Business Context and Reporting Period
PG&E Corporation is a holding company whose principal business is conducted through Pacific Gas and Electric Company, a regulated California utility serving approximately 5.1 million electric and 4.3 million natural gas customers. The utility provides electricity and natural gas distribution, generation, procurement, transmission, transportation, and storage services, primarily under CPUC and FERC regulation.
This combined, unaudited Form 10-Q covers the three months ended March 31, 2010, with comparisons to the three months ended March 31, 2009. The filing was dated May 7, 2010.
Key Financial Metrics
| PG&E Corporation consolidated metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenue | $3.475 billion | $3.431 billion | +$44 million, +1% |
| Operating income | $618 million | $513 million | +$105 million, +20% |
| Income before taxes | $446 million | $359 million | +$87 million, +24% |
| Net income | $261 million | $244 million | +$17 million, +7% |
| Income available to common shareholders | $258 million | $241 million | +$17 million, +7% |
| Diluted EPS | $0.67 | $0.65 | +$0.02, +3% |
| Dividends declared per common share | $0.46 | $0.42 | +$0.04 |
| Net cash from operating activities | $395 million | $890 million | -$495 million, -56% |
| Capital expenditures | $855 million | $1.079 billion | -$224 million, -21% |
PG&E Corporation's approximate operating margin was 17.8% in Q1 2010 versus 15.0% in Q1 2009. Net margin was approximately 7.5% versus 7.1%. The filing does not present a separately defined adjusted or non-GAAP margin.
- Electric revenue increased to $2.510 billion from $2.426 billion, while natural gas revenue declined to $965 million from $1.005 billion.
- Operating expenses decreased to $2.857 billion from $2.918 billion. Operating and maintenance expense declined $68 million, partially offset by a $32 million increase in depreciation, amortization, and decommissioning expense.
- Cash and cash equivalents at March 31, 2010 were $258 million for PG&E Corporation and $60 million for the Utility, down from $527 million and $334 million, respectively, at December 31, 2009.
- PG&E Corporation total assets were $43.540 billion and total equity was $10.621 billion at March 31, 2010. Utility assets were $43.299 billion and shareholders' equity was $11.208 billion.
- PG&E Corporation current liabilities were $7.780 billion, including $1.251 billion of short-term borrowings and $842 million of current long-term debt. Utility current liabilities were $7.356 billion, including $1.251 billion of short-term borrowings and $595 million of current long-term debt.
- At March 31, 2010, the Utility had $751 million of commercial paper outstanding, $265 million of letters of credit, and $924 million of availability under its $1.940 billion revolving credit facility. PG&E Corporation had $187 million available under its $187 million revolving facility.
- The Utility's earnings-to-fixed-charges ratio was 3.40x, and its earnings-to-combined-fixed-charges-and-preferred-dividends ratio was 3.33x. PG&E Corporation's earnings-to-fixed-charges ratio was 3.14x.
Material Changes Versus the Prior Comparable Period
- Net income and diluted EPS increased primarily because of higher earnings on authorized capital investments, lower employee termination costs, lower Diablo Canyon costs associated with the 2009 refueling outage, and lower employee benefit costs.
- These benefits were partly offset by $25 million of after-tax costs related to Proposition 16 support, a $20 million tax expense from federal healthcare legislation eliminating the future tax deduction for Medicare Part D subsidies, and $12 million of additional after-tax storm- and outage-related expenses.
- The effective tax rate increased to 42.4% from 35.3%, principally because of nondeductible ballot-initiative costs and the Medicare Part D deferred-tax-asset reversal.
- Operating cash flow fell substantially because Q1 2009 included $163 million of tax refunds, while Q1 2010 included no comparable refund, and because of higher collateral payments related to commodity risk management. The reduction was partly offset by the absence of $57 million of customer refunds paid in Q1 2009.
- Investing cash use declined primarily because capital expenditures decreased by $224 million due to project timing.
