PG&E Corporation and Pacific Gas and Electric Company — 2009 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009; filed October 29, 2009. The combined filing covers PG&E Corporation, a holding company, and Pacific Gas and Electric Company, a regulated electricity and natural gas utility serving northern and central California. The financial statements are unaudited.
Financial performance and position
| PG&E Corporation consolidated | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Operating revenues | $3.235 billion | $3.674 billion | $9.860 billion | $10.985 billion |
| Operating income | $607 million | $639 million | $1.776 billion | $1.716 billion |
| Net income | $321 million | $307 million | $957 million | $831 million |
| Income available to common shareholders | $318 million | $304 million | $947 million | $821 million |
| Diluted EPS | $0.83 | $0.83 | $2.49 | $2.24 |
| Operating margin | 18.8% | 17.4% | 18.0% | 15.6% |
| Net margin | 9.9% | 8.4% | 9.7% | 7.6% |
Revenue declined because of lower electricity and natural gas commodity costs and reduced demand, while lower purchased-power and natural-gas costs more than offset higher operating and maintenance expenses. Q3 operating and maintenance expense increased 7%, primarily from severance costs, accelerated gas-leak surveys, employee benefits, and property taxes.
- Cash flow: Nine-month operating cash flow was $2.807 billion for PG&E Corporation and $2.694 billion for the Utility, compared with $2.192 billion and $2.220 billion, respectively, in 2008. Capital expenditures were $3.022 billion, up from $2.691 billion.
- Liquidity: PG&E Corporation held $700 million of cash and the Utility held $511 million at September 30, 2009. The Utility had no commercial paper outstanding and had $1.667 billion of available revolving-credit capacity after $273 million of letters of credit.
- Debt: PG&E Corporation reported approximately $11.99 billion of short-term, long-term, and energy-recovery-bond debt; the Utility reported approximately $11.40 billion. The Utility’s $500 million floating-rate senior notes mature June 10, 2010.
- Equity and dividends: PG&E Corporation contributed $688 million to the Utility to support capital expenditures and maintain the CPUC-authorized 52% common-equity target. PG&E Corporation declared a quarterly dividend of $0.42 per share.
- Regulatory assets: Long-term regulatory assets were $5.931 billion and regulatory liabilities were $4.152 billion at September 30, 2009, reflecting the importance of future rate recovery and customer refunds to reported results.
Material changes versus the prior comparable period
- Nine-month income available to PG&E Corporation common shareholders rose 15% to $947 million, and diluted EPS increased 11% to $2.49.
- Nine-month revenue decreased 10%, primarily because of lower electricity and natural gas prices and lower purchased volumes. Electricity revenue declined 5%; natural gas revenue declined 24%.
- Nine-month operating income increased 3%, as commodity-cost reductions exceeded the revenue decline and higher operating expenses.
- Nine-month operating cash flow increased $615 million for PG&E Corporation, driven by recovery of a prior-year energy procurement under-collection, lower collateral payments, and tax refunds, partly offset by a $700 million payment on disputed claims.
- The Utility’s remaining net Chapter 11 disputed-claims liability declined to $1.005 billion after the $700 million August payment and $90 million of supplier settlements.
- Tax settlements generated significant benefits: PG&E Corporation received a $294 million federal refund in March and $311 million of tax and interest refunds in Q3; the filing also recognized a $56 million after-tax benefit in Q2 and additional Q3 tax benefits.
Guidance, outlook, risks, and unusual items
- Management expected to file the 2011–2013 General Rate Case application by year-end 2009. The draft application contemplated a 2011 revenue increase of $1.1 billion, or 6.5%, versus the 2010 forecast, but the CPUC’s ultimate authorization was uncertain.
- The Utility estimated average annual capital expenditures of approximately $2.7 billion during 2011–2013, primarily for aging electric and gas infrastructure.
- The SmartMeter program had incurred approximately $1.2 billion through September 30, 2009, including $1.0 billion of capital costs. The Utility expected most installations to be completed by the end of 2012, subject to cost recovery, implementation, and technology risks.
- Third-party power-purchase commitments totaled $45.372 billion on an undiscounted basis, including $36.141 billion after 2013. Natural-gas and nuclear-fuel commitments totaled $1.323 billion and $1.795 billion, respectively.
- Environmental remediation liabilities were $597 million. Management stated that undiscounted future costs could reach $1 billion or more if other responsible parties cannot contribute or contamination is greater than anticipated.
- Potential changes to once-through cooling requirements could require significant capital spending at Diablo Canyon. If cooling towers were required and were not technically or economically feasible, the Utility could face a material charge or cessation of operations.
- Diablo Canyon Unit 2 entered an extended scheduled outage in October 2009, expected to increase power-purchase costs. Nuclear-spent-fuel storage and related DOE litigation remained unresolved; the DOE conceded approximately $82 million of the Utility’s claimed recovery but disputed the balance.
- Energy-efficiency incentive awards remained uncertain. Potential awards and holdbacks varied substantially depending on CPUC methodology and final approval.
- Derivative liabilities totaled $287 million net, and the Utility could have been required to post approximately $414 million of additional collateral if credit-related provisions had been triggered.
- Management stated that there were no material off-balance-sheet arrangements and that PG&E Corporation and the Utility were in compliance with credit-facility covenants at quarter-end.
Most important facts for investors to verify
- Whether the CPUC approved the requested 2011–2013 rate increases and the requested gas transmission and storage revenue requirements.
- The final amount and timing of payments, refunds, and interest associated with the $1.005 billion Chapter 11 disputed-claims liability.
- Actual SmartMeter costs, deployment results, and the portion ultimately recoverable from customers.
- Final once-through cooling requirements and their potential effect on Diablo Canyon capital spending or operations.
- Resolution of DOE spent-fuel reimbursement litigation and the treatment of any recovery as customer credits.
- Future financing needs, including repayment or refinancing of the Utility’s $500 million floating-rate notes due June 2010.
- Changes in environmental remediation estimates, pension funding requirements, tax audits, and unrecognized tax benefits.