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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: "IssueAlert" <IssueAlert@scientech.com< X-To: X-cc: X-bcc: X-Folder: \Drew_Fossum_Dec2000_June2001_1\Notes Folders\All documents X-Origin: FOSSUM-D X-FileName: dfossum.nsf http://www.consultrci.com ********************************************************************* Discover a world of utilities information in our new e-zine, SourceBook Weekly, which will be launched on December 4, 2000. Get a free SourceBook Weekly article at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html ********************************************************************* =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, November 17, 2000 PG&E Corp. Pursues Multiple Generation Projections, Looks Outside of=20 California for Profits By: Will McNamara, Director, Electric Industry Analysis =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D PG&E Corp. (NYSE: PCG) announced that it will acquire a 44.4 MW wind power generating station near Palm Springs, Calif., to supply electricity to the Western power grid. PG&E subsidiary National Energy Group is purchasing the plant from Seawest Wind Power Inc., a San Diego-based developer of wind energy plants. PG&E expects the plant to enter commercial operation in the spring of 2001. ANALYSIS: This is just the latest in what appears to be a generation boom for PG&E Corp. Just over the last two months, PG&E Corp. also has announced several other generation projects, both within California and in other strategic areas of the country. National Energy Group (NEG)=01*PG&E Corp.'s unregulated power producer that sells energy on the East Coast, primarily in New England=01*is spearheading all of the new generation projects. PG&E Corp. claims that its goal is for NEG to be in a position to contribute 30 percent of earnings for the parent company by 2002. Thus, the accelerate= d increase of megawatts under the NEG banner certainly is working toward that goal. Let's take a quick look at the other generation projects that PG&E Corp. has announced in addition to the Palm Springs wind power facility. Just last week, NEG announced a long-term tolling agreement with Southaven Power= , an affiliate of Cogentrix Energy. Under terms of the agreement, NEG's=20 subsidiary PG&E Energy Trading gains rights to the total generation capacity produced at an 810-MW natural-gas fueled, combined cycle located in Mississippi, just south of the Tennessee border near Memphis. The deal is noteworthy because it positions NEG close to the existing TVA and Entergy electric substations that will deliver the plant's electricity into the region's transmission grid. This announcement followed other substantial projects in Southern Californi= a and Oregon. The 500-MW Otay Mesa Generating Project, located in San Diego County, is in the final stages of plant siting. The project represents the first new power plant built in San Diego County in almost three decades and, of course, will become operational during a time when low supplies in California continue to drive up prices. In Oregon, NEG has just submitte= d an application to build a new plant in Hermiston, Ore., adjacent to an already-existing 474-MW plant that NEG co-owns with PacifiCorp. The propose= d Umatilla Generating Project will be a combined cycle combustion turbine that will burn natural gas, with its fuel supply transported via the NEG's Pacific Northwest natural-gas pipeline. The growth of NEG is a real success for PG&E Corp. at a time when its=20 regulated subsidiary is struggling. PG&E Company, the utility that provides natural gas and electric service to approximately 12 million people in Northern and Central California, has accumulated about $2.9 billion in debt. PG&E Co. buys a great deal of the power it provides to customers on the wholesal= e market, but because of a retail rate freeze that is still in effect the company has little control over the rates it can charge customers. Thus, over the course of last summer, PG&E Co. was paying up to 19 cents per kilowatt hour while it was only able to charge its customers on average 5 cents per kilowatt hour. PG&E remains embroiled in negotiations with the CPUC over its petition to retroactively bill customers for its debt. While the regulated PG&E Co. could find itself wallowing in the red dependi= ng on regulatory rulings, NEG has soared. In the 2Q of 2000, PG&E Corp. report= ed second quarter earnings from operations of $0.69 per share on a diluted basis, or $253 million, which represented a 38-percent over diluted earning= s from operations in the same quarter in 1999. Much of this success can be attributed to NEG, which reported 2Q earnings of $37 million, which reflect= ed a 233-percent profit increase from the previous year's quarter. The winning streak continued into 3Q, in which PG&E Corp. reported diluted earnings from operations at $0.68 per share, or $248 million, and revenues of $7.5 billion, compared with third quarter 1999 revenues of $6.2 billion. This constituted a 22-percent increase in profit for the parent company. Again, NEG performed very well; NEG contributions rose, with diluted earnings from operations of $0.10 per share, or $37 million, on revenues of $5 billi= on. Clearly, PG&E Corp. has benefited greatly from NEG's ability, as an=20 unregulated subsidiary, to sell power outside of the regulated California market. Thus, it is no wonder that, although PG&E Corp. 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. In addition, the plant siting process in California historically has been quite restrictive and lengthy, which also may explain why PG&E Corp. has chosen to focus its generation efforts primarily outside of its own state. The siting process in California shows signs of becoming more facile. In fact, just yesterday, the California Energy Commission adopted emergency regulations to implement the state's new six-month power plant licensing process. The new regulations allow for "environmentally advanced" power plants=01*such as PG&E's wind power plant in Palm Springs=01*to be licensed= and come online more quickly in California. Currently, PG&E Corp. has ownership and arrangement interests in more than 30 plants, the bulk of which are managed by NEG. The company's generation portfolio currently consists of 7,000 MW, and more than 10,000 MW in new power plant development and construction is in production. As PG&E Corp. continues to expand its generation base, it probably realizes that current industry intelligence indicates that a company must have at least 30,000 MW in order to be a formidable player. By comparison, a company like AEP=01= * clearly one the top generation companies in the industry=01*has a worldwide generat= ing capacity of 38,404 MW. As NEG is PG&E's primary growth vehicle at the prese= nt time, I think we can expect to see additional generation projects announced by this subsidiary. Some questions remain. Will PG&E Corp. split its unregulated and regulated operations into two stand-alone companies, as other utilities such as AEP and Reliant have recently announced? I checked with my sources at PG&E Corp., and the official company position is that there are no plans to restructure in this way at this time. However, PG&E Corp. does acknowledge the dilemma between asking regulators for the right to bill customers for its regulated company's debt, while showing a 26-percent profit increase from its unregulated business. Also, what are the prospects for PG&E Corp.'s hydroelectric system? Accordi= ng to prior agreements, PG&E Corp. was supposed to sell its 3,896-MW=20 hydroelectric system and the company in fact began to do with a bidding process in Septem= ber 1999. However, just last August PG&E Corp. petitioned the CPUC to halt this auction process and instead allow the hydroelectric assets to be sold from the regulated PG&E Co. to an as-of-yet-unformed unregulated subsidiary for $2.8 billion. PG&E Corp.'s motivation in this proposal is fairly obviou= s; the unregulated subsidiary could reap substantial profits from the sale of hydropower at market prices. In addition, according to a Sept. 15 report from Dow Jones Newswires, assuming a book value of about $700 million for the hydroelectric system, PG&E Corp. could take the remaining $2.1 billion to pay off the transition debts incurred by PG&E Co. The CPUC and PG&E Corp. continue to interface regarding the value of the hydroelectric system and whether or not PG&E Corp. should be allowed to sell the assets to an unregulated company. While this debate rages on, NEG is free to continue along its aggressive growth mode. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Need to design and implement your IT Infrastructure? Find out what=20 SCIENTECH's Information Technology team can do for you at: http://www.consultrci.com/web/rciweb.nsf/web/Depts-IT.html =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Feedback regarding SCIENTECH's IssueAlert should be sent to=20 wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH's IssueAlerts are compiled based on independent analysis by=20 SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpos= e in publishing its IssueAlerts is to offer an independent perspective regard= ing the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e reply to this message and in the body of the email type "remove."
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