PG&E Corporation 2017 Q2 Form 10-Q Summary
Business Context and Reporting Period
PG&E Corporation is a California holding company whose primary operating subsidiary, Pacific Gas and Electric Company, provides regulated electric and natural gas generation, transmission, distribution, and storage services in northern and central California. The combined Form 10-Q covers the three and six months ended June 30, 2017, with comparisons to the same periods in 2016. The financial statements are unaudited and prepared under GAAP.
Financial Results and Key Metrics
| PG&E Corporation | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Operating revenues | $4.250 billion | $4.169 billion | $8.518 billion | $8.143 billion |
| Operating income | $748 million | $401 million | $1.628 billion | $496 million |
| Net income | $410 million | $210 million | $989 million | $320 million |
| Income available to common shareholders | $406 million | $206 million | $982 million | $313 million |
| Diluted EPS | $0.79 | $0.41 | $1.92 | $0.63 |
| Dividends declared per share | $0.53 | $0.49 | $1.02 | $0.95 |
- Revenue increased 2% in the quarter and 5% year to date. Electric revenue declined, while natural gas revenue rose substantially.
- Operating margin was approximately 17.6% in Q2 2017 versus 9.6% in Q2 2016; the six-month margin was approximately 19.1% versus 6.1%.
- Net margin was approximately 9.6% in Q2 2017 versus 5.0% in Q2 2016; the six-month margin was approximately 11.6% versus 3.9%.
- Improved earnings primarily reflected higher authorized base revenues, lower disallowed charges, and lower Butte fire-related charges compared with 2016, partially offset by lower insurance recoveries and a $47 million Diablo Canyon-related disallowance.
- Six-month operating cash flow was $2.756 billion, compared with $1.815 billion in 2016. Capital expenditures were $2.474 billion, producing approximate operating cash flow less capital expenditures of $282 million before financing and other investing items.
- Cash and cash equivalents were $178 million at June 30, 2017, compared with $177 million at December 31, 2016. Restricted cash was $7 million.
- PG&E Corporation had $1.180 billion of short-term borrowings, $700 million of current long-term debt, and $16.616 billion of long-term debt. Total debt to capitalization was 50%; the Utility’s ratio was 49%, both below the 65% revolving-credit covenant.
- At June 30, the Utility had $2.277 billion of unused revolving-credit capacity after letters of credit and commercial paper, while PG&E Corporation had $300 million available. The Utility had $681 million of commercial paper outstanding.
Material Changes Versus the Prior Comparable Period
- Operating and maintenance expense declined by $292 million, or 16%, in Q2 and by $799 million, or 21%, for the six months, primarily because 2016 included significant capital disallowances and San Bruno-related charges.
- Q2 2017 included $47 million of Diablo Canyon settlement-related disallowances; Q2 2016 included approximately $338 million of disallowed capital charges.
- Butte fire-related charges were lower than in 2016, but insurance recoveries also fell substantially. The Butte fire liability was $574 million at June 30, 2017, and the related insurance receivable was $521 million.
- Income taxes changed from a $175 million benefit in the first six months of 2016 to a $243 million provision in 2017, reflecting much higher pretax income and the absence of the prior-year tax benefits.
- Debt financing increased, including $600 million of Utility senior notes issued in March 2017. The Utility also repaid $345 million of pollution control bonds in June and remarketed $145 million of bonds previously held in treasury.
- The Board increased PG&E Corporation’s quarterly dividend from $0.49 to $0.53 per share and the Utility’s quarterly common dividend from $244 million to $270 million.
- PG&E Corporation issued common stock and contributed $190 million to the Utility during the first six months. Management forecast $400 million to $500 million of 2017 common-stock issuance, creating potential dilution.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management estimated 2017 capital expenditures of approximately $5.9 billion, followed by $6.1 billion in 2018 and $6.0 billion in 2019.
- Management forecast unrecovered pipeline-related expenses of $80 million to $125 million in 2017, primarily for identifying and removing transmission pipeline-right-of-way encroachments.
- The Utility expected to incur more than $50 million cumulatively in 2017 and 2018 to implement new natural gas safety standards under CPUC General Order 112-F.
- The CPUC’s 2017 General Rate Case authorized total annual revenue requirements of $8.004 billion for 2017, with increases of $444 million in 2018 and $361 million in 2019.
- The CPUC reduced the Utility’s authorized return on equity from 10.40% to 10.25%, effective January 1, 2018. Management estimated that related changes could reduce annual revenue requirements by approximately $100 million beginning in 2018.
- The Butte fire remains the largest disclosed contingency. The Utility accrued at least $750 million of probable losses, but could not estimate the upper end of the loss range. Potential additional claims included approximately $87 million from Cal Fire, $190 million from the Office of Emergency Services, and $85 million from Calaveras County, excluding other claims and potential punitive damages.
- The Utility received an $8.3 million CPUC safety citation related to the Butte fire and paid it in June 2017. It also faces continuing wildfire litigation, regulatory investigations, and possible future penalties.
- The CPUC safety-culture investigation could result in additional fines, penalties, remedial requirements, or a reduction in authorized return on equity.
- Environmental remediation liabilities totaled $1.015 billion at June 30, 2017. The filing states that undiscounted future environmental costs could be up to $1.0 billion higher than recorded if contamination or remediation requirements exceed current estimates.
- PG&E plans to retire Diablo Canyon when its operating licenses expire in 2024 and 2025, subject to CPUC approval. The filing recorded $47 million of related disallowances in the first half of 2017.
- Westinghouse, the Utility’s sole supplier of nuclear fuel assemblies and certain support services, filed for Chapter 11 protection. The Utility could face fuel-supply, outage, contract, and cost-recovery risks.
- Other material uncertainties include FERC transmission rate cases, potential additional natural gas safety enforcement, environmental obligations, the Ghost Ship and Valero lawsuits, cybersecurity threats, regulatory changes, and potential changes in customer demand and community-choice aggregation.
Important Facts for Investors to Verify
- Whether Butte fire losses exceed the $750 million accrual and whether insurance and other recoveries will be collected in full and on schedule.
- The outcome of the CPUC safety-culture investigation, ex parte communications proceeding, pending safety matters, and related effects on fines, capital recovery, and authorized return on equity.
- The outcome of the TO18 and TO19 FERC transmission rate cases and the timing of any refunds or revised revenue requirements.
- Whether pipeline-related expenses, Diablo Canyon disallowances, environmental costs, and new safety-regulation costs are recoverable through rates.
- The amount and timing of planned equity issuance, including the resulting dilution to PG&E Corporation shareholders.
- Whether operating cash flow and available credit remain sufficient to fund the Utility’s substantial capital program, debt maturities, dividends, and contingent liabilities.
- The effect of the Diablo Canyon retirement proposal, Westinghouse’s bankruptcy, and California’s evolving energy, climate, retail-choice, and community-choice-aggregation policies.