With a nine-year, locked-in rate of return of 11.22% and 52% equity, with $3.5 billion of free cash flow in the next three to five years and an imbedded average debt cost of 4.8%, Pacific Gas and Electric Co. appeared to be the obvious “star” Thursday on a panel of six fallen energy giants discussing the financial challenges of “Rising from the Ashes.”

The group discussion took place at Goldman Sachs’ Power and Utilities Conference in Las Vegas. Ironically, the PG&E utility was one of only two of the represented companies which had gone into voluntary Chapter 11 bankruptcy. It emerged from bankruptcy only a month ago.

What this translates into is lower risks and better state regulatory relations going forward for the San Francisco-based utility, its chief financial officer, Peter Darbee, said.

With a major settlement with the California Public Utilities Commission that runs for nine years and gives the federal bankruptcy court intervention powers if the agreement is breached, PG&E’s utility looked at a more assured future than what was described by the executives from Reliant, Dynegy, CMS Energy and Calpine Corp, all of which are heavily leveraged although taking steps to reduce debt and sell off non-strategic assets.

The Goldman Sachs analyst moderating the panel called PG&E a “different company, a healthy company from a cash flow perspective and a predictable company from return-on-equity perspective.” He asked rhetorically if there was a “next step up” or expansion for the holding company and utility, which now have severed any ties with past merchant energy businesses?

Noting that the influence of the San Francisco federal bankruptcy court will “diminish over time,” unless there is a “very significant violation” of the court-approved reorganization settlement, CFO Darbee said there are “many detailed provisions of the settlement protecting the company going forward,” such as the locked-in returns and equity ratios until the company reaches higher investment-grade ratings (A- or A3). After that, the utility would return to more traditional rate-based, cost-of-service regulation.

He said he doesn’t anticipate any problems with the settlement moving ahead because the CPUC under the leadership of a former energy utility executive, Michael Peevey, is going “in a very positive direction.” Darbee said Peevey’s role has been “outstanding” in dealing with a “very difficult situation, combining both a business and regulatory/political background, bringing very constructive leadership to the commission. Our relationship with the commission is improving, and we want to it to continue to improve.”

Darbee said the chance of more growth in the PG&E stock is “good,” because it is still trading at a discount to the utility group as a whole. “There are a lot reasons to suggest that the stock should trade at a premium to the group as a whole — one, unlike any other company that I am aware, we have locked in a minimum ROE of 11.22%, and we have the opportunity to move up from that; second, we have a 52% equity guarantee; and third, the cash flow from the company is truly extraordinary as we go forward.”

If the state legislature passes a refinancing, “securitization” measure for PG&E’s utility to save about $1 billion in its post-bankruptcy debt structure, even more free cash flow will be generated beyond the $3.5 billion level now envisioned, Darbee said.

In contrast, Calpine Corp.’s CFO Robert Kelly talked about how the national power plant developer/operator hopes to squeeze $200-$300 million of cash flow out annually in the next few years as it struggles to whittle down what is now roughly $19 billion in debt it carries on its books. With a rough ratio of 75% fixed-rate debt and the rest floating, the impending rise in interest rates has Kelly and some of the other executives nervous about added pressures to their over-leveraged positions.

Michigan-based CMS Energy’s President/COO David Joos said his restructured, retrenching global energy company has not generated a lot of free cash flow. “Obviously a lot of recent restructuring is about selling assets and moving our portfolio back into a more stable, predictable portfolio. We have been successful in paying down a lot of debt, but we still are over-leveraged compared to a lot of other companies.”

For San Jose, CA-based Calpine, CFO Kelly said the real major question facing his firm is “how you right-size the balance sheet and when do we get there?” He characterized the company as being in the “final stages of build-out, hitting around 30,000 MW of power plants spread through the nation by 2006, and it should be a company that can produce annual gross income (before interest, taxes, depreciation, etc.) in the $2 to $3 billion range.

Gross earnings should become less volatile, Kelly said, as “trading goes away and load-serving entities lean more and more to long-term contracts.” In this scenario, he said, “you can live with more debt.” Eventually, Kelly indicated Calpine needs to get debt perhaps down in the $15 to $17 billion range and do it by 2007, which is when the next big financings become due.

In response to a question from the moderator, Kelly said he didn’t think that Calpine ever considered the PG&E route of Chapter 11 bankruptcy 18 months ago when it was struggling more than it is now, but near the end of the discussion after hearing Darbee, Kelly quipped that maybe he should consider Chapter 11 if his firm can get cash flows like the utility has generated.

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