PCG

PG&E Corp and Pacific Gas and Electric Company: 10-Q Summary (Q3 2007)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2007, for PG&E Corporation (the holding company) and its primary subsidiary, Pacific Gas and Electric Company (the Utility). The Utility operates as a regulated public utility in northern and central California, providing electricity and natural gas distribution, generation, procurement, and transmission. The Utility serves approximately 5.1 million electricity customers and 4.3 million natural gas customers. Operations are primarily regulated by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).

Key Financial Metrics (Nine Months Ended Sept 30, 2007)

Note: Debt figures include short-term borrowings, commercial paper, and long-term debt. Restricted cash of approximately $1.4 billion is held in escrow for disputed claims.

Material Changes vs. Prior Period

• Net Income Decline: Consolidated net income decreased by approximately $36 million (4%) compared to the nine months ended September 30, 2006. Diluted EPS fell from $2.33 to $2.22.
• Revenue Growth: Total operating revenues increased by $488 million (5.2%) year-over-year, driven primarily by higher electricity procurement costs passed through to customers and authorized rate increases from the 2007 General Rate Case (GRC).
• Cost Increases: Cost of electricity rose by $411 million (19%) due to a 10% increase in the average cost of purchased power, attributed to higher payments to qualifying facilities (QFs) and reduced hydroelectric generation due to lower precipitation.
• Operating Expenses: Operating and maintenance expenses increased by $151 million (6%), largely due to higher customer assistance program costs, labor costs, and California labor code compliance accruals.
• Interest Expense: Interest expense increased by $102 million (23%) primarily due to interest accruals on disputed claims from the 2000-2001 energy crisis and new senior notes issued in March 2007.

Guidance, Outlook, and Risks

• Capital Expenditures: The Utility expects total capital expenditures for 2007 to be approximately $2.9 billion. Significant spending is directed toward the SmartMeter advanced metering initiative, generation facilities, and grid infrastructure.
• Financing Needs: The Utility plans to issue an additional $400 million to $600 million of long-term debt in the fourth quarter of 2007. Future financing needs depend on capital expenditure timing and the resolution of disputed claims.
• Regulatory Matters:
  • 2007 GRC: CPUC approved revenue requirements for 2007-2010, increasing authorized revenues by 4.5% over 2006 levels.
  • Cost of Capital: The Utility requested an 11.70% Return on Equity (ROE) for 2008, up from the current 11.35%.
  • Delayed Billing: CPUC ordered a $35 million refund to customers for billing irregularities, to be paid at shareholder expense.
• Key Risks and Contingencies:
  • Disputed Claims: Approximately $1.1 billion in net disputed claims from the 2000-2001 energy crisis remain unresolved. $1.3 billion is held in escrow. Interest accruals on these claims significantly impact interest expense.
  • Nuclear Fuel Storage: The DOE has failed to provide a permanent storage site for spent nuclear fuel. The Utility is building an on-site dry cask facility at Diablo Canyon, expected to be operational in 2008. Failure to complete this could curtail operations by 2010-2011.
  • Environmental Liabilities: Undiscounted environmental remediation liability stands at $515 million, with potential costs rising to $816 million if other responsible parties cannot contribute.
  • Direct Access: CPUC proceedings to re-establish direct access for retail customers could create supply/demand mismatches ("long" or "short" positions) affecting financial results.

Investor Verification Checklist

• Disputed Claims Resolution: Monitor FERC and judicial proceedings regarding the $1.1 billion in disputed claims and the associated interest accruals.
• Diablo Canyon Storage: Verify the timeline for the completion of the dry cask storage facility and any regulatory delays that could impact nuclear generation capacity.
• Regulatory Rate Cases: Track the outcome of the 2008 Cost of Capital proceeding and the CPUC's decision on the rehearing of the 2007 GRC.
• Capital Expenditure Recovery: Assess the Utility's ability to recover the $2.9 billion in 2007 capital expenditures through authorized rates, particularly for the SmartMeter program.
• Environmental Compliance: Review updates on EPA Section 316(b) regulations regarding cooling water intake structures at Diablo Canyon and potential capital costs for compliance.