PG&E Corp and Pacific Gas and Electric Company: Q3 2006 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006, for PG&E Corporation (the holding company) and its primary subsidiary, Pacific Gas and Electric Company (the Utility). The Utility operates as a regulated public utility in northern and central California, providing electricity and natural gas distribution, generation, procurement, and transmission. The filing reflects the company's post-Chapter 11 reorganization status, with ongoing regulatory oversight by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).
Key Financial Metrics (Nine Months Ended Sept 30, 2006)
| Metric | 2006 (in millions) | 2005 (in millions) |
|---|---|---|
| Total Operating Revenues | $9,333 | $7,970 |
| Operating Income | $1,669 | $1,554 |
| Net Income | $839 | $737 |
| Diluted EPS | $2.33 | $1.89 |
| Operating Cash Flow | $2,240 | $2,117 |
| Capital Expenditures | $(1,729) | $(1,318) |
| Total Assets | $34,829 | $34,074 |
| Long-Term Debt | $6,696 | $6,976 |
| Cash and Cash Equivalents | $422 | $713 |
Note: Figures represent consolidated results for PG&E Corporation. The Utility's net income for the nine months was $826 million.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 17% year-over-year. Electric revenues rose significantly due to higher procurement costs passed through to customers, a FERC order allowing recovery of Scheduling Coordinator (SC) costs, and the collection of Dedicated Rate Component (DRC) charges for Energy Recovery Bonds (ERBs).
- Profitability: Net income increased 14% ($102 million) and diluted EPS increased 23%. Key drivers included the recognition of $129 million in pre-tax income from the FERC approval of SC cost recovery and the reversal of reserves related to disputed generator claims.
- Cost Increases: Cost of electricity rose 35% primarily due to increased purchased power volumes (driven by a July 2006 "heat storm" and a Diablo Canyon refueling outage) and higher average power prices. Operating and maintenance expenses increased 21%, driven by pension contributions and storm-related costs.
- Accounting Changes: The company adopted SFAS No. 123R (Share-Based Payment) on January 1, 2006, resulting in a $9 million reduction in net income for the nine-month period compared to prior accounting methods.
Guidance, Outlook, and Management Commentary
- Regulatory Settlements: The CPUC approved a settlement for the 2007 General Rate Case (GRC), setting revenue requirements for 2007-2010. This includes an overall increase of $213 million over 2006 authorized amounts, with attrition adjustments for subsequent years.
- Capital Projects: The company is proceeding with the Advanced Metering Infrastructure (AMI) project ($1.74 billion estimated cost) and the Diablo Canyon Steam Generator Replacement Project. The CPUC approved the acquisition of Contra Costa Unit 8 (530 MW) from Mirant.
- Legal and Contingencies:
- Chromium Litigation: A $295 million settlement was paid in April 2006. Approximately $19 million remains accrued for unresolved claims.
- Environmental Remediation: Liability increased to $513 million, largely due to higher estimated costs at the Hinkley and Topock gas compressor stations. Costs at Hinkley are not recoverable from customers.
- Energy Crisis Refunds: Ongoing settlements with Enron, Reliant, and Mirant continue to generate cash proceeds credited to customers.
- Liquidity: The company maintains a $2 billion credit facility with $1.5 billion remaining capacity and a $1 billion commercial paper program. Management intends to maintain a 52% common equity ratio.
Investor Verification Checklist
- Regulatory Asset Recovery: Verify the final approval status of the 2007 GRC settlement and the specific timing of revenue recognition for the Scheduling Coordinator costs.
- Environmental Liabilities: Monitor the status of the Hinkley and Topock remediation costs, specifically the portion deemed non-recoverable from customers ($19 million impact in Q3).
- Capital Expenditure Execution: Track progress on the AMI project and the Diablo Canyon steam generator replacement, including potential delays from the California Coastal Commission regarding permits.
- Energy Procurement Costs: Assess the impact of the "heat storm" and Diablo Canyon outage on future procurement costs and the adequacy of the Energy Resource Recovery Account (ERRA).
- Legal Settlements: Confirm the final resolution of the Chromium Litigation and the status of remaining disputed claims from the Chapter 11 proceeding.