PG&E Corporation and Pacific Gas and Electric Company — 2020 Q2 Form 10-Q
Business context and reporting period
Combined unaudited quarterly report for the three and six months ended June 30, 2020. PG&E Corporation is the holding company for Pacific Gas and Electric Company, a regulated Northern and Central California electric and natural gas utility overseen primarily by the CPUC and FERC.
The companies remained debtors-in-possession at June 30, 2020 but emerged from Chapter 11 on July 1, 2020. Accordingly, the June 30 balance sheet reflects pre-emergence financing and restricted cash, while significant emergence transactions are subsequent events.
Key financial metrics
| PG&E Corporation consolidated | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenues | $4.533 billion | $3.943 billion | $8.839 billion | $7.954 billion |
| Operating income (loss) | $282 million | $(3.640) billion | $937 million | $(3.451) billion |
| Operating margin | 6.2% | (92.3)% | 10.6% | (43.4)% |
| Net loss | $(1.968) billion | $(2.549) billion | $(1.594) billion | $(2.413) billion |
| Loss attributable to common shareholders | $(1.972) billion | $(2.553) billion | $(1.601) billion | $(2.420) billion |
| Diluted loss per share | $(3.73) | $(4.83) | $(3.03) | $(4.58) |
Utility operating revenues were $4.533 billion in the quarter and $8.839 billion for the six months. Utility net loss attributable to common stock was $477 million in Q2 and $29 million for the six months, compared with losses of $2.554 billion and $2.424 billion, respectively, in the prior-year periods.
- Electric revenue increased 16.6% in Q2 and 12.8% for the six months; natural gas revenue increased 10.1% and 6.7%, respectively.
- Operating and maintenance expense was $2.141 billion for PG&E Corporation in Q2 and $4.108 billion for the six months, compared with $1.942 billion and $4.029 billion in the prior-year periods.
- Wildfire-related claims, net of insurance recoveries, were $170 million in Q2 and the six months, versus $3.900 billion in each comparable 2019 period.
- Wildfire Fund expense was $173 million in Q2 and the six months, reflecting amortization of the AB 1054 Wildfire Fund asset.
- Interest expense increased to $199 million in Q2 and $453 million for the six months, primarily because interest accruals on pre-petition debt resumed.
- PG&E Corporation recorded $1.624 billion of reorganization expense in Q2 and $1.800 billion for the six months, including approximately $1.5 billion of equity backstop premium and related financing costs.
Cash flow, liquidity, debt, and balance sheet
- Six-month operating cash flow was $3.291 billion for PG&E Corporation and $2.800 billion for the Utility, compared with $2.757 billion and $2.776 billion, respectively, in 2019.
- Capital expenditures were $3.399 billion in the first six months, compared with $2.410 billion in 2019.
- Financing activities provided $13.954 billion for PG&E Corporation and $9.334 billion for the Utility, primarily from exit-related debt financing.
- At June 30, PG&E Corporation had $968 million of cash and $14.413 billion of restricted cash. The Utility had $746 million of cash and $9.076 billion of restricted cash. Restricted cash primarily related to escrowed proceeds and plan distributions.
- PG&E Corporation reported $34.920 billion of noncurrent long-term debt plus $2.750 billion of current debt and borrowings. The Utility reported $30.263 billion of noncurrent long-term debt plus $2.100 billion of current debt and debtor-in-possession financing.
- At June 30, PG&E Corporation shareholders’ equity was $3.549 billion and total equity was $3.801 billion; Utility shareholders’ equity was $5.313 billion.
- As of July 1, post-emergence liquidity was approximately $2.8 billion, consisting of approximately $174 million of Utility cash, $343 million of PG&E Corporation cash, and $2.3 billion of credit-facility availability.
Material changes versus the prior comparable period
- Results improved substantially from 2019 because the prior year included approximately $3.9 billion of wildfire-related charges for the Camp Fire and 2017 Northern California wildfires, while 2020 included a $600 million Kincade Fire loss before $430 million of probable insurance recoveries.
