PG&E Begins Layoffs, Warns of Gas Shortage
After halting its fourth quarter dividend and requesting emergency help from the state for gas purchases last week, Pacific Gas & Electric Co. revealed that it also will lay off 325 employees immediately and another 675 over the next several months to save $180 million.
The company reported an "impending natural gas shortage emergency" in a filing to the Securities and Exchange Commission last week. PG&E's deteriorating credit situation is causing many of its gas suppliers to decline to sell it any more gas, even under existing gas contracts, in the absence of accelerated payments. Its credit ratings have been downgraded to near-junk status by Moody's Investors Service and Standard & Poor's. Fitch credit rating agency pushed the ratings to junk status.
PG&E told the SEC that some suppliers have made demands that it provide prepayment, cash on delivery, or other forms of payment assurance, which the utility is unable to meet. Other suppliers have refused to sell it gas for future periods beginning as early as last Friday.
"Most" of the company's 30 to 40 interstate gas suppliers are refusing to sell to the giant utility beyond existing contract terms, some of which expire within a few weeks, according to a PG&E utility spokesperson.
'We've got about 15 to 20 gas suppliers who have said they won't sell to us beyond what their current contractual arrangements are," said Jon Tremayne, the PG&E utility spokesperson in San Francisco. "Many of them go until the end of the month, others go through February and beyond. The supplies include virtually our entire supply of long-term contracts.
"And obviously if we are in the position where we can't buy gas for our customers, we do have storage, but that is somewhat limited in how long we would be able to do that, and it also depends on the temperatures and the weather we have. A cold snap could push our load from 1.2 Bcf/d to closer to 2 Bcf/d."
If PG&E can't buy any gas to serve core customers, it first would have to rely on gas in storage, which already is extremely low, and then would have to divert gas from large commercial and industrial customers (non-core customers), including electric generators, for delivery to core customers. If a significant number of gas suppliers terminate their contracts, the utility would exhaust all storage gas by the second week of February and there would be sustained curtailments of major portions of the utility's gas system, the company told the SEC.
PG&E continues to negotiate with the suppliers in hopes they will change their attitude, along with seeking remedies through various regulatory and court venues.
Texas-based Reliant Energy and Dynegy are among the suppliers refusing to extend existing contracts, Tremayne said. The Southern Company is another one, although it has publicly said that it continues to sell into the California market, without specifying the customers.
"It is some of the same companies that on the electric side have created the financial crisis by gouging (in the wholesale power market)," Tremayne said.
As long as Pacific Gas & Electric and Southern California Edison in the southern half of the state are forced to sell power at frozen retail rates that are four or five times lower than the wholesale cost of the electricity, the utilities cash flow will continue to erode, and the suppliers will remain reluctant to extend their gas supply contracts with the utilities.
Rate coverage to cover the cash flow drain is the only action in the short-term that will resolve the heightening problem, Tremayne said.
"Our borrowing capacity has been exhausted and our available cash is rapidly being depleted," Gordon Smith, president of the utility company said last week in a letter to employees. "Although we are hopeful that the ongoing discussions in Washington and Sacramento will produce actions that will alleviate the situation, it is clear that as a company we simply cannot continue to purchase power on behalf of our customers at exorbitant prices that are not recovered through rates and simultaneously continue to operate the utility."
The strategy starting last fall has been to preserve cash to continue to operate the utility. Actions to date will result in $120 million in savings in the first six months of this year. The suspension of the dividend will save another $116 million, and the initial employee reduction will save another $180 million. The company also is reducing its budget by $40 million and is putting a freeze on merit increases for management.
Smith also told the utility's 18,800 employees that many customer services will be cut back, among them customer telephone centers, work to put electric cables underground, meter reading, and community and charitable contributions.
PG&E also said that it would postpone release of its financial results for the fourth quarter of 2000, as it awaits the outcome of ongoing state and federal efforts to resolve the crisis. Those efforts could result in measures that would significantly and adversely affect the company's financial results.
As of Dec. 31, PG&E said, is recorded under-collected power purchase costs of $6.6 billion, "more than 100% of its total stockholders' equity." Wholesale power prices in December spiked to over $400/MWh, 1000% higher than a year earlier.
As of Jan. 10, PG&E told the SEC it had cash reserves of $500 million, which is clearly inadequate to make its scheduled near-term payments. It has a payment due to the California Independent System Operator (ISO) on Feb. 1 for real-time energy purchases of $583 million, an estimated payment to the California Power Exchange (PX), due on Feb. 15 for day-ahead energy purchases of $431 million, and an estimated payment to the ISO for energy purchases in December due on March 2 of $1.2 billion.
In addition, the utility's monthly gas procurement disbursements are more than $200 million. The recent rate increase approved by the California Public Utilities Commission (CPUC) on Jan. 4 will raise $70 million in cash per month for three months. But even if all that cash were made available immediately, $210 million represents about one week's worth of net power purchases at current prices, the company said. "Thus, the rate increase does not raise enough cash for the utility to pay its ongoing procurement bills or make further borrowing possible. Either a further ratings downgrade to below investment grade or a default in the payment of certain obligations of $100 million or more would create an immediate default under certain utility and PG&E Corp. credit and other financial agreements, entitling financial creditors to accelerate repayment of loans," PG&E said.
The utility currently is unable to borrow more money and is foreclosed from the capital markets because of its financial condition. Absent immediate regulatory, legislative or judicial relief, PG&E will default on its payment obligations and faces the risk of being forced into bankruptcy.
Richard Nemec, Los Angeles; Rocco Canonica
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