PG&E Corporation and Pacific Gas and Electric Company: Q1 2012 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, transportation, and storage services in northern and central California. The combined Form 10-Q covers the three months ended March 31, 2012, with comparisons to the three months ended March 31, 2011. The financial statements are unaudited.
The Utility served approximately 5.2 million electric distribution customers and 4.3 million natural gas distribution customers at March 31, 2012. The business is primarily regulated by the California Public Utilities Commission and the Federal Energy Regulatory Commission, with nuclear operations subject to Nuclear Regulatory Commission oversight.
Key financial metrics
| PG&E Corporation consolidated metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenues | $3,641 million | $3,597 million | +$44 million, 1% |
| Operating income | $487 million | $484 million | +$3 million |
| Income before taxes | $340 million | $326 million | +$14 million, 4% |
| Net income | $236 million | $202 million | +$34 million, 17% |
| Income available to common shareholders | $233 million | $199 million | +$34 million, 17% |
| Diluted EPS | $0.56 | $0.50 | +$0.06 |
| Operating margin | 13.4% | 13.5% | Broadly stable |
| Net margin | 6.5% | 5.6% | Improved |
| Dividends declared per common share | $0.46 | $0.46 | Unchanged |
Electric revenue increased 6% to $2,772 million, primarily from higher authorized base revenues under the 2011 general rate case. Natural gas revenue decreased 11% to $869 million because lower commodity costs reduced pass-through revenue; gas revenue excluding pass-through costs increased.
- Operating and maintenance expense increased 12% to $1,368 million, driven by natural gas safety activities, the $70 million contribution to the City of San Bruno, and higher Hinkley remediation costs.
- Depreciation, amortization, and decommissioning expense increased 19% to $584 million, reflecting capital additions and higher authorized depreciation rates.
- Electricity cost declined 3% to $859 million, while natural gas cost declined 32% to $343 million, mainly because of lower market prices.
- The consolidated effective tax rate declined to approximately 31% from 38% in the prior-year quarter, primarily due to a loss-carryback benefit and the absence of comparable nondeductible penalties recorded in 2011.
Cash flow, debt, and liquidity
| PG&E Corporation cash flow metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Cash provided by operating activities | $931 million | $1,088 million |
| Capital expenditures | $1,094 million | $945 million |
| Cash used in investing activities | $1,093 million | $883 million |
| Cash used in financing activities | $94 million | $256 million |
| Net change in cash | $(256) million | $(51) million |
| Cash and cash equivalents at March 31 | $257 million | $240 million |
Operating cash flow declined primarily because of a $104 million increase in net collateral paid for commodity risk-management activities. The Utility generated $949 million of operating cash flow. Capital spending increased $149 million year over year and exceeded operating cash flow, resulting in reliance on financing and equity contributions.
- PG&E Corporation reported $1.401 billion of short-term borrowings, $50 million of current long-term debt, and $11.767 billion of long-term debt at March 31, 2012.
- The Utility reported $1.401 billion of short-term borrowings, $50 million of current long-term debt, and $11.418 billion of long-term debt.
- The Utility had $1.1 billion of commercial paper outstanding, $367 million of letters of credit outstanding, and $1.488 billion of availability under its $3.0 billion revolving facility. PG&E Corporation had full availability under its $300 million facility.
- Both entities were in compliance with revolving-credit covenants, including the maximum 65% debt-to-total-capitalization ratio.
- PG&E Corporation issued common stock for $387 million of proceeds and contributed $385 million of equity to the Utility to maintain the Utility’s authorized 52% common-equity capital structure.
- On April 16, 2012, after quarter-end, the Utility issued $400 million of 4.45% senior notes due 2042, using proceeds partly to repay commercial paper.
Material changes versus the prior comparable period
- Income available to common shareholders increased 17%, with management attributing the improvement primarily to the timing of 2011 rate-case decisions, lower storm and outage expense, higher rate-base earnings, and higher gas transmission revenues.
