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Date: Wed, 7 Mar 2001 13:31:00 -0800 (PST)
From: mary.hain@enron.com
To: james.steffes@enron.com, richard.sanders@enron.com
Subject: PG&E Corp. Receives $1 Billion To Partially Pay Off Debts
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In case you haven't seen this.
---------------------- Forwarded by Mary Hain/HOU/ECT on 03/07/2001 09:38 PM
---------------------------
Enron Capital & Trade Resources Corp.
From: "SCIENTECH IssueAlert" <IssueAlert@scientech.com>
03/05/2001 05:01 AM
To:
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Subject: PG&E Corp. Receives $1 Billion To Partially Pay Off Debts
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IssueAlert for March 5, 2001
PGOCorp. Receives $1 Billion To Partially Pay Off Debts
by Will McNamara
Director, Electric Industry Analysis
PGOCorp., parent of nearly bankrupt utility PGOCo., announced that it has
closed a $1 billion loan agreement that will allow it to pay various debts
including its defaulted fourth quarter dividend to shareholders. The loans,
provided by GE Capital Structured Finance Group and Lehman Brothers, will be
secured by the company's equity interest in PGONational Energy Group LLC.
Analysis: Although this may seem like a positive step for the troubled
utility, PGOCo.'s partial payment pales in comparison to its outstanding
debt. Making matters even worse for the company is a new wave of lawsuits
seeking restitution in the amount of $3 billion.
The loans, which PGOCorp. was able to secure due to the strong performance of
its National Energy Group subsidiary, have enabled the corporation to "pay
its outstanding debt obligations on which it has defaulted or would default
in the near future." The obligations that have been paid include: $501
million in payments to commercial paper holders, $434 million in borrowings
under a revolving credit agreement, and $116 million owned to PGOCorporation
common shareholders for the defaulted 4Q 2000 dividend. The loan, which has a
term of two years, includes an option that, "depending on certain factors,"
would give the lenders between 2 and 3 percent of the shares in National
Energy Group. In addition, the loan agreement prohibits PGOfrom declaring or
paying future common stock dividends until the loans are repaid.
In an effort to conserve cash and stave off bankruptcy, on Jan. 10 PGOCorp.
halted payment of its fourth quarter dividend, which had been declared on
Oct. 18, 2000, and was due to be payable on Jan. 15. Soon after that, the
company announced that it would not be able to make certain payments on
commercial paper obligations.
Citing that the risk of bankruptcy played a factor in assuming the loan,
PGOCorp. CEO and President Robert Glynn said that the financing would be
repaid with PGOCorp. shareholder dollars only. In other words, Glynn
reassured customers of the utility that rates would not be increased as a
mechanism to repay this loan. However, PGOcontinues its negotiations with
Calif. Gov. Gray Davis to increase rates for at least a substantial part of
losses already accrued due to skyrocketing prices in the wholesale market.
Reportedly, as of Dec. 31, PGOhad racked up more than $6 billion in
undercollected costs.
In its 8K filing with the Securities and Exchange Commission, PGOCorp.
acknowledged that it would be damaged further if the California Public
Utilities Commission adopts current power payment proposals without an
electric rate increase. Meanwhile, a pending deal between PGOand Gov. Davis
is expected to include the sale of the utility's transmission assets to the
state of California, much like PG&E's counterpart Southern California Edison
(SCE) has already done.
The bottom line of the loans is that PGOis "removed from being in default on
its credit agreements," according to Greg Pruett, vice president of corporate
communications in an interview with CBS.MarketWatch.com. Pruett also said
that the loans amounted to "one less item of significance" that the holding
company has to attend to ensure it doesn't find itself "in a situation where
it could have creditors seeking to force it into bankruptcy."
