Business Context and Reporting Period
This Form 8-K, dated July 13, 2017, reports a regulatory decision by the California Public Utilities Commission (CPUC) regarding the cost of capital for Pacific Gas and Electric Company (PG&E), a subsidiary of PG&E Corporation. The filing addresses the final decision in the cost of capital proceeding for the Investor-Owned Utilities.
Key Financial Metrics and Regulatory Changes
- Return on Equity (ROE): Reduced from 10.40% to 10.25%, effective January 1, 2018.
- Cost of Debt and Preferred Stock: Reset effective January 1, 2018, reflecting actual embedded costs as of August 2017 and forecasted rates for new debt.
- Capital Structure: Maintained at 52% common equity, 47% long-term debt, and 1% preferred equity.
- Revenue Requirement Impact: PG&E estimates an annual revenue requirement reduction of approximately $100 million beginning in 2018.
- Filing Deadline: The next cost of capital application filing deadline is extended by two years to April 22, 2019.
Material Changes and Operational Adjustments
The CPUC adopted a joint petition for modification (PFM) without modification. Key changes include the suspension of the cost of capital adjustment mechanism for 2018, though it remains operational for 2019 if triggered. The proceeding remains open to gather information for future proceedings and to consider potential further ROE reductions pending recommendations from the NorthStar Consulting Group safety culture investigation.
Outlook, Risks, and Contingencies
PG&E expects to submit updated cost of capital and revenue requirement filings to the CPUC in September 2017. The estimated $100 million revenue reduction is contingent on current and forecasted market interest rates. Management notes that changes in market interest rates could materially affect future financing costs and revenue requirements. Actual changes will be quantified in the third quarter of 2017.
Investor Verification Checklist
- Verify the final quantification of the revenue requirement reduction in the September 2017 CPUC filing.
- Monitor the actual embedded cost of debt as of August 2017 and forecasted interest rates for 2018.
- Track the status of the NorthStar Consulting Group safety culture investigation and any potential impact on future ROE.
- Review the impact of the suspended cost of capital adjustment mechanism on 2018 financial results.