- These improvements were partly offset by $66 million of additional natural gas-related costs and $42 million of higher environmental-related costs in management’s earnings bridge.
- Natural gas matters increased operating and maintenance costs by $112 million year over year, including $104 million of pipeline-related work and the $70 million San Bruno contribution, partly offset by $11 million of insurance recoveries.
- The Hinkley environmental remediation liability increased from $149 million at December 31, 2011 to $218 million at March 31, 2012. Total environmental remediation liabilities increased to $921 million from $785 million.
- The Utility’s remaining net Chapter 11 disputed-claims liability was $832 million at March 31, 2012, including $658 million of disputed claims and $668 million of accrued interest, partially offset by $494 million of receivables from the CAISO and California Power Exchange.
- PG&E Corporation’s common shares outstanding increased during the quarter through public and employee-related issuances, contributing to some dilution of per-share earnings.
Guidance, outlook, risks, contingencies, and unusual items
- Management forecast 2012 natural gas pipeline-related costs of $450 million to $550 million, including $104 million incurred in the first quarter, and stated that some costs may not be recoverable through rates.
- The proposed four-year pipeline safety enhancement plan was estimated at approximately $2.2 billion, including $1.4 billion of capital expenditures and $750 million of expenses. CPUC decisions were expected in August and September 2012; cost recovery remained uncertain.
- Management accrued at least $200 million for expected CPUC penalties related to San Bruno investigations and self-reported violations. Penalties above the accrued amount could be material, and the company could not estimate the reasonably possible excess.
- Approximately 110 San Bruno-related lawsuits involving about 380 plaintiffs were pending. The Utility had incurred a cumulative $375 million charge for third-party claims and estimated up to $225 million of additional possible losses, excluding potentially material punitive damages. Approximately $992 million of insurance coverage was available above a $10 million deductible, but timing and recoverability were uncertain.
- The CPUC denied an appeal of an approximately $17 million penalty related to missed gas leak surveys; payment was ordered within 30 days. Additional citations and penalties remained possible.
- Hinkley remediation costs were not recoverable through rates or insurance. Management estimated total environmental costs could reach as much as $1.6 billion if contamination or remediation requirements exceed current expectations.
- PG&E Corporation expected to maintain its annual common dividend at $1.82 per share through 2012, subject to the natural gas matters described in the filing.
- The Utility requested a new capital structure and rates of return beginning in 2013, including a requested reduction in authorized common-equity return from 11.35% to 11.00%. The requested cost of capital was estimated to reduce 2013 revenue requirements by approximately $100 million versus the currently authorized level.
- Other significant risks included nuclear safety and seismic requirements at Diablo Canyon, environmental and greenhouse-gas regulation, renewable-energy procurement obligations, commodity-price and collateral requirements, credit-market access, cyber and infrastructure risks, and potential changes in regulatory cost recovery.
Important facts for investors to verify
- Track the CPUC’s final decisions on San Bruno penalties, pipeline safety-plan approval, cost recovery, and any additional citations or enforcement actions.
- Reconcile future San Bruno claims, punitive-damage exposure, insurance recoveries, and the $200 million penalty accrual against cash needs and equity financing.
- Monitor Hinkley remediation developments, the $218 million accrued liability, the approximately 300-household water-replacement or property-purchase program, and the potential $1.6 billion environmental exposure.
- Assess whether capital expenditures, collateral postings, commercial paper maturities, and debt issuance remain supportable from operating cash flow and available credit.
- Evaluate the impact of additional PG&E Corporation equity issuance on share count, EPS, and dividend coverage.
- Confirm the resolution and cash settlement of the $832 million net Chapter 11 disputed-claims liability and related customer refunds.
- Review the outcome of the 2013 cost-of-capital proceeding and the effect of any revised authorized return or capital structure on Utility earnings and PG&E Corporation distributions.