PG&E Corp quarterly report, Q1 FY2020

PG&E Corporation and Pacific Gas and Electric Company — 2020 Q1 Form 10-Q

Reporting period: Three months ended March 31, 2020; filed May 1, 2020. The combined report covers PG&E Corporation, a holding company, and Pacific Gas and Electric Company, its regulated Northern and Central California utility. Results are unaudited. Both entities remained debtors-in-possession under Chapter 11, filed January 29, 2019.

Financial performance and condition

PG&E Corporation consolidated	Q1 2020	Q1 2019
Operating revenues	$4.306 billion	$4.011 billion
Operating income	$655 million	$189 million
Net income	$374 million	$136 million
Income available to common shareholders	$371 million	$136 million
Basic / diluted EPS	$0.70 / $0.57	$0.25 / $0.25
Net cash from operating activities	$1.605 billion	$2.244 billion
Capital expenditures	$1.641 billion	$1.224 billion
Cash and cash equivalents at period-end	$1.960 billion	$2.964 billion

Revenue increased 7.4%, led by electric revenue of $3.040 billion, up from $2.792 billion, and natural gas revenue of $1.266 billion, up from $1.219 billion.
Operating income margin was approximately 15.2%, compared with 4.7% in Q1 2019. The improvement primarily reflected additional TO20 transmission-rate revenue and lower operating and maintenance costs.
Operating and maintenance expense declined to $1.967 billion from $2.087 billion. Depreciation, amortization, and decommissioning expense increased to $855 million from $797 million.
Interest expense increased to $254 million from $103 million, primarily because the company resumed accruing interest on certain pre-petition debt subject to compromise.
Reorganization items, net were $176 million, compared with $127 million, including legal, professional, and financing costs associated with Chapter 11.
The income tax benefit was $36 million, compared with $84 million; the effective tax rate was approximately negative 7.0%, versus negative 182.3% in Q1 2019.

Utility results

Utility income available for common stock was $448 million, compared with $133 million.
Utility operating income was $657 million, compared with $172 million.
Utility operating cash flow was $1.612 billion, down from $2.274 billion, due principally to increased vendor payments and reduced customer collections associated with COVID-19.
Utility cash and cash equivalents were $1.555 billion at March 31, 2020, compared with $1.122 billion at December 31, 2019.

Liquidity, debt, and capital resources

Management reported approximately $4.6 billion of total liquidity at March 31, 2020: approximately $1.5 billion of Utility cash, $0.4 billion of PG&E Corporation cash, and $2.7 billion of remaining DIP availability.
The $5.5 billion DIP facilities had $2.0 billion of term-loan borrowings, $774 million of letters of credit outstanding, and approximately $2.726 billion of aggregate availability at March 31, 2020. The facilities mature in December 2020, with a potential extension to December 2021 subject to conditions.
Liabilities subject to compromise totaled $50.751 billion for PG&E Corporation consolidated, including $49.941 billion at the Utility. This included $25.548 billion of wildfire-related claims and $23.298 billion of financing debt.
PG&E Corporation consolidated total assets were $86.688 billion and total equity was $5.759 billion at March 31, 2020. Utility total assets were $86.151 billion and shareholders’ equity was $5.786 billion.
Capital expenditures were $1.641 billion in the quarter. Management estimated approximately $7.5 billion of Utility capital expenditures for 2020.
Both companies had no commercial paper borrowings outstanding and expected limited or no commercial-paper access during Chapter 11.
Cash dividends remained suspended. The filing also describes restrictions on future dividends under the DIP financing, probation conditions, and the approved case-resolution contingency process.

Material changes versus the prior comparable period

Profitability improved substantially because of higher authorized transmission revenue and lower inspection, Camp Fire cleanup, and other operating costs.
Electric and natural gas procurement costs decreased to $545 million and $284 million, respectively, from $599 million and $339 million.
Operating cash flow declined 28.5%, while capital spending increased 34.1%, producing a substantially weaker operating-cash-flow-to-capital-spending profile.
Interest expense rose materially as interest on certain pre-petition obligations was again recorded.
Diluted weighted-average shares increased to 648 million from 527 million, reflecting 119 million incremental shares associated with the Chapter 11 backstop commitment premium; future plan-related equity issuance could cause further dilution.
Cash and cash equivalents declined year over year despite an increase from December 31, 2019, reflecting the effects of capital spending, Chapter 11 financing, and operating cash flow changes.

