Williams Profits Double; Bailey Issues CA Warning
With Energy Marketing & Trading (EMT) leading the way, Williams more than doubled the return on its energy businesses in the first quarter this year over last, recording results from continuing operations of $378.3 million or 78 cents per share, compared with a restated $138.9 million or 31 cents a share for 1Q 2000.
Based on the successful start to the year, the company adjusted earnings estimates for 2001 from the $1.60 to $1.80 projected earlier to between $2.10 and $2.20 per share. Williams Chairman Keith Bailey acknowledged the new estimate was close to the $2.25 previously estimated for 2002, and said the out-year figures would likely have to be revised as well because the company is on track to continue with at least 15% to 20% earnings growth through at least the next three years. Fielding analysts' comments in a teleconference, Bailey acknowledged that Williams tends to set conservative targets, reminding that energy is a cyclical business.
Regarding the $252 million the company is owed from power supplied, but not paid for in California, "even if we get completely stiffed, it will not have a significant impact on our business."
Bailey defended his statement issued the day before in support of a short-term power price cap across the western region to stabilize energy prices, saying the most important challenge is to address the credit risk in California. "You have to have a credit-worthy buyer. Right now we're in a stare-down. There's a good deal of uncertainty on the part of the state as to whether or not it is prepared to pay the market price." If, through price caps, the state can be assured it will be a fair price, and it can unambiguously say it will pay, and bring past due accounts into balance, then "people will be willing to invest, capacity can be created and the market can begin to work again."
He agreed that price caps discourage investment, but "not being paid detracts even more from a willingness to spend money." As long as a risk premium, based on the possibility of non-payment, is written into prices, "it drives us further away from a solution. We have got to get by the logjam of the credit risk existing in California." A short-term price cap would stabilize the market and "give California the chance to get it right."
He noted the political pressures that could build in the summer ahead, warning that other proposals to rein in prices "are much more draconian." Currently, the bias of the three Federal Energy Regulatory Commissioners is weighted more toward regulation. With the two new commissioners who have been proposed, that will change to a more market-based orientation. But "at the end of the day FERC is a political entity," responsive to consumers, Bailey reminded.
Responding to analysts' questions, the Williams chairman said FERC's order Wednesday to limit short-term emergency purchases to a formula-set market clearing price "has positive attributes" in that it rewards efficient generators, but it fails to address the credit risk.
Back on the subject of earnings, profits for EMT were $484.5 million vs. $77.8 million for the same period last year based on a jump in trading volumes of natural gas and power by two and a half times over last year, increased structured transactions and added value created in trading in cash markets. Bailey pointed to a near-doubling of the company's power portfolio from 8,900 MW at the end of 2000 to 15,000 MW three months later, as fueling the expected increased results over the balance of the year. Bailey said much of the new business was not reflected in 1Q results.
Going forward Williams expects to see greater returns from its gas pipeline business, where it has projects under way to add 5 Bcf of new pipeline capacity or 30% to its existing systems. The company is actively developing 10 major and numerous smaller projects in virtually every area of the country. The pipeline segment returned $204 million in the first quarter, compared with $197.3 million during the same period a year ago.
Its natural gas exploration and production unit benefited from higher prices to the tune of $50.6 million in profits compared to $11.4 million in 1Q last year. The midstream gas and liquids business suffered from those high natural gas prices which slashed margins from 18.2 cents per gallon in first quarter 2000 to 1.7 cents/gallon this year.
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