PCG

PG&E Corporation and Pacific Gas and Electric Company: Q1 2008 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2008, for PG&E Corporation (the holding company) and its primary subsidiary, Pacific Gas and Electric Company (the Utility). The Utility operates as a regulated public utility in northern and central California, providing electricity and natural gas distribution, generation, procurement, and transmission. The filing is a combined report for both entities.

Key Financial Metrics (Three Months Ended March 31, 2008)

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 11% to $3.733 billion from $3.356 billion in Q1 2007. Electric revenues rose 16% primarily due to higher procurement costs passed through to customers and increased public purpose program revenues.
• Profit Decline: Net income decreased 13% to $224 million (from $256 million in Q1 2007). Diluted EPS fell to $0.62 from $0.71.
• Cost Drivers: The decline in net income was driven by:
  • Diablo Canyon Outage: Extended refueling outage and steam generator replacement at Unit 2 increased costs by approximately $27 million compared to the prior year.
  • Storm Costs: Severe winter weather in January 2008 resulted in $25 million in additional storm-related costs.
  • Procurement Volume: Cost of electricity increased 42% due to a 46% increase in purchased power volume, necessitated by the Diablo Canyon outage and the termination of a DWR/Calpine power contract.
• Offsetting Factors: Higher returns on equity from authorized capital investments added approximately $28 million to net income.

Guidance, Outlook, and Risks

• Capital Expenditures: The Utility forecasts total capital expenditures of approximately $3.6 billion for 2008. Q1 spending was $853 million, driven by the SmartMeter project, generation facility spending, and infrastructure improvements.
• Regulatory Matters:
  • Cost of Capital: A proposed CPUC decision recommends a multi-year cost of capital mechanism, maintaining the 2008 ROE of 11.35% through 2010 unless triggered otherwise.
  • Spent Nuclear Fuel: The dry cask storage facility at Diablo Canyon is expected to be completed by late 2008, with fuel loading beginning in June 2009. Failure to complete by Oct 2010 (Unit 1) or May 2011 (Unit 2) could force curtailment of operations.
  • Hydroelectric Costs: An application was filed to recover $47 million in costs related to the valuation of hydroelectric facilities.
• Contingencies and Legal:
  • Disputed Claims: Approximately $1.1 billion remains in accruals for Chapter 11 disputed claims, with $1.2 billion held in escrow. Interest on these claims is approximately $614 million.
  • Environmental: Environmental remediation liability stands at $555 million, with a potential upper range of $912 million if other responsible parties cannot contribute.
  • Labor Code: Ongoing investigation into California Labor Code meal period violations; $23 million has been expensed to date, with potential for further material impact.
• Debt Financing: In March 2008, the Utility issued $600 million in Senior Notes. It also repurchased $454 million of pollution control bonds to mitigate interest rate risk.

Investor Verification Checklist

• Diablo Canyon Timeline: Verify the progress of the dry cask storage facility and the feasibility of the June 2009 fuel loading date to avoid operational curtailment.
• Disputed Claims Resolution: Monitor the status of FERC and judicial proceedings regarding the $1.1 billion in remaining disputed claims and the associated interest accruals.
• Regulatory Recovery: Track the CPUC's final decision on the $47 million hydroelectric divestiture cost recovery and the adoption of the multi-year cost of capital mechanism.
• Environmental Liability: Assess the potential for the $555 million environmental remediation liability to increase toward the $912 million upper estimate.
• Capital Expenditure Execution: Confirm that the Utility can manage the $3.6 billion 2008 capital spend within authorized revenue requirements, particularly regarding the SmartMeter project.