JUICE Financially Flush

By Published On: February 23, 2007

Until the energy crisis, Wall Street was a silent and sated presence in California’s regulatory world. When the bankruptcy of Pacific Gas & Electric – and nearly that of Southern California Edison – hit, satisfying financial interests suddenly became monstrously important to keeping the state’s lights on. Up to that time, utilities were basically golden geese, with investors often called “widows and orphans” because they could bank on a utility’s reliable stock and dividends. Before 1996-2000, regulators kept a reasonably close eye on utility investments. They chastised them when they went terribly wrong, levied disallowances, and didn’t always let them have their way. Post-energy crisis, regulators seemingly embrace the whims of utilities based on the bad fallout from the credit-unworthiness of the crisis years. Utilities can get whatever they want now, outgoing California Public Utilities Commission member Geoffrey Brown told Circuit. While the CPUC’s pro-utility stance is a double-edged sword for ratepayers, it sure is making utilities a lot richer. Billions of dollars in investments in advanced-metering systems may provide ratepayer bonuses in years hence. Equally high investments in utility-managed energy-efficiency programs may do the same. Hundreds of millions of dollars spent on new transmission lines may tilt the state’s power portfolio toward renewable energy. I hope it all works out as advertised. Meanwhile, there’s a whole lotta ratepayer money at stake. Today, utilities can pretty much ask for anything and get it. For instance, PG&E was easily granted $14 million by the CPUC in ratepayer funds to study the feasibility of running the Diablo Canyon nuclear plant past its retirement age. In contrast, the California Energy Commission was grudgingly given less than $1 million by the Legislature to thoroughly analyze the continued costs and benefits of nuclear power in California. So where does that leave utilities finance-wise? If this week’s announcements by PG&E and Sempra are any indication, they’re better off than their “widows and orphans” days. Amid major shuffling at the executive level, PG&E Corp. announced that its 2006 end-of-year income was $991 million, up from $917 million in 2005. Of that, Pacific Gas & Electric, the corporation’s utility, accounted for $971 million of the total in 2006, up from $918 million in 2005. The corporation raised its earnings expectations for this year, assuming that the company will earn its authorized return on equity of 11.35 percent set by the CPUC and that the proposed settlement to resolve the utility’s 2007 general rate case is approved by state regulators. Tom King, former PG&E chief executive officer, was promoted to president of the parent corporation February 21. Bill Morrow, current chief operating officer of the utility, was promoted to PG&E chief executive officer. King admitted this week that the company expects to make renewables only 18 percent of its power portfolio by 2010. The legislative requirement is 20 percent. On the nonrenewables side, the utility touted the usefulness of its Diablo Canyon nuclear plant, which executives said set a “record year,” producing 18 million GWh in 2006. “We believe the nuclear option needs to be on the table for the U.S.A.,” said Peter Darbee, current PG&E Corp. chief executive officer. Noting that the corporation may make a push for plug-in hybrid vehicles in the future, he added, “The more nuclear plants, the more energy there is for plug-in hybrids.” Plug-in hybrid vehicles are a business avenue the corporation may pursue, he added. However, he said that nuclear is an option for the rest of the country but not California because there is no solution to the radioactive waste problem. The prospect of the company’s acquisition or merger was also on the minds of analysts this week. “There’s a chilling effect on mergers and acquisitions,” said Darbee. “At the Federal Energy Regulatory Commission level it’s encouraging.” But he said that state regulators “jumped in and said they’re perfectly willing to prevent mergers and acquisitions.” After the federal 2005 EPAct terminated the Public Utility Holding Company Act – loosening the rules on utility mergers – some utilities saw greater promise for merger activity. However, with the example of FPL and Constellation – which called off their merger after state authorities began putting up roadblocks – the dynamic appears to have changed. Sempra Energy reported 2006 net income of $1.4 billion. Last year, the parent company of two utilities and other ventures clocked in at $920 million. San Diego Gas & Electric’s earnings last year were $237 million, compared with $262 million in 2005. The utility attributed the change primarily to demand-side-management incentives. It also cited “favorable resolution of prior-years’ tax and regulatory issues, offset by higher net income from electric generation in 2006, including the addition of the new Palomar generating facility.” As did PG&E, Sempra raised its earnings outlook for the year. SoCal Gas’s income registered $223 million in 2006, compared with $211 million in 2005. The company noted that there was $311 million in energy crisis litigation expenses in 2005 (Circuit, Jan. 6, 2006), offset by tax and regulatory issues. Sempra Commodities’ 2006 income was up to $504 million from $460 million in 2005. Sempra Generation posted $375 million last year, compared with $149 million the year before. The rise included $204 million from the sale of its jointly owned Texas power plants. Sempra Pipelines & Storage had a loss of $165 million in 2006, way down from an income of $64 million in 2005. Sempra LNG continued its losses. In 2006, losses totaled $42 million, worse than a loss of $25 million in the prior year. The company blamed it on an interaffiliate deal with Sempra Commodities as well as higher development costs for its liquefied natural gas facilities under construction. Still, Sempra has been raking in cash. It has $11 billion that it plans to spend in capital over the next five years. “Take some comfort that we don’t stuff it in a mattress. We will put it to use,” Donald Felsinger, Sempra chair and chief executive officer, told the financial community February 22. One deal the company may make is an investment in the output of a Brazilian sugar cane ethanol plant. Sempra signed a memorandum of understanding to assign offtake if the $4 billion plant is built. On the other hand, Sempra may be sinking money into another major litigation fight. A Ninth Circuit Court decision late last year put Sempra in a position to reengage in energy crisis-era settlements (Circuit, Dec. 20, 2006). The court clarified the template that federal regulators are to apply to actions to discover whether they are “just and reasonable.” On the table is as much as $1.4 billion. It is likely to be appealed to the U.S. Supreme Court in the next several weeks, according to Javade Chaudhri, Sempra general counsel. Finally, the financial community expressed interest in Sempra’s proposed Sunrise Powerlink transmission line and the controversy surrounding it. “It’s difficult to find anybody who likes the things we build, but they like the product of the things we build,” Felsinger replied. Financially strong utilities are good for the state. I worry, though, that they have crept back to the bad old days of sending limos to regulatory meetings, gold-plating pencils, and eyeing the latest corporate jet toys. Prove me wrong. Editor’s note: The above reflects this week’s earnings reports. Southern California Edison is scheduled to provide details of the year’s profits (or loss) next week. Circuit will follow up on that utility, as well as nonutility energy and renewables companies’ earnings.

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