With bankruptcy and California’s continuing market machinations an everyday preoccupation, PG&E Corp. seemed to take in stride the nation’s slowing economy and the growing industry concerns centered on Enron Corp.’s apparent implosion. The company’s senior officials said in their third-quarter earnings conference call with financial analysts last week that they see a dampening of demand, increased debt costs for nonutility operations and less opportunities to make big increases in energy trading.

“We quantify (exposure to Enron) every day,” said Thomas Boren, executive vice president of PG&E’s National Energy Group. “We have very strict credit policies and requirements for all of our trading counter-parties. Enron continues to be very responsive and compliant with all of our policies.

“We have traded with them for many years, and frankly we expect to be trading with them for many years to come. We have not given out a specific number as to our exposure to Enron because we don’t do that regarding any counter-party. In light of our policies, we think our exposure is manageable,” said Boren, noting that it is holding a “receivable” as part of its exposure to Enron.

“As you go through our books, you mark our Enron exposure as ‘booked-to-market’ and then you calculate based on the market. Depending on what happens in the market will determine whether or not it (our exposure) is a ‘receivable’. Enron would remain current with us in terms of daily and monthly receivables, so we look at that as exposure to them.”

In response to many questions about its nonutility operations and how the utility bankruptcy is affecting them, PG&E CFO Peter Darbee said “longer term, we’re not prepared at this point to give multi-year guidance on the NEG. We’re required to do so for the utility because of our proposed reorganization plan (in bankruptcy court).” There will be some growth next year in the power plant development, trading and interstate natural gas pipeline businesses, but their collective portion of PG&E Corp.’s overall earnings will not increase from its current level of between 20% to 25%, Darbee said.

“What we have here is a very dynamic market that NEG has to deal with, and we are going to adjust course according to market conditions.”

Besides the utility’s upcoming activities in bankruptcy court through the end of the year, Pacific Gas and Electric Co. is awaiting a lot of regulatory processing to ferret out the state power-buying agency, Department of Water Resources (DWR), revenue requirements, which were revised in a filing to the California Public Utilities Commission late Nov. 5. It also has pending cases on the allocation of the DWR revenue needs between the southern and northern parts of the state, and PG&E’s filed-rate doctrine lawsuit in federal district court is awaiting some internal court administration trying to determine if some other cases should be combined with PG&E’s suit.

However, PG&E’s counterpart private sector utility among the electrics, Southern California Edison Co. dropped its suit as part of its settlement with the CPUC. When asked for the financial analysts if PG&E is interested in pursuing a similar court settlement along the lines of Edison’s, PG&E CEO Robert Glynn said there was no interest in doing this.”We’re not in any discussions, nor seeking any, for an Edison-type deal with the CPUC,” he said.

The biggest surprise in PG&E’s earnings report was an extra $500 million in third quarter net income generated as a result of the accounting distinction between operating and nonoperating income, the latter being aside from the normal business operations. As a result, PG&E’s current cash levels have shot up to $4.3 billion, despite the fact that its largest subsidiary, the Pacific Gas and Electric Co. utility, is mired in Chapter 11 bankruptcy proceedings in a federal court in San Francisco.

The simple explanation is a unique summertime earnings bonanza caused by a 3-cent/kw rate increase and much lower-than-expected cost for its utility generated power supplies. It is much more complex understanding the accounting reasons for relatively PG&E’s quiet announcement that “total net income” for the third quarter was $771 million, or $2.12/diluted share, compared with $225 million, or 62 cents/diluted share for the same quarter in 2000, given the company’s terse reference to the $515 million increase over net income from “operations” as attributable to the “difference between generation revenues and generation costs” at the utility in the third quarter.

Darbee said in 2002 “there is a question about how to treat headroom (the difference between utility generation revenues and costs) going forward; that is whether it is ‘operating’ or ‘nonoperating’ income. We recognize there are good arguments that can be made either way, particularly when you consider the loss of Diablo Canyon (nuclear generating plant) pricing next year and its replacement with (the state regulatory commission-approved) utility-retained generation decision.”

(Although the California Public Utilities Commission so far has not indicated agreement, PG&E’s utility has argued that its hydro-electric retail pricing should be based on current market value of the system–not cost-based estimates, and that Diablo Canyon profits should be split 50-50 between utility ratepayers and shareholders.)

Darbee also indicated that it is currently unknown which way and when the CPUC will finally act on the pending issue of what can be charged for utility retained generation. “The outcome is likely to be contested, but it is our belief that the current rates will stay in place through our proposed reorganization plan processing in the bankruptcy arena,” he said.

“Therefore, in 2002, we intend to treat headroom as a special category, and through a combination of operating income and headroom we intend to meet or beat our 8%-10% growth target for the year. Remember, that however it is reported, headroom is cash and helps to contribute in a material way to the rehabilitation of the utility’s financial condition.”

PG&E is looking at next year as a “transition year,” and therefore somewhat of an aberration in forecasting what the company might perform like post-bankruptcy. Its officials did not disclose specifics Monday, but said that as part of the bankruptcy proposed reorganization plan, there are estimates of performance in 2003, assuming the utility is broken up into a state-regulated distribution gas-electric utility and three separate federally regulated companies for electricity generation, power transmission, and natural gas pipeline transmission/underground storage.

The 2003 projections in the reorganization plan disclosure statement in federal bankruptcy court does not include the current National Energy Group trading, power plant development/operation and interstate natural gas pipeline operations, all of which showed increased profits for the third quarter this year, compared to the same quarter in 2000. Darbee said that PG&E has been able to “largely neutralize” any adverse effects on the NEG from the utility bankruptcy.

Nevertheless, the nonutility operations have had the do the following because of credit woes at the holding company and utility: (1) pay higher interest costs for a $1 billion debt issue and other financing; (2) lose some trading/tolling opportunities because of the holding company, PG&E Corp., losing its investment-grade credit rating; and (3) an inability to do as much “long-term hedging as it would have done under normal circumstances,” Darbee said.

The bankruptcy, economic downturn and reduced electricity demand, particularly in the industrial sector, have all clouded the forecasts for NEG in 2002 and beyond, and it is not planning at this point in taking on new development projects, but will concentrate on all of the ones it currently has in play.

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