After halting its fourth quarter dividend and requestingemergency help from the state for gas purchases last week, PacificGas & Electric Co. revealed that it also will lay off 325employees immediately and another 675 over the next several monthsto save $180 million.
The company reported an “impending natural gas shortageemergency” in a filing to the Securities and Exchange Commissionlast week. PG&E’s deteriorating credit situation is causingmany of its gas suppliers to decline to sell it any more gas, evenunder existing gas contracts, in the absence of acceleratedpayments. Its credit ratings have been downgraded to near-junkstatus 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 thatit provide prepayment, cash on delivery, or other forms of paymentassurance, which the utility is unable to meet. Other suppliershave refused to sell it gas for future periods beginning as earlyas last Friday.
“Most” of the company’s 30 to 40 interstate gas suppliers arerefusing to sell to the giant utility beyond existing contractterms, some of which expire within a few weeks, according to aPG&E utility spokesperson.
‘We’ve got about 15 to 20 gas suppliers who have said they won’tsell to us beyond what their current contractual arrangements are,”said Jon Tremayne, the PG&E utility spokesperson in SanFrancisco. “Many of them go until the end of the month, others gothrough February and beyond. The supplies include virtually ourentire supply of long-term contracts.
“And obviously if we are in the position where we can’t buy gasfor our customers, we do have storage, but that is somewhat limitedin how long we would be able to do that, and it also depends on thetemperatures and the weather we have. A cold snap could push ourload from 1.2 Bcf/d to closer to 2 Bcf/d.”
If PG&E can’t buy any gas to serve core customers, it firstwould have to rely on gas in storage, which already is extremelylow, and then would have to divert gas from large commercial andindustrial customers (non-core customers), including electricgenerators, for delivery to core customers. If a significant numberof gas suppliers terminate their contracts, the utility wouldexhaust all storage gas by the second week of February and therewould be sustained curtailments of major portions of the utility’sgas system, the company told the SEC.
PG&E continues to negotiate with the suppliers in hopes theywill change their attitude, along with seeking remedies throughvarious regulatory and court venues.
Texas-based Reliant Energy and Dynegy are among the suppliersrefusing to extend existing contracts, Tremayne said. The SouthernCompany is another one, although it has publicly said that itcontinues to sell into the California market, without specifyingthe customers.
“It is some of the same companies that on the electric side havecreated the financial crisis by gouging (in the wholesale powermarket),” Tremayne said.
As long as Pacific Gas & Electric and Southern CaliforniaEdison in the southern half of the state are forced to sell powerat frozen retail rates that are four or five times lower than thewholesale cost of the electricity, the utilities cash flow willcontinue to erode, and the suppliers will remain reluctant toextend their gas supply contracts with the utilities.
Rate coverage to cover the cash flow drain is the only action inthe short-term that will resolve the heightening problem, Tremaynesaid.
“Our borrowing capacity has been exhausted and our availablecash is rapidly being depleted,” Gordon Smith, president of theutility company said last week in a letter to employees. “Althoughwe are hopeful that the ongoing discussions in Washington andSacramento will produce actions that will alleviate the situation,it is clear that as a company we simply cannot continue to purchasepower on behalf of our customers at exorbitant prices that are notrecovered through rates and simultaneously continue to operate theutility.”
The strategy starting last fall has been to preserve cash tocontinue to operate the utility. Actions to date will result in$120 million in savings in the first six months of this year. Thesuspension of the dividend will save another $116 million, and theinitial employee reduction will save another $180 million. Thecompany also is reducing its budget by $40 million and is putting afreeze on merit increases for management.
Smith also told the utility’s 18,800 employees that manycustomer services will be cut back, among them customer telephonecenters, work to put electric cables underground, meter reading,and community and charitable contributions.
PG&E also said that it would postpone release of itsfinancial results for the fourth quarter of 2000, as it awaits theoutcome of ongoing state and federal efforts to resolve the crisis.Those efforts could result in measures that would significantly andadversely affect the company’s financial results.
As of Dec. 31, PG&E said, is recorded under-collected powerpurchase costs of $6.6 billion, “more than 100% of its totalstockholders’ equity.” Wholesale power prices in December spiked toover $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 schedulednear-term payments. It has a payment due to the CaliforniaIndependent System Operator (ISO) on Feb. 1 for real-time energypurchases of $583 million, an estimated payment to the CaliforniaPower Exchange (PX), due on Feb. 15 for day-ahead energy purchasesof $431 million, and an estimated payment to the ISO for energypurchases in December due on March 2 of $1.2 billion.
In addition, the utility’s monthly gas procurement disbursementsare more than $200 million. The recent rate increase approved bythe California Public Utilities Commission (CPUC) on Jan. 4 willraise $70 million in cash per month for three months. But even ifall that cash were made available immediately, $210 millionrepresents about one week’s worth of net power purchases at currentprices, the company said. “Thus, the rate increase does not raiseenough cash for the utility to pay its ongoing procurement bills ormake further borrowing possible. Either a further ratings downgradeto below investment grade or a default in the payment of certainobligations of $100 million or more would create an immediatedefault under certain utility and PG&E Corp. credit and otherfinancial agreements, entitling financial creditors to acceleraterepayment of loans,” PG&E said.
The utility currently is unable to borrow more money and isforeclosed from the capital markets because of its financialcondition. Absent immediate regulatory, legislative or judicialrelief, PG&E will default on its payment obligations and facesthe risk of being forced into bankruptcy.
Richard Nemec, Los Angeles; Rocco Canonica
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