The global, multi-billion-dollar deal that California and Williams announced Monday that could ultimately include two other states and more than a dozen local governments, along with a series of class action plaintiffs, involves the state getting more control of its long-term power contracts and up to $417 million in separate payments from the energy company.

In return, Williams gets to remove the uncertainty and pall hanging over it surrounding all civil actions regarding its dealings in California and the opportunity to sell the state additional power supplies at the same $62.50/MWh to $87/MWh prices in its original long-term contract. It also now has the opportunity to sell part of its contract portfolio or joint venture it, including the “significant” value of its California contract.

As part of the renegotiated remaining eight-year power deal, Williams agreed to increase maximum supplies through 2010 from 1,400 MW to 1,875 MW; give the state more flexibility in when power is dispatched; signed a long-term natural gas agreement through 2010 for 1.2 to 1.8 million MMBtu/month; and is released from any future refund determinations as they relate to the state.

“Today’s settlement is the result of the productive dialogue we’ve had with California officials since we reached an agreement in principle in July,” said Steve Malcolm, Williams CEO. “Williams has continuously worked with California to provide fair solutions that meet the state’s energy needs. We were the first and only company to propose temporary price caps. We did an emergency pipeline expansion to increase the state’s supply of natural gas. We continued to sign long-term power contracts last year despite the purchasers’ credit issues.”

As part of the civil agreement, Williams denied all allegations made by the state in its various investigations or in the civil lawsuits that are signing on to this deal. Part of the agreement requires Williams to surrender a number of documents to the state as part of its due diligence.

The settlement “”resolves all the proceedings and investigations at the state level. It preserves the value of our long term deal with [the California Department of Water and Power], and it also, very importantly, it allows us to have a continuing and positive relationship with state of California,” Malcolm said. It was a settlement that needed to get done “in order to turn the company around.”

The settlement resolves a “fairly significant” overhang that has been affecting all Williams negotiations, “stabilizes our portfolio value in the West; and clears way for us to monetize all or a portion of the value in the California contracts.” Malcolm, speaking in a teleconference after the announcement, said the settlement preserves the value of its contracts with the state “which is significant.” He declined to put a dollar figure on them. The company is continuing to negotiate and talk with parties interested in a ” piece of our book or entering into some kind of [joint venture] for the whole book. While negotiations are progressing, “I can’t say when that will be completed.”

Questioned by reporters, Williams’ chief negotiator, Alex Goldberg, said the latest subpoena issued to Williams (and others) last Friday “relates to a federal antitrust investigation.” He said Williams is not concerned because “we weren’t involved in any kind of activities like that.” The documents requested are of the “nature one would receive in an antitrust type investigation” and are similar to documents which have been requested in other investigations of the California power market.

Goldberg said the savings on the long term contracts for California will be between $370 million and $1.4 billion, depending on how the state dispatches the power. He acknowledged that Williams still must deal with claims by California investor-owned utilities and municipals, but said the company is “adequately reserved” in case it must meet an obligation.

Gov. Gray Davis in a prepared sound bite called the settlement “an important victory for ratepayers,” adding that the new contracts will give California “reliable power delivered at more favorable terms. It also guarantees cooperation in further investigations that may be beneficial in making our case for refunds with the Federal Energy Regulatory Commission.”

The settlement, which has been anticipated for months, resolves the part of the state’s claim of some $9 billion in refunds due California from Williams which is estimated to be around $400 million for the state Department of Water Resources. (private and public-sector utility claims are not included.) With the Williams deal, the state has now renegotiated 13 contracts for a collective savings of $5 billion on the 56 contracts totaling $43 billion that were signed by the state Department of Water Resources (DWR).

California officials Monday said the deal included a $417 million global settlement with The Williams Companies, covering two state lawsuits and attorney general’s investigations, along with an estimated $1.4 billion renegotiation of the remaining eight years on its 10-year power supply deal. The $417 million payment from Williams includes $180 million in contract price reductions, $90 million worth of six peaking turbines and $147 million to be divided among the state AG, municipalities, water districts and utility districts filing suits against Williams, with the latter amount being used almost exclusively to fund energy efficiency programs, including $80 million administered by the state power authority to fund solar energy installation in schools across the state.

Along with smaller amounts collected from earlier contract renegotiations with Calpine, Constellation and others, the state now will have about $110 million in the power authority solar schools funds, California officials said, adding that as part of the Williams deal it does not give up its right to pursue criminal charges in the future, although officials cautioned they did not expect that to arise in this case.

Two other state attorneys general in the Washington and Oregon, along with a number of other parties have the opportunity to sign on to the deal by the end of this year. For now, the California AG, Department of Water Resources (DWR) and California Public Utilities Commission are the only parties, along with Williams.

“This is the first large-scale settlement with a major player from the energy crisis of 2000-2001, and in our view, it resolves everything that has arise as a result of our investigations by the (state) attorney general, including claims of gaming and other manipulation of the market,” said Ken Alex, the supervising deputy in the state attorney general’s office. “As long as the due-diligence turns out as expected, we will complete this agreement and we have until Dec.15 to do that. Also because this is the first major settlement, we appreciate Williams Companies’ willingness to come to the table to resolve this. This has been some very, very difficult negotiations.”

Calling it one of the “worst contracts” the state made for power, California officials said they have made their new contract “commercially reasonable” by re-designating two-thirds of the old contract’s “must-take” (1,400 MW) volumes into “dispatchable” volumes. The new contract also puts under the state’s control 1,100 MW of power units in the Los Angeles Basin that it can use as needed over the remaining eight years of the contract. These are the generation units that Williams has under a gas tolling agreement with AES Corp., the owner/operator of the plants in Southern California.

“The contract we had with Williams was entirely ‘must-take’, has very poor reliability provisions which gave the company the right to give us power when the price was right and not deliver it when we needed it,” said Bill Kissinger, the deputy legal affairs adviser to Gov. Davis. “Essentially, there are 40,000 gigawatts of must-take energy that have been chopped right off the contract.”

“We’ve knocked $1.4 billion off the $4.3 billion estimated cost of the original 10-year deal,” said Kissinger.

As part of the deal, California’s attorney general has five weeks to complete due diligence regarding before the agreement is final. Specifically, the state has “re-opener provisions” under which for the next five weeks the state AG’s office will do an extensive review in cooperation with Williams, looking at the company’s books and talking with its employees, state officials said.

The settlement also includes a major natural gas deal with Williams in which the state gets the rights to 130 million decatherms of natural gas over seven years an average price of $4.11/MMBtus, further making the state’s long-term deal with Williams a “better product,” Kissinger said. Supply deliveries would be split half and half between Kern River and the California-Arizona border receipt points. The state officials characterized the price of the new deal as reflecting the current price of gas “buying long.”

There are also provisions for Williams supplying six 45-MW peaking turbines to the state for further deployment to local governments in San Francisco and San Diego, which will be able to work with the state power authority to turn them into city-controlled peak-load resources.

State officials would not comment on other negotiations for similar settlements, or the numbers of other companies they are talking with. Long-term contracts that already have been renegotiated are not part of the current process.

At one point Deputy Attorney General Alex said that other energy companies should take notice of the Williams deal and the fact that by mid-December the company will be able to tell the energy market that it is the only one at that time to say it is free of any legal liabilities related to California. No other company by then will be able to make that claim, the California officials said.

“We are very hopeful that other companies will also see the benefit of settlements like this,” Alex said.

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