PG&E Corp quarterly report, Q2 FY2016

Business Context and Reporting Period

PG&E Corporation is a California holding company whose principal subsidiary, Pacific Gas and Electric Company, is a regulated electric and natural-gas utility serving northern and central California. The combined unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the prior-year periods.

Financial Performance and Position

PG&E Corporation metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Operating revenue	$4.169 billion	$4.217 billion	$8.143 billion	$8.116 billion
Operating income	$401 million	$687 million	$496 million	$758 million
Net income	$210 million	$406 million	$320 million	$440 million
Income available to common shareholders	$206 million	$402 million	$313 million	$433 million
Diluted EPS	$0.41	$0.83	$0.63	$0.90
Dividends declared per common share	$0.49	$0.46	$0.95	$0.91

Operating margin was approximately 9.6% in Q2 and 6.1% for the first six months; net margin was approximately 5.0% and 3.9%, respectively.
Six-month cash flow from operations was $1.781 billion, compared with $1.859 billion in 2015. Capital expenditures were $2.651 billion, producing negative operating cash flow after capital expenditures of approximately $870 million before financing and other investing items.
Net cash used in investing activities was $2.686 billion. Net cash provided by financing activities was $971 million, including debt issuance, short-term borrowings, and common-stock issuance.
At June 30, 2016, PG&E Corporation had $189 million of cash and $235 million of restricted cash. Total assets were $65.927 billion, long-term debt was $16.525 billion, short-term borrowings were $1.529 billion, and total equity was $16.998 billion.
The Utility had $120 million of cash, $1.529 billion of short-term borrowings, $16.177 billion of long-term debt, and $17.228 billion of shareholders’ equity.
Utility revolving credit facilities totaled $3.0 billion, with approximately $1.7 billion available after letters of credit and commercial paper. PG&E Corporation had $300 million available under its facility. Both companies were in compliance with debt covenants; debt-to-capitalization ratios were 52% for PG&E Corporation and 51% for the Utility.
The Utility expects approximately $5.6 billion of 2016 capital expenditures and $5.4 billion to $6.4 billion in 2017.

Material Changes Versus the Prior Comparable Period

Q2 income available to common shareholders fell 49%, and six-month income fell 28%; diluted EPS declined from $0.83 to $0.41 in Q2 and from $0.90 to $0.63 for the six months.
Revenue was broadly stable: Q2 revenue decreased 1%, while six-month revenue increased less than 1%. Electric revenue increased modestly, but natural-gas revenue declined because of lower gas prices.
Operating and maintenance expense increased $352 million, or 33%, in Q2 and $413 million, or 16%, for the six months. Significant drivers included $190 million of GT&S capital disallowances, higher Penalty Decision charges, a $50 million Diablo Canyon refueling outage, Butte fire costs, and a $24 million record-keeping penalty accrual.
Depreciation, amortization, and decommissioning expense increased 8% in Q2 and 9% year to date, reflecting capital additions and rate-case-related depreciation.
Interest expense increased 8% in both Q2 and the six-month period due to higher debt balances.
Cash from operations declined $78 million on a consolidated basis and $91 million at the Utility, primarily because of the $400 million customer bill credit required by the Penalty Decision.
The estimated undiscounted nuclear decommissioning cost increased by approximately $1.4 billion to $4.8 billion. The recorded nuclear asset retirement obligation increased to approximately $3.4 billion from $2.5 billion at December 31, 2015, including an $818 million estimate update and a $115 million increase related to the proposed Diablo Canyon retirement.
PG&E Corporation issued common stock and contributed $280 million to the Utility during the first six months. Management forecast approximately $800 million of common-stock issuance during 2016, implying potential dilution.

Guidance, Outlook, Commentary, and Risks

Management expects continuing charges for Penalty Decision obligations, pipeline-related costs, fines, regulatory matters, and Butte fire claims. It forecast unrecovered pipeline-related expenses of $100 million to $150 million in 2016.
The CPUC’s 2017 general rate case request was reduced to a $319 million revenue-requirement increase for 2017, with requested increases of $467 million for 2018 and $368 million for 2019. These amounts remain subject to regulatory review and could differ materially from the company’s request.
The CPUC’s phase-one 2015 GT&S decision authorized interim revenue requirements but left allocation of the $850 million shareholder-funded pipeline-safety obligation to a later phase-two decision. The company could not record the full retroactive revenue increase until the phase-two decision and expects complete recognition no earlier than 2017.
The Butte fire resulted in a $350 million accrual for estimated property damages and a $260 million receivable for probable insurance recoveries. Additional fire-suppression, personal-injury, and other claims could exceed the recorded accrual; management estimated fire-suppression costs at approximately $90 million.
The CPUC record-keeping proceeding included a $24 million accrual, but appeals could increase the penalty. The CPUC ex parte communications investigation is also expected to result in penalties, although the amount cannot be reasonably estimated.
The federal criminal proceeding related to natural-gas pipeline safety had 12 remaining counts after one count was dismissed in July 2016. Maximum statutory fines were approximately $6 million, while a potential Alternative Fines Act claim could be approximately $562 million. No criminal-fine accrual was recorded because such amounts were not considered probable.
Environmental remediation liabilities totaled $996 million, with potential undiscounted future costs of up to $2.0 billion if contamination is greater than anticipated or other responsible parties cannot contribute.
The Utility and counterparties proposed retiring Diablo Canyon when its licenses expire in 2024 and 2025, subject to CPUC and other approvals. The proposal includes substantial future spending for energy efficiency, replacement resources, employee programs, and community mitigation.
Other important risks include regulatory disallowances, wildfire liability and insurance availability, nuclear decommissioning estimates, access to debt and equity markets, credit ratings, cyber and physical security, environmental obligations, and changes in customer demand or commodity prices.

Most Important Facts for Investors to Verify

Outcome and timing of the CPUC phase-two GT&S decision and the final allocation of the $850 million shareholder-funded safety obligation.
Ultimate cost of the Butte fire, including insurance recoveries, fire-suppression costs, personal-injury claims, and potential additional litigation.
Results of the federal criminal case and CPUC investigations, including possible fines, penalties, remedial measures, and unrecoverable costs.
Whether the proposed 2017 general rate case increases are approved and whether the Utility can recover its forecast capital and operating costs.
Magnitude and timing of additional PG&E Corporation equity issuance and resulting EPS dilution.
Updated Diablo Canyon retirement, decommissioning, replacement-resource, and rate-recovery approvals.
Changes in nuclear decommissioning, environmental remediation, and other contingent liabilities relative to the amounts recorded at June 30, 2016.