PCG

PG&E Corp 10-Q Summary: Period Ended June 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 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 bankruptcy protection since April 2001. A critical development occurred on July 8, 2003, when PG&E National Energy Group, Inc. (PG&E NEG), another major subsidiary, filed for Chapter 11 bankruptcy. Consequently, PG&E Corporation ceased consolidating PG&E NEG's financial results effective July 8, 2003, and will account for the investment using the cost method.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Shift: PG&E Corporation reported a net income of $227 million for the quarter ended June 30, 2003, compared to $218 million in the same period in 2002. However, for the six-month period, the company reported a net loss of $127 million, a significant decline from the $849 million net income recorded in the first half of 2002.
• Revenue Composition: Utility operating revenues decreased by $131 million in the quarter and $672 million in the six-month period compared to 2002. This was primarily driven by increased pass-through revenues to the California Department of Water Resources (DWR) and lower average electric sales prices. Conversely, natural gas revenues increased significantly due to higher market prices passed through to customers.
• Expense Increases: Operating expenses rose due to higher costs of electricity and natural gas. Reorganization professional fees and expenses increased to $65 million for the quarter and $100 million for the six months, compared to $18 million and $34 million in the prior year periods, reflecting ongoing bankruptcy proceedings.
• Impairments and Charges: PG&E NEG recorded significant impairment charges, including a $175 million charge related to the consolidation of Attala Generating Company SPEs and a $30 million charge for the DTE-Georgetown toll termination fee.

Guidance, Outlook, and Risks

Settlement Plan: On June 19, 2003, PG&E Corporation, the Utility, and the California Public Utilities Commission (CPUC) announced a proposed settlement agreement to supersede competing reorganization plans. The plan envisions the Utility remaining a vertically integrated utility. It contemplates the issuance of approximately $8.7 billion in debt to satisfy allowed claims and the creation of a $3.7 billion regulatory asset to restore financial health. The plan requires CPUC approval (expected December 2003) and Bankruptcy Court confirmation.

PG&E NEG Deconsolidation: Following PG&E NEG's Chapter 11 filing, PG&E Corporation no longer consolidates its results. If the reorganization plan is implemented, PG&E Corporation's equity interest in PG&E NEG will be eliminated, potentially resulting in a one-time non-cash gain, though the amount cannot be estimated.

Key Risks and Contingencies:

• Regulatory Uncertainty: The Utility's financial condition depends heavily on the approval of the settlement agreement and the outcome of the California Supreme Court's review of a similar settlement involving Southern California Edison (SCE), which could impact the legality of recovering under-collected costs.
• Liabilities Subject to Compromise: The Utility has recorded approximately $9.5 billion in liabilities subject to compromise. The final amount of valid claims remains uncertain pending objections and settlements.
• Environmental and Legal: Significant contingencies include environmental remediation liabilities (estimated at $302 million for the Utility), chromium litigation (reserve of $160 million), and potential refunds related to surcharge revenues if the settlement is not approved.
• Liquidity: The Utility operates under Bankruptcy Court supervision, restricting access to capital markets and requiring court approval for certain payments. PG&E NEG is in default on approximately $5.6 billion of debt and equity commitments.

Investor Verification Checklist

• Settlement Plan Status: Verify the progress of the CPUC evidentiary hearings and the Bankruptcy Court's confirmation timeline for the proposed reorganization plan.
• PG&E NEG Deconsolidation Impact: Review the pro forma financial information to understand the standalone financial position of PG&E Corporation without PG&E NEG's losses.
• Regulatory Asset Recognition: Confirm the accounting treatment and probability of recovery for the proposed $3.7 billion regulatory asset and the $1.3 billion retained generation asset.
• Surcharge Revenue Validity: Assess the risk of potential refunds regarding the $6.5 billion in surcharge revenues collected since 2001, contingent on the California Supreme Court ruling and settlement approval.
• Debt Default Status: Monitor the status of the $4.69 billion in debt in default and the $9.27 billion in liabilities subject to compromise, including interest accruals and potential restructuring terms.