PG&E Corp quarterly report, Q2 FY2012

PG&E Corporation Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2012; filed August 7, 2012. The combined filing covers PG&E Corporation, a holding company, and Pacific Gas and Electric Company, its regulated Northern and Central California utility. The Utility served approximately five million electric distribution customers and four million natural gas distribution customers. Financial statements are unaudited and should be read with the 2011 Form 10-K.

Financial Performance and Position

PG&E Corporation	Three months 2012	Three months 2011	Six months 2012	Six months 2011
Operating revenues	$3,593 million	$3,684 million	$7,234 million	$7,281 million
Operating income	$467 million	$692 million	$954 million	$1,176 million
Net income	$239 million	$366 million	$475 million	$568 million
Income available to common shareholders	$235 million	$362 million	$468 million	$561 million
Diluted EPS	$0.55	$0.91	$1.11	$1.41
Dividends declared per common share	$0.46	$0.46	$0.91	$0.91

Operating margin, calculated as operating income divided by operating revenues, was approximately 13.0% for the quarter and 13.2% for the six months, compared with approximately 18.8% and 16.2%, respectively, in the prior-year periods. The filing does not present a separately defined adjusted or non-GAAP margin.

• Electric revenue increased 1% for the quarter and 4% year to date, while natural gas revenue decreased 17% and 14%, respectively. Much of the gas decline reflected lower pass-through procurement costs rather than lower earnings.
• Operating and maintenance expense increased 16% for the quarter and 14% year to date, driven principally by gas-safety work, San Bruno-related costs, reliability spending, and environmental remediation.
• Cost of natural gas declined 49% for the quarter and 38% year to date because of lower market prices. Cost of electricity increased 6% and 2%, respectively.
• The effective tax rate was 29% for the quarter and 31% for the six months, compared with 34% and 36% in 2011, primarily due to a 2012 loss-carryback benefit and the absence of comparable nondeductible penalties.

Cash Flow, Debt, and Liquidity

• Six-month operating cash flow was $2,174 million, compared with $1,905 million for PG&E Corporation and $1,934 million for the Utility in 2011.
• Capital expenditures were $2,219 million, up from $1,897 million; net investing cash use was $2,206 million for PG&E Corporation and $2,259 million for the Utility.
• PG&E Corporation ended June 30 with $292 million of cash and cash equivalents; the Utility had $45 million. Restricted cash was $381 million.
• PG&E Corporation reported $1,079 million of short-term borrowings and $12,166 million of long-term debt. The Utility reported $1,079 million of short-term borrowings and $11,817 million of long-term debt, excluding energy recovery bonds.
• The Utility had $825 million of commercial paper outstanding, $363 million of letters of credit, and $1,812 million of availability under its revolving credit facility. PG&E Corporation had full availability under its $300 million facility. Both companies were in compliance with applicable debt covenants.
• On April 16, 2012, the Utility issued $400 million of 4.45% senior notes due 2042. The Utility also repurchased $50 million of pollution-control bonds and repaid $200 million of energy recovery bonds during the six months.
• PG&E Corporation contributed $565 million of equity to the Utility to maintain its authorized 52% common-equity capital structure, funded principally through common-stock issuances. Additional equity issuance could dilute future EPS.
• The Board declared a quarterly dividend of $0.455 per share. Management expected the annual common dividend to remain $1.82 per share through 2012, subject to natural-gas matters.

Material Changes Versus the Prior Comparable Period

• Income available to common shareholders declined 35% for the quarter and 17% for the six months; diluted EPS declined 40% and 21%, respectively. The filing attributes the deterioration mainly to natural-gas matters, rate-case timing, planned incremental work, environmental costs, and higher share count.
• Six-month operating cash flow improved by $269 million for PG&E Corporation, but higher capital spending and lower restricted-cash releases resulted in a $221 million decrease in cash and cash equivalents.
• Natural-gas operating costs rose substantially: costs associated with natural-gas matters totaled $346 million year to date, including $232 million of pipeline-safety work, an $80 million San Bruno third-party-claims charge, and a $70 million contribution to the City of San Bruno.
• Environmental remediation liabilities increased to $920 million from $785 million at December 31, 2011. The Hinkley site accrual increased to $210 million from $149 million.
• Regulatory assets totaled $7,327 million, including $6,534 million of long-term assets, and regulatory liabilities totaled $5,008 million long term. Recovery depends on continued favorable regulatory treatment.

Outlook, Risks, Contingencies, and Unusual Items

• Management forecast 2012 pipeline-related costs of up to $550 million, including $232 million incurred through June 30, and approximately $250 million of total 2012 expenses above amounts assumed in prior rate cases. Incremental spending was expected to continue into 2013.
• The Utility requested CPUC approval for a pipeline safety enhancement plan involving approximately $1.4 billion of capital expenditures over four years. Approximately $95 million had been capitalized at June 30. The Utility stated that recovery through customer rates was uncertain.
• The CPUC was conducting three major investigations concerning pipeline records, class-location designations, and the San Bruno accident. PG&E believed total penalties of at least $200 million were probable, but had not recorded additional charges in 2012 and could not estimate losses above the amount accrued. Potential penalties could be material.
• Approximately 120 San Bruno-related lawsuits involving about 400 plaintiffs were pending. The Utility had recorded cumulative third-party claims charges of $455 million, including an $80 million 2012 charge, and estimated additional claims of up to $145 million, excluding potentially material punitive damages. Insurance coverage was approximately $992 million above a $10 million deductible, but the timing and amount of recoveries were uncertain.
• Federal and state authorities were investigating the San Bruno accident, and the Utility was identified as a target. Potential civil or criminal penalties could not be estimated.
• The Hinkley remediation program covered approximately 300 households. The Utility recorded $210 million for estimated remediation costs, while reasonably possible total environmental costs could reach $1.6 billion if contamination or remediation requirements prove more extensive.
• The Utility had $838 million of remaining net Chapter 11 disputed claims at June 30, consisting of $164 million of claims and $674 million of accrued interest. FERC proceedings and settlement adjustments remained unresolved.
• A proposed settlement with the Department of Justice would provide $266 million for spent-fuel storage costs through 2010, plus potential annual claims for 2011–2013. No receivable was recorded because approval remained uncertain.
• The draft 2014 General Rate Case application requested a $1.25 billion increase in 2014 authorized base revenues over 2013 levels and forecast nearly $4.0 billion of annual capital expenditures in 2014–2016. These requests were subject to CPUC review and approval.
• For 2013, the Utility requested a lower authorized return on common equity of 11.00%, versus the current 11.35%, and estimated that its requested cost of capital could reduce 2013 revenue requirements by approximately $100 million.
• The Utility used derivatives for non-trading risk management. A downgrade below investment grade could have required approximately $159 million of additional collateral under derivative agreements.

Important Facts for Investors to Verify

• Final CPUC decisions and penalties related to the San Bruno accident, pipeline-record and class-location investigations, and the 2012 self-reports.
• The ultimate cost, insurance recovery, settlement status, and potential punitive or criminal damages associated with San Bruno litigation.
• Whether the CPUC approves the pipeline safety enhancement plan and allows recovery of related operating and capital costs through rates.
• Progress and final cost estimates for Hinkley and other environmental remediation obligations, including potential exposure above recorded liabilities.
• Results of the 2014 GRC and 2013 cost-of-capital proceedings, including the authorized revenue requirement, capital structure, and ROE.
• Future equity issuance and potential dilution required to support the Utility’s capital structure and unrecoverable costs.
• Cash needs arising from capital expenditures, disputed Chapter 11 claims, energy collateral, debt maturities, and regulatory or litigation payments.