Utility Profits Up Despite Recession

By Published On: February 29, 2008

As the nation slumps into a possible recession, California energy utilities remained insulated from the economic malaise. Utilities’ profitability is apparently due to regulatory decisions that allowed them to recoup their capital investments from ratepayers and earn higher profits by operating more efficiently. All three major California energy companies plan to increase their dividends this year, reflecting their projected earnings growth. PG&E Corporation–the parent company of Pacific Gas & Electric, the utility–earned 36 percent more in the fourth quarter 2007 than the same period a year earlier thanks to Pacific Gas & Electric ratepayers who paid for the utility’s $2.8 billion of capital investments in infrastructure last year. PG&E bucked the ailing national economy by earning $203 million in net income for the fourth quarter 2007 ended December 31, 2007, compared to $152 million in fourth quarter 2006. PG&E reported earnings of $1 billion in net income for all of 2007, compared with $991 million in 2006. Its revenue for 2007 was $13.24 billion, up from $12.54 billion in 2006. PG&E credited its earnings surge to the California Public Utilities Commission’s favorable decision in the utility’s cost of capital proceeding. The CPUC approved a higher rate base for the utility, enabling the utility to recover its investments in new electric transmission lines, expanded gas pipeline capacity, so called “smart” meters, and new power plants. Moreover, revenue decoupling insulates the utility’s revenues from market volatility of increases and decreases in sales, PG&E officials said. (California separates a utility’s income from the amount of energy it sells, thus, allowing an incentive for energy efficiency.) PG&E anticipates a slight decrease in sales growth this year and a decline in new customer connections while its 2008 capital infrastructure investments will remain at the same level as 2007. “Investing in our system with aging infrastructure and higher load is key to long-term reliability and customer satisfaction,” said Peter Darbee, the corporation’s chair and chief executive officer. “We will continue to focus our attention on infrastructure investment and providing our customers with clean and reliable power, safely and cost effectively,” Darbee added. PG&E added 1,540 GWh in renewable energy resources last year. It is on track to achieve its state-mandated renewable portfolio standard, he added. According to Darbee, PG&E is committed to making its generation mix cleaner with more renewables. That is expected to not only reduce greenhouse gas emissions but lower risks and increase returns for shareholders in a new energy world dominated by concerns about global warming. PG&E broke ground last year on Gateway Generating Station, the utility’s first new power plant in California in 20 years, Darbee noted. The utility also is on target to complete its operational takeover of the Colusa generating plant and finish installing new turbines for the Humboldt power plant in 2010, he said. On the gas side, the utility also expanded its natural gas pipeline capacity and designed its $1.2 billion 130-mile Central California Clean Transmission Line from Bakersfield to Fresno. It is slated to come on line by 2012. Darbee acknowledged, however, that rising costs for construction materials will keep the utility’s capital costs high, with ratepayers, rather than shareholders, shouldering more of those investments. However, PG&E officials assured investors that the company’s contracts for advanced meters, generating stations, and large transmission projects included built-in 5 to 15 percent contingency costs to insulate the utility from market volatility. The CPUC approved an 11.35 percent return on equity for PG&E’s 2008 cost of capital with a 52 percent ratio, enabling the utility to earn a rate of return on up to 52 percent of its capital investments. PG&E is forecasting its 2008 earnings at between $2.90 and $3.00 a share based on its authorized earnings ratio and assumed energy efficiency gains. The utility asked the CPUC to approve an additional $565 million for advanced metering and other infrastructure investments in its $18.5 billion rate base for 2008, said Bill Morrow, the utility’s chairman and chief executive officer. PG&E plans to install over 1.25 million real-time meters in its service territory by the end of this year to help customers conserve energy and enable the utility to profit from the CPUC’s decision enabling utilities to recover 65 percent of their energy efficiency investments. PG&E, which currently has 200,000 smart meters installed, helped customers save enough energy last year to power 280,000 homes, Morrow said. Edison International’s fourth quarter and 2007 earnings reports reflect the company’s heavy investments in new digital technology to revamp its aging transmission and distribution systems and position itself to expand into new markets, officials said. Edison International reported net income of $211 million for the fourth quarter of 2007, down from $288 million in the fourth quarter of 2006. Edison’s 2007 net income was $1.098 billion compared to $1.18 billion in 2006. These results were offset by a 20 percent increase in Edison’s 2007 earnings fueled by subsidiary Edison Mission Energy’s increased energy margins and the regulated utility’s operating gains. Edison, the utility, increased its generation by 3.3 percent last year in both capacity and output. The unregulated subsidiary, Edison Mission’s 2007 core earnings were $560 million compared to $424 million in 2006. Edison, the utility, reported core earnings of $676 million in 2007, up from $618 million in 2006. Edison’s 2007 earnings report reflects $2.7 billion of debt refinancing in the second quarter of 