PG&E Corp 10-Q Summary: Quarter Ended March 31, 2006
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 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, and transmission. The company is emerging from Chapter 11 bankruptcy, with ongoing regulatory oversight by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).
Key Financial Metrics
| Metric (in millions) | Q1 2006 | Q1 2005 |
|---|---|---|
| Total Operating Revenues | $3,148 | $2,669 |
| Operating Income | $469 | $501 |
| Net Income | $214 | $218 |
| Diluted EPS | $0.60 | $0.54 |
| Operating Cash Flow | $1,129 | $952 |
| Cash and Cash Equivalents | $903 | $1,381 |
| Restricted Cash | $1,494 | $1,546 |
| Total Debt (Current + Noncurrent) | $9,607 | $N/A |
Note: Total Debt calculated as sum of Short-term borrowings, Long-term debt classified as current, Rate reduction bonds, Energy recovery bonds, and Long-term debt from the Balance Sheet.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 18% ($479 million) year-over-year. Electric revenues rose 12% and natural gas revenues rose 27%, driven primarily by higher commodity costs passed through to customers and the collection of the Dedicated Rate Component (DRC) for Energy Recovery Bonds (ERBs).
- Profitability: While revenues increased, Operating Income decreased 6% ($32 million) due to higher costs of electricity and natural gas, and increased amortization of regulatory assets. Net Income remained relatively flat, decreasing slightly by 2% ($4 million).
- EPS Improvement: Diluted earnings per share increased 11% to $0.60, primarily due to a reduction in the weighted average number of shares outstanding following share repurchases.
- Cost Increases: Cost of electricity rose 34% and cost of natural gas rose 41%, reflecting higher market prices for commodities.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Capital Expenditures: The Utility estimates 2006 capital expenditures of approximately $2.5 billion, with average annual expenditures projected at $2.5 billion through 2010.
- Regulatory Proceedings: The 2007 General Rate Case (GRC) is pending, with the Utility requesting revenue requirement increases. A final decision is expected by December 2006.
- Generation Resources: Applications have been filed for new long-term generation resources totaling over 1,400 MW, with delivery anticipated between 2009 and 2010.
Risks and Contingencies:
- Chromium Litigation: A settlement of $295 million was reached and paid in April 2006 for approximately 1,000 plaintiffs. An accrual of $314 million was recorded to cover this and remaining unresolved claims.
- CPUC Billing Investigation: An ongoing investigation into billing practices could result in refunds of up to $117 million plus interest and fines, though the outcome is uncertain.
- Energy Crisis Refunds: Ongoing proceedings with FERC and judicial bodies regarding refunds from energy suppliers (Enron, Reliant, Mirant) continue, with proceeds credited to customers.
- Environmental Liabilities: Undiscounted environmental remediation liability stands at approximately $466 million.
Unusual Items:
- Accounting Policy Change: Adoption of SFAS No. 123R (Share-Based Payment) on January 1, 2006, reduced net income by approximately $8 million compared to the prior method.
- Share Repurchases: PG&E Corporation settled an accelerated share repurchase (ASR) agreement, paying $58 million in March 2006, and entered a new share forward agreement.
Investor Verification Checklist
- Regulatory Asset Recovery: Verify the status of the 2007 General Rate Case and the CPUC's decision on the $155 million pension contribution revenue requirement.
- Chromium Litigation Resolution: Confirm the final disposition of the remaining unresolved claims beyond the $295 million settlement.
- CPUC Billing Investigation Outcome: Monitor the final ruling on the billing practices investigation to assess potential refunds and fines.
- Energy Recovery Bond (ERB) Amortization: Track the impact of ERB amortization on operating income and the timeline for full recovery by 2012.
- Capital Expenditure Execution: Review progress on the $2.5 billion annual capital plan, specifically the Diablo Canyon steam generator replacement and new generation resource approvals.