PG&E Corp 10-Q Summary: Quarter Ended March 31, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 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. PG&E Corporation's other major subsidiary, PG&E National Energy Group (PG&E NEG), is facing severe liquidity constraints and is in default on approximately $2.9 billion in recourse debt and guaranteed equity commitments. PG&E NEG is engaged in debt restructuring discussions and may file for Chapter 11 protection in the second quarter of 2003.
Key Financial Metrics
| Metric (in millions) | Q1 2003 | Q1 2002 |
|---|---|---|
| Total Operating Revenues | $2,607 | $2,935 |
| Operating Income (Loss) | $(129) | $1,301 |
| Net Income (Loss) | $(354) | $631 |
| Net Cash Provided by Operating Activities | $933 | $1,190 |
| Cash and Cash Equivalents (Ending) | $4,568 | $5,680 |
| Total Debt in Default (PG&E NEG) | $4,373 | $4,230 |
| Liabilities Subject to Compromise (Utility) | $9,216 | $9,185 |
Note: The Utility reported a net loss of $73 million for the quarter, while PG&E NEG reported a net loss of $369 million.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by $328 million (11.2%) primarily due to a $541 million decrease in Utility electric revenues. This was driven by increased pass-through revenues to the California Department of Water Resources (DWR) and lower sales volumes due to mild weather.
- Profitability Reversal: The company swung from a net income of $631 million in Q1 2002 to a net loss of $354 million in Q1 2003. This was largely due to a $707 million increase in the Utility's cost of electricity (excluding a one-time $595 million benefit in 2002 from ISO accrual reversals) and $200 million in impairment and write-off charges at PG&E NEG.
- Impairments: PG&E NEG recorded $200 million in impairments, write-offs, and other charges, primarily related to the consolidation of Attala Generating Company LLC and a settlement with Shaw Group.
- Discontinued Operations: Losses from discontinued operations (USGenNE, Mountain View, ET Canada) totaled $70 million in Q1 2003, compared to earnings of $8 million in Q1 2002.
Guidance, Outlook, and Risks
- Bankruptcy Proceedings: The Utility's confirmation trial for its Plan of Reorganization and the alternative CPUC/OCC Plan was stayed by the Bankruptcy Court until at least June 16, 2003, to facilitate settlement negotiations. The outcome remains uncertain.
- PG&E NEG Liquidity: PG&E NEG is in default and lacks sufficient cash to meet obligations. Management does not expect current restructuring efforts to restore financial condition without a Chapter 11 filing. Lenders may force an involuntary proceeding or PG&E NEG may file voluntarily in Q2 2003.
- Regulatory Risks: The Utility faces uncertainty regarding the recovery of under-collected transition costs and the potential requirement to refund surcharge revenues collected after the statutory end of the rate freeze. The California Supreme Court is reviewing related legal interpretations.
- Environmental and Legal: Significant contingencies include the Chromium litigation (reserve of $160 million), environmental remediation liabilities ($286 million), and potential costs related to nuclear decommissioning and steam generator replacements at Diablo Canyon.
- Accounting Changes: The company adopted SFAS No. 143 (Asset Retirement Obligations) and SFAS No. 146 (Exit Costs), resulting in minor cumulative effect losses.
Investor Verification Checklist
- Bankruptcy Plan Confirmation: Monitor the status of the Utility's Plan of Reorganization versus the CPUC/OCC alternative plan and the likelihood of confirmation.
- PG&E NEG Restructuring: Verify the timeline and terms of any potential Chapter 11 filing by PG&E NEG and the impact on the parent company's guarantees.
- DWR Pass-Through Liability: Confirm the final determination of the DWR revenue requirement and the extent of the $539 million accrued liability for pass-through revenues.
- Surcharge Refund Risk: Assess the probability of the CPUC ordering refunds of the one-cent, three-cent, and half-cent surcharges collected post-rate freeze.
- Environmental Compliance Costs: Review updates on the Salem Harbor and Brayton Point plants regarding compliance with new emission standards and potential shutdowns.