Williams Cos. settled litigation Monday with California over questionable energy trades during the state’s energy crisis two years ago.
The announcement sparked a dramatic rally for Williams stock in the final hour of trading Monday on Wall Street.
The frenzy was a penny short of making up all the ground the energy company lost early Monday because of its involvement in a federal antitrust investigation of the California energy market.
On Wall Street, Williams share value dropped 22 percent Monday on the weight of the federal investigation before regaining almost all of the loss, to close at $2.60.
The severe decline was due to a subpoena the U.S. attorney issued to Williams on Friday. A federal grand jury is investigating energy trading activity amid rolling blackouts and service interruptions throughout California from November 2000 to May 2001.
The U.S attorney also has issued subpoenas to Duke Energy Corp., Reliant Resources Inc., Mirant Corp. and perhaps others.
The subpoenas are the latest development in a multilayer investigation into trading schemes involving Enron Corp. and other major energy marketers.
In a report released last month, the California Public Utilities Commission alleged Williams and other companies held back a portion of their electricity generating capacity during the power shortage.
The U.S. Securities Exchange Commission, the Federal Energy Regulatory Commission and the Commodities Futures Trading Commission are also conducting inquiries.
The state and federal investigations are trying to establish whether marketers manipulated energy prices through various trading schemes.
Monday’s announced settlement provided a spark Williams needed to overcome the subpoena, the latest setback in a long line of troubles that have driven the company’s stock value down from a high of more than $30 last year.
Monday’s turbulent ride started early. After closing Friday at $2.61, Williams opened trading Monday at $2.15, due to the federal subpoena announcement that came after markets closed Friday.
Williams shares bottomed out at $2.03, or 22 percent lower than Friday’s close. The stock finished the day at $2.60 on the strength of the late afternoon rally.
Under the California settlement, Williams will increase maximum power supplies through 2010, will provide more flexibility for California to determine when power is dispatched and will reach a long- term natural gas sales agreement.
The company also will pay cash considerations of $150 million over eight years, contribute six turbine generators and assist in further investigation in the state’s electric power and gas market.
In turn, Williams is being released from outstanding power refund demands by the state.
The states of Oregon and Washington, which joined class- action suits against Williams, will also receive $15 million each across three years. The three states launched a coordinated investigation into energy companies amid allegations of price manipulation during the 2000-2001 West Coast energy crisis.
Williams Chief Executive Steve Malcolm called the settlement a major accomplishment that was necessary in order to turn the company around.
“It resolves all state proceedings and allows a positive relationship with the state of California.”
Malcolm called the yearlong dispute an overhang that has interfered with efforts to find a company to either buy its energy trading business or enter a joint venture agreement.
He said the agreement will reduce uncertainty, improve the value of its trading portfolio and make the operation more attractive to a buyer.
The federal antitrust investigation should not impede the company’s effort to sell the trading business, Malcolm said.
Williams has not been involved in antitrust activity, and potential buyers have not been concerned about that, he said.
Industry observer Fredric Russell president of Fredric E. Russell Investment Co., said Monday’s agreement is likely to aid Williams as it navigates the federal inquiry.
“While there are no guarantees, I’m sure that federal investigators will take some cues from the California settlement, which is another reason the settlement news is excellent.”
He said the settlement represents a glimmer of light for the company, embattled on so many fronts.
Russell said the clock is ticking on Williams’ $900 million credit agreement with billionaire investor Warren Buffett, and the company is struggling to reduce its $14 billion in debt by selling assets at fire- sale prices.
Meanwhile, Williams has watched its stock prices plummet and its credit rating fall to junk status.
“It’s enough to drive any CEO to an extra aerobics class,” said Russell, whose company sold all 200,000 of its Williams shares in September.
Gordon Howald, equity analyst for Credit Lyonnais Securities in New York, said the Williams stock is likely to continue its volatility until the investigations subside.
It’s difficult for large portfolio managers to take a long-term position with any energy marketing company because of what’s happening in the industry.
Howald, whose firm has a banking relationship with Williams, said the company will succeed in liquidating its assets and it will survive. Eventually, long-term investors will return to the stock, he said.