San Jose Mercury News

SAN JOSE, Calif._Despite spending far more to buy electricity than it charges consumers, Pacific Gas & Electric Co. isn’t facing the imminent bankruptcy that politicians fear, say financial analysts. Right now the company can pay its bills, and investors remain willing to lend it money to keep the lights on.

But the utility could be plunged into a financial crisis if it doesn’t get a rate hike or other new source of cash soon. The utility has already borrowed $4.6 billion to buy electricity at high market rates. And lenders won’t keep making loans to the company and power producers won’t keep selling it electricity unless they see strong evidence that they’re going to be repaid.

That evidence could come next Thursday, when the California Public Utilities Commission meets to consider PG&E‘s arguments that it has met the legal requirements to hike rates.

PG&E‘s problems are complex, rooted in the 1996 deregulation of electric rates. But it boils down to simple math: “We’re paying 27.9 cents per kilowatt-hour for electricity. We’re selling it to our customers for 5.4 cents,” says utility spokesman John Tremayne.

PG&E is something of a test case in utility deregulation, and rapt utility experts and government officials around the world are watching the drama unfold. So far, investors, mostly institutions like pension funds, have been willing to fund the difference by buying bonds sold by the utility and its parent company, PG&E Corp. Analysts rate the company’s ability to repay its debt as “strong,” and investors are betting that sooner or later, PG&E will be able to recoup the extra energy costs.

Wall Street also likes the stock of PG&E Corp., the parent company. It closed Friday at $24.06 per share, up $1.19. The utility generates the bulk of the money for its parent.

Eventually, the lenders might change their minds. “At some point there is the potential, if there isn’t relief, there will come an end to this infusion of cash,” said David Bodek, a director at Standard & Poor’s, a leading bond-rating agency in New York.

And then PG&E Corp. would be in deep trouble. It could be forced to file for bankruptcy protection, which would give it a temporary reprieve from paying debts while it figured out how to solve its problems.

Just how close the utility is to actual insolvency _ where it has no cash and no one will lend to it _ is difficult to measure because of its accounting practices, shifting power prices and the complicated relationship it has with its corporate parent, which has other sources of cash the utility might be able to draw on in a crisis.

On the one hand, the utility showed a robust $217 million profit in the third quarter, which ended Sept. 30, according to documents filed with the Securities and Exchange Commission. It had $68 million in cash, and the parent company had $304 million.

On the other hand, the utility has been shuttling billions of dollars it has borrowed to cover high power costs since summer into a special account approved by regulators. The debt in the account doesn’t count against the company’s bottom line because the company still expects to recover the money.

But if Pacific Gas & Electric Co. were forced to permanently absorb the costs booked in that special account ($2.18 billion as of Sept. 30 and now estimated at $4.6 billion), it would wipe out the company’s entire profit. “By tons,” said Gabe Togneri, vice president of investor relations for the utility’s parent company.

On the face of it, say some critics, it looks like the utility is telling two different stories. To Wall Street: We’re profitable! To California regulators and politicians: SOS!

“I think they’re talking out of both sides of their mouth,” says Doug Heller, a consumer advocate at the Foundation for Taxpayer and Consumer Rights in Santa Monica. “The claim of bankruptcy is more political than it is financial.”

Utility officials and bond and stock analysts who track the company insist PG&E‘s financial footing is indeed perilous because it needs more cash to meet interest payments on the new debt coming due. The utility has “serious liquidity problems,” said Bokek of Standard and Poor’s.

The situation was particularly dire Wednesday, when power producers refused to sell to the company, and Gov. Gray Davis and Sen. Dianne Feinstein, D-Calif, said they were worried that PG&E and Southern California Edison were near bankruptcy.

“It became a solvency issue simply because the generators were locking them out of the market and they had so much debt,” said Lori Woodland, a director of Fitch Inc. in Chicago. “There was a train crash that was about to occur.”

Intervention by Energy Secretary Bill Richardson and CPUC President Loretta Lynch’s promise to reconsider the utility’s situation averted the crash by shoring up investor confidence. Power prices are already beginning to fall, analysts say.

But PG&E says its financial situation remains very serious.

“If we do not get recovery and some certainty going forward of how we’re going to finance these power costs, the next time we go to the financial markets for some money, they’re going to say, ‘Under what terms are you ever going to recover this?’ ” Togneri said. “We do have cash on hand, but if you put it against the bills that we expect to receive it does run out, and faster than we would have anticipated months ago.”

Analysts say they can’t imagine the state would allow the utility to go bankrupt, given the size of both Pacific Gas & Electric Co. and the California economy. “It’s not in the interest of the state to drive these utilities into insolvency,” Bodek said.

Bankruptcies among utilities are rare. Paul Patterson, an electric power analyst at Credit Suisse First Boston in New York, says he can recall only two in recent history. In both of those cases, the creditors ended up owning the company.

And in both of those cases, the lights stayed on, Patterson said.

Still, the specter of power disruptions and rolling blackouts here sparks strong reaction.

“It would be like a eight-Richter earthquake,” said Tapan Munroe, president of Munroe Consulting Inc. in Moraga and consulting corporate economist for PG&E Corp. “Here we have the greatest high-tech economy, the Internet economy of the future, and there is no economy without electricity.”

Even if the lights don’t go out, the long-term financial cost to California of letting the utility become insolvent and forcing bondholders to take a loss would be great, analysts say.

“It would snuff out any investment in California like a candle in the wind,” said Patterson. “It would be cataclysmic.”