PG&E Corp (PCG) 2002 Q2 法說會逐字稿

Good morning ladies and gentleman welcome to Pacific Gas and Electric Corporation's second quarter earnings release conference call. At this time I'd like to the conference over to Mr. Jay Togneri Vice President of Investor Relation. Thank you and go ahead Mr. Togneri

Good morning, and thanks for joining our call to report second quarter earnings and discuss yesterday's rating actions by S&P. All participants are in a listen only mode through either a simultaneous web cast or via conference call, and after the call, a replay of the web cast will be available on the PG&E Corporation home page.

On the call today we have Bob Glynn Chairman and CEO of PG&E Corporation, Peter Darby Senior Vice President and CFO, Tom Boren President and CEO of the PG&E National Energy Group, and Gordon Smith President and CEO of Pacific Gas and Electric Company. Lynn Maddox the President of NEG's energy trading unit and other members of the team are also here and may be called upon during the question and answer session following.

I hope you've all had an opportunity to review the earnings press release we distributed this morning. It includes the statement of consolidated income and the supplemental performance metrics that we usually publish for both the utility and the NEG, and these materials may also be accessed on our web page www.pgecorp.com. We are also filing our form 10Q reports for the corporation and the NEG with the SCC today. We've been making these 10Q's available at the same time as our earnings release for the last six quarters in order to provide investors with our current financial disclosure to use in understanding the earnings release.

Finally, let me remind you that the call and the subsequent discussion will contain a number of forward looking statements based on expectations and assumptions that reflect the information currently available to management. Actual results may differ materially from those forward-looking statements. And as always, we encourage you to the review the SEC filings to obtain the additional information to better understand the many factors that can influence future results, and with that I'll turn the call over to Bob Glynn.

Good morning, we're going to begin this call by addressing the SEP action that was taken yesterday, we're also going to cover the financial and operational performance for the quarter, the status of Pacific Gas and Electric Companies chapter 11 preceding actions that we're taking to address the power market conditions and guidance for future earnings.

Yesterday, S&P down graded the NEG in its primary subsidiaries, and with the exception of the gas transmission Northwest unit; the NEG and its subsidiary ratings were down graded to a double B+. In otherworlds, below investment grade. We're certainly disappointed with this action. It's a fact given the market conditions of the wholesale energy sector, the metrics against which the credit rating agencies evaluate all companies have simply become more stringent. And as the S&P said, they're applying new methodologies to us and to others in the sector. Tom Boren and Peter Darbee will each address parts of the implications of this action and our response in just a few minutes.

Moving on to financial performance. Our total net income for the quarter was 59 cents per share compared with 207 per share for the same quarter last year, and that was a quarter, which you may recall, included some large positive items impacting comparability. For the second quarter earnings per share from operations on a diluted basis was 50 a share with out headroom and a $1.49 with. You know that headroom is the generation-related revenue in excess of power costs. These results compare to 67 cents and a $1.08 per share with out and with headroom respectively for Q2 of last year.

The earnings from the operations I just mentioned for the quarter reflect an operating loss of six cents a share for the natural energy group. NEG and others in the sector are facing difficult whole sale power market conditions with low sparks

persisting, a slow economy, little weather driven demand, and over supply in most market regions, we're taking actions to address this, and Tom Boren will provide details on that in a moment as well.

In Pacific Gas Electric Company earnings from operations were 54 cents a share with out head room and $1.53 with, and these utilities results are in line with our expectations for them for the quarter.

We've continued to make steady progress in resolving the utilities check for 11 proceeding. We continue to have positive discussions with our predators and were confident that our plan will move forward into the confirmation process this fall.

It's been 482 days since Pacific Gas and Electric Company filed chapter 11, and since then, it may have sounded to many of us like all that's gone on since then is the filing of the plan of reorganization, and the public and legal discussion of it's pro's and con's. Well there is a lot more going on then just that. The under pinning of everything that's going on in that time frame has been the outstanding work of the men and women of Pacific Gas and Electric Company in delivering natural gas and electricity to about 14 million Californians. They've been delivering it with increasing reliability, with greater customer satisfaction with service interactions with our front line team members, it's been delivered at the lowest system average electric price of any of California's three large investor owned utilities.

With a safety record it gets better and better with continued care for the environment while getting the job done, and it also includes delivering the best performance results ever in our equal opportunity purchasing program and delivering to our communities a base level of continued financial contribution which we aim primarily at those in our society who are most economically at risk.

The successful focus on fundamental operations is the foundation that then lets our company advocate its plan of reorganization. A plan that appropriately includes the issues of shareholder equity. And this is a solid foundation provided by the 24 by 365 performance from Pacific Gas and Electric Companies entire chain and thanks for that team.

Now Tom Boren will provide details about the National Energy

.

Thank you Bob and good morning. The S&P downgrades were driven by the current business climate and the forward

forecast that's used to predict our future cash flows from non-contract-based assets and trading. That combined with S&P change in that technology. As we previously disclosed PE&G has various obligations that require maintain certain industrious grades, credit ratings by NEG or it's subsidiaries.

While we produce these types of waiting intruders from the vast majority of our financial equipment we still have waiting triggers that could be activated after appropriate cure periods in various contractual alignment. The NEG has full category guarantees that are subject to ratings triggered in the event of a down grade by one or more of the credit rating agencies to below either the current level or below the industrial grade.

