PG&E Corporation Form 10-Q Summary
Business context and reporting period
Combined quarterly filing for PG&E Corporation and Pacific Gas and Electric Company, covering the three and nine months ended September 30, 2019. PG&E Corporation is a holding company whose principal subsidiary is the regulated utility serving northern and central California. Both entities filed for Chapter 11 protection on January 29, 2019 and operated as debtors-in-possession during the period.
Key financial metrics
| PG&E Corporation consolidated | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Operating revenue | $4.432 billion | $4.381 billion | $12.386 billion | $12.671 billion |
| Operating income (loss) | $(2.300) billion | $0.696 billion | $(5.751) billion | $(0.170) billion |
| Net income (loss) | $(1.616) billion | $0.567 billion | $(4.029) billion | $0.032 billion |
| Loss attributable to common shareholders | $(1.619) billion | $0.564 billion | $(4.039) billion | $0.022 billion |
| Diluted EPS | $(3.06) | $1.09 | $(7.65) | $0.04 |
| Operating margin | (51.9%) | 15.9% | (46.4%) | (1.3%) |
| Net margin | (36.4%) | 12.9% | (32.5%) | 0.3% |
- Wildfire-related claims, net of insurance recoveries, were $2.548 billion in Q3 and $6.448 billion for the first nine months, versus $(10) million and $2.108 billion, respectively, in the comparable 2018 periods.
- Q3 wildfire charges included $526 million for the 2018 Camp fire and $2.0 billion for the 2017 Northern California wildfires. Nine-month charges were $2.4 billion and $4.0 billion, respectively.
- Operating and maintenance expense increased to $2.206 billion in Q3 from $1.611 billion and to $6.235 billion for the first nine months from $5.001 billion. The increases included enhanced inspections and repairs, wildfire-related legal and cleanup costs, and a $237 million pipeline-replacement disallowance.
- Cash provided by operating activities was $4.067 billion for the first nine months, compared with $4.236 billion in 2018. Capital expenditures were $4.192 billion, compared with $4.592 billion.
- Net cash provided by financing activities was $1.485 billion, primarily reflecting debtor-in-possession financing. Cash and cash equivalents were $2.970 billion at September 30, 2019, compared with $1.668 billion at December 31, 2018.
- PG&E Corporation reported $45.093 billion of liabilities subject to compromise, including $22.463 billion of financing debt and $20.560 billion of wildfire-related claims. It also had $1.500 billion of debtor-in-possession financing outstanding.
- The $5.5 billion DIP facility had $3.401 billion of aggregate availability at September 30, 2019, after $1.500 billion of term-loan borrowings and $599 million of letters of credit.
- Shareholders’ equity declined to $8.739 billion from $12.651 billion at December 31, 2018. Cash dividends remained suspended.
Material changes versus the prior comparable period
- Revenue increased 1.2% in Q3 but declined 2.3% for the first nine months, reflecting lower electric revenue partly offset by higher natural-gas revenue and regulatory balancing-account activity.
- Results shifted from Q3 2018 net income of $567 million to a $1.616 billion net loss, principally because of wildfire charges, higher operating costs and $73 million of reorganization items.
- Interest expense fell to $52 million in Q3 and $215 million for the first nine months, from $232 million and $678 million, respectively, because PG&E stopped accruing interest on pre-petition debt after the Chapter 11 filing. Approximately $666 million of contractual interest on debt subject to compromise was not recorded through September 30, 2019.
- Reorganization items were $73 million in Q3 and $256 million for the first nine months, compared with none in 2018.
- Operating lease adoption added approximately $2.8 billion of right-of-use assets and lease liabilities in 2019.
Guidance, outlook, commentary, risks and unusual items
- Management states that substantial doubt exists regarding the companies’ ability to continue as going concerns because of wildfire liabilities and the Chapter 11 proceedings. The financial statements contain no adjustments for the possible outcome of those uncertainties.
- The proposed Chapter 11 plan contemplated up to $14.0 billion of new equity, an $8.4 billion trust for wildfire victims, an $11.0 billion settlement of insurance subrogation claims and $1.0 billion for settling public-entity claims. The plan was not approved and faced a competing plan filed by the Tort Claimants’ Committee and an ad hoc noteholder group.
- Debt commitment letters contemplated $34.35 billion of bridge financing: $27.35 billion secured at the Utility and $7.0 billion unsecured at PG&E Corporation. These commitments were subject to Bankruptcy Court, CPUC and other conditions and termination rights.
- Recorded wildfire liabilities were $20.560 billion at September 30, 2019. Management indicated potential wildfire liabilities could exceed $30 billion and could be substantially greater in certain circumstances. Recovery through insurance and customer rates remains uncertain.
- The CPUC determined that a company in Chapter 11 could not access the statutory customer harm threshold mechanism; PG&E sought rehearing. This could limit recovery of 2017 wildfire costs.
- Participation in California’s AB 1054 Wildfire Fund required emergence from Chapter 11 by June 30, 2020, satisfaction of additional eligibility requirements and an estimated initial contribution of approximately $4.8 billion plus annual contributions of approximately $193 million. Contributions were not recorded at September 30, 2019.
- The 2019 Kincade fire occurred after the reporting date. Its cause and potential liability were under investigation, and no loss estimate was available. Management stated that liability could materially affect liquidity, the bankruptcy process and Wildfire Fund eligibility.
- PG&E estimated an approximately $90 million fourth-quarter 2019 charge for customer credits related to the October 9, 2019 public safety power shutoff. The CPUC announced a formal investigation of 2019 shutoff events.
- Management estimated 2019 capital expenditures of approximately $7.2 billion and annual capital expenditures of $5.7 billion to $7.0 billion for 2020 through 2023.
- Major unresolved matters included wildfire claims estimation, the Tubbs fire trial, criminal and SEC investigations, CPUC wildfire and safety proceedings, FERC rate cases, environmental remediation and potential penalties or fines.
Most important facts for an investor to verify
- Whether PG&E can obtain Bankruptcy Court and CPUC approval for a viable plan of reorganization and achieve emergence by the AB 1054 deadline.
- The final allowed amount and treatment of wildfire, creditor and governmental claims, including whether liabilities exceed recorded amounts.
- The availability, conditions and termination rights of the $14.0 billion equity backstop and $34.35 billion debt commitments.
- Whether insurance recoveries and regulatory cost recovery will be realized, particularly for the 2017 and 2018 wildfire liabilities.
- The outcome and estimated liability from the 2019 Kincade fire, subsequent wildfires and public safety power shutoff investigations.
- The adequacy of DIP liquidity relative to operating needs, capital expenditures, insurance premiums, wildfire mitigation spending and bankruptcy costs.
- The effects of potential dilution, plan alternatives, ownership changes and suspended dividends on existing PG&E Corporation shareholders.