COMPANY NEWS: Williams evades potential bankruptcy through asset sales

Aug. 19, 2002
Williams Cos. Inc. earlier this month announced a number of transactions designed to resolve some its liquidity problems.

Williams Cos. Inc. earlier this month announced a number of transactions designed to resolve some its liquidity problems.

The Tulsa-based company-along with other US energy merchants-has been under pressure to gain the capital needed to reduce its debt and strengthen its balance sheet (OGJ, Aug. 5, 2002, p. 30).

Late last month, Williams reported a second quarter loss of $497 million attributable to its energy-trading unit.

Other recent company news includes:

  • Paramount Resources Ltd. acquired Summit Resources Ltd. for $332 million, including $80 million in Summit debt. Both companies are based in Calgary.
  • AgipPetroli SPA, a unit of Italy's ENI SPA, and Portuguese firm Galp Energia SGPS SA purchased from TotalFinaElf SA its entire gasoline distribution system and network of retail stations in Spain.
  • A unit of Enterprise Products Partners LP, Houston, has agreed to acquire the Toca-Western natural gas processing plant and natural gas liquids fractionator in Louisiana from Western Gas Resources Inc. for $32.5 million.
  • Magnum Hunter Resources Inc., Irving, Tex., is selling noncore oil and gas properties, including some 1,750 wells, to a new private limited partnership with General Electric Capital Corp. for $50 million, company officials said.

Williams's divestiture plan

"The company's top priorities have been to improve our financial position and resolve regulatory issues facing the company," said Steve Malcolm, Williams chairman, president, and CEO. "These significant financial achievementsellipsede- monstrate that we are gaining traction in our efforts to move forward on a stronger foundation," he said.

The transactions amounted to net cash proceeds for the financially strapped Williams of $1.4 billion from asset sales and $2 billion in secured financing, the company said.

The transactions include:

  • Houston-based Enterprise Products Partners LP said it has completed the acquisition of Mid-America Pipe- line Co. and Seminole Pipeline Co. from affiliates of Williams for $1.2 billion in cash.
  • EnCana Oil & Gas (USA) Inc., a unit of EnCana Corp. of Calgary, will acquire developed and undeveloped natural gas properties in Jonah field in Wyoming from a unit of Williams for $350 million.
  • Dominion Resources Inc., Richmond, Va., has agreed to pay $217 million to acquire Cove Point LNG LP, owner of the Cove Point, Md., LNG terminal. Late last year, the US Federal Energy Regulatory Commission affirmed an earlier decision to allow the Cove Point terminal to reopen in 2003 (OGJ Online, Dec. 20, 2001).

Malcolm said, "Tough times require tough decisions," adding that the company would continue with a plan to sell other "nonstrategic" assets.

Williams also inked a $1.1 billion credit agreement that would provide for an amended $700 million secured revolving credit facility and a new $400 million letter of credit facility. In addition, the company signed a $900 million senior secured credit agreement with a group of investors led by Lehman Bros. Inc. and Berkshire Hathaway. The facility is secured by "substantially all" of the oil and gas interests of Denver-based Barrett Resources Corp., which Williams acquired last year (OGJ Online, May 7, 2001).

Despite the asset divestitures, Williams informed its employees Aug. 7 that staff cuts at the company's London office were "likely," adding that it has proposed Sept. 12 as the date by which the UK office would "cease operations."

Enterprise purchase

The Enterprise unit's acquisition includes the purchase of a 98% ownership interest in Mapletree LLC, which wholly owns the Mid-America system-a 7,226 mile, 850,000 b/d natural gas liquids pipeline. Also acquired will be several propane terminals.

The Mid-America system comprises three pipeline sections: the 2,548 mile Rocky Mountain system, which transports mixed NGL extracted from natural gas production in the Rocky Mountain Overthrust and San Juan basin areas to Hobbs, NM; the 2,740 mile Conway North system, which links the NGL market hub in Conway, Kan., with petrochemical and refining plants as well as propane markets in the upper Midwest; and the Conway South system, which joins the Conway hub with refineries in Kansas and also carries mixed NGL from Conway to Hobbs.

Enterprise also purchased a 98% ownership interest in Williams unit Oaktree LLC, which owns an 80% equity interest in Seminole Pipeline. The Seminole system carries mixed NGL and NGL products from Hobbs and the Permian basin along a 1,281 mile route to Mont Belvieu, Tex. Seminole transports an average of 260,000 b/d of NGL.

EnCana's purchase

The properties being acquired by EnCana Oil & Gas are estimated to hold 600 bcfe of natural gas and associated NGL reserves, about 96% of which is gas. Presently, the properties are producing about 135 MMcfed, EnCana said. The acquisition increases by 50% EnCana's interest in Jonah field and increases its production from the field to more than 400 MMcfed, the company said.

EnCana, which was formed earlier this year through the merger of Alberta Energy Co. Ltd. (AEC) and PanCanadian Energy Corp. (OGJ Online, Jan. 28, 2002), first became involved in Jonah field in 2000 when AEC acquired McMurry Oil Co. (OGJ Online, May 3, 2000). Jonah field, which was discovered in 1993, is estimated to contain 3 tcf of gas reserves.

Dominion's Cove Point deal

Dominion's agreement to acquire the Cove Point terminal includes the purchase of an 87 mile pipeline. The deal is expected to close in mid-September, Dominion said.

For Williams, the terminal's sale is expected to reduce the company's capital expenditures by roughly $105 million for the rest of this year and 2003.

The terminal, which lies on more than 1,000 acres of land on the western shore of the Chesapeake Bay near Baltimore, is the largest in the US, with 5 bcf of storage capacity and 1 bcfd of send out capacity.