2007 for Edison Mission Group, the company’s power generation business, and Southern California Edison’s record $2.2 billion in infrastructure investments. John Bryson, Edison’s chairman and chief executive officer, characterized Edison Mission’s debt refinancing as a “significant step forward. It couldn’t be achieved in today’s credit market,” he conceded. Southern California Edison plans to spend $19 billion in capital investments over the next five years to modernize its electric system, Bryson said. If all of the proposed projects are completed between 2009 and 2012 the regulated utility’s earnings base will nearly double to $23 billion from $11.7 billion, Bryson said. “We are growing our utility earnings base through capital investment,” he said. The utility’s 2007 milestones include breaking ground on the Tehachapi electric transmission line, field testing the utility’s Smart Connect and Meter Initiative, bringing on line four new peaker power plants, overhauling and replacing aging distribution circuits, and replacing miles of dilapidated underground cables and power poles. The utility plans to install 5.3 million smart meters throughout its service territory in the next five years. In October 2007, the utility’s engineers installed what Bryson touted as the most advanced digital distribution circuit in the country in San Bernardino County that will significantly reduce outages and response time by identifying potential problems at the outset. On the nuclear side, the utility’s plan to replace the steam generators at its San Onofre Nuclear Power Plant also remains on schedule and on budget, he said. That is about a $700 million investment. The utility’s ability to finance its ambitious infrastructure projects hinges on the CPUC’s decision in the utility’s 2009-2011 general rate case which Edison officials expect around Thanksgiving. “That will determine our expansion and modernization that is important to our future,” Bryson stressed. He noted that the CPUC has provided “continued regulatory support for our very large capital investment program,” approving an 11.5 percent return on equity in the utility’s 2008 cost of capital decision. The CPUC and the Federal Energy Regulatory Commission authorized a combined rate base of $4.7 billion for Edison for 2008. The utility plans to deliver $1.2 billion in customer savings between 2006 and 2008 through the CPUC’s landmark energy efficiency incentive program, which enables utilities to earn profits from energy efficiency programs, Bryson said. Sempra Energy reported a record $1.13 billion of income from its continuing operations last year bolstered by a hefty $289 million of net income in the fourth quarter. That is more than double the company’s $125 million in the fourth quarter 2006. Like PG&E and Edison, the CPUC handed Sempra’s two regulated utilities favorable decisions in their cost of capital proceedings. The CPUC increased San Diego Gas & Electric’s authorized return on equity to 11.1 percent from 10.7 percent. The Federal Energy Regulatory Commission earlier increased San Diego Gas & Electric’s authorized return on equity on the utility’s transmission assets to 11.35 percent. Sempra’s two utilities had a combined net income of $513 million for 2007, 12 percent more than their $460 million net income in 2006. SDG&E’s 2007 net income increased to $283 million from $237 million in 2006. Last year’s gain was fueled by higher electric transmission and generation earnings and the favorable resolution of tax issues. However, SDG&E’s fourth quarter 2007 net income dipped to $47 million, compared with $55 million in 2006 because of lower taxes that year. At the same time, SoCal Gas’ net income rose to $58 million in fourth quarter of 2007 compared with $55 million for the fourth quarter of 2006. SoCal Gas’ 2007 net income increased to $230 million from $223 million in 2006 mostly because of higher operating margins. Meanwhile SDG&E and SoCal Gas reached settlements in their general rate cases and expect the CPUC to issue final decisions this spring. The utilities have filed for retroactive rate increases from January 1 of this year. In unregulated businesses, Sempra Generation’s fourth quarter 2007 net income dipped to $40 million from $53 million in the fourth quarter of 2006 primarily because of a three-month outage at Sempra’s El Dorado Energy plant in Nevada coupled with higher taxes. Sempra Generation’s net income for 2007 totaled $162 million compared with $375 million in 2006, which included $204 million from the sale of the company’s Topaz Power Plant in Texas. The CPUC approved SDG&E’s purchase of Sempra Generation’s El Dorado power plant effective late 2011. SDG&E reached a milestone in its protracted effort to construct the Sunrise Powerlink 500 kV transmission project in completing a draft environmental impact study for the controversial project last month, officials said. SDG&E expects the CPUC to issue a final decision on the Sunrise Powerlink in the second half of 2008. If approved, the transmission line could become operational in 2011, the utility said. Sempra Energy plans to complete several major natural gas infrastructure projects and is launching its global commodities-marketing joint venture with The Royal Bank of Scotland in April. RBS Sempra Commodities will absorb the operations of Sempra Commodities. “This transaction will significantly expand the global footprint of our commodities business while at the same time enable us to raise our dividend and begin our share-repurchase program,” said Donald Felsinger, Sempra’s chair and chief executive officer. Sempra also is considering a stand alone group where SDG&E would be the developer in renewable energy developments, said Matt Burkhardt, vice president of electric procurement at SDG&E.

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