Nov. 14, 2002 — PG&E Corp. earned $466 million, or $1.19 per share, in total net income for the third quarter of 2002. The corporation earned $771 million, or $2.12 per share, for the same quarter in 2001.
On an operating basis, the corporation reported earnings both excluding and including $376 million, or $0.95 per share, of “headroom.” Excluding headroom, earnings from operations were $274 million, or $0.69 per share for the quarter, compared with $256 million, or $0.70 per share for the same quarter last year. Including headroom, earnings from operations for the quarter were $650 million, or $1.64 per share, compared with $892 million, or $2.45 per share, for the same quarter in 2001.
Headroom reflects the partial recovery of prior uncollected wholesale power and transition costs which the company was required to write off during the energy crisis.
“Our focus in the third quarter remained on solid fundamental operating performance, advancing toward confirmation of Pacific Gas and Electric Company’s plan of reorganization, and working closely with PG&E National Energy Group’s lenders toward longer term solutions to current financial challenges,” said Robert D. Glynn, Jr., Chairman, CEO and President of PG&E Corporation.
Total net income for the third quarter also reflected a number of items impacting comparability with third quarter 2001 operating results.
The most significant items included incremental interest costs of $75 million, or $0.18 per share, associated with the energy crisis and the utility’s Chapter 11 filing; $71 million, or $0.18 per share, of charges to reflect reductions in the value of goodwill; $18 million, or $0.05 per share, for impairment losses associated with certain equipment for the PG&E NEG’s dispersed generation program; $68 million, or $0.17 per share, of costs associated with the $600 million term loan repaid to GE Capital in late August and the related waiver obtained from the other Corporation lenders; $11 million, or $0.03 per share, of restructuring costs at PG&E NEG; and bankruptcy-related costs of $32 million, or $0.08 per share, generally consisting of external legal and financial advisory fees.
These charges were offset partially by $42 million, or $0.11 per share, in gains reflecting the change in the market value of PG&E NEG warrants issued in connection with the corporation’s term loan agreement; $6 million, or $0.02 per share, for a change in mark-to-market accounting methodology at PG&E NEG; and $43 million, or $0.11 per share, in tax benefits related to PG&E NEG’s synthetic fuel investment tax credits.
The corporation’s quarterly report on Form 10Q, to be filed today with the U.S. Securities and Exchange Commission, also discloses the earnings impact of accounting for stock options if the company were to record them as an expense. For the third quarter, accounting for stock options as an expense would have reduced earnings by $0.02 per share.
Pacific Gas and Electric Co.
Not including headroom, the corporation’s California utility business, Pacific Gas and Electric Company, contributed $232 million, or $0.59 per share, to earnings from operations for the quarter, compared with $192 million, or $0.53 per share, for the same period in 2001.
Third quarter 2002 results were higher primarily because they include the continuing benefit of CPUC-authorized revenue adjustments granted last year to cover the costs associated with growth in the utility’s rate base and inflation during 2001. Third quarter 2001 did not include the adjustment because it occurred and was booked entirely in the fourth quarter. This year, however, the benefit has been partially offset by the fact that to date no adjustment has been authorized to cover these costs for 2002.
Earnings from operations including headroom were $608 million, or $1.54 per share, for the quarter, compared with $828 million, or $2.28 per share, for the same quarter last year.
Operational performance at the utility remained strong in the third quarter, as the utility continued to deliver safe, reliable electric and gas service. The utility also received high marks from customers responding to its customer service survey, with more than 90 percent rating their service as good, very good or excellent.
“Our utility team continues to deliver more than just safe, reliable electricity and natural gas service to our 14 million customers,” said Glynn.
“We’re delivering nationally recognized award-winning energy efficiency and conservation programs, environmental leadership in such areas as greenhouse gases and federal clean air legislation, programs to help customers who are economically at risk, an award-winning equal opportunity purchasing program that helps thousands of small businesses, and support for hundreds of local organizations and programs in various communities. And we’re doing this with the lowest system-wide average electric rates among California’s three largest investor-owned utilities. This performance continues to provide a solid foundation for us to move forward with the utility’s plan of reorganization.”
