PG&E Corp. CEO Robert Glynn told financial analysts Wednesday that he sees “much more certainty” for his company now than there was a year earlier. He envisions 2002 as a year in which PG&E’s major utility subsidiary clears bankruptcy, some assets are sold and the regulatory climate stabilizes even if market volatility does not.

Speaking at the Morgan Stanley Global Electricity and Energy Conference, Glynn noted that there still are major unknowns this year and the company is conservatively forecasting about the same level of earnings overall. He said the ongoing Chapter 11 bankruptcy proceedings of Pacific Gas and Electric Co. are not being used as a long-planned attempt by the holding company to “flee state regulation” as it is being accused of doing by California Public Utilities Commission, which is promoting an alternative reorganization plan in the federal bankruptcy court.

“Disaggregation” of the utility — breaking off its electric generation/transmission and natural gas pipeline transmission/storage assets into three wholesale, nonutility companies — is not “the starting point for our plans, it is the result,” said Glynn. The starting point was three-pronged: (1) a need to pay off all valid creditor claims; (2) regain investment-grade financial ratings; and (3) avoid having to increase utility customers’ retail rates, he said. Only the utility’s plan will do that, he reiterated.

“Our plan has continued to move forward and gather momentum” and is expected to be approved by the bankruptcy court by the end of this year, said Glynn, despite the fact that the court earlier this year refused to agree with the utility that federal law automatically preempted any state laws counter to the proposed bankruptcy reorganization plan.

In addition to moving all of the nondistribution utility assets to three separate new wholesale companies under the PG&E Corp. structure, Glynn said the plan anticipates some $250 million in asset sales as part of proceeds — along with substantial refinancing — used to pay off creditors.

In the meantime, the company’s utility will be involved in court-directed mediation sessions this month, with the CPUC and creditors’ committee, but Glynn said he is not optimistic that any settlements can be reached because the “same people will be talking about the same issues.” Nevertheless, he said the company is approaching the talks in “good faith.”

Despite the heavy focus and time commitments to the utility bankruptcy proceedings, Glynn said the vast bulk of the 20,000 employees are focused on operating the company’s businesses and they have been operating them quite well with 19% increases in overall and utility net income for last year, compared to 2000. “The results are very solid and have out-performed the forecasts by a wide margin,” Glynn said.

The PG&E National Energy Group (NEG), its power plant building/operations, interstate natural gas pipelines, and energy trading units, has regained its investment grade ratings (for the group overall, the pipelines and the trading unit) after being severely limited last year because of the spill over from the utility bankruptcy. All of its power plants now under construction will be continued on schedule, Glynn said, but others will be delayed.

About 7,700 MW will come on line in the next two years, joining an existing 7,100 MW in operation to give PG&E’s nonutility power plant operations about 15,000 MW in service by the end of 2003. However, without the credit squeeze and the downturn in energy prices, Glynn said PG&E would have been looking to have about 25,000 MW a few years from now.

In response to a question about the future “regulatory environment” from an analyst in attendance, Glynn said there is going to be more comprehensive federal-level wholesale regulation, and increased emphasis on “regional energy flows.” Given that California is “extremely dependent” on surrounding states, Glynn sees more “federalizing” in the regulatory process, particularly given the U.S. Supreme Court decision last week.

PG&E Reports 19% Earnings Increase

PG&E Corp. last Tuesday reported a 19% increase in earnings from operations last year, compared to 2000, including a 19% increase for the utility over 2000 results ($2.51/share, or $914 million). PG&E’s National Energy Group (NEG), its nonutility operations, increased its contribution to earnings from operations by 27% (57 cents/share, or $209 million), compared to the previous year, but that is not expected to continue this year due to currently depressed energy prices.

Company officials on a conference call indicated that fourth quarter results provide a harbinger for this year’s earnings, with the utility providing a bigger share and the nonutility NEG providing a smaller contribution to profits due to depressed energy prices and corresponding deferral of some of its proposed new power plant projects. In the fourth quarter, utility earnings were 94 cents/share, compared to 31 cents/share in 2000. NEG results were 2 cents/share for the fourth quarter, compared to 8 cents/share in 2000. Overall, the company is forecasting earning in the same $3/share range for this year as was realized in 2001.

Total net income reported for 2001 was $1.1 billion, or $3.02/share. That compared to a reported total net loss of $3.36 billion, or a negative ($9.29)/share, in 2000. (The negative 2000 results were the result of accounting rules that required PG&E “to record a more than $4.1 billion charge for wholesale power costs and transition costs that it could no longer consider ‘probable’ of recovery in light of multiple adverse regulatory decisions by the California Public Utilities Commission.”)

The utility Chapter 11 bankruptcy did not adversely affect earnings, and, in fact, “financial results for the full year 2002 show that the company’s fundamental operations performed solidly last year,” said Glynn, adding that the results would be “solid in any year, but 2001 wasn’t just ‘any year,’ given the volatility of the markets, the utility bankruptcy filing and the Enron demise at year-end.”

While noting that capital expenditures will likely decrease by $1 billion annually this year and next and earnings are expected to remain down for the year, Tom Boren, the head of PG&E’s nonutility NEG businesses, said the company is assuming spark spreads will widen as the year progresses and energy prices move upward in reaction to what he calls the 60,000 to 100,000 MW of new generation capacity that was cancelled over the past six to eight months.

Among the NEG results, the natural gas operations provided 21 cents/share of the year-long 57 cents/share contribution, Boren indicated. He noted that about $200 million of the $1.5 billion planned for capital budgets in 2002 will be spent on the Pacific Northwest interstate natural gas pipeline expansions and the currently under-construction U.S. portion of the North Baja Pipeline being built on a joint venture basis with affiliates of San Diego-based Sempra Energy ($160 million will pay for the North Baja and Pacific Northwest pipeline work; $40 million for maintenance).

NEG has 7,099 MW of generating capacity it owns or controls nationally, with a large contingent in northeastern part of the country; it has 7,743 MW under construction, said Boren, noting that 2,640 MW are expected to begin operations this year, and by year-end PG&E will have about 9,800 MW it either operates or controls.

In the energy trading area, PG&E saw its gross margin for the year drop to $176 million from $205 million in 2000, with an overall mark-to-market loss of ($120 million).

In other news last week, Pacific Gas and Electric Co. asked the bankruptcy court for approval to pay up to $22.4 million to three groups of small claim holders. The request will be considered at a hearing March 25, and if approved, the payments will be completed by July 31. As part of 13,000 proofs of claims filed in its bankruptcy case, the PG&E Corp. utility has received more than 4,000 that are claims of $5,000 or less, totaling about $6.7 million cumulatively, according to the utility’s estimates.

There are also 50 mechanics’ lien claims, totaling $10.2 million, and 50 reclamation claims totaling another $5.5 million, PG&E said. “These claims are for the value of goods delivered to the utility immediately prior to or shortly after the April 6, 2001 bankruptcy filing,” the utility said. “By paying these claims, PG&E (will reduce) its ongoing liability for post-petition interest related to these claims.”

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