The first categories guarantees and other obligations support a trade agreement. At the end of July the NEG's tattered current closure was approximately 433 million dollars of which 170 million dollars is subject to securitization requirements given the downgrade. Practically the NEG and energy trading have managed their

facilities throughout the year to be able to cover margin requirements in the event of a downgrade, and we have sufficient lucidity to cover all this exposure with cash or other collateral.

Second of the commitment such as totaling 76 million dollars such as transportation capacity, security bonds and storage.

The third category is guarantees supporting the various holden transactions that we've entered into with third party. There are three guarantees totaling 675 million dollars that are triggered because of the down break. Just as we did a year ago when we

PG&E Corporation guarantee, with NEG guarantees we will work with our counterparties and their lenders to discuss a simple solution.

The last category is NEG guarantees that support various obligations under agreement with third parties totaling 1.3 million dollars, 930 million dollars of this amount is directly related to access under construction or in development, and its contingent on performance. 780 million of the 1.3 billion in guarantees at industrious grade rating measurement supply.

All of the underlying entities will be a guarantee of performing under their obligations. Therefore, our exposure if any will any damages with regards to performance is immaterial. We will work with the beneficiaries of these guarantees to cure a way inseparable to fault that may be called by the ratings down grade. With the current down turn and the wholesale energy market for the NEG has already taken a number of actions.

Year to date, we trust two billion dollars from our combined O2 and O3 construction program. We were lubed rating triggers in several of our commitments totaling almost 1.6 billion dollars and we completed a number of financings including upsizing our general construction facility to 1.5 billion rolling over the gas transmission northwest revolver at 125 million, and issuing 180 dollars of gas transmission northwest notes in a private placing. And we put our bankers on the problem, and the triggers, and the latest equipment on hold to accept the market place and the financial feasibility described.

Now operations we've earned the second quarter we've added more than 15 hundred-mega watts to the NEG operating portfolio. We generated over nine million mega watt hours from quality control capacity, we have merchants plan availability of 86 percent, we've settled 64 million mega watt hours of power, and 26 billion cubic feet a day of natural gas through energy trading, which continues to produce positive real life earnings and cash, and at 99 percent of the capacity of the gas transmission northwest pipe line under long term contract. While we make this progress to date going forward we are taking a dis election.

As we completed our review of development progress placed on hold its clear from our evaluation and just about everyone else with that domestic regions will be an oversupply situation for several years. Preston Parks read and the press returns until the forecast reserve margins trend down to levels, which would support the investment. Accordingly we're scaling back our development programs as follows. We are writing down three thousand mega watts of development projects and 10 thousand mega watts of turban and related equipment.

This results in a charged earnings of 159 million dollars, or 43 cents per share. While we have not terminated any commitment for these equipment, our termination costs represents the reservation payment made to date and an incremental liability of approximately 58 million dollars in which will be paid upon termination. This leaves about 38 hundred-mega watts of projects that will either be sold or developed including our

project, which is in early construction.

We've also initiated a call production program with a target of saving a minimum of 40 million dollars annual administrative general and other operating expenses. Many of the reductions will be in the development area, however they will also cut across the goal. The cost of this program will be taken from the charged earnings in the third quarter when the program actually gets implemented. The NEG out of necessity began focusing on the issue of counter parties credit exposure,

availability of equity capital when our utility payment ran into credit rating difficulty in filed in early 2001. While none of that was fund, it is sufficient to recognize the issues and note the actions needed at the current

finds infaxed our industry section. The steps that we are taking now are those needed to whether the present conditions and to be in position for a market recovery. Now I'll turn the call over to Gordon Smith.

Thanks Tom you know as we've done since the beginning of the chapter 11 process, Pacific Gas and Electric Company delivered solid operating results during the quarter while continueing to achieve some of our best safety results ever. I'm proud that our team continues to keep their eye on the ball. In the second quarter of this year the

incompleted another successful

fueling outage for unit 1. During this outage, we also performed an inspection of the unit 1 reactor head to determine if any signs exist of a problems that were discovered at

. The camera mounted a remote control devise was used to inspect for any possible boric acid corrosion, and I'm happy to report that absolutely no problems were found, and these positive results were formerly reported to the

Regulatory Commission. The Abla continues to perform well. At the end of the second quarter, overall capacity factor was 80 percent with

a 30 day fueling outage a record for unit one.

In terms of customer service for the quarter, 90 percent of our customers who received service from our front-line employees ranked our service as good, very good, or excellent. And this is our highest rating over the past six quarters and is reflective of our absolute commitment to meet or exceed customer expectations.

Couple of other important benchmarks are: one, unplanned electric outages are down 25 percent this quarter compared to last year; and two, injuries resulting in lost time - lost work time had declined by 16 percent during the first half of this year compared to last and last year's safety record was among our best ever.

Now turning to electric sales for the quarter, total energy delivered was about two percent lower compared to last year, primarily due to milder weather. On the wholesale gas side of our business transport volumes on California gas transmission were down around 15 percent to 111 million decatherms for the quarter. And as we have previously discussed, this year's volumes reflect a return to more normal conditions compared to last year, 2001, when throughput was high to meet increased gas-fired generation demand due to below average hydro conditions. Peter will explain the financial impacts of this in a few minutes.

Now as Bob has previously said, we look forward to the confirmation process in the Chapter 11 proceeding. As you all may know or you already know, the creditor voting deadline is 11 days away and ends on August 12th. Results are expected to be available in early September and we are pleased to see a group of senior debt holders, representing over $2 billion in claims, supporting the PG&E plan and objecting to the CPCU plan. And later this morning a status conference will take place where we expect the court to set a schedule for the confirmation process on a going-forward basis.

