PG&E Corp. Reports Third Quarter Financial Results

Utility Operating Statistics
PG&E NEG Operating Statistics
  • PG&E Corporation reported total net income of $1.19 per share for the third quarter of 2002, compared with $2.12 per share for the third quarter of 2001. (All "per share" amounts in this release are presented on a diluted basis.)
  • On an operating basis, earnings without "headroom" were $0.69 per share, compared with $0.70 per share for the third quarter of 2001. Including headroom, the Corporation's earnings from operations were $1.64 per share for the third quarter this year, compared with $2.45 per share for the third quarter of 2001.
  • Pacific Gas and Electric Company's earnings from operations, without headroom, rose slightly over operating earnings for the same period a year ago, at $0.59 per share, compared with $0.53 per share for the third quarter of 2001.
  • PG&E National Energy Group (PG&E NEG) reported earnings from operations of $0.08 per share, compared with $0.21 per share for the third quarter of 2001.

(San Francisco) -- PG&E Corporation (NYSE: PCG) 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.


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.


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 conference call with the financial community will be held today at 8:30 AM Pacific time to discuss the Corporation's results for the quarter. The call will be open to the public on a listen-only basis via webcast. Please visit our website for more information and instructions for accessing the webcast. A replay of the conference call will be available toll-free by calling (877) 690-2088, and also will be available on our website. International callers will be able to access the replay by dialing (402) 220-0644.

* Terms Used in This Release Headroom - Headroom is generation-related revenues in excess of power costs at Pacific Gas and Electric Company.

This press release contains forward-looking statements regarding management's guidance for 2002 earnings per share (which excludes any potential charges resulting from PG&E NEG's restructuring efforts currently underway), and management's guidance for 2003 earnings per share (which excludes any earnings impact from PG&E NEG operations or the restructuring efforts currently underway), that are necessarily subject to various risks and uncertainties. These statements are based on current expectations and assumptions which management believes are reasonable and on information currently available to management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of many factors, including:

  • whether the Utility can continue to record "headroom" (the current recovery in the Utility's existing electric rates of prior uncollected costs previously written off according to accounting principles generally accepted in the United States) and changes in the quarterly amount of such headroom;
  • the pace and outcome of the Utility's bankruptcy case; · whether the Utility is required to re-assume the obligation to purchase power for its retail customers, or take assignment of the Department of Water Resources' (DWR) contracts, or both, under circumstances that threaten to undermine the Utility's creditworthiness, financial condition, or results of operations;
  • whether and the extent to which the CPUC disallows any Utility costs associated with the administration of the DWR's power contracts allocated to the Utility's customers;
  • the effect of CPUC decisions implementing recently enacted California Senate Bill 1976, which requires the California investor-owned utilities resume procuring power for their retail customers on January 1, 2003;
  • the CPUC's determination of the end of the rate freeze and the amount of under-collected power procurement and transition costs the Utility is allowed to collect from its customers after the end of the rate freeze;
  • the Utility's ability to transition successfully from its existing customer billing system to a new customer billing system, currently undergoing implementation and testing, without suffering significant business interruption loss;
  • the outcome of PG&E NEG's negotiations with its lenders to reach a global restructuring of PG&E NEG's and its subsidiaries' debt, which would require PG&E NEG to abandon, sell, or transfer certain of PG&E NEG's merchant assets and reduce energy trading operations;
  • the extent to which PG&E NEG incurs a charge to earnings as a result of the abandonment, sale or transfer of assets, whether such transactions occur in connection with the implementation a global restructuring as may be agreed to by the lenders or in an effort to meet current liquidity needs;
  • the extent to which counterparties demand collateral in connection with energy trading activities, and the ability of PG&E NEG and its subsidiaries to meet the liquidity calls that may be made;
  • the volatility of commodity fuel and electricity prices and the effectiveness of risk management policies and procedures;
  • future sales levels;
  • volatility in income resulting from mark-to-market accounting, changes in mark-to-market methodologies, and the extent to which the assumptions underlying mark-to-market accounting and risk management programs are not realized;
  • the ability of counterparties to satisfy their financial commitments and the impact of counterparties' nonperformance on liquidity;
  • the effect of compliance with existing and future environmental laws, regulations, and policies, the cost of which could be significant;
  • the effect of new accounting pronouncements; and the outcome of pending regulatory proceedings, environmental matters, and litigation.

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