PG&E Corporation and Pacific Gas and Electric Company — Q3 2017 Form 10-Q
Business context and reporting period
Combined quarterly report for the period ended September 30, 2017. PG&E Corporation is a holding company whose principal operating subsidiary, Pacific Gas and Electric Company, is a regulated electric and natural gas utility serving northern and central California. The companies are primarily regulated by the CPUC and FERC, with nuclear facilities subject to NRC oversight.
Financial performance and liquidity
| PG&E Corporation consolidated | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Operating revenues | $4,517 million | $4,810 million | $13,035 million | $12,953 million |
| Operating income | $899 million | $640 million | $2,527 million | $1,136 million |
| Net income | $553 million | $391 million | $1,542 million | $711 million |
| Income available to common shareholders | $550 million | $388 million | $1,532 million | $701 million |
| Diluted EPS | $1.07 | $0.77 | $2.98 | $1.40 |
| Operating margin | 19.9% | 13.3% | 19.4% | 8.8% |
| Net margin | 12.2% | 8.1% | 11.8% | 5.5% |
For Pacific Gas and Electric Company, nine-month 2017 net income was $1,491 million versus $706 million in the prior-year period; income available for common stock was $1,481 million versus $696 million.
- Cash flow: Nine-month operating cash flow was $4.7 billion for PG&E Corporation and $4.692 billion for the Utility, up from $3.283 billion and $3.241 billion, respectively. Capital expenditures were $3.938 billion, compared with $4.128 billion in the prior-year period.
- Cash and liquidity: PG&E Corporation had $191 million of cash at September 30, 2017; the Utility had $70 million. The Utility had $2.581 billion of revolving facility availability, while total availability for both registrants was $2.881 billion.
- Debt: PG&E Corporation reported $18.188 billion of current and noncurrent debt, including short-term borrowings; the Utility reported approximately $17.839 billion. Debt-to-total-capitalization ratios were 49% for PG&E Corporation and 48% for the Utility, below the 65% revolving-facility covenant limit.
- Balance sheet: PG&E Corporation total assets were $71.526 billion and total equity was $19.286 billion at September 30, 2017. Long-term regulatory assets were $8.546 billion and regulatory liabilities were $7.265 billion.
- Dividends and financing: PG&E Corporation declared a quarterly dividend of $0.53 per share, increased from $0.49. The Utility approved a quarterly common dividend of $270 million. PG&E Corporation expects to issue $400 million to $500 million of common stock by year-end 2017, primarily to fund Utility equity contributions.
Material changes versus the prior comparable period
- Nine-month operating revenue increased modestly, but the mix shifted materially: natural gas revenue rose to $2.999 billion from $2.363 billion, while electric revenue declined to $10.036 billion from $10.590 billion.
- Operating income and net income increased substantially, primarily because 2016 included significant gas transmission and safety-related disallowances and a $400 million customer refund, while 2017 benefited from authorized rate increases, lower disallowed charges, and higher insurance recoveries related to the Butte fire.
- Nine-month operating and maintenance expense declined to $4.414 billion from $5.631 billion at PG&E Corporation. Depreciation, amortization, and decommissioning expense increased to $2.134 billion from $2.090 billion, and interest expense increased to $663 million from $621 million.
- PG&E Corporation’s nine-month earnings from operations, a non-GAAP measure, increased to $1.562 billion, or $3.04 diluted EPS, from $1.209 billion, or $2.42 diluted EPS.
- The Utility issued $600 million of senior notes in March 2017, repaid or retired certain debt, and reduced commercial paper borrowings. PG&E Corporation made $405 million of equity contributions to the Utility during the first nine months.
Guidance, outlook, commentary, risks and unusual items
- Northern California wildfires: Fires beginning October 8, 2017 were disclosed as subsequent events. Causes remained under investigation, and the Utility had submitted 20 incident reports involving its facilities as of October 31. Estimated service restoration and repair costs were $160 million to $200 million, including $60 million to $80 million of capital expenditures. The Utility believed these costs may be recoverable through CEMA, subject to CPUC approval, but could not estimate potential liability for third-party claims.
- The Utility reported approximately $800 million of liability insurance for the Northern California wildfires. As of October 31, nine lawsuits had been filed, and additional claims were possible. Liability could be substantial if facilities were found responsible under inverse condemnation or negligence theories.
- Butte fire: The probable loss estimate increased to at least $1.1 billion from $750 million at December 31, 2016. The estimate excluded significant portions of potential OES and Calaveras County claims and did not include punitive damages. Recorded third-party claims liability was $702 million at September 30, while recorded insurance receivables were $741 million; ultimate recoveries and losses remained uncertain.
- Capital spending: The Utility estimated capital expenditures of approximately $5.7 billion in 2017, $6.3 billion in 2018, and $6.0 billion in 2019. Management also forecast more than $1 billion of grid investments through 2020.
- Regulatory outlook: The 2017 GRC authorized revenue requirement increases of $88 million for 2017, $444 million for 2018, and $361 million for 2019. A CPUC cost-of-capital decision reduced authorized ROE from 10.40% to 10.25% beginning January 1, 2018; the Utility estimated an annual revenue requirement reduction of approximately $120 million.
- FERC trial staff proposed a $1.353 billion 2017 transmission revenue requirement and an 8.46% ROE, below the Utility’s requested $1.718 billion and 10.90% ROE. The TO18 and TO19 proceedings remained unresolved and subject to potential refunds.
- Other material exposures included the CPUC safety-culture investigation, ex parte communications proceeding, potential safety citations, the Valero refinery outage lawsuit, environmental remediation liabilities of $1.018 billion, and possible additional environmental costs of up to $1.0 billion.
- The Utility expects to retire Diablo Canyon at the expiration of its operating licenses in 2024 and 2025, subject to CPUC approval. The 2015 nuclear decommissioning decision reduced the recorded asset retirement obligation by $66 million; the nuclear decommissioning trust had a fair value of $3.2 billion at September 30, 2017.
Most important facts an investor should verify
- Progress and findings from Cal Fire and CPUC investigations into the October 2017 wildfires, including whether PG&E facilities were involved.
- Potential wildfire liabilities, insurance availability, CEMA and WEMA recovery decisions, and the effect on debt covenants, credit ratings, liquidity, and equity issuance.
- Changes in the Butte fire loss estimate, settlement payments, punitive-damages exposure, and insurance recoveries.
- Final outcomes of the CPUC safety-culture and ex parte proceedings and any resulting fines, penalties, ROE reductions, or other ratemaking remedies.
- FERC decisions in the TO18 and TO19 rate cases, including any refunds and the final authorized ROE and revenue requirements.
- Actual capital expenditures versus the $5.7 billion 2017 forecast and the Utility’s ability to fund them while maintaining its authorized capital structure.
- Whether pending regulatory assets and liabilities, environmental costs, and other contingencies remain recoverable through customer rates.