Separately, we also have a hearing on our appeal of the bankruptcy court's decision on express preemption on August 16th in federal district court. We received a ruling from Judge Walker that rejected the arguments by the California PUC and other governmental parties that appeal of the bankruptcy court's express preemption ruling was premature at this time.

And in our filed rate case, which is also under Judge Walker, an order was issued a week ago that denied the CPUC and TURN's - TURN is a consumer group in San Francisco - motion to dismiss the case. In his ruling Judge Walkers also denied the motions for summary judgement that had been filed by the California PUC, the utility and TURN. A case management conference has been scheduled for August 16th.

Now I'd like to turn the call over to Peter Darbee, our CFO.

Thanks, Gordon.

To follow up on Tom's discussion of the S&P action let me first discuss the implications to the holding company loan. Recall that the holding company has a very simple capital structure with one loan and a couple of principal lenders.

A and B of the loan had rating requirements that are triggered only if both S&P and Moody's rate the NEG below investment grade. If that were to occur the lenders had the right to declare the loans due and payable. However, we believe the mostly scenario is that we would work out a mutually agreeable arrangement with the lenders. Most importantly, the holding company has substantial cash which positions it well in this rapidly changing business environment.

Now on to second quarter earnings. As Bob mentioned, on a reported basis the corporation earned 59 cents per diluted share. This compares with $2.07 cents per share for the same period a year ago. Earnings from operation on a diluted basis, without headroom, were 50 cents per share. This compares to 67 cents per share in the year-ago quarter. Including headroom earnings were $1.49 per share with $1.08 last year.

I'm going to cover earnings from operations for each segment. That will be followed by a discussion of items impacting comparability and 2002 guidance.

Beginning with Pacific Gas & Electric Company, the utility earned 54 cents per share from operations without headroom per quarter. This compares with 48 cents for the same period last year. The primary differences are as follows. First, roughly six cents is due to the levelized nature of URG revenues. Recall that last year Diablo Canyon operated on an incentive mechanism with revenues based on generation. While Diablo underwent a refueling outage during the second quarters in both years, this year there was no revenue impact. This is because the rate making is now on a cost-of-service basis.

Another six cents can be attributed to the timing of the 2001 attrition revenue decision. We booked the entire 2001 revenue increase in the fourth quarter of 2001. Therefore, this increase is reflected in the utility's second quarter results in 2001 whereas it was not in the second quarter results last year. These effects were offset by approximately three cents because without 2002 attrition relief rate based growth and inflation continue to negatively impact results.

The utility filed for an annual increase of $96 million this year. However, the CPUC already ruled that an attrition increase would be effective no earlier than April 22. Therefore, at best the 2002 revenue increase would be two-thirds of our request or about $65 million.

Last, the quarter-over-quarter comparison is impacted by three cents as a result of California gas transmission. Gas transport volumes were high last year and they are tracking more normal levels now.

With respect to earnings from operations including headroom the utility reported $1.53 per diluted share for the quarter. This compares with 89 cents for the same period last year. Headroom for the quarter was 366 million or 99 cents per share. This compares to approximately $150 million or 41 cents of headroom in the second quarter of last year. Recall that while the three-cent rate increase was approved in March 2001 it was not implemented until June of last year.

Although we are reporting utility operating earnings with and without headroom, I want to remind you that headroom is cash earnings. Since last summer headroom has had a substantial rehabilitative effect on our balance sheet. Specifically, at the end of the second quarter utility retained earnings were a positive $64 million. At the low point retained earnings were a negative $1.9 billion at the end of the year 2000. At the end of 2001 they were approximately a negative billion dollars.

Headroom reflects the recovery of uncollected costs that were written-off for financial reporting purposes but still exist on our regulatory books. Accounting for headroom that's been recorded to date the utility's un-recovered power procurement and transition costs are still a significant number at $4.7 billion on a pretax basis.

The PG&E National Energy Group reported a loss of six cents per share for the quarter compared with earnings of 19 cents last year. Specifically, integrated energy and marketing reported a loss of eight cents per share this quarter compared with earnings of 14 cents for the quarter a year ago.

Approximately 10 percent of the NEG's results reflect poor power prices. In addition, six cents of the difference was due to the absence of the fuel adjustment provision in the standard offer for loads in New England. This provision was an adder to the underlying energy price last year when gas and oil prices were high.

Because the NEG has more plants in operation and under construction now, higher O&M and interest costs also impacted the quarter's results by approximately three cents per share. There were no portfolio management transactions during the second quarter this year. Last year the NEG recorded after-tax gain of approximately $10 million or three cents per share during the same period.

Interstate Pipeline Operations reported four cents this year compared to five cents for the quarter last year. With almost 99 percent of the GTN pipeline under long-term contracts now these results are in line with our expectations.

Rounding out our results with the PG&E Corporation, we recorded earnings of two cents per share at the holding company. As was the case in the first quarter, this was primarily due to consolidated tax benefits.

Now for items impacting comparability. As Tom has already discussed, we took a 43-cent charge to earnings for writing down 3,000 megawatts of developments projects and 10,000 megawatts of turbine commitments and related equipment. We also recorded 31 cents related to the incremental interest expense and other costs associated with the California energy crisis and the utility's Chapter 11 filing.

In addition, last quarter we mentioned a change in accounting related to implementing a derivative implementation group interpretation on FAS 133. It became effective at the beginning of April and resulted in marking to market certain NEG power sales and fuel supply contracts. Previously these contracts were treated as normal purchases and sales.

