PG&E Corp 10-Q Summary: Period Ended September 30, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2003, for PG&E Corporation and its principal subsidiary, Pacific Gas and Electric Company (the Utility). The Utility has been operating as a Debtor-in-Possession under Chapter 11 of the U.S. Bankruptcy Code since April 6, 2001. A significant development in this period was the Chapter 11 filing of PG&E National Energy Group, Inc. (renamed NEGT, Inc.) on July 8, 2003. Consequently, PG&E Corporation deconsolidated NEGT, Inc. and reported its operations as discontinued operations effective July 8, 2003. The Utility is currently pursuing a proposed settlement agreement with the California Public Utilities Commission (CPUC) to emerge from bankruptcy as an investment-grade utility.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2003 |
|---|---|---|
| Operating Revenues | $3,103 | $7,897 |
| Operating Income | $1,173 | $2,026 |
| Net Income | $510 | $383 |
| Net Income from Continuing Operations | $508 | $754 |
| Loss from Discontinued Operations (NEGT) | $(2) | $(365) |
| Cash and Cash Equivalents | $4,675 | $4,675 (Balance Sheet) |
| Net Cash Provided by Operating Activities | N/A | $2,916 |
| Liabilities Subject to Compromise | $9,317 | $9,317 (Balance Sheet) |
| Long-Term Debt (Non-Compromise) | $3,313 | $3,313 (Balance Sheet) |
Material Changes vs. Prior Period
- Net Income Decline: Net income for the nine months ended September 30, 2003, was $383 million, a significant decrease from $1,315 million in the same period in 2002. This decline is primarily driven by a $365 million loss from discontinued operations (NEGT, Inc.) and higher costs of electricity and natural gas.
- Revenue Mix: Total operating revenues decreased slightly year-over-year for the nine-month period ($7,897 million vs. $8,108 million). Electric revenues fell $631 million due to changes in DWR pass-through revenues and lower average sales prices, while natural gas revenues increased $420 million due to higher commodity costs passed through to customers.
- Cost Increases: Cost of electricity increased $841 million (94.1%) and cost of natural gas increased $407 million (69.3%) for the nine-month period, largely due to increased volumes purchased and higher market prices.
- Debt Restructuring: In July 2003, PG&E Corporation issued $600 million in Senior Secured Notes to repay its existing credit agreement, incurring an $89 million pre-tax loss on the write-off of unamortized fees.
Guidance, Outlook, and Risks
Settlement Plan: The Utility and CPUC announced a proposed settlement agreement in June 2003. If approved, the Utility would emerge from Chapter 11 with an investment-grade rating (BBB- or Baa3), pay all valid creditor claims in full, and establish a $2.2 billion after-tax regulatory asset amortized over nine years. Creditor voting concluded in late September 2003 with all classes voting in favor; the confirmation hearing began November 10, 2003.
Regulatory Risks: The Utility faces significant uncertainty regarding the recovery of surcharge revenues and the allocation of California Department of Water Resources (DWR) revenue requirements. If the settlement is not approved, the Utility may be required to refund billions in surcharge revenues, materially adversely affecting earnings.
Legal and Environmental: The Utility is involved in extensive litigation, including chromium exposure claims (with a $160 million reserve) and natural gas royalty litigation. Environmental remediation liabilities are estimated at $323 million, with a potential upper limit of $418 million.
Dividends: PG&E Corporation did not declare dividends in the first nine months of 2003. Under the proposed settlement, the Utility would not pay dividends before July 1, 2004.
Investor Verification Checklist
- Settlement Confirmation: Verify the status of the Bankruptcy Court confirmation hearing for the CPUC Settlement Plan and the CPUC's final vote expected in late December 2003.
- NEGT Separation: Confirm the final terms of NEGT, Inc.'s reorganization plan and the resulting write-off or gain recognition for PG&E Corporation's equity interest.
- Surcharge Revenue Status: Monitor CPUC decisions regarding the retention of approximately $7.5 billion in surcharge revenues collected since 2001.
- DWR True-Up: Track the outcome of the 2001-2002 DWR revenue requirement true-up proceeding, which could result in significant cash payments or refunds.
- Chromium Litigation: Review the schedule and outcomes of the test trial for chromium exposure claims, scheduled to begin in March 2004.