PG&E Corp quarterly report, Q2 FY2014

PG&E Corporation Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2014. The combined filing covers PG&E Corporation, a holding company, and Pacific Gas and Electric Company, its regulated utility subsidiary serving northern and central California. The financial statements are unaudited and prepared under U.S. GAAP.

Financial Results and Key Metrics

PG&E Corporation	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Operating revenues	$3,952 million	$3,776 million	$7,843 million	$7,448 million
Operating income	$518 million	$636 million	$1,002 million	$1,138 million
Net income	$271 million	$332 million	$501 million	$574 million
Income available to common shareholders	$267 million	$328 million	$494 million	$567 million
Diluted EPS	$0.57	$0.74	$1.06	$1.29
Net cash from operations	Not separately provided	Not separately provided	$1,280 million	$1,459 million

Q2 operating margin was approximately 13.1%, compared with 16.8% in the prior-year quarter. Six-month operating margin was approximately 12.8%, compared with 15.3% in 2013. The Utility reported Q2 net income of $250 million versus $329 million, and six-month net income of $478 million versus $566 million.

Revenue increased 4.7% in Q2 and 5.3% for the first six months, primarily from higher electric transmission and gas transmission revenues and recovery of certain pipeline safety costs.
Operating income declined 18.6% in Q2 and 12.0% for the first six months, reflecting higher operating and maintenance expense, depreciation, and unrecovered natural gas safety costs.
Q2 operating and maintenance expense increased to $1,328 million from $1,256 million; six-month expense increased to $2,627 million from $2,594 million.
Six-month capital expenditures were $2,320 million, down from $2,521 million. Management estimated 2014 capital expenditures of $5 billion to $6 billion.
PG&E Corporation declared dividends of $0.46 per common share for the quarter and $0.91 per share for the first six months.

Liquidity, Capital Structure, and Debt

At June 30, 2014, PG&E Corporation had $132 million of cash and cash equivalents, compared with $296 million at December 31, 2013. The Utility had $70 million, compared with $65 million.
PG&E Corporation generated $1,280 million of operating cash flow and used $2,293 million in investing activities during the first six months. Financing activities provided $849 million.
PG&E Corporation had $13,966 million of long-term debt and $1,452 million of short-term borrowings. The Utility had $13,616 million of long-term debt and $1,340 million of short-term borrowings.
The Utility issued $900 million of senior notes in February 2014 and $300 million of floating-rate senior notes in May 2014. PG&E Corporation issued $350 million of 2.40% senior notes and retired $350 million of higher-coupon notes.
Revolving credit facilities were extended to April 2019. Total facility capacity was $3.3 billion, with $2.061 billion of reported availability at June 30, 2014.
PG&E Corporation issued approximately $589 million of common stock during the first six months and contributed $580 million of equity to the Utility. Management expected further equity issuance to fund capital needs and unrecovered costs.
The Utility’s authorized capital structure was approximately 52% equity and 48% debt and preferred stock. Both registrants were in compliance with revolving-credit covenants.

Material Changes Versus the Prior Comparable Period

PG&E Corporation’s Q2 income available to common shareholders decreased 19% and diluted EPS decreased 23%. Six-month income decreased 13% and diluted EPS decreased 18%.
Natural gas matters reduced after-tax earnings by approximately $40 million in Q2 and $27 million for the first six months versus the prior-year periods. Unrecoverable natural gas costs were $97 million in Q2 and $137 million for the first six months, compared with $29 million and $91 million, respectively.
Depreciation, amortization, and decommissioning expense increased 8% in Q2 and 7% for the first six months, primarily because of capital additions.
Operating cash flow declined $179 million for PG&E Corporation and $203 million for the Utility, despite lower capital expenditures.
Common shares outstanding increased, contributing approximately $0.04 of Q2 EPS dilution and $0.07 of six-month EPS dilution.
PG&E Corporation recorded an approximately $20 million investment gain in 2014 that did not recur in 2013.

Guidance, Outlook, Risks, and Unusual Items

The CPUC’s proposed 2014 General Rate Case decision recommended a $453 million, or 6.8%, increase in revenue requirements, versus the Utility’s $1.160 billion request. The proposed decision had not become final at the reporting date.
The Utility requested $1.29 billion of 2015 gas transmission and storage revenue requirements and expected a final decision around March 2015.
Management forecast 2014 unrecovered pipeline-related expenses of $350 million to $450 million.
Cumulative unrecovered natural gas matters reached approximately $2.616 billion at June 30, 2014, including $1.547 billion of pipeline-related expenses, $549 million of disallowed capital, $239 million of accrued fines, $565 million of third-party claims, $354 million of insurance recoveries, and a $70 million contribution to the City of San Bruno.
Three CPUC investigations related to natural gas operations and the 2010 San Bruno accident remained pending. The SED recommended penalties of approximately $2.25 billion. The Utility had accrued $200 million for the minimum probable state fine but could not estimate the ultimate amount.
A July 30, 2014 superseding federal indictment charged the Utility with 28 felony counts. Statutory fines could total $14 million, while the alleged alternative maximum fine was approximately $1.13 billion. No criminal-fine accrual was recorded because payment was not considered probable.
A proposed PSEP settlement would reduce expense funding by $23 million versus the Utility’s request. The Utility had previously recorded $549 million of cumulative charges for PSEP capital costs expected to exceed recoverable amounts; approximately $400 million of PSEP-related capital costs remained in property, plant, and equipment.
Environmental remediation liabilities totaled $878 million, including $269 million for Topock and $170 million for Hinkley. Undiscounted future environmental costs could reach as much as $1.7 billion under adverse assumptions.
Remaining Chapter 11 disputed claims, including accrued interest, totaled $766 million, supported in part by $291 million of restricted cash. A July 2014 settlement was expected to produce $312 million of future customer refunds.
California drought conditions reduced hydroelectric generation and were expected to increase electricity procurement costs, although the Utility expected recovery through customer rates.
The May 2014 revenue-recognition standard will become effective January 1, 2017; the companies were evaluating its impact.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Final CPUC decisions in the 2014 GRC and the three pending natural gas investigations, including potential fines, disallowances, and unrecovered safety costs.
Progress and outcome of the federal criminal prosecution and possible fines under the Alternative Fines Act.
Actual 2014 pipeline-safety spending, PSEP cost recovery, and any additional impairment or disallowance charges.
Future equity issuance requirements and the resulting dilution to PG&E Corporation shareholders.
Cash flow effects of capital expenditures, regulatory balancing accounts, disputed claims, customer refunds, and insurance recoveries.
Environmental remediation estimates for Hinkley and Topock and the extent of future rate recovery.
Final outcomes of the 2015 gas transmission and storage rate case and pending FERC transmission rate cases.