PG&E Corp. on Tuesday said that it has entered into a settlement with its National Energy & Gas Transmission Inc. (NEGT) subsidiary to resolve claims that PG&E is obligated to compensate NEGT for tax savings resulting from the incorporation of losses and deductions related to NEGT or its subsidiaries in the utility’s consolidated federal income tax return.
PG&E expects the settlement will allow it to make approximately $350 million of additional cash available for stock repurchases.
The $350 million, which had been restricted pending a resolution of the dispute, will be incremental to $1.2 billion that PG&E has previously estimated will be available for dividends and stock repurchases in 2005, assuming the refinancing of Pacific Gas and Electric Co.’s $2.21 billion regulatory asset occurs as planned in January 2005.
Accordingly, PG&E is raising its previous guidance for 2005 earnings from operations to a range of $2.15 to $2.25 per share, reflecting the impact of the expected additional share repurchases. PG&E executives recently delivered a very bullish message to analysts, reporting sharply increased earnings and saying they were expecting to resume dividend payments early next year for the first time in four years (see Daily GPI, Aug. 4).
“The settlement agreement provides for timely closure of outstanding issues between PG&E Corporation and NEGT,” said Robert Glynn, Jr., CEO of PG&E. “This resolution lifts the restriction on corporate cash and reduces uncertainty as we focus on shareholder value from the improved financial performance of our core utility business.”
The parties to the settlement — PG&E, NEGT and its wholly-owned or controlled subsidiaries, and the official committee of unsecured creditors in NEGT’s Chapter 11 case — will execute a mutual release of all tax-related claims and substantially all other claims. Additionally, PG&E will pay NEGT $30 million. The release of claims by PG&E has no effect on the previously reported value of its net negative investment in NEGT.
The settlement agreement requires the approval of the U.S. District Court for the District of Maryland, where NEGT’s complaint has been transferred, and the Bankruptcy Court overseeing Chapter 11 proceedings for NEGT and certain of its subsidiaries. A joint hearing before both courts has been set for Sept. 22, 2004.
If either the District Court order or the Bankruptcy Court order approving the settlement is appealed so that the order does not become final before by Oct. 29, 2004, the settlement agreement would terminate unless the parties mutually agree to waive such termination.
Following NEGT’s Chapter 11 filing in July 2003, PG&E’s financial statements no longer reflect NEGT’s operations. However, PG&E continues to be responsible for including income or losses from NEGT and its subsidiaries in the utility’s consolidated federal income tax returns until the effective date of NEGT’s Chapter 11 plan of reorganization, when PG&E’s equity interest in NEGT will be cancelled.
Based on preliminary information recently provided by NEGT, PG&E anticipates paying approximately $100 million of consolidated tax obligations in 2004 attributable to NEGT taxable income.
At June 30, 2004, PG&E held approximately $1.22 billion of cash. In addition to the $30 million payment and the $100 million in consolidated tax obligations, uses for the cash include up to $650 million to retire, renegotiate or partly refinance the company’s senior secured notes in order to remove stock repurchase restrictions.
PG&E expects to use approximately $350 million for common stock repurchases in addition to those already anticipated as part of the $1.2 billion of dividends and stock repurchases targeted to be made in 2005. The company expects that remaining cash would be sufficient for normal working capital requirements and contingencies, even if $650 million is used to retire the senior secured notes.
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