PG&E Corporation Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013. The combined filing covers PG&E Corporation, a holding company, and Pacific Gas and Electric Company, its regulated California utility serving northern and central California. The financial statements are unaudited and should be read with the 2012 Form 10-K.
Financial Results and Key Metrics
| PG&E Corporation | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Operating revenues | $4,175 million | $3,976 million | $11,623 million | $11,210 million |
| Operating income | $291 million | $614 million | $1,429 million | $1,568 million |
| Net income | $164 million | $364 million | $738 million | $839 million |
| Income available to common shareholders | $161 million | $361 million | $728 million | $829 million |
| Diluted EPS | $0.36 | $0.84 | $1.65 | $1.96 |
| Dividends declared per common share | $0.46 | $0.46 | $1.37 | $1.37 |
- Revenue increased 5% in the quarter and 4% year to date, driven primarily by higher electric revenue and pass-through collections.
- Operating margin declined to approximately 7.0% in the quarter from 15.4% in the prior-year quarter; the nine-month margin declined to approximately 12.3% from 14.0%.
- Operating income and common earnings fell primarily because of higher unrecoverable natural-gas-related costs, including a $196 million PSEP disallowance charge and a $110 million San Bruno-related claims charge.
- Lower depreciation, amortization, and decommissioning expense partially offset higher operating costs. The decrease primarily reflects the completion of amortization of the energy recovery bonds regulatory asset in 2012.
- Quarterly income tax was a $24 million benefit versus a $100 million provision in the prior-year quarter. The nine-month effective tax rate was approximately 26%, compared with 29% in 2012.
Cash Flow, Debt, Liquidity, and Capital
| PG&E Corporation | 9M 2013 | 9M 2012 |
|---|---|---|
| Cash from operating activities | $2,833 million | $3,452 million |
| Capital expenditures | $3,881 million | $3,361 million |
| Cash used in investing activities | $3,813 million | $3,359 million |
| Cash provided by financing activities | $860 million | $0.0? million |
| Cash and cash equivalents at September 30 | $281 million | $296 million |
The filing reports 2012 financing cash flow as a $310 million use; the table above should therefore be read as $860 million provided in 2013 versus $310 million used in 2012.
- Operating cash flow declined $619 million year over year, reflecting tax payments in 2013 versus tax refunds in 2012 and changes in working capital.
- Capital expenditures increased $520 million. Management forecast approximately $5.1 billion of 2013 capital expenditures, including pipeline safety spending.
- PG&E Corporation held $281 million of cash and $301 million of restricted cash at September 30, 2013. Pacific Gas and Electric Company held $60 million of cash and $301 million of restricted cash.
- PG&E Corporation had $953 million of short-term borrowings and $1.288 billion of current long-term debt. Long-term debt was $11.918 billion.
- The Utility had $693 million of commercial paper outstanding, $938 million of current long-term debt, and $11.918 billion of long-term debt. Its $3.0 billion revolving facility had $2.216 billion of availability after commercial paper and letters of credit.
- Revolving credit facilities were extended to April 1, 2018. The companies were in compliance with applicable covenants.
- The Utility issued $750 million of senior notes in June 2013 and used proceeds partly to repurchase $461 million of notes due in 2014 and repay commercial paper.
- PG&E Corporation issued 18 million common shares for $724 million of net proceeds during the first nine months and contributed $835 million of equity to the Utility.
- Approximately $1.3 billion of long-term debt was scheduled to mature within six months after the reporting date, with planned refinancing through capital markets.
Material Changes Versus the Prior Comparable Period
- Common earnings decreased 55% in the quarter and 12% for the first nine months; diluted EPS decreased from $0.84 to $0.36 and from $1.96 to $1.65, respectively.
- Electric revenue increased 6% in the quarter and 4% year to date, while natural-gas revenue was flat in the quarter and up 3% year to date.
- Electricity costs increased 28% in the quarter and 23% year to date, primarily due to higher renewable energy procurement, higher spot prices, and increased purchased-power volumes.
- Operating and maintenance expense increased 18% in the quarter and 1% year to date. The quarter included $394 million of natural-gas-related costs not recoverable through rates, compared with $40 million in the prior-year quarter.
- Cash from operations decreased while capital spending increased, producing greater reliance on debt and equity financing.
- PG&E Corporation’s shares outstanding increased, contributing approximately $0.04 of quarterly and $0.11 of year-to-date EPS dilution in the management reconciliation.
Guidance, Outlook, Risks, and Unusual Items
- Pipeline Safety Enhancement Plan: The Utility recorded a $196 million third-quarter charge for forecasted PSEP capital expenditures expected to exceed recoverable amounts. Cumulative disallowed PSEP capital charges reached $549 million, and management warned that additional charges are possible.
- San Bruno matters: The Utility recorded a $110 million charge for settlements and remaining third-party claims. Cumulative third-party claims charges reached $565 million, with $354 million of insurance recoveries recognized through September 30, 2013.
- Pending CPUC investigations: The SED recommended a $2.25 billion penalty package, including a $300 million State General Fund fine, $435 million of previously disallowed PSEP costs, and $1.515 billion for future PSEP work and operational remedies. The Utility had accrued $200 million for probable State General Fund fines but could not estimate the final amount.
- If the SED recommendation were adopted, management estimated total unrecovered costs and fines related to natural-gas transmission operations could exceed $4 billion. Additional civil or criminal penalties remain possible.
- The Utility forecast unrecoverable pipeline-related operating expenses of $350 million to $450 million for 2013.
- The 2014 General Rate Case remained pending. PG&E requested a $1.16 billion increase in 2014 revenue requirements, while the Division of Ratepayer Advocates recommended a $125 million decrease from 2013 authorized levels.
- The Utility planned to file a 2015 gas transmission and storage rate case to recover ongoing safety and service costs. Failure to obtain adequate rate recovery could affect regulatory accounting and future earnings.
- Environmental remediation liabilities totaled $914 million, including $197 million for Hinkley and $268 million for Topock. Reasonably possible undiscounted environmental costs could reach $1.7 billion.
- The IRS was reviewing several tax matters. Management believed unrecognized tax benefits could decrease by approximately $350 million within the next 12 months, depending on audits and IRS guidance.
- The filing identifies material exposure to regulatory decisions, energy prices, credit ratings, financing access, insurance recoveries, environmental requirements, nuclear licensing, weather, cyber events, and future unrecoverable operating or capital costs.
Important Facts for Investors to Verify
- Final CPUC decisions on the three San Bruno-related investigations and the amount of any fines, disallowed costs, or mandated remedial spending.
- Whether the CPUC approves the revised PSEP scope and the Utility’s requested revenue recovery, and whether further PSEP charges are required.
- Timing and outcome of the 2014 GRC and 2015 gas transmission and storage rate case.
- Actual 2013 capital expenditures, operating cash flow, debt maturities, refinancing terms, and future equity issuance requirements.
- Additional San Bruno settlements, insurance recoveries, criminal-investigation developments, and unresolved derivative or class-action litigation.
- Progress and ultimate cost of Hinkley and Topock remediation, including the impact of final environmental standards.
- Potential dilution from PG&E Corporation stock issuance and the effect of natural-gas-related charges on the Utility’s capital structure, credit ratings, and dividend capacity.