PG&E Corporation 10-Q Summary
Business context and reporting period
This unaudited combined Form 10-Q covers PG&E Corporation and its principal subsidiary, Pacific Gas and Electric Company, for the quarter and six months ended June 30, 2010. PG&E Corporation is a holding company; the Utility provides regulated electric and natural-gas generation, transmission, distribution, transportation, and storage services in northern and central California. The Utility served approximately 5.2 million electric and 4.3 million natural-gas distribution customers at June 30, 2010.
Key financial metrics
| PG&E Corporation metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Operating revenues | $3.232 billion | $3.194 billion | $6.707 billion | $6.625 billion |
| Operating income | $695 million | $656 million | $1.313 billion | $1.169 billion |
| Net income | $337 million | $392 million | $598 million | $636 million |
| Income available to common shareholders | $333 million | $388 million | $591 million | $629 million |
| Diluted EPS | $0.86 | $1.02 | $1.54 | $1.67 |
| Operating margin | 21.5% | 20.5% | 19.6% | 17.6% |
Revenue increased 1.2% for the quarter and 1.2% year to date. Operating income increased 5.9% for the quarter and 12.3% year to date, but net income declined 14.0% and 6.0%, respectively. The effective income-tax rate increased to approximately 36% for the quarter and 38% year to date, compared with approximately 24% and 27% in the prior-year periods.
- Electric operating revenue was $2.515 billion for the quarter and $5.025 billion year to date. Natural-gas revenue was $717 million and $1.682 billion, respectively.
- Operating and maintenance expense declined 7.6% for the quarter and 7.1% year to date, while depreciation, amortization, and decommissioning expense increased 9.1% and 8.4%, respectively, primarily because of capital additions.
- Six-month net cash provided by operating activities was $1.373 billion, compared with $1.754 billion in 2009. Capital expenditures were $1.786 billion, compared with $2.077 billion.
- Six-month net cash used in investing activities was $1.743 billion; net cash provided by financing activities was $108 million. Cash and cash equivalents declined to $265 million at June 30, 2010, from $527 million at December 31, 2009.
- At June 30, 2010, PG&E Corporation reported total assets of $44.218 billion, total debt and energy recovery bonds of approximately $12.862 billion, and total equity of $11.123 billion. The Utility reported total assets of $43.995 billion, debt and energy recovery bonds of approximately $12.062 billion, and shareholders’ equity of $11.482 billion.
- PG&E Corporation declared common dividends of $0.455 per share for the quarter. Six-month common dividends paid were $320 million at PG&E Corporation and $358 million by the Utility to PG&E Corporation.
Material changes versus the prior comparable period
- Lower earnings primarily reflected the absence of prior-year benefits, including a $28 million after-tax recovery related to hydroelectric-generation costs and a $56 million after-tax tax-settlement benefit.
- 2010 earnings were reduced by $20 million after tax in the quarter and $45 million year to date for costs supporting Proposition 16, which were not recoverable through rates.
- Year-to-date results also included a $20 million after-tax charge from the elimination of the federal tax deduction for certain Medicare Part D retiree-medical subsidy contributions and $12 million after-tax of storm-related costs.
- These items were partly offset by $19 million after-tax of higher authorized capital-investment earnings in the quarter and $40 million year to date, lower termination and leak-survey costs, lower Diablo Canyon refueling-outage costs, and reduced uncollectible expense.
- PG&E Corporation issued 16.4 million common shares upon conversion of $247 million of 9.50% convertible subordinated notes. The notes were fully converted and no longer outstanding at June 30, 2010.
- The Utility issued $250 million of 5.8% senior notes due 2037 and entered into a new $750 million unsecured revolving credit facility. The Utility had approximately $1.0 billion of commercial paper outstanding at June 30, 2010, while its revolving credit facilities had no cash borrowings and $1.564 billion of stated availability after letters of credit and other usage.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide a conventional earnings-per-share or revenue guidance range. Management states that liquidity is expected to be adequate, assuming continued access to capital markets, based on operating cash flow, existing credit facilities, and future financings.
- Pending CPUC and FERC proceedings will determine a substantial portion of the Utility’s 2011 and later revenue requirements. In the 2011 General Rate Case, the Utility’s updated request was approximately $6.6 billion, while the Division of Ratepayer Advocates recommended a level $883 million lower.
- The Utility’s authorized capital structure is 52% common equity and 48% debt and preferred stock; the authorized return on equity was 11.35% through 2010. PG&E Corporation contributed $130 million to the Utility during the first half of 2010 to support this capital structure and capital spending.
- The Utility had $920 million of net disputed Chapter 11 claims liability at June 30, 2010, supported in part by $512 million held in escrow. The timing and ultimate amount of claims, interest, offsets, and refunds remain uncertain.
- Environmental remediation liabilities were $615 million, with potential undiscounted future costs estimated at up to $1.1 billion if contamination or third-party cost-sharing assumptions worsen. The Utility expects recovery of $326 million under CPUC mechanisms and additional recovery of $123 million for certain remediation activities.
- The Utility has approximately $56.1 billion of undiscounted future power-purchase commitments, including $44.6 billion after 2014, plus $1.194 billion of natural-gas supply, transportation, and storage commitments and $1.666 billion of nuclear-fuel commitments. It also has a $1.4 billion, 15-year commitment for Ruby Pipeline service beginning in 2011.
- SmartMeter deployment remained subject to CPUC investigation, possible installation moratoria, customer litigation, and potential cost-recovery risk. The Utility had incurred $1.7 billion and installed approximately 6.1 million meters at June 30, 2010.
- Diablo Canyon faces regulatory uncertainty regarding once-through cooling and marine-life protection. Cooling-tower installation could cost as much as $4.5 billion; failure to obtain an alternative compliance approach could potentially affect continued operations.
- Energy-efficiency incentive true-up outcomes ranged from a potential $75 million penalty to a $105 million reward in scenarios discussed by the CPUC’s Energy Division. The Utility’s submitted scenario indicated approximately $63 million of additional incentive revenue, but no final decision had been issued.
- Other significant risks include regulatory cost recovery, commodity prices and collateral requirements, nuclear operations and spent-fuel storage, environmental compliance, storms and wildfires, aging infrastructure, direct access and customer loss, tax audits, and access to capital markets.
- Commodity derivatives are used for customer risk management rather than speculation. A downgrade below investment grade could have required approximately $426 million of additional net collateral at June 30, 2010.
Most important facts for investors to verify
- Final CPUC decisions in the 2011 General Rate Case, gas transmission and storage rate case, and related FERC transmission proceedings.
- Resolution of Chapter 11 disputed claims, associated interest, escrow balances, supplier settlements, and customer refunds.
- SmartMeter investigation results, litigation, installation approvals, and the recoverability of program costs.
- Diablo Canyon once-through-cooling requirements, compliance costs, operating-license matters, and spent-fuel litigation.
- Actual environmental remediation costs versus the $615 million accrued liability and potential exposure of up to $1.1 billion.
- Final energy-efficiency incentive true-up and any potential ERRA procurement-cost disallowance, including the $176 million proposed disallowance.
- Commercial-paper refinancing needs, credit-facility availability, debt maturities, collateral requirements, and compliance with the 65% debt-to-capitalization covenant.
- Capital-spending execution and future rate-base recovery, including SmartMeter, transmission, renewable generation, Humboldt Bay, and Colusa projects.