PG&E; Cuts Dividend, Citing Deregulation
Demonstrating the profit pressure utilities face with the dawning of deregulation, Pacific Gas & Electric Co., the nation’s largest utility, said Wednesday that it is slashing the dividend on its stock by 39%.
Reductions in once-sacrosanct dividends have become more common for many electric utilities in recent years, as they seek to conserve cash for the competitive battle brought on by deregulation.
Edison International, parent of Rosemead-based Southern California Edison, hacked its dividend by 30% in 1994. Other major utilities that have cut their dividends in the 1990s include PacifiCorp in Portland, Ore.; FPL Group in Florida; and New York State Electric & Gas.
Similarly, a dividend cut has been widely expected at San Francisco-based PG&E;, but the size exceeded some analysts’ expectations. The reduction of the PG&E; payout to an annualized $1.20 per share from the previous $1.96 per share takes effect with the dividend payable in January.
Although the move may aggravate many smaller shareholders, Cheryl Richer, utility analyst at Standard & Poor’s, described the cut as a “positive” that could lead to an upgrading of PG&E;’s credit rating on Wall Street. If PG&E; had maintained its dividend indefinitely at a time of declining profit, its financial condition would have weakened, Richer said.
PG&E; announced the cut as it reported a 38% drop in its third-quarter profit, to $233 million on revenue of $2.52 billion, from $362 million on revenue of $2.6 billion a year earlier. And PG&E;’s profit will continue to fall in coming quarters, the firm said.
The dividend cut was prompted largely by higher costs and lower returns from PG&E;’s investment in its Diablo Canyon nuclear plant in San Luis Obispo County. PG&E; has received unusually high returns on power production at the nuclear plant because the utility five years ago accepted greater risk for power losses caused by outages.
But those returns will diminish sharply over the next several years as part of the cost recovery program embedded in the electricity deregulation bill signed by Gov. Pete Wilson. And PG&E; still faces uncertainties over how much of Diablo’s above-market operating and capital costs it can recover even as the fixed costs are paid off, said Dan Rudakas, utility analyst at Everen Securities in Chicago.
Moreover, the electricity deregulation law, with its mandated 10% reduction in electric rates starting in January 1998, will force PG&E; to accelerate the write-down of the value of other assets to prepare for the shift from energy monopoly to competition.
“Implementation of this new law will mean that earnings will be lower than in the recent past and under greater pressure in the competitive marketplace,” PG&E; Chief Executive Stanley T. Skinner said.
PG&E; shares closed at $23.625 on Wednesday, down 25 cents on the New York Stock Exchange, before the news was announced. The stock has already fallen from a high of $30.625 in late-1995.
Whether PG&E;’s cut is indeed larger than many investors expected will be shown today as the stock resumes trading. The new dividend provides an annualized yield of 5.1% based on the stock’s Wednesday close. That is below the yields on many other electric utilities, including Edison (5.3%) and Enova Corp. (6.9%). The average electric utility yield is about 6%.
Because investors don’t expect great price appreciation from most utility stocks, the yield must be high enough to lure investors. If investors feel that PG&E; stock should yield more, the price will fall, thus raising the yield to new buyers.
California utilities in general have been more prone to dividend cuts because California has been at the vanguard of deregulation. Pacific Telesis, parent of Pacific Bell, slashed its dividend 42% this year as a prelude to its planned merger with SBC Communications.
