PG&E Corporation 2016 Q3 Form 10-Q Summary
Business Context and Reporting Period
PG&E Corporation is a California holding company whose principal 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 quarter and nine months ended September 30, 2016. Financial statements are unaudited and prepared under GAAP.
Key Financial Metrics
| PG&E Corporation, $ millions except per-share data | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Operating revenues | 4,810 | 4,550 | 12,953 | 12,666 |
| Operating income | 640 | 545 | 1,136 | 1,303 |
| Net income | 391 | 310 | 711 | 750 |
| Income available to common shareholders | 388 | 307 | 701 | 740 |
| Diluted EPS | $0.77 | $0.63 | $1.40 | $1.53 |
| Dividends declared per common share | $0.49 | $0.46 | $1.44 | $1.37 |
- Q3 revenue increased 6%, while nine-month revenue increased 2% year over year, primarily reflecting authorized base-revenue increases and rate-case effects.
- Q3 operating margin was approximately 13.3%, up from 12.0%; nine-month operating margin was approximately 8.8%, down from 10.3%.
- Q3 net margin was approximately 8.1%, compared with 6.8%; nine-month net margin was approximately 5.5%, compared with 5.9%.
- Nine-month cash flow from operating activities was $3.25 billion, up from $2.94 billion. Capital expenditures were $4.13 billion, compared with $3.66 billion, producing negative operating cash flow after capital expenditures of approximately $880 million.
- At September 30, 2016, PG&E Corporation had cash and cash equivalents of $71 million, restricted cash of $168 million, short-term borrowings of $1.15 billion, current long-term debt of $160 million, and long-term debt of $16.53 billion.
- PG&E Corporation had $135 million available under its $300 million revolving credit facility; the Utility had approximately $2.24 billion available under its $3.0 billion facility. Both companies were in compliance with their debt covenants.
- Total assets were $66.57 billion and total equity was $17.61 billion at September 30, 2016. The Utility’s debt-to-capitalization ratio was 49%, versus a 65% maximum under its revolving credit facility.
Material Changes Versus the Prior Comparable Period
- Q3 net income attributable to common shareholders increased $81 million, but nine-month earnings declined $39 million. Nine-month results were pressured by Butte fire costs, capital disallowances, pipeline-related expenses, legal and regulatory costs, and the absence of a prior-year SolarCity investment gain.
- Q3 operating and maintenance expense increased 10% to $1.78 billion. Nine-month operating and maintenance expense increased 12% to $5.63 billion, reflecting higher labor, benefits, service-contract, and transmission and distribution project costs.
- Interest expense increased 9% in Q3 and 8% for the nine-month period because of higher debt and short-term borrowings.
- Nine-month depreciation, amortization, and decommissioning expense increased 8% to $2.09 billion, primarily due to capital additions.
- PG&E Corporation issued common stock and made $740 million of equity contributions to the Utility during the first nine months. An August underwritten offering generated $309 million of net proceeds. The company expects continued equity issuance, creating potential dilution.
- The Utility issued $600 million of 2.95% senior notes due 2026 and entered into a $250 million floating-rate term loan maturing in February 2017.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated 2016 capital expenditures of approximately $5.7 billion and approximately $6.0 billion annually for 2017 through 2019.
- PG&E Corporation forecast approximately $800 million of common-stock issuance during 2016 and $400 million to $600 million during 2017, primarily to fund Utility equity contributions and potentially unrecoverable costs.
- The 2017 general rate-case settlement proposal contemplated an $88 million increase in 2017 revenue requirements, followed by increases of $444 million in 2018 and $361 million in 2019, subject to CPUC approval and unresolved issues.
- The CPUC’s San Bruno-related Penalty Decision totals $1.6 billion. Through September 30, 2016, the Utility had recorded $1.4 billion of related fines, customer credits, and disallowed capital or safety costs; approximately $150 million of future costs remained identified, excluding certain remedy-related costs.
- The Utility accrued $350 million for estimated Butte fire property damages and recorded $260 million of probable insurance recoveries. Management stated that additional losses are reasonably possible and that the $90 million estimate for fire-suppression costs was not included in the accrual. The ultimate exposure remains uncertain.
- The Utility was found guilty on six felony counts related to pipeline integrity management and obstruction of a federal proceeding. A $3 million accrual was recorded; sentencing was scheduled for January 2017, and additional non-recoverable compliance or monitoring costs were possible.
- CPUC penalties and other enforcement actions remained possible for ex parte communications, gas-safety record keeping, pipeline rights-of-way, and approximately 550,000 atmospheric-corrosion inspections performed by non-qualified personnel. The filing does not provide a clear estimate of potential future charges for these matters.
- The Utility proposed retiring Diablo Canyon when its current licenses expire in 2024 and 2025. The estimated undiscounted nuclear decommissioning cost increased to $4.8 billion, with a GAAP asset-retirement obligation of approximately $3.5 billion and nuclear decommissioning trust assets of approximately $2.9 billion at September 30, 2016.
- Environmental remediation liabilities totaled $992 million, with management estimating that undiscounted future costs could reach $2.0 billion under adverse assumptions. Approximately $704 million was expected to be recoverable through rates.
- Other significant risks include regulatory disallowances, wildfire and inverse-condemnation liability, insurance sufficiency, debarment from federal contracts, environmental obligations, nuclear decommissioning, commodity and interest-rate volatility, financing access, and cybersecurity or operational-system failures.
Most Important Facts for Investors to Verify
- Final CPUC decisions on the 2015 gas transmission and storage rate case and the 2017 general rate case, including the treatment of the $850 million safety-related disallowance.
- Developments in Butte fire claims, fire-suppression costs, insurance recoveries, and potential liabilities beyond the $350 million accrual.
- Federal sentencing, the motion for judgment of acquittal, DOI debarment proceedings, and any required independent monitoring or remedial programs.
- Future CPUC, SED, federal, and criminal penalties related to gas-safety practices, ex parte communications, inspections, and pipeline rights-of-way.
- PG&E Corporation’s future equity issuance requirements and the resulting dilution to EPS and dividends.
- Whether operating cash flow continues to cover the company’s substantial capital program and debt-service requirements.
- CPUС approval of the Diablo Canyon retirement proposal, decommissioning cost recovery, replacement-resource commitments, and possible changes to the recorded asset-retirement obligation.