The cumulative effect of implementing this change was a mart-to-market loss of 16 cents per share. However, it will have no impact on the timing or amount of cash collected through these long-terms contracts.

Now, turning to guidance. Excluding headroom we are revising our 2002 guidance to $2.25 to $2.35 per share from the 2.50- to 2.55-range. This incorporates the effects of the prolonged downturn in the merchant sector as well as the dilution from the recent financing at the holding company.

With regard to the NEG, we expect the second half of the year to be stronger than the first half due to the seasonality of load and weather variability typical of the third quarter, contributions for new plants on line this year and savings from NEG's cost-reduction program.

With headroom at $1.46 mid-year through the year earnings from operations including headroom are already at $2.56 cents per share. As we expect headroom to continue for the remainder of the year, earnings from operations including headroom will likely exceed $4.75 cents per share this year.

Our earnings guidance is also subject to the uncertainty of bankruptcy-related events as well as regulatory proceedings. This includes those related to attrition or DWR-related decisions by the CPUC. And as we have said before, we view 2002 as a transition year from the current environment to our proposed plan of reorganization. We continue to believe that 2003 and beyond is the best basis for long-term valuation of the company.

To close, despite all the challenges facing the company and the sector as a whole, we continue to make steady progress. We remain focused on the confirmation of our plan of reorganization, safe and reliable operations, and good financial results for our shareholders.

And now I'd like to turn it back to Bob.

Thanks, Peter.

Couple of other items you might be interested in about our financial disclosures and other matters. First, as

mentioned, we've been releasing our 10-Q or 10-K, as the case may be, with our earnings so that you can have the context for our financial disclosure statements around our earnings releases.

Next, there's lots of discussion about the issue of expensing the cost of stock options. We've disclosed this in our annual reports with values extending back to 1999. And beginning with this quarter we're disclosing it in our 10-Qs as well. For those you who want to find it in our last annual report, the information's on page 78. You'll see if you look at this that the amount equates to between one and two percent of after-tax net income over this time period. And we don't reprice options.

We're supporting U.S. Senate Bill 20724, a bill by California Senator Diane Feinstein. That bill proposes appropriate regulatory oversight for over-the-counter energy trading activities. We think that this is an important step - that this passing of this bill would be an important step in rebuilding public confidence in the energy industry.

In closing, to be very blunt and very candid, I'm not and none of our team are one bit satisfied with this quarter's overall financial performance. We know that investors expect us to deliver even in difficult market conditions. It's our aim to do just that and the actions that we've outlined in this call are aimed at that objective. The credit rating situation is a challenge. We've prepared a contingency plan for the downgrade and we're implementing that plan.

Thanks, and now

.

OK. We're now ready to take questions and I would like to ask, as I did last quarter, that everyone limit yourself to one question. That seemed to work well, the call moved along. And it gives everybody a chance to ask questions. And, of course, if you have additional questions you're welcome to get back in the queue. Thanks.

And, Steve, we're now ready for the Q&A instructions.

Very well, sir.

Ladies and gentlemen, if you'd like to ask a question press star, followed by one. If you'd like to withdraw that question press star, followed by two.

Our first question is from Greg Gordon of Goldman Sachs.

Go ahead, please.

Thanks, good morning. Had a little bit of trouble hearing the breakdown of the four differences

of ratings guarantees. Could you go through those again and give us the sum total of dollar amount that you now have to go back and deal with and how much is covered by current liquidity? And then also roll that into what the parent exposure is so we can get a total number? And if you have the ability to, could you give us some details behind your contingency plan?

OK. OK. In response to that multi-part question, Greg, Tom is going to start by going through the stuff that you may have missed if the call broke up a bit.

Go ahead, Tom.

OK. There are four categories. The first category, Greg, had to do with obligations supporting our trading agreement. At the end of July our aggregate exposure was $433 million, and of that $170 million was subject to securitization because of the downgrade.

Second group was commitments - what we call other commitments. It totaled $76 million. It's for transportation capacity, for surety bonds and storage. The third category is guarantee supporting the various

transactions that we've entered into. And there's

guarantee totaling $575 million that are triggered because of the downgrade.

And then the last category is the - what we call guaranteed

various obligations under agreements with third parties. That totals $1.3 billion. 930 of that is directly related to assets for construction. 780 million of the 1.3 guarantees that investment grade rating maintenance requirement.

Now I haven't added that up. I don't know if somebody else has here for those four categories but we can or you can and ...

Right. So that last number the guarantees for third parties, 1.3 billion, you're saying only 750 million is triggered by the downgrade?

780 million of it's that investment grade rating maintenance requirement.

So it's roughly one-and-a-half billion dollars. And then at the parent - if S&P - Moody's were to follow suit there'd be an incremental billion?

That's correct, little over a billion.

And can you guys tell us a little bit about what this contingency plan - what the key tenets of your contingency are?

Well, there's really the items that Peter and Tom each included following the description of the numbers.

Just to elaborate from the standpoint of the GE transaction, we have a constant dialog with GE as well as the other lenders. We have - you know, we will obviously have a dialog with them about this and work out a mutually agreeable solution. And I'm confident that we'd be able to accomplish that.

Tom, do you have anything that you want to add with respect to contingency plans?

Sure. One of the things I guess I would say is that we've gone through this before, Greg. And, you know, just to step back and look it from one perspective, if you have to think about the lawyers say, you know, past performance is not a predictor of the future.

You know, we have done this and, you know, in the past, 18 months ago when we went through this, you know, we had 100 percent of our guarantors we lost, which was our parent, and this time we didn't lose 100 percent. Prices and credit exposure are a fraction of what they were 18 months ago, $10 gas now versus $3 gas. And with lower prices and low credit exposure liquidity goes a lot farther for us.