- Financing cash provided declined to $184 million from $248 million for PG&E Corporation and to $170 million from $316 million for the Utility. Q1 2010 included $418 million of net commercial-paper issuance, no long-term debt issuance, and a $20 million equity contribution from PG&E Corporation to the Utility.
- The Utility's natural gas cost declined $62 million, including a $49 million litigation-related refund concerning alleged natural gas market manipulation. The benefit was passed through to customers and did not materially increase earnings.
Outlook, Risks, Contingencies, and Unusual Items
- No formal earnings guidance is provided. Management stated that future funding is expected to come from operating cash flow, existing liquidity, equity contributions, and future debt or equity financings, assuming reasonable capital-market access.
- The Utility's authorized capital structure remains 52% common equity and 48% debt and preferred stock; authorized return on equity was 11.35% through 2010. PG&E Corporation contributed $20 million to maintain the target equity ratio.
- Major regulatory proceedings include the 2011 General Rate Case, the Gas Transmission and Storage rate case, and the electric transmission owner rate case. The Utility requested a $1.10 billion 2011 revenue increase, while the CPUC Division of Ratepayer Advocates recommended an increase of approximately $227 million, creating an $874 million gap. Final outcomes remain uncertain.
- Energy-efficiency incentive true-up scenarios ranged from a $75 million penalty to a $105 million reward; the final amount was not determinable at filing.
- The Utility reported approximately $49.282 billion of undiscounted future power-purchase commitments, $1.161 billion of natural-gas supply, transportation, and storage commitments, and $1.760 billion of nuclear-fuel commitments. The Ruby Pipeline commitment is expected to total $1.4 billion over 15 years beginning in 2011.
- At March 31, 2010, the net liability for remaining Chapter 11 disputed claims was $954 million. The Utility held $515 million in restricted cash for remaining disputed claims and could not predict the timing or ultimate amounts of pending FERC and judicial proceedings.
- Environmental remediation liabilities were $613 million, of which the Utility expected to recover $361 million through an approved ratemaking mechanism and another $126 million through authorized rates for certain remediation and decommissioning costs. Potential future environmental costs could reach approximately $1 billion or more, and liabilities for certain San Francisco manufactured-gas-plant sites could not yet be estimated.
- PG&E Corporation had $247 million of convertible subordinated notes maturing June 30, 2010. Subsequent to quarter-end, the Utility issued $250 million of senior notes and $50 million of tax-exempt pollution-control bonds.
- Commodity derivatives are used for customer risk management rather than speculation. A credit-rating downgrade below investment grade could have required approximately $470 million of additional net collateral at March 31, 2010.
- The SmartMeter program had incurred $1.47 billion of costs against a $2.2 billion authorized project cost. CPUC and legislative investigations, customer complaints, litigation, and potential cost-recovery disallowances created execution and regulatory risk.
- The Water Board's once-through-cooling policy could require substantial Diablo Canyon compliance costs. The Utility estimated cooling towers could cost as much as $4.5 billion and warned that an adverse determination could require cessation of Diablo Canyon operations.
- The Utility had no off-balance-sheet arrangements expected to have a material effect on financial condition or results. Management concluded disclosure controls and procedures were effective, with no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Verify the final outcomes and authorized revenue requirements from the 2011 General Rate Case, Gas Transmission and Storage case, and electric transmission rate case.
- Track liquidity after the June 2010 maturity of the $247 million convertible subordinated notes, subsequent debt issuance, commercial-paper balances, and collateral requirements.
- Assess the final energy-efficiency incentive true-up, which could range from a penalty to a reward, and the treatment of related amounts in customer rates.
- Monitor Chapter 11 disputed-claims proceedings, potential interest and refund obligations, and the adequacy of the $515 million restricted escrow balance.
- Evaluate environmental remediation exposure, particularly unestimated manufactured-gas-plant liabilities and potential Diablo Canyon cooling-water compliance costs.
- Follow SmartMeter investigations, litigation, program performance, and the ability to recover the remaining authorized investment in rates.
- Confirm the effect of direct-access expansion and renewable-energy requirements on load, procurement costs, capital needs, and future revenue recovery.