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FYI
-----Original Message----- From: firstcall.notes@tfn.com@ENRON [mailto:IMCEANOTES-firstcall+2Enotes+40tfn+2Ecom+40ENRON@ENRON.com] Sent: Monday, July 02, 2001 2:18 PM To: Koenig, Mark Subject: "BLAME CANADA" - Some Thoughts on the Cali... PART 1 FIRST CALL RESEARCH NETWORK 10:45am EST 02-Jul-01 Bear Stearns US (K. Winters,R./D. Franson,R. 212 27) REI "BLAME CANADA" - Some Thoughts on the Cali... PART 1 Robert K. Winters 212 272-6844 rwinters@bear.com 6/28/01 Robert D. Franson 212 272-6196 rfranson@bear.com Subject: Industry Overview Industry: Wholesale Energy BEAR, STEARNS & CO. INC. EQUITY RESEARCH "BLAME CANADA" - Some Thoughts on the California Energy Crisis, the FERC Settlement Negotiations and Wholesale Energy Companies ***"BLAME CANADA" - Curiously Absent in the California Debate ***MOVING BACK FROM THE PRECIPICE - Will the FERC Settlement Process Prevent Governor Davis from Leading the Industry (and the State of California) Over the Precipice? ***CONFUSING NUMBERS There are admittedly a lot of numbers floating out there with respect to the California Power Crisis. The administrative law judge (ADL) for the FERC, Curtis L. Wagner Jr., is currently knee-deep in these numbers and allegations as he attempts to reach a settlement between the various sides of this issue during a compact 15-day settlement period mandated by the FERC. The deadline for this settlement if July 9th - if no settlement is reached, the FERC has threatened to impose its own solution, which would most likely lead to a protracted legal battle that could play out over several years. California Dreaming $9 Billion - But Where Does the Number Come From? One thing does appear to be clear here - no one, including Judge Wagner, appears to have any idea where this $9 billion number, which Governor Davis and his compatriots keep quoting, comes from. According to the information we have obtained, the total amount of "Estimated Wholesale Revenues Above Competitive Market Baseline" (pre and post Oct 2000) for the generators over which the FERC has jurisdictional control is around $4.75 billion. However, as has already been pointed out many times, the FERC can only order refunds from Oct. of last year onward due to a Federal law which requires a filing for refunds to be made within 60 days of the purchases - the CA. ISO didn't begin appealing for refunds until Dec. of 2000. Therefore, looking at the Oct.-Feb. time period, the amount involved appears to be more like $2.61 billion for generators over which the FERC has jurisdictional control. For all generators, the numbers look more like $3.8 billion for the Oct.-Feb. time period and $6.8 billion for the entire period - May 2000 through Feb. 2001. It's worth noting that none of the generating companies know where any of these numbers from the CA. ISO come from and what the bases of any of these calculations are. For now these numbers appear to be just another data point in the negotiations, although they clearly do appear to undermine the California's position on the $ 9 billion refund its demanding. Judge Wagner has already appeared to put out one data point in the negotiations, stating at the outset that the California is owed refunds (of course, California hasn't paid its bills yet on this issue, so calling this a refund is a bit disingenuous) of perhaps a billion dollars or so (according to the Wall Street Journal). We believe that this represents one line of demarcation being set out by the judge early on to encourage both sides in this debate. Known reserves, or quoted reserves, taken by generators or wholesale energy companies involved total more than $1 billion, and of course that doesn't include everyone since there are a number of generators involved who aren't or haven't, disclosed any information. Reserved Amounts, Amounts Owed to Generators by CA. ISO, Alleged Overcharge Computed by CA. ISO - No Wonder Investors Having Been Steering Clear. Based on our conversations with investors over the past several weeks, it appears that many investors see good value in some of the wholesale energy companies and independent power producers at current levels, but the problem is the political uncertainty. Emerging Markets political psychology has now become a part of valuing these companies as it relates to the "third world" nature of the California power system. This is in line with what we began to warn investors about several weeks ago with respect to this crisis, but it also could represent an excellent buying opportunities in certain names. We continue to believe that somehow, someone (or something, in the case of the FERC) will eventually lead us back from the precipice from where Governor Davis has been taking this issue. Alongside a potential resolution of this case through the current settlement negotiations, strong second quarter earnings from these companies could also provide a catalyst. If we were to assume that the ultimate settlement figure were to be less than this "floated figure" by Judge Wagner at the outset of this settlement process, then on the face of it the generators would appear to be more than fully reserved on this issue. However, that assumes that a settlement can be reached in the allotted 15 days, that is not more than $1 billion, and also assumes that each companies established reserves, or lack of