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Williams Settlement Could Help Group

Nov 13, 2002 | CBSMARKETWATCH.COM Williams Cos.' settlement with California this week could signal a turning point for power companies that have been suffering in the wake of the state's energy crisis and Enron's demise, according to at least one observer.

On Monday, the energy company announced that it has agreed to pay the state $417 million in cash and other concessions. The company also agreed to changes in its original $4.3 billion power contract that could save California up to $1.4 billion.

The agreement may appear costly for Williams, one of the nation's largest energy providers, but it releases the company from refund claims by the state and could pave the way for similar pacts for other energy merchants.

"This is a great settlement," said Gordon Howald, an analyst at Credit Lyonnais Securities. "It could be the beginning of a shift into positive momentum," for the sector.

Williams is among a half dozen energy providers caught up in accusations of price gouging during California's energy crisis of 2002 to 2001.

Californians saw electricity prices soar as the state's botched deregulation plan careened out of control in late 2000 and 2001. The state eventually was forced to begin buying electricity on behalf of its insolvent investor-owned utilities, running up billions in debt.

In addition to Williams, companies like Mirant, Reliant, Duke Energy and Dynegy are facing multiple probes by state and federal officials into their actions during the crisis. Subpoenas were served this week as part of a federal grand jury probe in San Francisco.

Shares of Williams Cos. have dropped more than 90 percent in the past two years with the company fighting to stave off bankruptcy just a few months ago. See earlier story.

But the Williams settlement with California is positive because it guarantees cash flow to the company in return for relatively few concessions, according to Howald.

He pointed out that Williams will make the cash payments of $147 million to the state over a period of eight years and the $90 million in combustion turbines it's giving up could very well be just sitting in warehouses since the company doesn't really have the cash to go out and build new plants at the moment.

The $180 million reduction to the prices in the contract is "not a big adjustment" considering that the original contract was $4.3 billion, he said, and the company has said the difference in rate structure won't reduce cash flows in the near-term.

The settlement allows Williams to monetize its contract with California, and that's a "positive" for the company, he said.

A boost for others

For the other energy merchants, the settlement may also be a benefit because it will help them deal with stringent credit rating requirements.

In the wake of Enron's collapse last year, ratings agencies like Standard & Poor's have clamped down on energy merchants. Last week the agency reported that energy merchant companies must refinance more than $90 billion between now and 2006.

"Weakening industry fundamentals, poor short-term liquidity, and lack of capital market access have made refinancing of this medium-term debt increasingly difficult for many energy merchants," S&P said in a release Nov. 6.

One of the big issues that credit rating agencies consider are power contracts, how much cash is associated with those contracts and the likelihood of receiving that cash over a period of time, Howald said.

If the industry sees more settlements relative to California, rating agencies could ease up a bit, along with lending banks.

"If California caused a lot of these problems (for the energy companies) maybe this is the inflection point that begins a shift to a positive momentum for the generators and the wholesale merchant companies," he said.

But even Williams isn't out of the woods yet, points out John Olson, chief investment officer of Sanders Morris Harris, a Houston-based investment firm.

"It helps to get a big monkey off their back, but there are some other monkeys out there," Olson said. "They are going to have to deal with debt and their liquidity issues and marketing issues before they can see daylight again," he added.

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