Y2K budgets soaring at nonfinancial companies

Y2K budgets at many large nonfinancial corporations have jumped as much as five-fold in the first quarter, indicating that management may have greatly underestimated the scope of their year 2000 computer problems, according to a recent study by Weiss Ratings Inc.

OGE Energy Corporation, based in Oklahoma City, reported a Y2K budget of $35 million in its March 31, 1999 SEC filing, representing a 483 percent increase from the $6 million the company disclosed at year-end 1998. The company has received a Weiss Y2K Rating of "low," primarily reflecting concerns regarding the integrity of its budgeting process.

USX-U.S. Steel Group, among the nation's 100 largest corporations, nearly doubled its Y2K budget to $71 million at the end of the first quarter of 1999, after budgeting only $36 million at year-end 1998, according to its filings with the SEC. The company is rated "below average" due to this dramatic increase and a failure to use more than 52 percent of the budgeted funds by March 31.

Similarly, Kroger Company, based in Cincinnati (not rated due to insufficient data), boosted its budget by 158 percent from $31 million to $80 million, while Fluor Corp. in Irvine, Calif., (rated "low") more than tripled its budget from $15 million to $55 million.

Even some technologically advanced companies have had difficulty gauging the costs of their future Y2K fixes. America Online Inc., for example, boosted its Y2K budget to $20 million at March 31, 1999, more than double the $8 million estimate of three months earlier and four times the estimate of six months earlier.

AOL is rated "low" by Weiss because of the company's apparent failure to accurately estimate future Y2K costs, as well as the lack of progress in using those funds. Nearly two-thirds of AOL's Y2K budget was still unspent at the end of the first quarter, according to the company's disclosures to the SEC.

In contrast, some large companies have reported significant reductions in their Y2K budgets, although many of these had experienced large budget increases earlier. For example, Texaco Inc. (rated "below average low"), revised downward its Y2K budget by 43 percent in the first quarter, but only after an upward revision of 76 percent from the third to fourth quarters of 1998.

Similarly, Eastman Kodak Company (not rated due to insufficient data) cut back its Y2K budget by 31 percent, following a budget increase of 45 percent at the end of last year.

Martin Weiss, chairman of Weiss Ratings, said, "Estimating Y2K fix-it costs has been touch-and-go for many companies. Often, the more bugs they fix, the more they find. The net result is that some of these companies are falling even further behind in their Y2K remediation schedules."

Among other Fortune 1,000 companies, large firms rated "low" for their Y2K readiness include (in order of their size): Intel Corporation, Dynegy Inc., Farmland Industries Inc., Tenet Healthcare Corporation, Texas Utilities Company, Lear Corporation, Consolidated Natural Gas Company, El Paso Energy Corporation, Ikon Office Solutions Inc., Comcast Corporation, Owens-Illinois Inc., Applied Materials Inc., Merisel Inc., Phelps Dodge Corporation, Solectron Corporation, Beverly Enterprises Inc. and 3Com Corporation.

The largest nonfinancial companies rated "below average" for their Y2K readiness include AT&T Corporation, Texaco Inc., Bell Atlantic Corporation, Motorola Inc., PepsiCo Inc., SBC Communications Inc., United Technologies Corporation, ConAgra Inc., United Parcel Service of America Inc., BellSouth Corporation, International Paper Company, MCI Worldcom Inc., Atlantic Richfield Company, UAL Corporation and others.

Meanwhile, large "high" rated companies include Phillip Morris Companies Inc., J.C. Penney Company Inc., American Stores Company, AMR Corporation, American Express Company and AlliedSignal Inc. These have generally reported consistent Y2K budgets over time and consistent progress in allocating resources to Y2K remediation, indicating advanced states of completion.

The Weiss r atings for large nonfinancial corporations are based on a proprietary model that compares publicly available data on Y2K budgets and expenditures over time and in relation to industry peer groups, while reviewing the company's own assessment of its Y2K status.

Weiss rates financial corporations, such as banks, S&Ls, and insurance companies, separately, based on the Weiss Y2K questionnaires received privately from these institutions.

"The information disclosed by the companies to the SEC does not permit definitive conclusions regarding their current status, but it does give us a pretty good indication upon which we base our opinion," Martin Weiss said. "Unfortunately, many companies have failed to disclose even the basics such as their Y2K budgets and expenditures, despite SEC guidelines that call for these disclosures."

IBM, for example, has so far failed to reveal the amount it has spent in Y2K remediation efforts, making it difficult for outside analysts to evaluate its Y2K progress. Other major companies that have failed to disclose Y2K budgets, expenditures or both, as requested by the SEC, include Boeing Company and Merck & Company.

(The preceding article was provided by Weiss Ratings Inc. of Florida.)