Business Context and Reporting Period
PG&E Corporation is a California holding company whose principal subsidiary, Pacific Gas and Electric Company, is a regulated electric and natural gas utility serving northern and central California. This combined Form 10-K covers the fiscal year ended December 31, 2012, not a standalone fourth quarter.
- Approximately 5.2 million electric distribution customers and 4.4 million natural gas distribution customers at year-end.
- The Utility had approximately $52 billion of assets and approximately $15 billion of revenue in 2012.
- Primary regulators are the California Public Utilities Commission, Federal Energy Regulatory Commission, and Nuclear Regulatory Commission.
Financial and Operating Metrics
| Metric | 2012 | 2011 | Change or comment |
|---|---|---|---|
| PG&E Corporation net income | $816 million | $844 million | Down approximately 3% |
| PG&E Corporation basic EPS | $1.92 | $2.10 | Down approximately 9% |
| PG&E Corporation diluted EPS | $1.92 | $2.10 | Down approximately 9% |
| PG&E Corporation comprehensive income | $928 million | $833 million | Higher due primarily to pension-related OCI |
| Electric operating revenue | $12.014 billion | $11.601 billion | Up approximately 4% |
| Natural gas operating revenue | $3.021 billion | $3.350 billion | Down approximately 10% |
| Electric deliveries | 86,113 GWh | 81,255 GWh | Up approximately 6% |
| Natural gas purchased | 247,792 MMcf | 279,157 MMcf | Down approximately 11% |
| Average natural gas purchase price | $2.45 | $3.69 | Down approximately 34% |
| Parent cash and equivalents | $207 million | $209 million | Essentially unchanged |
| Parent operating cash flow | $(49) million | $(76) million | Improved, but remained negative |
The filing text provided does not include the Utility’s consolidated net income, consolidated operating cash flow, consolidated margins, total debt, or consolidated liquidity balances. Accordingly, consolidated profitability, leverage, and liquidity cannot be fully assessed from the supplied text.
- PG&E Corporation reported $817 million of equity in earnings of subsidiaries, compared with $852 million in 2011.
- Parent investments in subsidiaries were $1.023 billion in 2012, funded partly by $751 million of common stock issuance and $716 million of dividends received from subsidiaries.
- PG&E Corporation made a $170 million equity contribution to the Utility during the fourth quarter to support its 52% common-equity target and capital expenditures.
- The parent had $120 million of short-term borrowings and $349 million of long-term debt at December 31, 2012. The Utility issued $1.15 billion of senior notes during 2012, but the supplied filing text does not provide total year-end Utility debt.
- Renewable resources represented 14,497 GWh, or 19.0% of bundled electric load. Diablo Canyon operated at an approximately 90% average capacity factor.
Material Changes Versus the Prior Comparable Period
- Electric revenue increased despite lower average residential usage, with electric deliveries rising from 81,255 GWh to 86,113 GWh.
- Natural gas revenue declined as purchased volumes and the average purchase price fell materially. Transportation-only gas revenue increased to $499 million from $400 million.
- PG&E Corporation earnings and EPS declined, while comprehensive income increased because 2012 other comprehensive income included a $112 million benefit versus an $11 million loss in 2011.
- The Utility materially expanded gas pipeline safety work, including confirmation of 202 miles of transmission pipeline, installation of 46 automated or remotely controlled valves, replacement of 40 miles of transmission pipeline, and retrofitting of 78 miles for in-line inspection.
- The CPUC approved the pipeline safety enhancement plan in December 2012 but disallowed rate recovery of a significant portion of forecast first-phase costs.
- The CPUC authorized a new capital structure effective January 1, 2013 consisting of 52% equity, 47% long-term debt, and 1% preferred stock, versus 52% equity, 46% long-term debt, and 2% preferred stock through 2012.
Outlook, Risks, Contingencies, and Unusual Items
- The Utility filed its 2014 General Rate Case application in November 2012 for rates covering 2014 through 2016. The filing does not provide a clear earnings guidance range.
- The CPUC approved 2013 electric procurement costs and associated revenue requirements, with related rate changes effective January 1, 2013.
- The Utility faces three major CPUC investigations concerning gas safety recordkeeping, pipeline operation near populated areas, and practices potentially related to the San Bruno accident. Penalties and remedial measures remained unresolved; the companies stated that reasonably possible losses from potential civil or criminal penalties could not be estimated.
- Approximately 140 lawsuits involving about 450 plaintiffs were pending at December 31, 2012 in connection with the September 2010 San Bruno pipeline accident. Settlement agreements had resolved claims of approximately 140 plaintiffs by February 8, 2013.
- A related criminal investigation by the U.S. Department of Justice, California Attorney General’s Office, and San Mateo County District Attorney’s Office identified the Utility as a target. The filing states that potential charges and losses were uncertain.
- The Utility paid a $17 million CPUC penalty in 2012 for missed periodic gas leak surveys and had submitted 34 additional self-reports that could lead to further citations or penalties.
- Diablo Canyon faces potential future compliance costs related to once-through cooling requirements. The filing states that cooling towers could cost as much as $4.5 billion and that adverse regulatory decisions could require alternative mitigation, substitute power, or potentially cessation of operations.
- Environmental remediation liabilities include the Hinkley and Topock compressor station sites, former manufactured gas plants, and other contaminated locations. The Utility spent approximately $51 million on former manufactured gas plant sites in 2012.
- The Department of Energy settlement awarded the Utility $266 million for spent nuclear fuel storage costs incurred through December 31, 2010, while uncertainty remained regarding future federal disposal of spent fuel.
- Deloitte & Touche issued an unqualified audit opinion, with an explanatory paragraph concerning pending CPUC investigations and enforcement matters that could result in material penalties. Management concluded that disclosure controls and internal control over financial reporting were effective.
Most Important Facts for Investors to Verify
- Review the incorporated 2012 Annual Report and notes for Utility consolidated net income, cash flow, total debt, liquidity facilities, rate-base growth, capital expenditures, and margins, which are not fully reproduced in the supplied text.
- Quantify potential CPUC penalties, San Bruno litigation exposure, remediation costs, and recoverability through customer rates.
- Assess the approved pipeline safety plan’s funding gap and the effect of disallowed costs on cash flow and earnings.
- Track the 2014 General Rate Case, cost-of-capital authorization, and future rate recovery for safety and environmental investments.
- Evaluate Diablo Canyon licensing, cooling-water compliance, decommissioning obligations, and the availability of substitute power if operations are restricted.
- Confirm the maturity profile and covenants of PG&E Corporation and Utility debt, including the Utility’s 2013 debt maturities and available revolving credit capacity.