|
|
Enron Mail |
Today's IssueAlert Sponsors:
[IMAGE] The CIS Conferencec provides utility management personnel unequaled insight and current information on Customer Relationship Management (CRM), E-Commerce, Technologies and Marketing. Fifty-four sessions conducted by utility industry representatives will focus on issues facing the industry. Over 100 companies will exhibit the latest technologies and services. Former President George Bush is our Honored Keynote Speaker www.cisconference.org Miss last week? Catch up on the latest deregulation, competition and restructuring developments in the energy industry with SCIENTECH's IssuesWatch [IMAGE] The most comprehensive, up-to-date map of the North American Power System by RDI/FT Energy is now available from SCIENTECH. The Wall Map measures 42" x 72"; the Executive Map Set consists of 18 11" x 17" maps. Visit our website at www.ConsultRCI.com for a detailed description of these valuable maps and complete ordering instructions. [IMAGE] [IMAGE] April 9, 2001 Pacific Gas & Electric Co. Declares Bankruptcy by Will McNamara Director, Electric Industry Analysis Pacific Gas & Electric Co. (NYSE: PCG), the utility unit of PGOCorp., on Friday filed for reorganization under Chapter 11 Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of California in San Francisco. The company said it is taking this action in light of its uncollected energy costs, which are now increasing by more than $300 million per month; continuing CPUC decisions that economically disadvantage the company; and the now unmistakable fact that negotiations with Gov. Gray Davis and his representatives are going nowhere. Pacific Gas & Electric Co. reportedly has more than $9 billion in uncollected costs for wholesale power purchases. Neither PGOCorp. nor any of its other subsidiaries, including its National Energy Group, have filed for Chapter 11 reorganization or are affected by the utility's filing. Analysis: Despite the fact that Pacific Gas & Electric Co.'s bankruptcy filing has been in the making for several months, and that its financial insolvency appeared inevitable, the actual filing for Chapter 11 protection on Friday caught many by surprise, including California's top officials. Ironically, the utility's 13 million customers may end up being the least impacted by the bankruptcy, as Pacific Gas & Electric Co. will remain in the business of providing power while it works its way through bankruptcy court. However, there is little doubt that the bankruptcy filing of California's largest utility will spark many reverberations throughout the state and across the country, the full impact of which is not presently known. There naturally is a great deal of industry press surrounding this major news, so I won't waste time regurgitating information that is being widely disseminated. Rather, I will focus on what I believe to be some of the key elements of this story. 1. The bankruptcy was announced the day after it became clear to PGOthat the state of California would not be purchasing its transmission assets at a price that PGObelieves the assets to be worth. In addition, a new rate increase approved by the governor could not be used to repay any of Pacific Gas & Electric Co.'s existing debts. The night before the bankruptcy filing, Gov. Davis delivered a televised address to the state in which he indicated that the rate increases would be contingent on PGOselling the transmission assets to the state. In other words, if PGOagreed to the state's price for the transmission assets, a portion of the rate increase would be used to alleviate the utility's subsequent debts. The inside word is that Pacific Gas & Electric Co. was finally driven to its bankruptcy decision due to disagreements with Gov. Davis regarding the price of the transmission assets, which could be anywhere from $3 billion to $9 billion. Officially, Pacific Gas & Electric Co. said that its negotiations with the state "were going nowhere." The CPUC had previously approved rate increases of up to 46 percent for the customers of SCE and Pacific Gas & Electric Co., but clearly stipulated that none of this added revenue could be used to pay off existing debt. In his statewide address on the eve of the bankruptcy, Gov. Davis reluctantly announced an additional rate increase for non-residential customers that would average about 26.5 percent. Davis had fiercely resisted any form of a rate increase to accommodate Pacific Gas & Electric Co.'s debt. The official PGOresponse to both increases was that they were insufficient to pay off existing debts of the utility operation. 2. PGOCorp. and other non-utility subsidiaries are not impacted by the bankruptcy measure (at least for now). Due to a shrewd financial restructuring that was approved by FERC a few months ago (see 1/12/01 Issue Alert for more information), high-profit subsidiaries such as National Energy Group and PGOGas Transmission Northwest Corp. were placed into a special-purpose, bankruptcy remote entity known as GTN Holdings LLC. Consequently, these non-regulated subsidiaries (along with the parent corporation) may not be impacted by the utility's bankruptcy filing. The U.S. federal bankruptcy judge ultimately may take a closer look at how profits were divided among the parent operation and other non-regulated subsidiaries, but for the time being only Pacific Gas & Electric Co. has declared bankruptcy. 