Business Context and Reporting Period
This Form 8-K, dated April 22, 2019, reports on a regulatory filing by Pacific Gas and Electric Company (PG&E), a subsidiary of PG&E Corporation. The filing details an application submitted to the California Public Utilities Commission (CPUC) for the 2020 Cost of Capital Proceeding. This proceeding seeks authorization for the utility's capital structure and rates of return effective January 1, 2020. The filing occurs while the company is navigating Chapter 11 bankruptcy proceedings that commenced on January 29, 2019.
Key Financial Metrics and Requests
The utility requested a significant increase in its allowed return on equity (ROE) to address wildfire-related challenges and fund infrastructure investments. Key metrics from the application include:
- Requested ROE: 16.0% for 2020 (up from the currently authorized 10.25%).
- Weighted Average Cost of Capital (WACC): Requested at 10.80% for 2020, compared to the current 7.69%.
- Estimated Revenue Impact: The proposed ROE increase would result in a $1.2 billion increase in the revenue requirement based on current rate base.
- Capital Structure: The requested structure maintains 52.0% common equity, 0.5% preferred stock, and 47.5% long-term debt.
- Infrastructure Investment Plan: PG&E expects to fund up to $28 billion in energy infrastructure investments from 2019 to 2022, including $21 billion for safety and reliability.
Material Changes Versus Prior Period
The filing highlights a material shift in the cost of capital assumptions compared to the 2019 authorized rates:
- Return on Equity: Increased from 10.25% to a requested 16.0%.
- Cost of Debt: Increased from 4.89% to a requested 5.16%.
- Revenue Requirements:
- Electric generation and distribution: Requested increase from $6,266 million to $7,110 million.
- Gas distribution: Requested increase from $1,739 million to $1,968 million.
- Gas transmission and storage: Requested increase from $1,269 million to $1,428 million.
These changes are driven by the need to attract investment capital for modernizing critical energy infrastructure and mitigating wildfire risks.
Guidance, Outlook, and Risks
Management indicated that the requested return on equity reflects the severe wildfire-related challenges facing the utility. The filing includes several contingencies and forward-looking statements:
- Regulatory Uncertainty: The utility cannot predict the timing or outcome of the CPUC proceeding. Revenue requirement changes may differ if the CPUC approves different rate base amounts in pending 2019 and 2020 rate cases.
- Bankruptcy Context: The utility proposed to file a new cost of capital application upon emerging from Chapter 11 bankruptcy. The current application does not modify a separate request for a waiver of the capital structure condition filed in February 2019 due to wildfire charges.
- Adjustment Mechanism: The utility requested the continuation of the annual cost of capital adjustment mechanism, though this could be superseded by a new application.
- Risks: Actual results may differ materially based on CPUC decisions, legislative actions regarding wildfire risk, and the resolution of bankruptcy proceedings.
Investor Verification Checklist
- Verify the CPUC's final decision on the 16% ROE request and the resulting impact on the 2020 revenue requirement.
- Monitor the status of the Chapter 11 bankruptcy proceedings and any subsequent cost of capital applications filed post-emergence.
- Review the outcomes of the pending 2019 Gas Transmission and Storage Rate Case and 2020 General Rate Case, as these will determine the actual rate base used for revenue calculations.
- Assess the progress of the $28 billion infrastructure investment plan, particularly the $21 billion allocated to safety and reliability.
- Confirm whether the CPUC grants the previously filed waiver of the capital structure condition related to wildfire charges.