We have multiple times the financial liquidity that we had back then. We have a lot more tools in our toolbox and a lot better diversified portfolio.

And to get back to your point earlier about the construction and so forth, all of the underlying guarantee entities where we have guarantees are performing under their obligations. Therefore, our exposure if anything damages with regard to them is minimal.

OK, thanks, guys.

Thanks, Greg.

Your next question's from Scott

of CSFB.

Go ahead, please.

Hi. Could you run through the - and I guess sorry if I missed this, but did you run through the cash and liquidity facilities you've got at each level in comparison to, you know, the amounts that come due under these single or double triggers?

At the parent, to begin with we have approximately $600 million of cash on hand relative to the facilities which are somewhat over a billion dollars. So that's the situation there.

And as we mentioned at the time that we did the parent financing, that provided adequate liquidity to meet maturities and interest payments through 2006 - scheduled maturities and interest payments through 2006. So the issue is should - at the parent would be should there be a downgrade by Moody's then we would have to negotiate with the lenders as result of that because that would be

default at the parent.

But as I mentioned, we're confident that we could work something out.

Tom.

Yeah, this is Tom Boren. At the NEG we've got $732 million of cash and $878 million in undrawn credit for approximately

. I would point out to you, though, that we are in the process of rolling over $750-million-364-day revolver. And that has about $375 million approximately outstanding under it. So we're going through that process currently.

Just a clarification on the - up at the - up at the top. The - is there anything at the parent that has obligations down to NEG besides the rating trigger on this recent billion dollar financing?

No. At some time a year ago the parent had substantial guarantees to the NEG but at the point of the stress of the financial - of the utility we relieved ourselves of nearly all of those guarantees. There might be some minor numbered amounts under $50 million but there's nothing material.

And there's no receivables from money that's owned from the parent down to NEG through loans or tax-sharing arrangements or anything like that?

Nothing material. Our last - in our last financing we really settled out most of the inter-company receivables. That was one of the purposes of the financing.

Thank you.

Next question is from Paul

of Jefferies.

Go ahead, please.

Thank you very much. With respect to the certifications on financial statements that are - I guess the deadline is middle of August. Can you just give us an update on where you stand on that?

The deadline for us is the middle of August or when we file our Q. We're filing our Q today with certifications.

OK, thank you.

And next is Mr. Tom

with Lehman Brothers.

Go ahead, please.

Thanks, good morning. Just a couple thoughts on liquidity. Just could you give a status update on the 750-million August '02 revolver being re-negotiated, I guess when you expect to have that and what you expect it to look like, as well as the undrawn level on the August '03 revolver?

And then two other liquidity tie-in questions. Do you have the ability to walk away from the

and

, the 610 million commitment there in March of '03? And then finally what the cap ex levels are NEG for '02 and '03?

OK. Your one question was - had many parts to it. Let me start off with the revolver. We were and have been in the process of rolling over that revolver. We maintain very strong relationships with our banks. The banks are in the process of renewing. They were provided, by the way, the same information as S&P was provided and they are in the process of taking

credit. Some of the major banks have already received credit approval. So we're still looking for a favorable response on our revolver.

Obviously, the rating's downgrade will

step back and look at it for just a minute - everybody else is. We still expect favorable response. So that's the first one.

Your multi-part other part was - I don't have the dollar amount that is drawn on the $500 million right before me. I'll get it before the call is over. We've got the number here somewhere among our information.

And the next part of it was

and

.

is up and operating. It's in the good market. It's

. We have $609 million of equity commitments. With the commitments we had to refinance we have until March of next year. We were well down the road in putting that refinancing in place and we still expect to put that refinancing in place. The structure may change a little bit on what we were doing, how we were doing, rates and so forth. But, yeah, I would - I would expect us to go forward with it.

is first shipment goes commercial in August. The last shipment goes commercial in October.

is turning out to be in a very reasonable market for us in the West. So I would expect us to be able to put the financing in place and not

.

And cap ex for 2002 and 2003, they're both right on almost a billion-five each.

And that's maintenance and growth?

Yes, it is.

Our next question is from

of JP Morgan.

Go ahead, please.

, JP Morgan, go ahead, please.

Hello? Can you hear me?

Yes, we can.

OK. I was on a speakerphone. Am I correct in terms of the answer to the prior question about guarantees between the parent company and NEG, is that because of the ring-fencing that you had done at the time of the utilities bankruptcy filing? There really aren't any guarantees anymore, but how does that tie in with the two traunches or the billion dollars or so where there are NEG downgrades that the triggers - rating triggers were that debt. I'm not sure I understand if there are no guarantees.

Oh boy. Let me - let me take a shot at that. It's Peter Darbee.

At the time that the utility defaulted and then filed for Chapter 11 what happened at that point was the parent no longer had substantial credit strength that it could convey to the NEG. And so what we did was we rapidly moved the substantial number of guarantees that we had from the parent to the National Energy Group and isolated that within the family. And there are minimal, under $50 million, of guarantees there whereas previously there had been over $2 billion of guarantees from parent to NEG.

So those were moved down and it was somewhat concurrent with the whole process of ring-fencing the NEG to create stand-alone credit capability at the NEG.

I'm sorry. The parent company debt then is a separate issue.

That's correct. Now, there is,

, to your point, there are provisions in the parent company debt that provide that in the event of a downgrade by both of the rating agencies to below investment grade, that would constitute an event of default. So in that circumstance, we would have to work something out with

and the lenders to deal with that. But I just want to point out that we have ample cash at the parent to pay interest for years into the future. And so we think that we'd be able to work out a deal with them.

