Monday, February 27, 2006

Army to Pay Halliburton Unit Most Costs Disputed by Audit - New York Times

The Army has decided to reimburse a Halliburton subsidiary for nearly all of its disputed costs on a $2.41 billion no-bid contract to deliver fuel and repair oil equipment in Iraq, even though the Pentagon's own auditors had identified more than $250 million in charges as potentially excessive or unjustified.

The Army said in response to questions on Friday that questionable business practices by the subsidiary, Kellogg Brown & Root, had in some cases driven up the company's costs. But in the haste and peril of war, it had largely done as well as could be expected, the Army said, and aside from a few penalties, the government was compelled to reimburse the company for its costs.

Under the type of contract awarded to the company, "the contractor is not required to perform perfectly to be entitled to reimbursement," said Rhonda James, a spokeswoman for the southwestern division of the United States Army Corps of Engineers, based in Dallas, where the contract is administered.

The contract has been the subject of intense scrutiny after disclosures in 2003 that it had been awarded without competitive bidding. That produced criticism from Congressional Democrats and others that the company had benefited from its connection with Dick Cheney, who was Halliburton's chief executive before becoming vice president.

Later that year auditors began focusing on the fuel deliveries under the contract, finding that the fuel transportation costs that the company was charging the Army were in some cases nearly triple what others were charging to do the same job. But Kellogg Brown & Root, which has consistently maintained that its costs were justified, characterized the Army's decision as an official repudiation of those criticisms.

"Once all the facts were fully examined, it is clear, and now confirmed, that KBR performed this work appropriately per the client's direction and within the contract terms," said Cathy Mann, a company spokeswoman, in a written statement on the decision. The company's charges, she said, "were deemed properly incurred."

The Pentagon's Defense Contract Audit Agency had questioned $263 million in costs for fuel deliveries, pipeline repairs and other tasks that auditors said were potentially inflated or unsupported by documentation. But the Army decided to pay all but $10.1 million of those contested costs, which were mostly for trucking fuel from Kuwait and Turkey.

That means the Army is withholding payment on just 3.8 percent of the charges questioned by the Pentagon audit agency, which is far below the rate at which the agency's recommendation is usually followed or sustained by the military — the so-called "sustention rate."

Figures provided by the Pentagon audit agency on thousands of military contracts over the past three years show how far the Halliburton decision lies outside the norm.

In 2003, the agency's figures show, the military withheld an average of 66.4 percent of what the auditors had recommended, while in 2004 the figure was 75.2 percent and in 2005 it was 56.4 percent.

Rick Barton, co-director of the postconflict reconstruction project at the Center for Strategic and International Studies in Washington, said despite the difficulties of doing business in a war zone, the low rate of recovery on such huge and widely disputed charges was hard to understand. "To think that it's near zero is ridiculous when you're talking these kinds of numbers," he said.

The Halliburton contract is referred to as a "cost-plus" agreement, meaning that after the company recovers its costs, it also receives various markups and award fees. Although the markups and fees are difficult to calculate exactly using the Army figures, they appear to be about $100 million.

One of Halliburton's most persistent critics, Representative Henry A. Waxman, a California Democrat who is the ranking minority member of the House Committee on Government Reform, said in a written statement about the Army's decision, "Halliburton gouged the taxpayer, government auditors caught the company red-handed, yet the Pentagon ignored the auditors and paid Halliburton hundreds of millions of dollars and a huge bonus."

About $208 million of the disputed charges was mostly related to the cost of importing fuel, which was at the heart of the controversy surrounding the contract. Kellogg Brown & Root hired a little-known Kuwaiti company, Altanmia, to transport fuel in enormous truck convoys. The Pentagon auditors found that in part because of the transportation fees that Kellogg Brown & Root agreed to pay Altanmia, the cost for a gallon of gasoline was roughly 40 percent higher than what the American military paid when it did the job itself — under a separate contract it had negotiated with Altanmia.