However, as noted, just as PGOCorp. received this loan, the parent company
and the utility announced that they have been hit with two lawsuits seeking a
total of nearly $3 billion in restitution. PGOCorp. and PGOCo., on the basis
of the newly secured loan, say that they can only make partial payments of $1
billion. Both lawsuits were filed with the Securities Exchange Commission on
Feb. 13. According to CBSMarketWatch.com, one lawsuit alleges that PGOCorp.
violated its fiduciary duties by repurchasing common share of its PGOCo. unit
at a price of $2.3 billion. The second lawsuit claims that PGOCorp. collected
nearly $2.96 billion from PGOCo. under a tax-sharing arrangement, but paid
only $2.29 billion to all governments under the arrangement. The plaintiff in
both suits is identified only as Richard D. Wilson, who seeks to enjoin any
more such buybacks unless "good cause" is shown, and also seeks restitution
of $2.3 billion, with interest, from PGOCorp. The parent company and utility
have discounted the validity of the lawsuits, although they said they were
unable to predict any outcome or how it might their financial conditions.
In its most recent filing with the SEC, PGOalso disclosed that the utility
unit owes $1.1 billion to the California Independent System Operator for
December energy purchases, and another $331 million to a group of
unidentified power generators for January deliveries. At that time, which was
only a few days before PGOCorp. secured the loans, the company said it could
only make partial payments of these debts on a pro rata basis. As a result,
PGOCorp said it could only pay the California ISO about $177 million, and
make payments of $51 million to the power suppliers. It appears that PGOCorp.
has not used any of the funds secured in its loans to make additional
payments to the California ISO or power suppliers.
As noted, PG&E's subsidiary National Energy Group played a prominent role in
its parent's loans. The loans will be secured by the company's equity
interest in National Energy Group, and the lenders could potentially gain a 2
or 3 percent interest in the subsidiary. National Energy Group is PGOCorp.'s
unregulated power producer that sells energy on the East Coast, primarily in
New England. PGOCorp. has previously claimed that its goal is for National
Energy Group to be in a position to contribute 30 percent of earnings for the
parent company by 2002. While the regulated PGOCo. continues to struggle in
debt, National Energy Group has been quite successful. In fact, much of
PGOCorp.'s earnings over 2000 came directly from National Energy Group, which
gained a 233-percent profit increase in 2Q 2000 and an 22-percent profit
increase in 3Q 2000. Clearly, PGOCorp. has benefited greatly from National
Energy Group's ability, as an unregulated subsidiary, to sell power outside
in deregulated markets outside of California. Thus, it is no wonder that,
although PGOCorp. still considers California to be an attractive market, the
core driver of its strategy is NEG, which is able to operate in all lucrative
markets as they become deregulated.
Just last month, PGOCorp. gained approval to implement a shrewd restructuring
of its business units that protects National Energy Group (and other
high-profit subsidiaries) from any impact that the bankruptcy of the
regulated utility or parent company might cause. In other words, if PGOCorp.
and PGOCo. ultimately declare bankruptcy, subsidiaries such as National
Energy Group would not bear any foreseeable impact, protecting some of PG&E's
most profitable business units from financial insolvency. Ironically,
however, through this loan there is now a tie between the unregulated
business of National Energy Group and the regulated PGOCo., although the
ramifications of this connection are not completely clear at this time.
Moreover, while the loan that PGOhas secured certainly helps, it by no means
brings an end to the utility's financial problems. Through the loan, PGOhas
been enabled to pay outstanding debt obligations on which it has already
defaulted or may default on in the near future. However, the payments made in
the amount of $1 billion only reflect a small percentage of PG&E's reported
$6 billion of total debt. Thus, bankruptcy is still a strong possibility for
the company unless some other new major development occurs. Most likely, this
development will be the sale of its transmission system to the state. PGOmay
have to lower its expectations of what it believes its system to be worth
(reportedly $1 billion). However, just as SCE has now been apparently
protected from bankruptcy filing due to the sale of its own transmission
system, PGOmay also find that an asset sale is its only recourse at this
juncture.
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