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
"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
"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
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