reserves, proves to be in line (this last area being the most doubtful). As an example, Enron (ENE - Attractive Rated) has, according to the company, booked reserves on this issue of $435 million while it claims to be owed $570 million by the CA. ISO. However, the alleged overcharge by Enron by the CA. ISO is only $39 million. Enron, it would appear from these numbers, could stand to make a windfall from these settlement negotiations. On the other hand, Reliant (REI - Not Rated) appears to have reserved just $39 million but claims to be owed $358 million by the CA. ISO. The CA. ISO, however, appears to be claiming that REI overcharged it by $750 million, although realistically the figure here we should focus on is $378 million based on the Oct, 2000 - Feb., 2001 time period. The problem is of course, no one knows how the CA. ISO's figures were calculated, let along Governor Davis has lifted his $9 billion figure from. Breaking Down the Numbers. In the enclosed excel file we have broken down information (where available) for the various wholesale energy companies and independent power producers with respect to alleged overcharge by the CA. ISO, the reported EBIT for these companies in fiscal year 2000, the amount that these companies have claimed is owed them by the CA. ISO and the approximate reserves each of these companies has taken with respect to this issue. In many cases, these are obviously not hard data points since they can't be readily located in filings by these companies with the SEC. Some of the figures come from various public statements made by the heads of these companies, or are lifted from articles where they were attributed to someone at these companies. . Attached File (Please Request File Separately in the Case of First Call Note). The Camouflaged Canadians. It has been interesting to read through articles regarding the California Power crisis, and even to watch "supposedly" well- researched documentaries that are expected to present a "balanced" thorough account of what has been and what continues to happen in California and throughout the Western United States. This is a complicated subject, a complicated chain of events which has led to this crisis, but it is still stunning at times to see major issues missed by the press, or ignored by the California Governor's office, in assessing this issue. More often than not, the hydroelectric system in the Pacific Northwest and the integral role it plays in supplying California power during the summer doesn't get adequate attention, nor does the hydro system of our neighbors up north. You want to know who has made the most money yet off the California Power Crisis - look north. For obvious political and legal reasons, Governor Davis in California has pointed the finger solely and continually at Houston, Texas. However, perhaps Governor Davis and/or the rest of California should perhaps focus some attention on Canada if they want to determine who gained the most from this crisis. Through the first three-quarters of 2000, BC Hydro's net income increased by close to $860 million on a y/y basis. According to info we have seen related to the California ISO calculations regarding potential overcharges, that appears to be the single largest amount of money made from the California Energy Crisis (we have assumed for now in this statement that California would deem all of the increase in profit on a y/y basis to be illegally gained, which is admittedly an overstatement, but then again these figures for BC Hydro don't include fourth quarter results for 2000 whereas the Ca. ISO comparison figures do). Fourth quarter results for BC Hydro are not expected to be reported until somewhere on July 9-11, but we would expect the fourth quarter to be a "whopping number". The attached excel sheet provides more data, but the quarterly net incomes for BC Hydro and % y/y increases were as follows; 1Q00 - $306 million, up 147% y/y; 2Q00 - $658 million, up 306% y/y; 3Q00 - $362 million, up 100% y/y; 4Q00 - ?. According to the information we have been able to find, it looks as if BC Hydro announced two rebates to their Canadian customers during 2000 which look to total around $1.5 Billion. Canadians don't vote in California's 2002 Gubernatorial race, nor will they be allowed to vote in the 2004 Presidential Election in this country. And although we're not lawyers, it seems that is would be more than a little difficult for Governor Davis to sue Canadians and their ratepayers for a return of these rebates. Perhaps we quibble, but it would appear to be selective prosecution on the part of the California politicians. But then again, perhaps California's attorney general has a "jail partner" in mind as well for the head of BC Hydro. Bear Stearns may be a market maker or be associated with a specialist that makes a market in the common stock or options of the issuer(s) in this report, and Bear Stearns or such specialist may have a position (long or short) and may be on the opposite side of public orders in such common stock or options. Bear Stearns may be a market maker or may be associated with a specialist that makes a market in the common stock or options of the issuer(s) in this report, and Bear Stearns or such specialist may have a position (long or short) and may First Call Corporation, a Thomson Financial company. 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