Is it fair to say from a total legal standpoint -- let's say that NEG also files for bankruptcy, that the assets of the parent company, which includes, of course, the utility subsidiary, which is also in bankruptcy, cannot be siphoned off for NEG credit holders, or bond holders. Is that correct, legally?

Yes.

So that's completely

, the liability does not go back to the parent, whose principle assets remains the utility subsidiary.

Yes. I'm not sure that I understand that question, but the basic theme that you raise, that there is a financial insulation and separation between the utility side of the operation and the NEG is correct. And

, would you have anything to add to that as our legal counsel?

That's correct,

. The two subsidiaries are independent entities. The parent company owns them, but the consolidation of the entities in a bankruptcy would not happen. They're independent.

And that's because of the affiliate transactions restrictions that we've been following for years that provide for separation of the financial operations of the two companies.

If I could just throw in one extra question, and hopefully that's a quick one. Does this change your thinking at all about pursuing your bankruptcy course and potential settlement with the

. You can hardly have both subsidiaries in bankruptcy.

They're really separate issues,

. They're on separate tracks and on very different time horizons. And it doesn't change our view about moving forward as we have been on the resolution of the

reorganization in a successful confirmation hearing this fall. OK.

Next question ...

Next question is from

of National Bank Financial. Go ahead, please.

Thank you. I have a three part question that relates to the impairments and write offs of long-term turbine repayments and related to capitalized

costs. The 101st

, the 159 million, how does that break down between the turbine repayments and the

costs?

This is

, the Controller. The development costs are $11 million and the turbine costs are about $148 million.

Now, with respect to the termination payment that was made, I believe $58 million. If that's the correct number, is that a pre or a post-tax number?

The $58 million is a pre-tax number.

OK, and the other part of that question is, what are the pros and cons of you terminating your commitments, as compared to maintaining them in the event you decide to take some or all of these turbines?

We are -- this is Tom Borton, we continue to have negotiations with the vendors. And there is a possibility we can take some of these reservation fees and apply it to other capital expenditures that we might make with them. Secondly, it gives us the opportunity to continue to look at the market out there and see what's happening in the market for basically another 12 months, as

compares.

If that's the

you have before you have to make a decision on termination at 12 months.

It could be possibly 12 months, yes.

Thanks very much.

And to the person that asked earlier how much was drawn or available under our $500 million, two-year revolver, we have in excess of $300 million available on the $500 million revolver that we have.

OK, next question.

Next question is from

of UBS, go ahead please.

, are you there?

OK, next question will be from

of

management. Go ahead, Mr.

.

Good mroning. Could you just highlight two things with the utility level cash balances at the end of the second quarter and just give us the second quarter, you know, year over year EBITDA, of the utility?

Yes, we're going

.

We're searching for that in the queue,

.

Cash at the utility is $3.8 billion at June 30th.

And the second part of that of that question was?

The second part was EBITDA, and I'm not sure that we -- we'll come back to that question,

, actually.

Chris has it now.

EBITDA for the three months ended June 30th at the utility was 1.3 billion, and for the six months ended was 2.9 billion.

And '01?

In '01, the three months ended was 1.6 billion. And the six months ended was .3.

Thank you very much.

You're welcome.

Now I have either

from Merrill Lynch. Go ahead, please.

Yes, hi, can you hear me?

Yes we can,

.

Tom, the bank loans at the

level, do any of them have either triggers or

clauses, and I guess also tied in with that is, you mentioned potentially trying to replace the

credit with other credits behind, like, your towing deals or other guarantees. Or other something else. What else could you replace that with?

OK,

, I think what I'm going to do -- we've got

on the phone with us in Bethesda, and I hope he's going to be able to -- you'll be able hear him, and if not you're hear my less detailed description. John?

Yes, thank you,

. This is

in Bethesda. On our credit facilities, we have removed all of the ratings triggers. We replaced them with covenant package in which we're comfortably within the limits of all of those covenants. There is a standard

clause in our revolving credit agreement in terms of draws and, you know, but we don't believe just a ratings downgrade would affect that.

In terms of providing alternative collateral, there are various ways, obviously, to support the collateral demands for trading through cash, letters of credit under our various facilities as well as working through with trading counter parties to basically offset various positions and we would expect to, on our other counter party credits where we have ratings triggers, to negotiate with the various parties specifically the totaling deals to work out some acceptable arrangements.

Could you -- I mean, could you be a little more clear on what -- because those are sizeable numbers what -- because you talked about replacing, I think, the credit or -- with something else on the totaling deals; is there another credit you can replace it with in the group, I guess maybe the pipeline?

The pipeline is -- would be creditworthy to do that. Whether we would chose to do that or not is something we're under -- in the process of evaluating. The way the guarantees work, these totaling agreements, are basically with

our power trading affiliate and they are -- the requirement under the totaling agreement is that we provide a creditworthy guarantor to that agreement in various amounts. If the guarantor is no longer creditworthy we have a cure period in order to replace it.

If it's not replaced, it would be an event of default potentially under the totaling agreement that would not necessarily trigger any claims for payment or cash by the guarantor since the payment for claims is basically for an amount equivalent to the replacement value -- or the difference between the replacement value or the substitute totaling agreement and the one that we have entered into which would have to be established and pursued through the proceedings in the agreement. So it is not an immediate cash claim, although the totaling agreements themselves could go into default. But, there is a process to, essentially, work through a resolution.