Progress on the plan of reorganization in the third quarter included several significant milestones. The plan received the overwhelming approval of nine out of 10 voting creditor classes, allowing the plan to move forward into the confirmation process, which is scheduled to begin November 18. Also important, the U.S. District Court ruled in the company’s favor affirming that the federal bankruptcy law allows state law to be expressly preempted in order to confirm a plan of reorganization. More recently, an administrative law judge with the Federal Energy Regulatory Commission issued a preliminary decision approving the long-term power contract proposed as part of the utility’s plan.
PG&E National Energy Group
The corporation’s national wholesale energy business, PG&E National Energy Group, reported earnings from operations of $33 million, or $0.08 per share, for the quarter, compared with earnings from operations of $77 million, or $0.21 per share, for the third quarter of last year.
PG&E NEG’s third quarter earnings from operations included a contribution of $0.04 per share from the unit’s Integrated Energy and Marketing segment, compared with $0.18 per share for the same quarter last year. The difference primarily reflects lower power prices in New England for the third quarter of 2002, a change in the value of certain long-term contracts that is reflected in operating results, and the absence of any portfolio management transactions like the sale of the Otay Mesa power project which contributed income to the third quarter of 2001.
Performance on the PG&E NEG’s Northwest natural gas pipeline, which operates almost entirely under long-term contracts, remained solid for the third quarter. The Interstate Pipeline Operations segment of the PG&E NEG contributed $0.05 per share for the quarter, compared with $0.05 per share for the same quarter of 2001.
PG&E NEG moved forward in the third quarter with previously announced plans to reduced its annual expenses through staff reductions and other cost cutting steps. For example, PG&E NEG recently announced its plans to shut down its Spencer Station Generating facility in Texas by the end of 2002. These steps are expected to achieve an annual reduction rate of $50 million in expenses from 2001 levels, exceeding the initial goal of achieving a $40 million reduction. Third-quarter results include a pre-tax non-operating charge of $19 million to reflect the costs of implementing these plans.
In addition to expense reductions, PG&E NEG has continued to seek opportunities for transactions to reduce debt and increase liquidity. In the fourth quarter, PG&E NEG signed an agreement in principal to sell one-half of its 50 percent interest in the Hermiston Generating plant in Oregon.
PG&E NEG is continuing talks with several groups of lenders and debt holders to reach a resolution to the financial challenges associated with recent credit downgrades and weak wholesale power market conditions. Because its finances are not sufficient to meet its obligations to these parties, PG&E NEG is seeking to reach agreement with the parties on a proposed comprehensive debt restructuring plan. Elements of the restructuring may include abandoning, selling or transferring certain assets and continuing to reduce the company’s energy trading activities.
Third quarter results also included $9 million, or $0.02 per share, in earnings from operations at the holding company, reflecting consolidated tax benefits.
During the quarter, the corporation worked with lenders under its term loan agreement to eliminate credit ratings triggers associated with PG&E NEG and provide for an additional $300 million in loans. Those efforts led to a new credit agreement signed in October. The new $300 million replaced a portion of the funds the corporation used to pay off a $600 million loan from GE Capital in August.
The corporation expects that the new borrowings, combined with an existing loan for $420 million, will provide the corporation with ample financial resources to fund its operations through 2006, when the loans are due.
“Given the recent climate in the energy industry and the challenges many companies have faced, we strongly believe it is prudent to take steps now to maintain increased financial flexibility until we see a longer term stabilization and recovery in the marketplace,” said Glynn. “The credit agreement our team negotiated with the lenders achieves this goal.”
The corporation reaffirmed its prior projections for 2002 earnings from operations excluding headroom, which are expected to be in the range of $2.25-$2.35 per share for the year. For earnings from operations including headroom, the corporation reaffirmed its projection of $4.75 per share for 2002. Through three quarters, earnings from operations including headroom is $4.23 per share.
The corporation is providing 2003 guidance only for the holding company and utility operations, recognizing that accurate guidance for PG&E NEG cannot be provided until further steps have been taken to resolve the challenges in that business. Earnings from operations for the corporation and the utility are expected to be in the range of $1.90-$2.00 per share, not including headroom.
Among other assumptions, the 2003 guidance estimate is based on the company’s expectation that the utility’s plan of reorganization will be implemented on or before May 30, 2003.
A replay of the conference call will be available toll-free by calling 877-690-2088, and also will be available on their web site at www.pgecorp.com. International callers will be able to access the replay by dialing 402-220-0644.