- Revenue increased primarily because of additional revenue recorded under the pending TO20 transmission rate case and higher authorized revenue requirements.
- Interest expense increased materially as pre-petition debt interest accruals resumed.
- PG&E Corporation’s 2020 loss remained significant because of $1.5 billion of backstop premium and related equity-linked reorganization expense and a $619 million tax charge associated with the stock contribution to the Fire Victim Trust.
- Regulatory assets increased to $7.507 billion from $6.066 billion at year-end 2019, including wildfire mitigation, insurance premium, and deferred tax items.
Emergence, outlook, and unusual items
- The confirmed Plan funded the Fire Victim Trust with $5.4 billion in cash, an additional $1.35 billion of deferred tax-benefit payments, and 477 million PG&E Corporation shares representing 22.19% of outstanding shares at emergence. The Subrogation Wildfire Trust received $11.0 billion in cash, and settling public entities received $1.0 billion plus a $10 million defense fund.
- In July 2020, PG&E Corporation raised approximately $9.0 billion of gross equity and equity-linked proceeds. The Utility issued or reinstated substantial secured debt, and both companies obtained new revolving and term credit facilities.
- Management estimates 2020 capital expenditures of approximately $7.5 billion and 2021 capital expenditures of $7.6 billion to $8.2 billion.
- The Utility expects to incur approximately $2.6 billion in 2020 wildfire mitigation costs. Recovery of significant memorandum-account balances remains subject to CPUC review and approval.
- The companies do not expect to resume common or preferred dividends upon emergence. PG&E Corporation’s common dividend restriction generally remains until it recognizes $6.2 billion of post-emergence non-GAAP core earnings, subject to additional regulatory and debt restrictions.
- Cal Fire determined after quarter-end that the 2019 Kincade Fire was caused by PG&E transmission lines. Management recorded a probable loss of at least $600 million before insurance, but the ultimate liability could be higher and may include penalties, fines, and uninsured claims.
- COVID-19 reduced customer collections and weather-adjusted demand. Customer accounts receivable more than 30 days past due were approximately $491 million at June 30, $148 million above the comparable 2019 level. Management estimated approximately $200 million of reduced billed revenue from mid-March through mid-July.
Principal risks and contingencies
- Future wildfire liability, insurance availability and cost, the adequacy and exhaustion risk of the Wildfire Fund, and the ability to obtain timely regulatory recovery.
- Outstanding Kincade Fire claims, investigations, securities litigation, PSPS-related proceedings, probation requirements, and CPUC/FERC rate-case outcomes.
- High post-emergence leverage, secured collateral requirements, variable-rate debt, refinancing needs, and restrictive debt covenants.
- Potential dilution from additional shares issued for HoldCo rescission or damage claims and possible changes in the tax treatment of the Fire Victim Trust.
- COVID-19 effects on collections, customer demand, workforce availability, capital programs, financing costs, and recovery of incremental costs.
- Environmental remediation liability of $1.359 billion at June 30, 2020; the filing states that actual costs could differ materially from estimates.
Investor verification checklist
- Verify the final accounting and balance-sheet impact of the July 1, 2020 Chapter 11 emergence, including debt, equity, restricted cash, wildfire trusts, and plan-related liabilities.
- Track the CPUC decision on the proposed $7.5 billion wildfire-cost securitization and its effect on debt reduction and Fire Victim Trust payments.
- Monitor Kincade Fire claims, insurance recoveries, regulatory proceedings, penalties, and any additional loss beyond the recorded $600 million estimate.
- Assess actual customer collections, load trends, COVID-19 regulatory recovery, and changes in uncollectible accounts.
- Review wildfire mitigation spending, safety-certification compliance, probation conditions, and recovery of WMPMA, FRMMA, FHPMA, CEMA, and CPPMA balances.
- Reconcile post-emergence share counts, Fire Victim Trust ownership, equity-unit settlement obligations, and possible future dilution.
- Confirm debt maturities, covenant compliance, available revolver capacity, interest costs, and the timing of any proposed securitization or refinancing.