The Army said in a written statement that it had largely accepted Kellogg Brown & Root's assertions that costs had been driven up by factors beyond its control — the exigencies of war and the hard-line negotiating stance of the state-owned Kuwait Petroleum Corporation. The Army said the Kuwaiti fuel company blocked attempts by Kellogg Brown & Root to renegotiate its transportation contract with Altanmia. In the end, the Army decided to pay the Halliburton subsidiary all but $3.81 million of the $208 million in fuel-related costs questioned by auditors.

The Kellogg Brown & Root contract, called Restore Iraqi Oil, or RIO, will be paid with about $900 million of American taxpayer money and $1.5 billion of Iraqi oil proceeds and money seized from Saddam Hussein's government. Official criticism of the work became so intense that in November, an auditing board sponsored by the United Nations recommended that the United States repay some or all of the $208 million related to the alleged fuel overcharges — an allegation Halliburton says has never been justified.

In fact, Ms. Mann said, the Army's decision clearly showed that "any claims that the figures contained in these audit reports are 'overcharges' are uninformed and flat wrong." She said that the fuel charges themselves had been 100 percent reimbursed and that the reductions all came from adjustments on administrative costs associated with that mission.

Still, the Army conceded that some of the criticisms of the company's business practices were legitimate. As a result, the Army said, it would exclude about half of the auditors' questioned charges from the amount used to derive the markups and fees, which are calculated as a sliding percentage of the costs. That decision could cost the company a maximum of about $7 million.

Ms. James, the Corps of Engineers spokeswoman, said that in addition to the other modest penalties that Kellogg Brown & Root had been assessed by the Army's contracting officers, the sliding percentages on some of the fees had been lowered by unspecified amounts to reflect shortcomings in the company's dealings in Iraq. "All fees were awarded in accordance with the award fee plan set out in the contract, which placed more emphasis on timely mission accomplishment than on cost control and paperwork," Ms. James said.

Mr. Barton, of the Center for Strategic and International Studies, said that with the relatively small penalties paid by the company for falling short in its performance in Iraq, it was hard to see what the Army's scrutiny of the company's practices had amounted to in the end.

"When they say, 'We questioned their business model or their business decisions' — well, yeah, so what?" Mr. Barton said. "You questioned it but there was no result."

In answer to written questions, a spokesman for the Defense Contract Audit Agency, Lt. Col. Brian Maka, said the settlement of the disputed charges was based on "broader business case considerations" beyond just Pentagon audits.

But when asked whether the Army's decision reflected on the quality of the audits, Colonel Maka said only that the agency "has no indication of problems with the audit process," and he referred questions on the settlement itself to the Army.

A former senior Defense Department manager knowledgeable about the audits and the related contracting issues said, "That's as close as D.C.A.A. can get to saying, 'We're not happy with it either.' "

Because of the size of the contract and the contention surrounding Halliburton's dealings with the government, the RIO audits were carried out by the agency's top personnel and were subjected to extraordinarily thorough reviews, the former manager said.

This is unlikely to be the last time the Army and Halliburton meet over negotiated costs. On a separate contract in Iraq, for logistics support to the United States military, more than $11 billion had been disbursed to Kellogg Brown & Root by mid-January, according to the Army Field Support Command, based in Rock Island, Ill. Pentagon auditors have begun scrutinizing that contract as well.

Monday, February 06, 2006

IPO stems insider stock sales - Houston -

KBR disclosure curbs brisk trading activity by Halliburton CEO

By Jim Greer
Houston Business Journal
Updated: 7:00 p.m. ET Feb. 5, 2006

David Lesar made millions on insider stock sales over the past two months, but Halliburton Co. policy prevented the chairman and CEO from making millions more this week.

On Jan. 27, Lesar went public with the news that 20 percent of the energy service company's KBR unit was slated for an initial public offering.

On Jan. 26, he sold 75,000 shares of Halliburton at more than $73 per share for a gross of about $5.5 million.