The cure period is how long?

The cure periods vary between 10 days and 30 days for the replacement of the guarantor.

The two largest are 30 days, I believe.

The two largest are 30 days. The smaller one is

.

Thank you very much.

OK. You're welcome. Steve, next question.

Next we have David Graham of Metropolitan West Capital Management. Go ahead please.

I wondered -- a couple of questions. I understand at

you'll probably have control of something of the order of 14,000 megawatts of power by the end of next year. You know, how much of that, you know, is hedged and how much is unhedged? Also, I wonder what the status is of your asset sales and whether or not you're going to increase the asset sales as a result of the downgrade and third, could you give us a direction of change of earnings per share at

and, you know, the holding company for 03?

This is

, let me start with the percent hedge for 2003 we were 50 percent hedged of estimated EBITDA.

Yeah, how about in terms of the megawattage?

In terms of volume?

Right.

Actually we focus on the dollars versus the volume.

All right.

With respect to the guidance question, for 03, we historically provide that guidance at the end of the third quarter and that will be our plan going into the third quarter of this year, will be to provide the guidance for 03.

Let me just provide some elaboration with respect to 02 and that is we've changed our guidance by about 25 cents and the preponderance of the change in the guidance relates to the operations of the

as you might expect.

This is

asset sales. We have three assets that we're looking at selling. Unfortunately, the market is very tough and we haven't received a price for those assets that we're willing to accept right now. We have received a number of interesting offers and we're continuing to look closely at those. OK.

Can I

, the -- my understanding is there's about 9,000 megawatts or so of power that has not been hedged, that is under construction?

Well, this is

again. The way we approach this is we model what we think the availability is based on fuel prices and we hedge accordingly based on the amount of liquidity we have and the amount of depth in the forward market. So we anticipate when those new facilities will be coming on and we proportion

in relation to the construction schedule.

All right, next question.

Your next question is from Jason West of Deutsche Bank. Go ahead, Mr. West.

Yeah, could you guys provide any cash flow expectations for the

for maybe this year and next year if possible? Just, sort of where the operating cash flow is expected to come out?

Jason, I think that type of question is probably better taken off line with the

group in terms of level of detail that might be required to, sort of, go through the disclosure statements and the information's already in there.

Jason, this is

, I would add one thing to that, just in the general nature is there was one story out, I think on Bloomberg's about poor cash flows from

and that's prompted an interest, I know, the issue is rating, it's not the poor cash flow from

but it's the change in methodology, by the way, that

now uses to look at cash flows. They no longer count all the cash at

other than structured transactions already in place.

Right, well, just with the one follow-up on that, the cash flow from the earnings release from the quarter at

was -- looked like a loss of about 46 million, was that due to the charge -- was that a cash charge or was that something else?

Where are you looking, Jason?

The funds from operations on the last page.

That's a combination of higher interest costs, part of it's the operating loss. If you compare it to last year in particular, last year, you know, we had a portfolio management transactions cluster and the second quarter of last year we were liquidating some positions because of credit crunches and things of that nature so there was a fair swing in that. I noticed that number myself and asked some of our folks to look at it and I haven't -- with all that's going on, hadn't gotten a detailed explanation of it yet. But, I'm sure

will be able to give you more details later on.

OK, great. Thanks a lot.

Your next question is from John Riley of Watershed Asset Management. Go ahead, Mr. Riley.

Yes, good morning guys. Not to beat a dead horse, but I just want to make sure I'm looking at things the correct way, the way it was in the first Q regarding the guarantees and the cash that you need to put into this business now that your rating has dropped at the National Energy Group. I understand the 170 million that it sound like you have to put into the

now that the rating is down and the 76 million, but on the totaling and the other various obligations, in the Q at the end of March it said, net exposure under guarantees supporting totaling agreements was approximately 3 percent or 20 million based on your guarantees of 620 million. Now it sounds like the guarantees are about 575 million, what is that net exposure number as of the end of June, or actually as of today it would be, obviously, even better that you think you have to put up if you had a mark-to-market damage claim on your totaling agreements that you have with your counter parties?

I'm just trying to give you a precise answer here. I don't know that I can give you a better answer than what we've already provided to you, as you said, not to beat a dead horse. You know, part of the issue associated with the totaling transaction, it would be anything -- if we disagree with their determination then the resolution of the damages would be decided through arbitration and that would be our current fair market value for those totals versus the other counter party and so you go through that process and it would be inappropriate for us to say at this time what ours would be versus what theirs would be on a replacement

.

How did you get to the 20 million number that was in the Q. Like help us understand what that number was?

I think that's

. I think you're referring to the

John.

Actually under contingencies in the March 31, 02 PG&E National Energy Group 10-Q there's a sentence that says "as of March 31st, 2002 net exposure under guarantees supporting totaling agreements was 20 million dollars".

OK, I think what we ought to do is -- as we don't have that answer right at our fingertips, John, is work on it as we continue to take questions and we've got the obligation to come back to you with whatever response we have.

All right. Thanks.

OK.

The next question is from John Callendy of JK Utility Advisors. Go ahead please.

Your question on the earnings guidance of 225 to 235, you mentioned

should be better second half of the year, but can you -- what's assumed for

in that 225, 235 and then secondly, on the obligations at

of 1.3 billion with 730 million being performance related, you indicate you're performing on these contracts, I guess, can you explain a little bit further what that means and what that really does in terms of how that works and what that does to reduce that 730 million obligation to some more nominal number?

