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

In return, Williams gets to remove the uncertainty and pall hanging over it from the many civil actions related to its activities 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.

Contrary to reports Friday, a spokesman for Gov. Gray Davis said Friday the state had no plans to pull out of the settlement following the release by FERC last week of background documents involving Williams’ activities in California. “Obviously we are pleased with the settlement,” said Steven Maviglio, but “we do want to take a look at the documents.” They are a “serious piece of information,” and provide the “gory details” about events in the market (see related story).

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 other energy companies on Nov. 8 “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.

Davis 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.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. California officials indicated the deal will allow them to pursue criminal charges in the future, but added they did not expect that to arise in this case.

Out of a $417 million portion of the settlement, $30 million is to be divided between the states of Washington and Oregon in response to their antitrust efforts that have shadowed California’s since mid-2000.

“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 arisen 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 California 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 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.

California 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. However, “we are very hopeful that other companies will also see the benefit of settlements like this,” said one.

Williams got more good news last Thursday when the Department of Justice antitrust division said it closed an 18-month investigation into a capacity agreement between Williams and the AES Corp., and will take no action.

The investigation was launched last year after Enron was found to have fraudulently manipulated the California energy market for its own benefit. With the new damaging information in hand, Sen. Dianne Feinstein (D-CA) and other regulators urged the DOJ to explore potential violations of federal fraud statutes by Enron and other energy suppliers.

The government agency was specifically looking into whether the generating capacity of AES power plants in Southern California was illegally restricted as a result of a capacity agreement between a unit of Williams and AES, sending prices higher as a result.

In September, a California Public Utilities Commission report based on operating data from Dynegy, Duke, Reliant, Mirant and Williams/AES found that each generator, during the 38 days of blackouts or service interruptions to businesses during the seven-month period of California’s power crisis had between 37% and 46% of its capacity unused, either for planned/unplanned maintenance or for unknown reasons.

The closed investigation was not associated with Williams’ California settlement or the request for information subpoena the company is responding to from the U.S. attorney in the Northern District of California.

Williams Reports $294M 3Q Net Loss

On the financial front last week, marketing and risk management losses in the third quarter more than offset an earnings increase from ongoing core businesses, Williams said Thursday. The company recorded an unaudited third quarter 2002 net loss of $294.1 million, or 58 cents per share, compared with restated net income of $221.3 million, or 44 cents per share, for the same period last year.

Despite the swing to a loss for the quarter, shares of the company on the New York Stock Exchange finished strongly on Thursday, climbing nearly 15% to close at $2.79/share. The stock price had slipped to around $2.50/share in Friday afternoon trading.

Its energy marketing and risk management business posted a $387.6 million segment loss for the quarter, compared with a segment profit of $356.9 million during the third quarter 2001.

Williams, which has divested numerous assets in recent months, also received a big vote of confidence earlier in the week when the company reached a settlement agreement resolving all the proceedings and investigations of it at the state level in California (see Daily GPI, Nov. 12).

Williams’ 3Q2002 results also included 22 cents per share for income from discontinued operations, compared with 5 cents per share for the same period last year. These items include the after-tax results of operations, gains from sales and impairment charges for certain assets that have been sold or were approved for sale in the third quarter, including Central, Mid-America and Seminole pipelines and the soda-ash operations. Williams noted that prior-year results have been restated to conform to current-year reporting for discontinued operations. Dismissing discontinued items, the company reported an unaudited recurring third quarter net loss of 40 cents per share, compared with restated net income of 59 cents per share in the same period last year.

“Our third quarter consolidated financial results reflect difficult market conditions and the impact of actions we’re taking to strengthen our company,” said Malcolm. “They also illustrate the scale of the opportunity we are working to capture by reshaping our company’s business platform to significantly reduce our financial risk and liquidity requirements. While we’re intently focused on strengthening our company, it’s important to recognize that the ongoing businesses that are core to Williams’ future recorded a significant increase in period-over-period segment profit for the third quarter.

Malcolm added that the company’s restructuring plan has also included the “sale of assets — two liquids pipelines, a wholly owned natural gas pipeline and an interest in two others, certain exploration and production properties, an LNG facility, a natural gas gathering system, an interest in a Lithuanian oil complex and retail TravelCenters — that are expected to generate $2.6 billion in cash.”

During the quarter, Williams recorded a $408.7 million loss from continuing operations. The loss includes pre-tax impairment charges of $432.6 million associated with certain Petroleum Services assets and an additional $22.9 million writedown of amounts due from WilTel Communications Group, whose federal bankruptcy court-approved reorganization plan went into effect in October. The company partially offset those amounts with a $143.9 million pre-tax gain from the sale of certain Exploration & Production properties and a $58.5 million pre-tax gain from the sale of its interest in a Lithuanian oil complex. The third quarter of 2001 included a $94.2 million pre-tax writedown of investments that were deemed to be other than temporary.

Despite all of the asset divestitures, Malcolm said, “We still have work to do. Chiefly, we are marketing other non-core assets, and we are continuing the process of selling or joint-venturing parts of our energy marketing and risk management business, but there is no new information to share on either front today.”

A lot has happened since the company’s last earnings report. In that time, Williams has realigned its organization to create increased focus on its Exploration & Production and Midstream Gas & Liquids businesses. Those two units, along with Gas Pipeline and the company’s investment in Williams Energy Partners, serve as the foundation of Williams’ business. “As prominent drivers in Williams’ future, it’s appropriate to structure our organization in a way that should facilitate increased focus on our core businesses,” Malcolm said. “This move demonstrates the important contribution that we expect Exploration & Production and Midstream Gas & Liquids to make.”

By elevating those two businesses, the company eliminated the Energy Services organizational and reporting structure under which Petroleum Services and International also reported. If it is successful in executing its planned asset sales and/or assignments, those units, as well as Energy Marketing & Trading, would cease to exist in their current forms.

Tied in with its restructuring, Williams named Phil Wright as chief restructuring officer, a new position with accountability for selling assets and reducing costs. Wright previously served as president and CEO of the Energy Services business group. Wright reports directly to Malcolm, as do the senior vice presidents of Exploration & Production, Ralph Hill; Midstream Gas & Liquids, Alan Armstrong; and Gas Pipeline, Doug Whisenant.

The company’s Gas Pipeline segment contributed profit of $172.6 million vs. $101.8 million for the same period last year, while the Exploration & Production segment posted the largest profit increase, from $65 million for 3Q2001 to $231.8 million for the quarter just ended. Williams’ Midstream Gas & Liquids segment chipped in profit of $104 million vs. a restated segment profit of $69.5 million for the same period last year. Williams Energy Partners, which has a corporate structure independent of Williams, reported third quarter segment profit of $13.4 million vs. $27.1 million during 3Q2001.

Going forward, Williams also laid down some guidance for its ongoing businesses — Gas Pipeline, Exploration & Production, Midstream Gas & Liquids and the investment in Williams Energy Partners. The company said it continues to expect recurring segment profit from $1.4 to 1.5 billion for 2002 and from $1.1 to 1.3 billion for 2003.

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