PG&E Corp quarterly report, Q1 FY2016

PG&E Corporation and Pacific Gas and Electric Company — 2016 Q1 Form 10-Q

Reporting period: Three months ended March 31, 2016; filed May 4, 2016. PG&E Corporation is the holding company and Pacific Gas and Electric Company is its principal regulated utility serving northern and central California. The financial statements are unaudited and prepared under GAAP.

Financial performance

PG&E Corporation	Q1 2016	Q1 2015	Change
Operating revenues	$3.974 billion	$3.899 billion	+1.9%
Operating income	$95 million	$71 million	+$24 million
Net income	$110 million	$34 million	+$76 million
Income available to common shareholders	$107 million	$31 million	+$76 million
Diluted EPS	$0.22	$0.06	+$0.16
Net cash from operating activities	$1.055 billion	$1.080 billion	-$25 million

Electric revenue increased to $3.131 billion from $3.013 billion, while natural-gas revenue decreased to $843 million from $886 million.
Operating expenses increased to $3.879 billion from $3.828 billion. Operating and maintenance expense rose to $2.010 billion, and depreciation, amortization, and decommissioning expense rose to $697 million.
The effective tax benefit was unusually large: $187 million in 2016 versus $93 million in 2015. Management attributed the increase primarily to tax audit results and the absence of a comparable non-deductible penalty accrual.
Approximate operating margin was 2.4% and net margin was 2.8% in Q1 2016; the net margin was materially affected by the income tax benefit.

Liquidity, capital spending, and debt

PG&E Corporation ended the quarter with $142 million of cash and cash equivalents, compared with $123 million at December 31, 2015. The Utility had $44 million, compared with $59 million.
PG&E Corporation generated $1.055 billion of operating cash flow and used $1.250 billion in investing activities, including $1.229 billion of capital expenditures. Capital expenditures exceeded operating cash flow by approximately $174 million.
The Utility estimated 2016 capital expenditures of approximately $5.6 billion and 2017 capital expenditures between $5.4 billion and $6.5 billion.
PG&E Corporation reported $693 million of short-term borrowings, $160 million of current long-term debt, and $16.522 billion of long-term debt. The Utility reported $693 million, $160 million, and $16.174 billion, respectively.
In March 2016, the Utility issued $600 million of 2.95% senior notes due March 1, 2026 and entered into a $250 million floating-rate term loan due February 2, 2017. Proceeds were used partly to repay commercial paper.
At March 31, 2016, available revolving credit capacity was $300 million for PG&E Corporation and $2.524 billion for the Utility. Debt-to-capitalization ratios were 51% and 50%, respectively, versus a 65% covenant limit. Both entities were in compliance with their covenants.
PG&E Corporation forecast common-stock issuance of $600 million to $800 million during 2016, primarily to fund equity contributions to the Utility and other obligations, creating potential dilution.

Material changes versus Q1 2015

Reported earnings improved substantially, but the comparison was affected by unusual items, including Q1 2015 fines and customer-refund charges related to the CPUC Penalty Decision and a 2015 SolarCity investment gain.
Underlying earnings from operations declined from $418 million, or $0.87 diluted EPS, in Q1 2015 to $407 million, or $0.82 diluted EPS, in Q1 2016 under management’s non-GAAP reconciliation.
Q1 2016 included $381 million of pre-tax Butte fire charges, consisting of $350 million for estimated property damages and $31 million for cleanup, repair, and legal costs.
Q1 2016 included an additional $87 million charge for disallowed capital expenditures under the CPUC Penalty Decision. Cumulative charges under that decision reached $1.194 billion, with approximately $356 million of future charges and costs identified in the filing.
Decommissioning cost estimates increased by approximately $1.4 billion to $4.8 billion undiscounted. The recorded nuclear asset-retirement obligation increased to $3.3 billion at March 31, 2016 from $2.5 billion at December 31, 2015.

Outlook, contingencies, and key risks

Butte fire: Following Cal Fire’s April 28, 2016 report attributing the fire to contact between a tree and the Utility’s electric line, the Utility recorded a $350 million property-damage provision. Approximately 32 complaints involving about 1,300 plaintiffs had been filed. The Utility estimated at least $90 million of possible fire-suppression costs, but could not estimate the upper end of total exposure. Insurance coverage may be insufficient.
Natural-gas and regulatory matters: The CPUC’s Penalty Decision totals $1.6 billion, including a $300 million fine already paid, a $400 million customer bill credit, $850 million of pipeline-safety projects and programs to be funded by the Utility, and at least $50 million of other remedies.
Pending enforcement: The Utility faced a federal criminal case with 13 remaining counts. Potential statutory fines were stated as up to $6.5 million, with a potential alternative fine of approximately $562 million based on alleged gross gains. No criminal-fine accrual had been recorded because the amounts were not considered probable.
The CPUC’s natural-gas distribution record-keeping investigation could result in significant penalties or remedial costs. The SED recommended approximately $112 million, while Carmel recommended penalties of up to approximately $652 million; the Utility argued that any penalty should not exceed $33.6 million.
The CPUC ex parte communications investigation could include up to 159 communications, with fines of up to $50,000 per violation per day. Management believed penalties were probable but could not reasonably estimate the amount.
Environmental remediation liabilities totaled $964 million, of which approximately $680 million was expected to be recoverable through ratemaking. Undiscounted future environmental costs could reach $1.9 billion.
Management forecast $100 million to $150 million of unrecovered pipeline-related expenses in 2016, primarily for removing transmission pipeline rights-of-way encroachments.
The 2015 gas transmission and storage rate case and 2017 general rate case remained pending. PG&E requested a $333 million 2017 revenue-requirement increase, while ORA recommended an $85 million reduction from currently authorized levels.
PG&E Corporation’s dividend was maintained at $0.46 per common share for the quarter. Management stated that additional equity issuance could materially dilute EPS and would be needed to fund unrecoverable costs, penalties, and Utility capital requirements.
The Utility had approximately $50 billion of undiscounted future purchase commitments at December 31, 2015, primarily for power, natural gas, transportation, renewable energy, and generation-related requirements.

Investor verification priorities

Verify the ultimate cost, insurance recoveries, and litigation outcomes associated with the Butte fire.
Track additional charges and cash requirements under the $1.6 billion CPUC Penalty Decision and pipeline-safety programs.
Monitor the federal criminal case, CPUC investigations, potential fines, and the impact on financing access and credit ratings.
Confirm final decisions in the 2015 gas transmission and storage rate case and the 2017 general rate case, including retroactive revenue recovery and cost disallowances.
Assess the effect of the higher nuclear decommissioning estimate and any resulting customer-rate recovery.
Reconcile GAAP earnings with management’s non-GAAP earnings from operations, particularly the tax benefit and unusual legal, regulatory, and wildfire charges.
Evaluate planned equity issuance, dilution, debt maturities, liquidity availability, and the Utility’s ability to fund capital expenditures while maintaining its authorized capital structure.