Accounting Delays PG&E; Earnings
PG&E; Corp. delayed announcing its earnings Thursday, citing accounting foul-ups with off-the-books financial vehicles. The echoes of Enron Corp. caused shares to tumble in early trading.
PG&E; said it thinks that the financial vehicles, called “synthetic leases,” used to keep three power plants and some electricity-generating turbines off its books, may not have had enough outside ownership under federal rules, which would require the San Francisco utility holding company to amend its financial statements back to 1999.
However, PG&E; said, any reclassification would not have a “material impact” on earnings, equity or the company’s debt agreements. The amendment would involve increasing assets and liabilities by about $1 billion, PG&E; said, taking pains to point out that its use of off-the-books financing was limited and was fully disclosed in filings with the Securities and Exchange Commission.
Despite those assurances, PG&E;’s stock slumped in early trading, indicating Wall Street’s anxiety over accounting issues in the aftermath of Enron.
PG&E;’s stock dipped as low as $19.81 on Thursday morning on the New York Stock Exchange but ended the day at $20.12, down 47 cents, or 2.28%. Investors initially panicked but calmed down when the extent of the problem appeared to be relatively small, said Jeffrey Gildersleeve, an analyst with Argus Research Corp.
Gildersleeve, who has a “sell” rating on the stock, didn’t expect the disclosure to harm PG&E;’s prospects as its utility struggles to emerge from bankruptcy protection.
The utility, Pacific Gas & Electric, has proposed a reorganization that has been challenged by state utility regulators. The parent company and another subsidiary, National Energy Group, are not part of the bankruptcy.
“The timing was unfortunate in that the market is obviously very jittery about accounting and corporate transparency,” Gildersleeve said. “On the other side, it wasn’t something that they planned or thought about. It was more of a ‘whoops.’”
PG&E; had planned to release its earnings and file its annual 10-K report with the SEC before the market opened Thursday and to hold a conference call with investors to discuss the results. But as the firm and its auditors, Deloitte & Touche, were going over the documents Wednesday, they uncovered a “technical issue” related to four synthetic leases, PG&E; spokesman Greg Pruett said.
Instead of holding routine monthly payments from the partnerships in a special account, the proceeds were given to the participants, primarily banks, Pruett said, declining to name the partners. That may have accidentally reduced the ownership of outside investors below the 3% necessary to keep the assets off PG&E;’s balance sheet, he said.
PG&E; decided to wait to announce its results so that the numbers would be accurate and so that the earnings news release and the 10-K, which more fully discloses assets and liabilities, could be put out together, Pruett said. Enron was criticized by investors and analysts for failing to release those documents together, a move seen as attempting to cloud analysis of the energy trader’s complex business.
“We’ve always thought that it is far better to be excessive in providing information to investors,” and that practice has intensified with the Enron-inspired skittishness, Pruett said. The synthetic leases “were disclosed on a regular basis” and credit-rating companies were informed about them, he said.
PG&E; expects to resolve the accounting questions quickly and issue its 10-K, fourth-quarter and year 2001 earnings “in a fairly short time frame,” Pruett said.
Corporations commonly use synthetic leases to finance construction so that they can enjoy the tax advantages but don’t have to take depreciation charges from the assets against their earnings.
PG&E;’s National Energy Group used the leases to finance the $1.4-billion construction of a power plant in Connecticut, which is nearing operation, and the La Paloma power plant that is being built near Bakersfield.
