PG&E Corporation 2018 Q1 Form 10-Q Summary
Business Context and Reporting Period
Combined unaudited quarterly report for PG&E Corporation and Pacific Gas and Electric Company for the three months ended March 31, 2018. PG&E Corporation is a holding company whose principal subsidiary is the regulated utility serving northern and central California. The business operates primarily in one segment and is regulated by the CPUC, FERC, NRC, and other agencies.
Key Financial Metrics
| PG&E Corporation | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $4.056 billion | $4.268 billion | Down 5.0% |
| Operating income | $599 million | $867 million | Down 30.9% |
| Net income | $445 million | $579 million | Down 23.1% |
| Income available to common shareholders | $442 million | $576 million | Down 23.3% |
| Diluted EPS | $0.86 | $1.13 | Down $0.27 |
| Operating margin | 14.8% | 20.3% | Down 5.5 percentage points |
| Net margin | 11.0% | 13.6% | Down 2.6 percentage points |
| Operating cash flow | $1.512 billion | $1.574 billion | Down $62 million |
| Capital expenditures | $1.470 billion | $1.216 billion | Up $254 million |
Electric revenue was $2.951 billion, compared with $3.065 billion, and natural gas revenue was $1.105 billion, compared with $1.203 billion. Operating and maintenance expense increased to $1.597 billion from $1.517 billion, while depreciation, amortization, and decommissioning expense increased to $752 million from $712 million.
The effective income tax rate declined to 9.6% from 17.4%, primarily because the Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%, partly offset by lower tax benefits related to share-based compensation.
At March 31, 2018, PG&E Corporation had $144 million of cash and cash equivalents, $967 million of short-term borrowings, $394 million of current long-term debt, and $17.407 billion of noncurrent long-term debt. The Utility had $122 million of cash, $846 million of short-term borrowings, $45 million of current long-term debt, and $17.407 billion of noncurrent long-term debt.
PG&E Corporation and the Utility had $3.034 billion of total revolving credit facility availability, including $179 million at PG&E Corporation and $2.855 billion at the Utility. Both companies remained in compliance with their debt covenants. Total debt-to-capitalization ratios were 49% for PG&E Corporation and 48% for the Utility, versus a 65% covenant limit.
Material Changes Versus the Prior Comparable Period
- Operating income declined substantially because earnings-related revenue decreased while operating and maintenance costs and depreciation increased.
- Earnings-related utility revenue declined $84 million, primarily because Q1 2017 included $102 million of retroactive gas transmission and storage revenue and Q1 2018 included $81 million of provisions for rate refunds related to the Tax Act.
- Operating and maintenance expense increased $80 million, including approximately $40 million of higher environmental remediation expense, $32 million of higher liability insurance premiums, and $21 million of Northern California wildfire legal and other costs.
- PG&E Corporation's non-GAAP earnings from operations decreased to $468 million, or $0.91 per diluted share, from $544 million, or $1.06 per diluted share.
- Operating cash flow decreased modestly, while capital expenditures increased approximately 21%. Net cash used in investing activities increased to $1.475 billion from $1.235 billion.
- Dividends on PG&E Corporation and Utility common stock remained suspended. Utility preferred dividends were also suspended beginning with the period ending January 31, 2018.
- In February 2018, the Utility repaid a $250 million term loan and entered into a new $250 million term loan maturing February 22, 2019. It also redeemed $400 million of senior notes before maturity.
Outlook, Risks, Contingencies, and Unusual Items
- Northern California wildfires: The Utility incurred $259 million of restoration and repair costs through March 31, 2018, including $108 million of capital expenditures. Recovery through the CEMA account requires CPUC approval. Investigations into causes and regulatory compliance were ongoing, and management could not reasonably estimate potential liability.
- Wildfire-related claims could include property damage, business interruption, personal injury, wrongful death, fire suppression, evacuation, medical costs, penalties, interest, and attorneys' fees. The Utility reported more than 150 lawsuits involving approximately 2,500 plaintiffs as of May 1, 2018. Wildfire liability insurance totaled approximately $840 million, subject to retentions and policy limitations.
- Butte fire: The Utility believed a loss of at least $1.1 billion was probable, but could not estimate the upper end of the loss range. The accrued third-party claims liability was $443 million at March 31, 2018, while the recorded insurance receivable was $399 million. The Utility had recorded $922 million of probable insurance recoveries through the reporting date.
- Regulatory and enforcement matters: A CPUC settlement approved after quarter-end provided for a total penalty of $97.5 million related to ex parte communications, including cash payments, revenue requirement reductions, and other remedies. The filing also disclosed ongoing safety-culture, pipeline, wildfire, and other regulatory proceedings.
- Tax Act and rates: The Utility submitted rate-case modifications that, if approved, would reduce annual revenue requirements by approximately $325 million from certain proceedings and an additional approximately $125 million from other rate cases, while increasing rate base. Timing and outcomes remained uncertain.
- Capital spending outlook: Management estimated Utility capital expenditures of approximately $6.3 billion in 2018 and $6.0 billion in 2019, compared with approximately $5.7 billion in 2017.
- Management forecast unrecovered pipeline-related expenses of $35 million to $60 million in 2018. The Utility also faces potential capital disallowances, including $576 million of 2011–2014 gas transmission and storage spending subject to CPUC audit after a $120 million permanent disallowance.
- Credit ratings were downgraded by Fitch, S&P, and Moody's during the first quarter but remained investment grade at March 31, 2018. A downgrade below investment grade could increase borrowing costs, restrict commercial paper access, and require up to $800 million of additional collateral for certain derivative positions.
- Diablo Canyon retirement remains planned for 2024 and 2025. The CPUC authorized recovery of certain employee retention, retraining, licensing, and cancellation costs, but rejected the proposed $85 million community mitigation recovery absent legislative authorization.
Important Facts for Investors to Verify
- Scope, causation findings, insurance coverage, litigation outcomes, and potential liabilities related to the Northern California wildfires.
- Changes to the $1.1 billion minimum probable Butte fire loss estimate, insurance recoveries, settlements, and unresolved government claims.
- CPU C and FERC decisions affecting Tax Act rate reductions, CEMA recovery, wildfire expense recovery, transmission rates, and gas transmission and storage revenues.
- Liquidity requirements, credit-rating actions, collateral obligations, covenant compliance, and the need for future debt or equity financing.
- Whether suspended dividends will be reinstated and whether future equity issuance could dilute PG&E Corporation shareholders.
- Actual capital expenditures versus the $6.3 billion 2018 estimate and the extent to which expenditures remain recoverable in rates.
- Potential additional fines, safety-related remedies, capital disallowances, environmental costs, and other contingencies not yet estimable.