Let me take the first question, this is

, with respect to guidance. We historically, like many other companies in this industry, have not broken out guidance for the sub-components of the consolidated group. There are different numbers that have been put out there by research analysts and you can take a look at them, so what I would say is, there were numbers that people looked at before and the preponderance of the reduction that is occurring in our consolidated guidance that you see is really the result of the change in the performance of the

. So I think that's the best we can do at this time in answering that question.

Tom, could you address the second part of the question?

You might have to tell me the second part, someone else was whispering in my ear trying to answer the earlier question. Could you repeat the second part of your question?

Yeah, the second part of my question's to do with running through what the triggers were including 1.3 billion dollars of obligations with -- with, I think that the number was 730 million dollars related to performance contracts or obligations that 733 million dollar, I think, was indicated would be a much smaller number or a nominal number because you're performing on those contracts. I'm not sure what all that means, can you explain that; how that works?

Let me ask

in Bethesda to respond to that.

Thanks, Tom. This is John. Let me give you some examples of what's in this and why even though some of these guarantees have ratings triggers, we would not expect anybody to activate them.

For example, we have backstopped some of the construction contracts in wrapping the construction in which we have basically a prime contractor who has given the

contract for two of our major projects that are in our

facility. The guarantee was gave was basically a wrap which essentially provided that all the pieces of the project would be there and all the different -- a few pieces of the sub-contract. The underlying performance by the contractor is underway. They have guaranteed us, as well as the lenders, and they, in fact, have liquidated damage provisions in that agreement. So, even though there is a ratings trigger, our larger guarantee is with the same lenders who are basically already lending to the facility and, in fact, we have been working with them to remove those ratings triggers. That's approximately 550 million dollars there.

In addition, there's probably about 150 to 200 million dollars of guarantees to various other vendors for the equipment that we're purchasing for a construction that's underway. Some development work and things like that which has ratings triggers. We're performing under those agreements, in fact, some of those agreements are ones we're contemplating terminating and so the guarantees actually cover some of these termination payments that we have reserved for and would be expecting to pay. So it's things like that that are in that grab bag and clearly some of those are for performance under pipelines or assets or ash disposal contracts, things like that, that are related to our assets which we will need to actively work on to replace. But the actual order of magnitude of amounts of those guarantees which we would expect to have to actually collateralize with cash or letters of credit is a very small number.

So just what you ran through, that's 730 million dollars should approach -- should be a nominal number then?

Yeah. Also included in there is actually a guarantee that we've put on our own internal totaling and leasing agreement for the

transaction and so that's basically a guarantee of our own obligations to basically perform under that financing, that's a leaseback financing that we did. It's not a guarantee of the debt, but it's a guarantee of an internal

and as we're performing under the guarantee, we don't expect that to be called. That does not have a ratings trigger in it.

OK. Thank you.

OK. Steve, why don't we take two more questions and then we'll wrap it up.

Very well, sir. The next question is from Andy Levi of Bear Wagner. Go ahead please.

Hi guys. On the 3.8 billion dollars cash you have at the parent, how much of that, if any of it, is set aside for the interest payments that you talked about. And if you were to refinance 375 or roll it over, is it more likely that it's going to be a secured facility versus an unsecured facility, and mostly going forward on some of the other stuff that's maybe rolled over?

OK, let me begin the response to that question. You mentioned $3.8 billion of cash that's apparent. That number is really the number at the utility, so I just wanted to differentiate that. The number at the parent is approximately 5 to $600 million of cash, so that's the situation there.

And with respect to -- you may recall that the cash at the parent had been higher, in about the 4.5 billion range -- at the utility, excuse me. And what we have been doing is paying off some of the interest there, as prescribed by the court. We've been paying off some pre-petition liabilities so that cash has come down, but also the pre-petition liabilities have come down. Now, you had an additional question.

I'm sorry, just on the 3.8, is any of that set aside for future interest payments?

On the 3.8 billion, that's going to be utilized in connection with the plan of reorganization for coming out of bankruptcy over on the utilities side of the business.

So that money's basically spoken for already.

Well, it will be -- yes. It will go towards the resolution of the total $13 billion in obligations at the utility that have to be dealt with as part of the planned reorganization. Right, and the point that I'd also make is that the utility is paying interest currently on its obligations, debt obligations and others.

I understand that, thank you.

And then there was a question, I think, on the revolver.

Yes, I just wonder is that more likely to be a secured when you renegotiate it?

Yes, and I would differentiate that in contrast is at the

as opposed to the two members we talked about at the parent and the utility.

Yes, and right now we're going forward with the same security that we've had in the past, and hoping to get it done on that basis.

Next question.

And our last question is going to be from

of

.

Sorry, my follow up question has been answered. Thank you.

OK. Thanks.

OK, before we closed the call there were one or two questions that were asked that we were following up on, and I'd like to just take care of those before we close, so ...

. I've got the question

about the

we had hedged. And typically, we do focus on the dollars, however, if just looking at

, for 2002, we're 76 percent hedged. In 2003, we're 33 percent hedged.

OK, and then

, the controller?

And this is the follow up on the guarantee question from the disclosures from the first quarter versus what we said in the conference call relating to the tolling arrangement. We had talked about in this call -- we've extended 620 million of guarantees, and we gave a number of 575 million that have ratings triggers associated with them. Previously, we had disclosed that of these guarantees, they're actually issued in various

of guarantees, and they had ranges from 20 million up to 250 million. So the 20 million would be the lower end of the individual guarantees backing into various tolling arrangements.

OK. I'd like to thank everybody for being on the call. Have a good day.