PG&E Corporation 2019 Q1 Form 10-Q Summary
Business context and reporting period
This combined Form 10-Q covers PG&E Corporation and its primary operating subsidiary, Pacific Gas and Electric Company, for the three months ended March 31, 2019. The Utility provides regulated electric and natural gas services in northern and central California under CPUC and FERC oversight.
Both entities filed voluntary Chapter 11 petitions on January 29, 2019 and operated as debtors-in-possession during the quarter. Management stated that wildfire-related uncertainties raise substantial doubt about the companies’ ability to continue as going concerns; the financial statements were nevertheless prepared on a going-concern basis without adjustments for potential bankruptcy outcomes.
Key financial metrics
| PG&E Corporation consolidated | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenues | $4.011 billion | $4.056 billion | Down $45 million |
| Operating income | $189 million | $599 million | Down $410 million |
| Net income | $136 million | $445 million | Down $309 million |
| Income available to common shareholders | $136 million | $442 million | Down $306 million |
| Diluted EPS | $0.25 | $0.86 | Down $0.61 |
| Operating cash flow | $2.244 billion | $1.512 billion | Up $732 million |
| Capital expenditures | $1.224 billion | $1.470 billion | Down $246 million |
| Cash and cash equivalents at March 31 | $2.964 billion | $144 million | Up $2.820 billion |
Operating margin declined to approximately 4.7% from 14.8%, and net margin declined to approximately 3.4% from 11.0%. The filing does not present an adjusted or non-GAAP margin measure.
- Electric revenue was $2.792 billion, down from $2.951 billion. Natural gas revenue was $1.219 billion, up from $1.105 billion.
- Operating and maintenance expense increased to $2.087 billion from $1.604 billion, primarily from enhanced inspections and repairs, Camp Fire cleanup and repair, and wildfire-related legal costs.
- Depreciation, amortization and decommissioning expense increased 6% to $797 million.
- Interest expense fell to $103 million from $220 million because the companies stopped accruing interest on pre-petition debt after the Chapter 11 filing.
- The income tax line was a benefit of $84 million versus a provision of $51 million in the prior-year quarter, producing an unusually negative effective tax rate.
- At March 31, 2019, total assets were $82.287 billion and total equity was $13.129 billion. Liabilities subject to compromise totaled $39.322 billion.
Liquidity, debt and cash flow
- Operating cash flow benefited from reduced vendor payments and interest payments following the bankruptcy filing, as well as an $833 million increase in liabilities subject to compromise.
- Investing cash outflow was $1.247 billion, including $1.224 billion of capital expenditures.
- Financing cash inflow was $300 million at the consolidated level, principally reflecting a $350 million debtor-in-possession borrowing partially offset by $111 million of related issuance costs and other items.
- The DIP financing package provides up to $5.5 billion of senior secured superpriority financing: a $3.5 billion revolving facility, a $1.5 billion initial term loan and a $500 million delayed-draw term loan. At March 31, $350 million had been drawn under the revolving facility and approximately $1.019 billion of interim revolving availability remained, after letters of credit.
- On April 3, 2019, after quarter-end, the Utility borrowed $1.5 billion under the initial term loan and repaid the $350 million revolving borrowing. As of April 30, the Utility reported $1.5 billion of DIP borrowings, $3.2 billion of revolving commitments and $500 million of delayed-draw commitments available, subject to conditions.
- Pre-petition debt was classified as subject to compromise. Consolidated debt subject to compromise was $22.253 billion at March 31, 2019, while total liabilities subject to compromise were $39.322 billion.
- The companies had no commercial paper borrowings outstanding and did not expect access to the commercial paper market during the Chapter 11 cases. Credit ratings had fallen below investment grade, and Moody’s and Fitch had withdrawn ratings.
Material changes versus the prior comparable period
- Net income attributable to common shareholders fell 69% to $136 million, and diluted EPS fell 71% to $0.25.
- Operating income fell primarily because operating and maintenance expense increased $483 million on a consolidated basis, including substantial safety inspection, wildfire cleanup and legal costs.