An additional 2.5 bcf of storage capacity is expected to be in service at the site by 2004.

When Dominion acquires the facility, Dominion Energy will operate it.

London layoffs

News of Williams's plan to close its London office follows close on the heels of an announcement to continue to trim down its "financial commitment and exposure to its energy marketing and risk management business" in the US and elsewhere.

"Over the last several months, significant turmoil in the energy trading sector has impacted our ability to trade and compete for new structured energy transactions," said Tim Loposer, Williams president of European energy marketing and trading. "While we are still working on two parallel paths-seeking a joint venture partner, and selling all or portions of our energy portfolio-we know that the marketing and trading group will be a much smaller organization going forward," he said.

Reactions

Shortly after Williams revealed its divestiture plan, Fitch Ratings released a research note that called the planned transactions "clearly positive," adding that the deals would "mitigate the near-term financial hurdles" facing the company. Fitch noted that Williams's business, credit, and cash flow profile "continues to evolve."

Separately, Merrill Lynch said that Williams's latest actions would effectively take any "bankruptcy questions off the table." Merrill Lynch added that it expected the company to divest itself of another $2.3 billion worth of noncore and underperforming assets by yearend.

"We expect (Williams) is going back to its roots in 2003," Merrill Lynch said, referring to the company's start as an integrated natural gas pipeline and energy services company in the mid-1990s. Merrill Lynch said that its list of potential assets that could be placed on the selling block include some of Williams's refineries, its Canadian midstream assets, and its Central Pipeline Corp.

Paramount-Summit deal

Summit holds 115.6 bcf of proved and 34.7 bcf of probable gas reserves and 10.5 million bbl of proved and 3.7 million bbl of probable oil and natural gas liquids reserves. It also holds more than 376,500 net acres of undeveloped land throughout Alberta, British Columbia, Saskatchewan, Montana, and North Dakota.

Summit produced 52.3 MMcfd of gas and 4,812 b/d of oil and condensate in the first quarter of 2002.

Paramount said the two companies' holdings are highly complementary and that it expects minimal employment losses to occur as a result of the transaction.

Agip-Galp purchase

The deal includes 186 stations with a total throughput of 620 million l./year. Also purchased by the two companies was a storage site on the Mediterranean Spanish coast with 100 million l. of capacity. The agreement is subject to approval by the Italian Competition Authority.

Based on the sale agreement signed by the firms, AgipPetroli will sell to TotalFinaElf 195 of its Italian retail stations with a total throughput of 270 million l./year. Galp, meanwhile, will sell to TotalFinaElf 111 of its retail stations in Portugal with a total throughput of 260 million l./year.

"The initiative is in line with AgipPetroli's target to develop its presence in the Spanish market and in particular in the eastern Mediterranean area in order to reach a market share of more than 5%," parent ENI said. "For Galp, the strengthening of its market share in Spain is part of its development strategy in the Iberian Peninsula," it added.

Enterprise acquisition

The facilities being acquired by Enterprise lie near its existing Toca natural gas processing plant in St. Bernard Parish, La.

The gas processing plant, which has a capacity of 160 MMcfd, processes gas delivered by Southern Natural Gas Co. and serves gas producers from the continental shelf and deepwater Gulf of Mexico.

The fractionator can separate 14,200 b/d of mixed NGLs into pro- pane, normal butane, isobutane, and natural gasoline.

Also included in the purchase are assets that support the complex, including storage and truck, rail, and barge loading facilities.

The deal, which is expected to close Sept. 24, is subject to a preferential purchase right by the owners of the Yscloskey, La., natural gas processing plant, in which Enterprise holds 28.2% interest. If any of the plant owners exercise their right to acquire interest in the Toco-Western facilities, Enterprise explained, it would reduce the ownership interest being acquired by Enterprise.

Magnum sells assets

"Predominately all" of the properties being sold by Magnum were acquired by the company through its merger with Prize Energy Corp., officials said. Proved reserves of those properties are 51% oil and 49% natural gas.

Magnum Hunter entered into a "mutually binding commitment" to sell those properties to the limited partnership, its second with GE Capital "over the last several years," said officials. The transaction is expected to close by the end of this month, pending legal documentation and environmental due diligence, with an effective sales date of Aug. 1.

Final sale price may be adjusted based upon the value of commodity price hedges completed at the time of closing.

GE Capital will have 95% initial ownership in the limited partnership, with Magnum Hunter holding the remaining 5%. But upon the partnership's payout, expected within 10 years based on a certain pretax rate of return, Magnum Hunter's position as general partner will increase to 37.63%, officials said.

"Given the relative strength of the forward commodity price curves to historical prices, we believe the timing of this divestiture of noncore assets takes advantage of the favorable current market conditions," said Gary C. Evans, chairman, president, and CEO of Magnum Hunter.

"There is a real disconnect in the market today with respect to the value of hard assets in the private energy sector vs. public evaluations," he said. "The net proceeds to be received at closing will go to further reduce Magnum Hunter's existing commercial bank indebtedness as we seek to achieve our goal of a 50% debt-to-equity ratio."

Gruy Petroleum Management Co., a wholly owned subsidiary of Magnum Hunter, operates two thirds of the properties, on a value basis, officials said.

Late last year Magnum Hunter and Prize Energy announced plans to merge into a $1.2 billion independent oil and gas company during the first quarter of this year (OGJ Online, Dec. 18, 2001). Company officials said at that time the proposed merger would result in cost savings of $8-10 million/year.

Under the merger agreement that gave Magnum Hunter shareholders 51% of the combined company, Prize shareholders were to get $24/share payable in 2.5 shares of Magnum Hunter common for each share of Prize Energy, plus a cash component based on a sliding scale, with a minimum of 25¢/share.