El Paso Corp. announced Friday it reached a “comprehensive settlement agreement in principle” that resolves all regulatory and legal actions related to the sale or delivery of natural gas and electricity to California and three other western states from September 1996 to the present. The cost of the settlement was estimated by the California governor at $1.7 billion.

The proposed settlement, which requires the approval of FERC and the courts, essentially “closes the doors on all [of El Paso’s] significant financial exposure related to the California crisis,” said El Paso General Counsel Peggy Heeg during a webcast conference in which the terms of the settlement were laid out to financial analysts. El Paso said it expects the settlement, “crafted to minimize current demands on El Paso’s liquidity,” to be finalized by year-end. Settlement parties agree there was no admission of wrongdoing.

Parties to the settlement included private class-action litigants in California, state Gov. Gray Davis and the lieutenant governor, the attorneys general of California, Oregon, Washington and Nevada, the California Public Utilities Commission (CPUC), the California Electricity Oversight Board, Pacific Gas and Electric and Southern California Edison.

As a result of the settlement in principle, El Paso, the CPUC and the two state utilities were expected ask FERC Friday to stay a decision in the high-profile complaint case pending at the agency, which accused the Houston-based energy company of manipulating pipeline deliveries to drive up prices in California during the state’s energy crisis in 2000 and 2001 [RP00-241]. The settlement came only days before the Commission was scheduled to rule in the long-standing complaint case.

Terms of the proposed settlement call for El Paso to:

Despite the financial concessions, new Chairman Ronald Kuehn refused to admit any wrongdoing on El Paso’s part. “El Paso’s actions were at all times consistent with the spirit and the letter of the law,” he said, adding that he was “convinced” the company and its employees “[had] done nothing wrong.”

For Gov. Davis, “This is very good news for California ratepayers. This is more evidence that the energy crisis was not a California-created problem, but rather market manipulation by the energy pirates that FERC was ready to sweep under the rug.”

The settlement “removes significant market uncertainty surrounding the company,” and at the same time minimizes the current demands on El Paso’s liquidity, said El Paso CFO Brent Austin.

He estimated El Paso will take a $650 after-tax charge in the fourth quarter of 2002 due to the settlement. As for 2003 and beyond, the settlement’s impact on annual earnings was expected to be 8 cents per share, Austin said, adding this will decline over time.

A “piece of this settlement effectively will be pushed down [to affiliate] El Paso Natural Gas,” he noted. “I would expect that El Paso Natural Gas, for example, will be making the up-front payments, as well as the annual payments of $22 million a year.” He calculated that $300 million of the $650 million after-tax charge will be reflected on the books of the El Paso pipeline.

As for the stock component of the settlement, he said El Paso anticipates it will issue 26.4 million common shares once the deal becomes effective. Austin noted that El Paso will provide more details of the settlement in a 10-K to be filed with the Securities and Exchange Commission (SEC) later this month.

Looking to the future, Heeg said El Paso and parties still “have quite a few steps that have to be taken” before the settlement can become a done deal. The courts will have to certify as a class the litigants against the company. And FERC will have to approve the settlement in principle, which she said El Paso and parties are “optimistic they’ll do.”

She noted, however, that “California law gives parties, once you certify the class, [the opportunity] to opt out of a settlement” and pursue individual damages on their own.

“People can continue to sue us if they want if they opt out of the classes…But the parties to the settlement, which are pretty significant, cannot bring any litigation against El Paso” relating to gas and power transactions dating back to September 1996, Heeg said.

She indicated the settlement has implications for some pending power refund cases at the Commission. “As to electric FERC cases, some of them are directly covered by this…and some are not” because they are not parties to the agreement.

The settlement does not excuse California from an estimated $20 million that is owed to El Paso for back deliveries of power to the state, however, she told analysts.

State officials have prodded FERC for more than two years to act on allegations that El Paso Natural Gas and a merchant energy affiliate conspired to withhold transportation capacity from California to drive up wholesale gas prices at the Arizona border [RP00-241]. The gas price spikes came in the midst of the wholesale electricity market meltdown, further driving up the cost of bulk power.

El Paso’s common stock, which had reached a low point of $3.45 per share in mid-February, has been steadily gaining since that time as reports circulated about a possible settlement. The stock gained 90 cents on Thursday as details began to surface and continued an upward trend Friday. It closed at $6.13 a share. This compared to more than $46 a share a year ago.

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