U.S. power sector downturn seen lasting 3-5 years

LOS ANGELES, June 13 (Reuters) -

The power industry may be near the bottom of its business cycle and the trough should last at least three years, but no more than five, the head of the PG&E National Energy Group said on Thursday.

"We expect the current trough to last at least three years," said Tom Boren, president and chief executive of PG&E National Energy Group.

Boren, who was speaking at the Deutsche Bank Electric Power Conference in New York, said he believed that revelations related to the trading strategies and demise of industry giant Enron Corp. were continuing to hurt other players.

"Everyone is looking at this. and it is causing a crisis of confidence," Boren said in a Webcast monitored here, noting that barely a day passed without another negative story about the industry.

Bethesda, Maryland-based PG&E National Energy Group operates power plants and natural gas pipelines and is also an energy trader. It is a unit of San Francisco-based PG&E Corp. .

Boren said "spark spreads," a measure of the profitability of making electricity from natural gas, were currently between $8 and $12 for both 2002 and 2003.

"That is below what we want in terms of making a reasonable return," he noted.

Boren said that many industry participants were laying off traders and concentrating more on just earning a return on their assets. National Energy Group was seeking a "balanced" approach, maintaining a trading operation while keeping a strong asset base, said.

"If you don't have a trading business you can expect a much lower return overall, I think," he said.

Boren said his company was well placed to deal with the industry's current liquidity crisis after experiencing a "life or death situation" last year, earlier than its rivals.

The company's liquidity was affected by the problems of sister utility Pacific Gas & Electric, which filed for Chapter 11 bankruptcy protection in April 2001.

"They (other power producers) are going through it (the liquidity crisis) as a herd. We went through it as a lone steer and that is to our advantage," Boren said.

He noted organizations such as rating agencies had been able to spend much more time helping the company through its crisis because there was not "a ton of other companies challenged at the time."

Earlier this week, PG&E National Energy Group said it had restructured $889 million in financing agreements to eliminate clauses that could have forced it to repay debt early or to post collateral, should its credit ratings be cut.

The company is rated Baa2 by credit rating agency Moody's Investor Service with a negative outlook. It is rated BBB by agency rival Standard & Poor's with a stable outlook. Both ratings are low investment grade.

Moody's also recently issued a report saying that energy trading companies might be too volatile to deserve investment-grade ratings unless they can link to more stable businesses that can generate increasing cash flows.

"I am optimistic we will be successful in removing other key rating triggers over the next few months," he said.

PG&E Corp. shares were down 19 cents at $20.41 in late trading on the New York Stock Exchange on Thursday.