- Reorganization items of $127 million were recorded in Q1 2019, compared with none in Q1 2018. These consisted primarily of DIP financing costs and legal and other professional fees, net of interest income.
- Cash from operations increased substantially because pre-petition obligations and interest payments were stayed or otherwise deferred; this improvement should not be treated as a recurring operating trend.
- The balance sheet was significantly reshaped by bankruptcy accounting, including $39.322 billion of liabilities subject to compromise and the replacement of pre-petition debt classifications with DIP financing.
- Effective January 1, 2019, the companies adopted the new lease standard and recorded approximately $2.8 billion of operating lease right-of-use assets and liabilities.
Wildfire contingencies, outlook and unusual items
- Estimated wildfire-related claims at March 31, 2019 totaled $14.212 billion: $10.5 billion for the 2018 Camp Fire, $3.5 billion for the 2017 Northern California wildfires and $212 million for the 2015 Butte Fire. These claims were classified as subject to compromise after the Chapter 11 filing.
- Management stated that potential losses related to the 2017 and 2018 wildfires could exceed $30 billion, excluding possible punitive damages, fines, penalties and future claims. The company could not estimate the upper end of the loss range.
- Recorded probable insurance recoveries were $1.38 billion for the Camp Fire, $842 million for the 2017 wildfires and $922 million for the 2015 Butte Fire. Recoverability and timing remain uncertain, and losses are expected to substantially exceed available insurance.
- The Utility incurred $889 million of wildfire facility cleanup and repair costs through March 31, 2019, including $361 million of capital expenditures. It also incurred $210 million of enhanced and accelerated inspection and repair costs during Q1 2019.
- Cost recovery through the WEMA, CEMA, FHPMA and FRMMA remains subject to CPUC authorization and reasonableness reviews. The FRMMA balance was $55 million at March 31, 2019; long-term WEMA-related regulatory assets totaled $111 million.
- The SEC opened an investigation on March 20, 2019 into public disclosures and accounting for losses associated with the 2017 and 2018 wildfires and the 2015 Butte Fire.
- The Utility remained subject to federal probation and a court-appointed monitor. New probation conditions imposed April 3, 2019 require enhanced vegetation management, inspections, reporting and compliance with the CPUC-approved wildfire mitigation plan. The Utility must forgo dividends until it complies with applicable requirements.
- Cash dividends on PG&E Corporation common stock, Utility common stock and Utility preferred stock remained suspended. PG&E Corporation did not expect to pay cash dividends during the Chapter 11 cases.
- Management estimated 2019 capital expenditures of approximately $7.1 billion and 2020 capital expenditures of approximately $7.0 billion. The Utility’s 2020 GRC application requested $9.6 billion of base revenues, a $1.1 billion increase over 2019 authorized amounts.
- The Utility’s April 2019 cost-of-capital application requested a 16% return on equity for 2020, compared with the currently authorized 10.25%. The request is subject to CPUC approval and is not guidance.
- On April 3, 2019, PG&E announced significant Board changes, and William D. Johnson became CEO and President effective May 2, 2019. On May 1, the companies sought bankruptcy-court approval for a proposed $105 million Wildfire Assistance Fund.
Most important facts for investors to verify
- Progress toward a confirmed and executable Chapter 11 plan, including treatment of wildfire claims, pre-petition debt, equity interests and exit financing.
- Actual availability and covenant restrictions under the DIP facilities, including the effect of letters of credit, collateral requirements and future borrowing needs.
- Changes to the $14.212 billion recorded wildfire claims and any development toward the potential liability exceeding $30 billion.
- Amounts and timing of insurance recoveries and CPUC approval of wildfire, cleanup, inspection and mitigation cost recovery.
- Status and outcomes of the SEC investigation, criminal investigations, federal probation, CPUC proceedings and FERC rate cases.
- Whether operating cash flow remains elevated because of bankruptcy-related payment deferrals or normalizes as post-petition obligations are paid.
- Whether the Utility can fund its projected capital program and maintain safe service while access to conventional capital markets remains restricted.