. 1 problem was that it was over-diversified -- too many assets financed with too much debt," Olson says. "The second problem was a corporate strategy designed to spend their way out of a recession. The company remained aggressive far too long in the gas market cycle. When everyone else was retrenching, Arkla was still involved in acquisitions."

A River Doesn't Run Through It

The best example of his point is a major interstate pipeline called Line AC that the company began building in 1989. The pipeline was to run from western Oklahoma across the Mississippi River, hooking up with major pipelines that carry gas northward from the Gulf Coast.

The portion from Chandler, Okla., to Glendale, Ark., was completed, but Arkla's fellow investors abruptly dropped out before the line could reach the Mississippi.

The pipeline was designed to handle 1 billion cubic feet of gas per day, but circumstances left if feeding into a line that can only handle 750 million cubic feet per day.

"It's fair to say the contracts weren't iron-clad," Honea says.

But that wasn't the only problem.

"They never really had first-class business going through that pipeline," Straley says. "Basically it was mostly TABULAR DATA OMITTED short-term contracts to transport gas."

Olson says the third problem was Arkla's deferral of long-festering problems in its regulatory structure.

Arkla's interstate pipeline unit was regulated by the federal government, but its gas distribution arm -- Arkansas Louisiana Gas Co. -- was regulated separately by all five of the states in which it operated. While similar corporations split their pipeline and distribution operations to avoid double regulation, Arkla kept the operations integrated to keep the states and their politicians happy.

"It became something of a regulatory shell game," Olson says, because the federal government would allow Arkla to pass on costs to its customers but the states would not.

Arkla's inaction cost the company about $15 million a year until the regulatory posture was finally changed in March -- after McLarty had left the company.

McLarty has been an easy scapegoat for Arkla's woes, and he has received national criticism for being a so-called failed corporate executive who was chosen to manage the White House. But many believe he did a creditable job under pressure.

"I think |Arkla~ was a victim of circumstances, just like other natural gas companies," says Sheffield Nelson, a former CEO of the company. "I've seen some Monday morning quarterbacking on Mack McLarty. I think that that's unfair."

Honea also is a staunch defender.

"Mack inherited basically a bankrupt company," he says. "He had a tough decade to manage."

Certainly, McLarty could not change history. Shortly before he took over the company in 1984, the federal government unleashed a devastating round of deregulation on the gas industry.

The new policy allowed gas users to escape long-term contracts with pipeline companies like Arkla, but it did not allow the pipeline companies to walk away from their gas purchase contracts with producers.

Down the Chute

Arkla quickly lost many of its customers and was saddled with $4 billion worth of gas it couldn't sell. That left Arkla with a choice: Should the company pressure the producers to void the deals by entering lengthy, nasty negotiations, or should it cut a deal and be done with it?

That's where McLarty's personality comes in. He chose conciliation and settled the contracts by paying the producers in advance for their gas at set prices while desperately hoping that gas prices would soon rise.

The prices didn't go up, and Arkla eventually shelled out $800 million to clean the slate.

"The strategic decisions necessary to get these things repaired -- that goes back to the McLarty era," Olson says. "He deferred on a lot of problems, but to his credit he made some of the first steps toward fixing those problems."

But this is a new era at Arkla, and all is forgiven.

Honea, who developed the "turnaround man" reputation by taking a series of tough assignments with FMC Corp. and saving Conway school bus manufacturer American Transportation Corp., says the company should be grateful to McLarty for its very survival.

And there is new reason for cheer: An extension to Line AC may soon be back under construction. Arkla is pursuing an agreement with Panhandle Eastern Corp. to extend the line to Shaw, Miss., where it could connect with Panhandle's

"Trunkline" system.

The project would be economically possible because Arkla could move an additional 300 million-500 million cubic feet of gas per day through the extension to pipelines east of the Arkla system, giving the company a potential edge over the Gulf Coast pipeline companies competing for Midwestern and Northeastern customers.

Considering that Arkla has about 500 billion Btu's of extra capacity each year, the extension could be a huge development for the company. The extension would cost about $120 million, with Arkla picking up about 60 percent of the tab.

Meanwhile, Honea is enjoying a few flights of fancy. At this moment, Arkla is developing a hot-air balloon shaped like a blue flame. Except it's fueled by natural gas, of all things.

The symbolism is blatant. With a lot of hard work, he figures, Arkla could soar "up, up and away." And that's not hot air, either.
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Title Annotation:Milt Honea; Thomas F. McLarty
Author:Haman, John
Publication:Arkansas Business
Date:Jul 26, 1993
Words:1644
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