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The finance chief of California's largest utility company spoke with CFO.com Thursday about how it is coping with the turmoil in the capital markets.
Tim Reason, CFO.com | US
September 19, 2008
As CFO and treasurer of PG&E Corp., Chris Johns runs the numbers for the parent of California's largest investor-owned utility. It's a company that's seen crisis before: the 2000–2001 California energy crisis. That event, which featured soaring wholesale and retail energy prices, swiftly brought the company to its knees, forcing its two major subsidiaries into Chapter 11 and causing the parent to default on its loans and commercial paper.
PG&E has long since put its financial troubles in the past — its utility subsidiary, Pacific Gas & Electric, emerged from bankruptcy in 2004. But surviving those experiences left the company with a powerful belief in firm financial leadership — so much so that the CFO that led it through its troubles earlier in the decade, Peter Darbee, is now CEO, and Johns's boss.
As part of CFO.com's ongoing look at how finance professionals are coping with the current market crisis, Johns spoke with CFO.com Thursday about how their company is coping with the turmoil in the capital markets.
You actually issued a dividend yesterday. It must be nice to be a utility stock, which is traditionally considered a good bet for investors seeking safety.
Some things do continue to go on. In general you are right, although yesterday I was pretty surprised. A lot of times you will see people move to defensive utility stocks, of which we are one, but yesterday the entire sector was down. If they were taking a flight to quality, it must have been to cash and treasuries.
What was your reaction to Libor doubling overnight?
I can't say we're not a little surprised that it doubled overnight. It continues to show how highly sensitive the world economy is to market movements of almost any kind. When markets see something like that, or somebody announces they are having trouble getting access to credit or people are worried about their quarterly earnings, the marketplace's reaction seems to be a lot more extreme and not always as rational. When you think about the market starting to react to the Lehman news — the speed with which that happened, and the management's inability to provide any kind of plan or reaction [or to say] what Lehman's response would be, it becomes a little worrisome. You want to be able to at least get out and say here is the plan, here's how we are going to work through the troubles, but the market is not always allowing that to happen. [I wonder,] is this turbulence going to be more and longer than we had anticipated?
From the point of view of your own finance operations, what is your biggest concern?
The impact is mostly on our access to credit. We are obviously investment-grade and a pretty good credit ourselves, but we are in the middle of a very large capital investment program. We have told people we are investing $13 billion in infrastructure over the next years. It is important that we continue to have access to capital and credit over that time. The market reaction doesn't distinguish between higher-quality credit and lower-quality credit companies. On Tuesday there didn't appear to be access to credit anywhere, and as we look through the rest of this week, we are not anticipating seeing any senior debt, anywhere. We were able to eke $100 million out of the market yesterday. [PG&E issued $100 million in bonds.] But trying to do it on a large basis, I think it will continue to be challenging for a while. And then on the flip side, we do have some exposure to some of these organizations in terms of the banks that are participating in our credit facilities. If they are going through struggles, then it has an impact on us. Do we truly have access to credit from these institutions?
How are your customers doing paying their bills?
We have seen a slight [increase] in the amount of accounts receivable outstanding. Nothing material to our day-to-day operations, but it is an area we focus on continually.
How about your access to commercial paper?
The market is a little challenging, but we have been able to get access to levels of CP that we've needed. We have seen a pretty significant increase in price, and they are trying to pull back on the length of time CP can be outstanding. But we have been able to get access.
So, to summarize, it sounds like your main concern is access to capital.
It truly is. Are the markets going to settle enough that you can go out and get capital when you need it? Are people going to honor the credit lines that you have outstanding? One of the big concerns is that as Lehman is [bankrupt and] merging [into Barclays] and Merrill [is bought by BofA], that's two less banks that you can go to. As you think about what is going to happen with Morgan and Goldman, that limits competition and might have price impacts. As banks merge or get bought out, the amount that they participate in our credit facilities isn't additive. It generally goes down with consolidation. We believe we have access to credit and work well with our banks, but if [the consolidation and market turmoil] continue, it could have a large impact on our access to credit.
Could you defer some of that investment program you mentioned?
We're averaging about $3 billion a year in capital investment in the company, and while we have some ability to adjust those capital expenditures, a lot of it is just day-to-day business — hooking up lines, maintaining poles. And we continue to do that.
How would you compare this to other crises in your finance career?
You have to remember I went through the California energy crisis. This is the third time in my tenure that I've gone through a crisis here, and the focus is on cash. We've got processes in place [to make sure cash is invested safely] and make sure we have taken all the prudent steps necessary to make sure we can meet our cash needs. You don't want to sit and be subject to the changes in the marketplace, and you want to make sure you have the ability to control your own fate and have as much access to liquidity as you need.