PG&E Corporation 10-Q Summary
Business context and reporting period
Combined unaudited quarterly report for PG&E Corporation and Pacific Gas and Electric Company for the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. PG&E Corporation is a holding company whose principal business is conducted through the regulated utility, which serves approximately 5 million electric and 4 million natural gas distribution customers in northern and central California.
Key financial metrics
| PG&E Corporation | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Operating revenues | $3,860 million | $3,513 million | $11,141 million | $10,220 million |
| Operating income | $408 million | $503 million | $1,584 million | $1,816 million |
| Net income | $203 million | $261 million | $771 million | $859 million |
| Income available to common shareholders | $200 million | $258 million | $761 million | $849 million |
| Diluted EPS | $0.50 | $0.66 | $1.90 | $2.19 |
| Operating margin | 10.6% | 14.3% | 14.2% | 17.8% |
| Dividends declared per common share | $0.46 | $0.46 | $1.37 | $1.37 |
- Revenue increased 9.9% in the quarter and 9.0% year to date, primarily reflecting higher authorized base revenues and increased pass-through costs.
- Operating and maintenance expense increased 22% in the quarter and 25% year to date. Depreciation, amortization, and decommissioning expense increased 13% and 16%, respectively.
- Net income declined 22% in the quarter and 10% year to date. The filing attributes the decline principally to natural gas pipeline matters, environmental remediation, litigation and regulatory costs, a Diablo Canyon refueling outage, and higher storm and maintenance costs.
- Net cash provided by operating activities was $3.232 billion for PG&E Corporation and $3.261 billion for the Utility in the first nine months, compared with $2.320 billion and $2.351 billion, respectively, in 2010.
- Capital expenditures were $2.968 billion, compared with $2.794 billion in the prior-year period. Net cash used in investing activities was $2.930 billion for PG&E Corporation and $2.815 billion for the Utility.
- PG&E Corporation ended the period with $277 million of cash and cash equivalents; the Utility had $53 million. PG&E Corporation’s total assets were $47.517 billion and total equity was $12.211 billion.
- PG&E Corporation reported $11.516 billion of long-term debt, $1.137 billion of short-term borrowings, and $50 million of current long-term debt. The Utility reported $11.167 billion of long-term debt, $1.062 billion of short-term borrowings, and $50 million of current long-term debt.
- Revolving credit capacity totaled $3.3 billion, with $2.089 billion available after borrowings, letters of credit, and commercial paper. The companies were in compliance with applicable covenants, including the maximum 65% debt-to-capitalization ratio.
Material changes versus the prior comparable period
- The Utility’s electric revenue increased 12% in the quarter and 10% year to date; revenue excluding pass-through costs increased $167 million and $504 million, respectively, largely due to authorized rate increases and separately funded projects.
- Natural gas revenue increased 2% in the quarter and 5% year to date, while the nine-month cost of natural gas increased 1%.
- Pipeline-related costs that were not recoverable through rates totaled $177 million in the quarter and $303 million year to date. Total pipeline-related costs, including San Bruno claims and net of insurance recovery, were $398 million year to date versus $238 million in the prior-year period.
- The Hinkley environmental remediation provision increased by $106 million in the quarter and $132 million year to date; the related accrued liability reached $150 million at September 30, 2011, compared with $45 million at year-end 2010.
- The company issued $300 million of 4.25% Utility senior notes due 2021 in May and $250 million of 3.25% senior notes due 2021 in September. Interest expense increased 6% for both the quarter and nine-month period.
- PG&E Corporation issued 4.388 million shares under its equity distribution agreement for $185 million of net proceeds and contributed $350 million to the Utility to maintain its authorized 52% common-equity ratio.
- The remaining net Chapter 11 disputed-claims liability declined to $840 million from $934 million at December 31, 2010. Restricted cash held for these claims was $320 million at September 30, 2011.
Guidance, outlook, risks, and unusual items
- Management projected up to $550 million of pipeline-related expenses in 2011 and $100 million to $200 million in 2012 for activities outside the proposed pipeline safety enhancement plan. These costs were not expected to be recovered from customers.
- The proposed four-year pipeline safety plan contemplated approximately $2.2 billion of expenditures, including $1.4 billion of capital expenditures and $750 million of expenses. CPUC approval, timing, scope, and rate recovery remained uncertain.
- The Utility recorded a cumulative $375 million provision for San Bruno third-party claims and estimated reasonably possible additional claims of up to $225 million, for a potential total of $600 million. Insurance coverage was approximately $992 million above a $10 million deductible, but the amount and timing of further recoveries were uncertain. Civil, criminal, punitive, and regulatory penalties could be material and were not estimable.
- The CPUC administrative law judge recommended a $38 million penalty for the Rancho Cordova accident; approximately $39 million was accrued at September 30, 2011. The proposed resolution remained subject to CPUC approval.
- Total environmental remediation liabilities were $763 million, including $150 million for Hinkley. Management stated that undiscounted future environmental costs could reach as much as $1.4 billion under adverse circumstances.
- PG&E Corporation expected to issue approximately $600 million of additional equity through the end of 2012, subject to regulatory approvals and excluding potential fines, penalties, or punitive damages.
- Management expected the current $1.82 annual common-stock dividend to continue, subject to the outcome of pipeline-related matters.
- Other important exposures include Diablo Canyon relicensing and seismic studies, potential new nuclear-safety requirements, SmartMeter costs exceeding the $2.3 billion authorized cap, renewable-energy and greenhouse-gas compliance, commodity collateral requirements, and extensive power-purchase commitments.
Investor verification checklist
- Verify the ultimate cost, insurance recovery, penalties, and rate treatment associated with the San Bruno accident and related pipeline proceedings.
- Monitor CPUC approval and cost-recovery decisions for the proposed pipeline safety enhancement plan and any replacement of more than 1,200 miles of plastic gas distribution pipe.
- Assess changes in Hinkley remediation estimates and the potential for environmental liabilities to exceed recorded amounts.
- Review debt maturities, commercial paper usage, credit-facility availability, covenant compliance, and projected equity financing needs.
- Track Diablo Canyon seismic studies, license renewal proceedings, potential NRC requirements, and the recoverability of related costs.
- Reconcile reported revenue growth with pass-through costs and evaluate whether operating-cost increases are recoverable through regulated rates.
- Confirm the status of SmartMeter cost overruns, customer litigation, renewable-energy requirements, and other regulatory contingencies.