3. Power suppliers still owed money by PGOcould likely never get paid. Much of Pacific Gas & Electric Co.'s $9 billion debt is owed to power suppliers that sold power to the utility over the last year or so. With the onset of lengthy legal proceedings, it becomes more unlikely that these power suppliers will be paid what they are owed any time soon. Consequently, power suppliers owed more than $100 million by Pacific Gas & Electric Co. also saw their stocks drop as a reaction to the bankruptcy announcement. According to a report in Reuters, Duke Energy (NYSE: DUK) was down $2.65 or 6.25 percent at $30.75; Dynegy Corp. (NYSE: DYN) was off $2.58 or 5.07 percent at $48.34; Williams Companies (NYSE: WMB) was $2.26 or 5.4 percent lower at $39.60; and Reliant Energy (NYSE: REI) lost $2.70 or 5.95 percent to $42.65. In addition, there is the real question of whether or not such power suppliers will be willing to provide power used by a bankrupt company (even if the state of California remains involved as the buying intermediary). For its part, PGOCorp. Chairman Bob Glynn said that the utility subsidiary intends to eventually "pay all our debt" in full but he did not report a specific figure. In addition to the power suppliers, banks that have provided loans to Pacific Gas & Electric Co. (such as Bank of America, Wells Fargo and J.P. Morgan Chase) could all be impacted by the bankruptcy. Pacific Gas & Electric Co.'s preliminary bankruptcy filing lists its top creditor as Bank of New York, to which it owes more than $2.2 billion. Although some payments may be made after years of litigation, such lenders and bondholders may be forced to write off billions of dollars that were previously advanced to Pacific Gas & Electric Co. as losses. 4. The blame game is in full force. Davis and state regulators have repeatedly blamed out-of-state generators for price gouging and federal regulators for failing to impose wholesale rate caps on electricity prices. Also, Gov. Davis has issued harsh words against PG&E. Over the weekend, Davis appeared on two nationally televised news programs to berate PGOfor awarding an estimated $50 million in bonuses and raises to about 6,000 midlevel managers and support staff on the eve of the utility's bankruptcy filing. "Management at PGOis just focused upon padding their own pockets, not in discharging their duty to serve their many customers in California," Davis reportedly said. Earlier, Davis had previously issued a statement saying PGO"management is suffering from two afflictions: denial and greed." In addition, California regulators have criticized FERC for not implementing wholesale price caps in the Western region, which they believe would help to stabilize the market in California. U.S. Sen. Dianne Feinstein said that, "it is inexcusable that FERC has refused to intervene and provide temporary stability and reliability [through the use of wholesale price caps]." Feinstein vowed to introduce legislation to force federally mandated price caps for the entire Western region. For its part, FERC refused to take responsibility for the California crisis, saying instead that Pacific Gas & Electric Co.'s bankruptcy filing was "the unfortunate result of a massive failure by policymakers at all levels." PGOblames decisions made by the CPUC and Gov. Davis that it believes "undermined" its ability to return to financial viability and recover its uncollected costs. Specifically, PGOblames the California government for not allowing it to recover prior wholesale power costs through recent rate increases, which essentially has kept the utility in a debt situation. PGOalso believed that the governor was not moving quickly enough to reach an agreement regarding the sale of PG&E's transmission system to the state. Consumer groups continue to lambaste the utility and its parent company, which they claim has $30 billion in available capital that could have been used to pull its subsidiary out of debt. 5. Could the bankruptcy filing of SCE be far behind? The second-largest utility in California continues to maintain that it intends to avoid bankruptcy and it believes it can work out a "comprehensive solution to our current crisis." However, because the two utilities have been so closely linked through the state's energy crisis, PG&E's decision to declare bankruptcy certainly raises the odds that SCE will eventually follow suit. In fact, Moody's Investors Service is reporting that Pacific Gas and Electric Co.'s bankruptcy increases the possibility of an SCE bankruptcy filing. Further, Moody's is reporting that numerous creditor groups, particularly the small generators, have become impatient with the time that it has taken to advance settlement discussions with the state of California, thereby increasing the prospects for an involuntary petition by a group of creditors. On April 6, the day of Pacific Gas & Electric Co.'s bankruptcy filing, shares of SCE tumbled $4.29, or nearly 34 percent, to finish trading at $8.35. Surprisingly, SCE shares jumped about $2.00 by mid-morning on April 9, to trade at about $10.00. The reason for the increase is not fully known, although SCE continues to remain involved in negotiations with Gov. Davis regarding its own outstanding debt. 6. This is just the start of a long, drawn out legal process. The electric utilities that previously declared bankruptcy (including El Paso Electric, Public Service Company of New Hampshire and El Paso Electric) all found themselves embroiled in legal proceedings for several years. Thus, although we may not know the ultimate outcome for Pacific Gas & Electric Co.'s bankruptcy proceedings, we do know that the company will be essentially consumed with litigation and a thorough investigation of its financial records for the foreseeable future. Federal Bankruptcy Judge Dennis Montali of San Francisco has been assigned the PGOcase. Montali will have the ultimate power to approve or reject any plan for how PGOreorganizes or arranges to repay its debt. Several positive elements of the process that might work to PG&E's advantage is that the utility will now be held accountable to only one individual, Judge Montali. Pacific Gas & Electric Co. will no longer have to appease several regulatory entities across state and federal lines. Second, by the time that the bankruptcy proceedings are completed, market dynamics hopefully will have improved and California's supply problem should be resolved. Consequently, Pacific Gas & Electric Co. could eventually rise again, like the phoenix out of its ashes, and emerge as a much stronger company than it is today. An archive list of previous IssueAlerts is available at www.ConsultRCI.com Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Nancy Spring via e-mail or calling (505)244-7613. Advertising opportunities are also available on our website. SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly on our site. If you no longer wish to receive this daily email, send a message to IssueAlert, and include the word "delete" in the subject line. SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2001. SCIENTECH, Inc. All rights reserved.
|