Buffett to finish LV pipeline expansion

Malcolm Hall

Friday, March 8, 2002 | 10:42 a.m.

Williams Cos. is selling its Kern River natural gas pipeline -- which runs through Las Vegas -- to a company owned by financier Warren Buffett for $960 million to reduce debt and increase cash flow to keep its investment grade credit rating, avoiding "Enronitis."

Williams will receive $450 million in cash and Des Moines, Iowa-based MidAmerican Energy Holdings Co. will assume $510 million in debt. The sale to MidAmerican, a subsidiary of Buffett's Berkshire Hathaway Inc., is expected to close by March 31.

"We are taking this step to strengthen our balance sheet to meet the more conservative requirements of the rating agencies," said Steve Malcolm, president and chief executive officer of Tulsa, Okla.-based Williams.

Built in 1992, the 926-mile Kern River pipeline extends from Opal, Wyo., to the San Joaquin Valley near Bakersfield, Calif., and runs beneath the Summerlin area of Las Vegas. MidAmerica will continue with previously announced expansion plans to more than double the capacity of the 835 million cubic feet per day pipeline.

The expansion, a twin pipeline or "loop," would run parallel to the existing pipeline except through two sensitive areas: the Wasatch Mountains near Salt Lake City and underneath the 20-mile Las Vegas leg. In Las Vegas, the pipeline would remain a single line from Centennial Boulevard past Hualapai Way. The extra capacity would be compressed to pass through these single-pipe areas in Nevada and Utah.

Thursday's announcement came the same day Williams reported a loss for 2001 of $477 million, or 95 cents per share, after taking a pre-tax charge of more than $2 billion related to its floundering former communications division, Williams Communications Group, which last month said it might have to declare bankruptcy.

Malcolm told the Las Vegas Sun Thursday his company has been pursuing a plan to strengthen its balance sheet since credit markets tightened up after Enron's fall in December and that other asset sales continue.

"Kern River is profitable. It's a money maker," he said, "But ... we had to take decisive steps to strengthen the balance sheet given this new environment in which we operate with the Enron meltdown and the communications meltdown effects on the Williams Communications Group."

Williams spun off 95 percent of Williams Communications to shareholders in April 2000 but the company's stock has been battered in recent weeks and the communications group has been hit with numerous class action suits filed on behalf of shareholders. William stock closed Thursday at $22.10 after trading as high as $46.44 almost one year ago to the day.

Jim Gipson, vice president of communications for Williams, said the company has been investment grade since 1997 but that after Enron collapsed in December, the major credit rating agencies told companies in the energy trading business to reduce debt.

"What we did was a very direct and decisive step to get in front of the Enronitis controversy and it lets us continue to take care of our business, which is the second largest pipeline company behind El Paso," he said. "We simply needed the liquidity and appropriate debt to capital ratios to give us the financial flexibility to develop the substantial amount of energy infrastructure the country needs to meet demand."

Gipson said Berkshire Hathaway will complete the pipeline expansion and will keep all Kern River employees, including 12 who work in the Las Vegas District office, which oversees daily operations of the pipeline in Nevada and California. Most of the Kern River staff works out of Williams' Northwest Pipeline company headquarters in Salt Lake City.

"They don't have any other pipelines and they need our skill sets," Gipson said. "Las Vegas will see the planned expansion continue and will be assured of long-term, abundant access to Rocky Mountain natural gas supplies and, as importantly, a competing source for natural gas transmission into that market, which is one of the best markets in the world."

When completed in May 2003, Kern River will be capable of moving 1.7 billion cubic feet of natural gas per day to markets in Nevada and California. When converted to electricity, that is enough energy to power about 10 million homes. Williams said there is "tremendous" demand for natural gas to fuel new power plants in Nevada and California.

Larry Hartwick, district manager for the pipeline in Las Vegas, said the pipeline is important to Las Vegas and Southern Nevada because without it, new electrical generating plants would not be going up north of the city at Apex.

"We pay a big tax base in Clark County and are a major transporter to Southwest Gas (Corp.)," he said. "And obviously the existence of that pipeline makes it possible for these new generating plants to locate in the area and that brings jobs and more tax base. If we weren't here, they wouldn't have a fuel source and they wouldn't build those plants here."

While major energy supply companies have scaled back some power plant projects in recent months, those going forward at Apex include a 530-megawatt Mirant plant, Duke Energy's 1,200-megawatt plant and Pinnacle Energy West's 570-megawatt project. The Duke and Mirant plants are under construction.

After the sale, Williams will still own businesses that operate four interstate natural gas pipelines, an energy marketing and trading business, natural gas and petroleum exploration and production, 15,000 megawatts of electric generation, natural gas liquids pipelines, petroleum pipelines and terminals, gasoline refineries in Alaska and Tennessee, ethanol production and international investments mostly in South America and Europe.