Added to eight previous stock sales executed in December and January, Lesar cashed in just under 354,000 shares for about $24.3 million in an eight-week period (see chart).

The KBR public offering announcement lit an even bigger fire under an already hot Halliburton stock price.

At close of trading on Jan. 27, the stock had moved into the $79 range after closing near $75 on the previous day. On Jan. 30, the price topped $82 before settling near $81.

On Feb. 1, in midday trading, shares of Houston-based Halliburton changed hands around $81.31, or about 8.4 percent above the stock's closing price the day before Lesar announced plans to publicly spin off the longtime engineering and construction business formerly known as Kellogg Brown & Root.

At midday on Feb. 1, the price remained north of $81, about 8.4 percent above the closing price the day Lesar executed his most recent sale.

But Lesar personally couldn't cash in on the extra boost Halliburton shares got from the KBR IPO news on the following day. Company policy restricts insiders from cashing in on material information that hasn't been made public knowledge.

The rule closed the trading window on Jan. 27 and forced Lesar to leave millions of dollars on the table.

At the stock's Feb. 1 perch above $81, shedding the same 353,981 shares that were sold in December and January transactions would have delivered Lesar an extra $4.5 million or so pretax.

Specifics for investors
The potentially plumper payout remains purely hypothetical.

A Halliburton representative points to the company's "Code of Business Conduct: Use and Public Disclosure Of Material Nonpublic Information."

This stodgy-sounding corporate policy, which reflects U.S. Securities and Exchange Commission regulations, states that it is a violation of federal laws "for any person to buy or sell securities if he or she is in possession of material nonpublic information relating to those securities."

The KBR IPO details publicly disclosed by Lesar on Jan. 27 appear to fall into the "material nonpublic information" category.

Last year, Halliburton reported an intent to sell or spin off KBR, with an IPO as one possible option. Timing remained unclear.

The specific course of action for KBR wasn't announced until Lesar's Jan. 27 disclosure that Halliburton would pursue a KBR IPO filing.

Wall Street already expected that Halliburton would do an IPO instead of pursuing another option. But Lesar on Jan. 27 offered specifics that investors have been awaiting, according to Citigroup Investment Research analyst Geoff Kieburtz.

Immediately after filing a 10K, the annual report due by mid-March, Halliburton expects to file KBR IPO documents, Kieburtz adds.

So various details on the planned IPO, including proceeds Halliburton could receive, aren't likely to emerge until next month, at the earliest.

But today, "the substantial proceeds expected from the IPO are already fueling rumors" of future acquisitions that Halliburton will make, according to a Jan. 30 report from equity analyst David Rewcastle of Argus Research Co.

Even ahead of the KBR stock offering, Halliburton is awash in cash.

Argus Research on Jan. 30 raised the 2006 earnings per share projection for Halliburton by $1.05 to $5.25. At the same time, Argus unveiled a preliminary estimate that envisions Halliburton earning $6.55 per share for 2007.

Halliburton is the world's second-largest energy services company.

Late in the day on Jan. 26, Halliburton announced robust financial results for the fourth quarter and full year of 2005.

"The best (year) in our 86-year history," Lesar said in the Jan. 26 news release.

Halliburton's announcement of the banner year, including fourth-quarter earnings that beat analyst expectations, came out only hours after Lesar made the last of his most recent stock sales.

So the earnings news, like the KBR details, also had qualified as material nonpublic information. One more reason Lesar wouldn't have been able to cash in his stock at the new highs set this week.

Still, Lesar's selling of Halliburton shares at prices well below previous levels points up the fact that insiders aren't necessarily the best traders. Indeed. Lesar also shed stock in the oilfield services giant before December last year, again leaving millions of dollars on the table.

"His track record's actually quite bad," says Jonathan Moreland, editor of Insider Insights. "He sells and it goes up."

But Lesar still has ample ammunition for future trading.

According to a Jan. 26 filing with the Securities and Exchange Commission, Lesar still beneficially owns nearly 700,000 shares of Halliburton.