Bankruptcy, outlook, contingencies, and unusual items

Management stated that substantial doubt exists regarding the companies’ ability to continue as going concerns because of wildfire liabilities and the Chapter 11 proceedings. The financial statements were nevertheless prepared on a going-concern basis without adjustments for possible outcomes.
The proposed Plan contemplated approximately $13.5 billion for fire victims, $11.0 billion for insurance subrogation claims, $1.0 billion for certain public entities, new equity of up to approximately $9.0 billion, $6.75 billion of PG&E Corporation equity for the Fire Victim Trust, and substantial new or reinstated debt.
Backstop commitments permitted up to $12.0 billion of equity funding, subject to numerous conditions and termination rights. Debt commitment letters provided $10.825 billion of bridge financing, also subject to conditions; management intended to pursue permanent financing instead.
The Plan confirmation target was June 30, 2020. Failure to confirm and consummate a qualifying plan could delay emergence, terminate financing or restructuring agreements, and jeopardize participation in California’s Wildfire Fund. The Bankruptcy Court approved a contingency process that contemplated a potential sale of PG&E Corporation or the Utility if the Plan failed.
Recorded wildfire-related claims for the 2015 Butte fire, 2017 Northern California wildfires, and 2018 Camp fire totaled $25.5 billion. The filing stated that this amount could change materially and could substantially increase if settlements failed or claims were challenged.
The 2019 Kincade fire remained under investigation. Management considered a loss reasonably possible and estimated that losses could exceed $600 million before insurance, excluding certain fines, penalties, punitive damages, government claims, and other potentially unquantifiable amounts.
COVID-19 reduced customer collections and non-residential electricity demand and could increase operating, financing, and liquidity pressures. Management could not quantify the ultimate effect and was evaluating potential regulatory relief and cost reductions.
The Utility’s 2020 wildfire insurance coverage was approximately $430 million, compared with approximately $1.4 billion for the prior policy period. Management expected wildfire losses to substantially exceed available insurance.
The Utility incurred approximately $1.21 billion of wildfire cleanup and repair costs through March 31, 2020, including costs related to the Camp, 2017 Northern California, and Kincade fires.
The Utility entered into a plea agreement concerning the 2018 Camp fire, subject to court approvals, involving guilty pleas to 84 counts of involuntary manslaughter and one count of unlawfully causing a fire, an approximately $3.5 million fine, $0.5 million of investigation-cost reimbursement, and up to $15 million of water-related commitments over five years.
Regulatory proceedings could result in material disallowances. The Wildfires OII settlement process contemplated $1.625 billion of disallowed wildfire-related expenses and capital expenditures, and a subsequent proposed modification increased total disallowances to $1.823 billion and shareholder-funded system enhancements to $114 million, subject to final approval.
Environmental remediation liabilities totaled $1.357 billion at March 31, 2020. The Utility estimated that undiscounted future costs could increase by up to $216 million at Topock, $129 million at Hinkley, $539 million at former manufactured-gas-plant sites, $78 million at other sites, and $80 million at fossil-fuel sites.

Investor verification checklist

Verify confirmation, effectiveness, financing, and ultimate terms of the Chapter 11 Plan, including dilution, debt reinstatement, and Fire Victim Trust funding.
Verify whether the Utility satisfied all conditions for participation in the AB 1054 Wildfire Fund and its ability to fund the expected approximately $4.8 billion initial contribution and approximately $193 million of annual contributions.
Monitor the outcome of the Kincade fire investigation and potential losses exceeding the disclosed $600 million lower-end estimate.
Assess COVID-19 effects on collections, demand, capital spending, regulatory recovery, and exit financing.
Track CPUC and FERC decisions affecting wildfire cost recovery, rate cases, transmission revenue, penalties, capital structure, and the proposed $7.5 billion post-emergence securitization.
Review final settlement and court outcomes for wildfire claims, FEMA and other governmental claims, the Wildfires OII, criminal proceedings, securities litigation, and probation requirements.
Evaluate future equity dilution, the $1 billion estimated backstop-premium expense for 2020, and the absence of a dividend timetable.