PG&E Corporation 2018 Form 10-K Summary
Business context and reporting period
Combined annual report for PG&E Corporation and Pacific Gas and Electric Company, covering the fiscal year ended December 31, 2018. PG&E Corporation is a holding company whose primary subsidiary is a regulated electric and natural gas utility serving northern and central California. The filing includes subsequent events through February 28, 2019, including the January 29, 2019 Chapter 11 filings.
Key financial metrics
| PG&E Corporation, $ millions except per-share data | 2018 | 2017 |
|---|---|---|
| Operating revenues | $16,759 | $17,135 |
| Operating income (loss) | $(9,700) | $2,905 |
| Net income (loss) | $(6,837) | $1,660 |
| Loss available to common shareholders | $(6,851) | $1,646 |
| Diluted EPS | $(13.25) | $3.21 |
| Total assets at year-end | $76,995 | $68,012 |
| Cash and cash equivalents at year-end | $1,668 | $449 |
| Net cash provided by operating activities | $4,752 | $5,977 |
| Capital expenditures | $6,514 | $5,641 |
| Net cash used in investing activities | $(6,564) | $(5,650) |
| Net cash provided by financing activities | $3,031 | $(55) |
PG&E Corporation’s operating margin was approximately (57.9%) in 2018 versus approximately 17.0% in 2017, primarily because of wildfire-related charges. The Utility reported operating revenues of $16.760 billion, operating loss of $9.699 billion, and net loss available for common stock of $6.832 billion.
- Wildfire-related claims, net of probable insurance recoveries, totaled $11.771 billion in 2018, including $9.120 billion related to the 2018 Camp fire and $2.658 billion related to the 2017 Northern California wildfires.
- Gross wildfire-related charges were approximately $14.0 billion, offset by $2.2 billion of probable insurance recoveries.
- At December 31, 2018, wildfire-related claims liabilities were $14.226 billion. Recorded liabilities included $10.5 billion for the Camp fire and $3.5 billion for the 2017 fires; the Butte fire liability was $226 million.
- Operating cash flow declined by $1.225 billion from 2017, reflecting wildfire cleanup, repair, legal and other costs, vegetation management spending, timing of operating working capital, and $59 million of income tax payments compared with a $162 million refund in 2017.
- Net property, plant and equipment increased to $58.557 billion from $53.789 billion. The Utility expected approximately $7.1 billion of 2019 capital expenditures and $6.9 billion in 2020.
- At year-end, PG&E Corporation had $3.435 billion of short-term borrowings and $18.559 billion of long-term debt classified as current. The Utility had $3.135 billion of short-term borrowings and $18.209 billion of long-term debt classified as current. The classification reflected acceleration triggered by the subsequent Chapter 11 filings.
- Common and preferred dividends were suspended; PG&E Corporation declared no common dividend in 2018 and stated that it did not expect to pay cash dividends for the foreseeable future.
Material changes versus the prior comparable period
- Revenue decreased 2.2% from 2017, while the company moved from $1.660 billion of net income to a $6.837 billion net loss.
- Electric operating revenue declined to $12.713 billion from $13.124 billion, partly because of lower bundled customer demand and customer migration to community choice aggregators and direct access providers. Natural gas revenue increased slightly to $4.046 billion from $4.011 billion.
- Operating and maintenance expense increased to $7.153 billion from $6.321 billion, including higher wildfire cleanup, legal costs, insurance premium write-offs, and related activities.
- Cash provided by operating activities fell to $4.752 billion from $5.977 billion, while capital expenditures increased by $873 million.
- Debt and liquidity risk increased materially as credit ratings were downgraded below investment grade and the companies drew substantially on revolving credit facilities in November 2018.
- The 2018 Camp fire and additional 2017 wildfire accruals drove the quarterly fourth-quarter loss of approximately $6.869 billion and the full-year loss.
Guidance, outlook, risks, contingencies, and unusual items
- Chapter 11: PG&E Corporation and the Utility filed voluntary Chapter 11 petitions on January 29, 2019. The companies continue operating as debtors in possession. Pre-petition claims and most related litigation are subject to the automatic stay, while regulatory and criminal proceedings generally continue.
- DIP financing: A $5.5 billion senior secured superpriority debtor-in-possession facility was established, comprising a $3.5 billion revolver, a $1.5 billion initial term loan, and a $500 million delayed-draw term loan. Initially, $1.5 billion of revolver capacity was available; as of February 28, 2019, $350 million had been borrowed, $30 million of letters of credit were outstanding, and remaining revolver availability was $1.12 billion. Final approval of the remaining facilities was uncertain.
- Going concern: Management and Deloitte identified substantial doubt about the ability of PG&E Corporation and the Utility to continue as going concerns. The financial statements were prepared on a going-concern basis and do not include adjustments that could result from bankruptcy or wildfire outcomes.
- Wildfire exposure: Potential liabilities for the 2018 Camp fire and 2017 Northern California wildfires could exceed $30 billion, excluding potential punitive damages, fines, penalties, and future claims. The accrued amounts represent the lower end of estimated losses and may increase materially.
- Insurance: Available wildfire coverage for August 2018 through July 2019 was approximately $1.4 billion, substantially below expected wildfire exposure. Probable insurance recoveries recorded at year-end were $1.380 billion for the Camp fire and $842 million for the 2017 fires.
- Cost recovery: Recovery of wildfire-related costs through rates or securitization was uncertain and could take years. SB 901 permits potential securitization for certain 2017 wildfire costs but not for possible 2018 Camp fire costs; no recovery asset was recorded for wildfire claims costs.
- Other contingencies: The Utility estimated a probable $1.1 billion loss for the 2015 Butte fire, excluding a potentially significant Office of Emergency Services claim that could not be estimated. Environmental remediation liabilities were $1.283 billion, with potential undiscounted costs of up to $2.5 billion.
- Regulatory and enforcement matters: The Utility remains subject to federal probation and a third-party monitorship following its San Bruno conviction. It also faces CPUC investigations into safety culture and gas locate-and-mark practices, potential fines, rate disallowances, and other regulatory proceedings.
- Operations and strategy: Diablo Canyon Units 1 and 2 are scheduled to retire in 2024 and 2025. The Utility reported 38.9% renewable energy deliveries in 2018, exceeding the 28% annual target, and is pursuing significant wildfire mitigation, grid hardening, storage, renewable energy, and transportation electrification investments.
- Capital structure: The Utility’s authorized capital structure requires approximately 52% common equity. Management expected to seek a CPUC waiver because wildfire losses reduced the equity ratio; the timing and outcome were uncertain.
Most important facts for investors to verify
- Final allowed wildfire claims, including whether the accrued $14.226 billion liability and the potential exposure above $30 billion are sufficient.
- Terms, availability, borrowing levels, collateral requirements, covenants, and final court approval of the DIP facilities.
- Progress and ultimate terms of the Chapter 11 plan, creditor recoveries, any restructuring charges, and potential dilution or elimination of existing equity.
- Insurance recoveries and the extent to which wildfire costs can be recovered through rates, securitization, or other regulatory mechanisms.
- Outcomes of CPUC, FERC, NRC, federal probation, criminal, environmental, and safety proceedings, including potential penalties and rate disallowances.
- Whether the Utility can fund planned capital expenditures and maintain safe, reliable operations while operating under bankruptcy restrictions.
- Changes in wildfire insurance availability and pricing, regulatory treatment of safety investments, and the effect of customer migration to CCAs, direct access, distributed generation, and storage.