PG&E; Defends Including Windfall in Its Earnings Guidance for 2002

PG&E; Corp., parent of California’s largest utility, Wednesday defended its decision to include gains from the gap between power costs and higher retail rates for the first time in forecasting earnings, and declined to specify how much of that windfall was built into its guidance.

PG&E; Chief Executive Robert Glynn said the inclusion of that so-called headroom in the company’s 2002 earnings guidance was necessary due to “regulatory uncertainty” surrounding its Pacific Gas & Electric Co unit, which remains in Chapter 11 bankruptcy.

PG&E; on Tuesday projected 2002 earnings of $3 a share, but in a reversal of past practice included the difference between fixed retail rates earned by its utility unit and its costs of operations. A large surplus during the last few months has allowed it to recover previously written-off costs.

San Francisco-based PG&E; Corp. did not forecast a parallel loss in 2001 when market conditions were reversed and wholesale prices were above retail rates, opting instead to treat the difference as a one-time charge.

Although the company’s 2002 earnings guidance appeared to indicate flat earnings versus $3.02 a share in 2001, Wall Street analysts, who have mostly stripped out the price differential, were forecasting a substantial drop in 2002 earnings.

“Headroom is included as a proxy for regulatory uncertainty,” Glynn told a Morgan Stanley energy conference. Glynn, during the question-and-answer session, repeatedly declined to specify how much “headroom” was included in the company’s guidance while saying he was not seeking to “obfuscate” the company’s outlook.

Analyst Scott Pearl of Credit Suisse First Boston said Wednesday in a research report that company guidance includes as much as 60 cents a share of headroom. He projected the company’s 2002 earnings at $2.40 a share, excluding headroom.

Analyst James Dobson of Deutsche Banc Alex. Brown on Wednesday cut his estimate for 2002 to $2.50 a share from $2.95, also excluding headroom.

Dobson said although the company’s earnings guidance implied about 50 cents a share in headroom earnings in 2002, it would probably be much larger than that, noting “reported earnings in 2002 are likely to significantly exceed $3 a share.”

PG&E; shares fell 36 cents to $22.61 on the New York Stock Exchange.