PG&E Corporation 10-Q Summary
Business context and reporting period
PG&E Corporation is a California holding company whose principal operating subsidiary, Pacific Gas and Electric Company, provides regulated electricity and natural gas services in northern and central California. This combined, unaudited Form 10-Q covers the quarter and six months ended June 30, 2019. Both entities filed for Chapter 11 protection on January 29, 2019 and operated as debtors-in-possession during the period.
Financial performance and position
| PG&E Corporation consolidated metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $3.943 billion | $4.234 billion | $7.954 billion | $8.290 billion |
| Operating loss | $(3.640) billion | $(1.465) billion | $(3.451) billion | $(0.866) billion |
| Net loss | $(2.549) billion | $(0.980) billion | $(2.413) billion | $(0.535) billion |
| Loss attributable to common shareholders | $(2.553) billion | $(0.984) billion | $(2.420) billion | $(0.542) billion |
| Diluted loss per share | $(4.83) | $(1.91) | $(4.58) | $(1.05) |
| Net cash from operating activities | Not separately provided | Not separately provided | $2.757 billion | $2.753 billion |
| Capital expenditures | Not separately provided | Not separately provided | $2.410 billion | $2.897 billion |
Operating expenses increased to $7.583 billion in the quarter and $11.405 billion year to date, primarily reflecting $3.9 billion of wildfire-related claims, net of insurance recoveries, in each period. Q2 operating and maintenance expense was $1.942 billion, while depreciation, amortization and decommissioning expense was $796 million.
At June 30, 2019, PG&E Corporation reported $3.459 billion of cash and cash equivalents, total assets of $84.387 billion, liabilities subject to compromise of $42.610 billion, debtor-in-possession financing of $1.5 billion, and total equity of $10.594 billion. The Utility reported $3.036 billion of cash and cash equivalents and $41.829 billion of liabilities subject to compromise.
The $5.5 billion DIP facilities consisted of a $3.5 billion revolving facility, a $1.5 billion initial term loan, and a $500 million delayed-draw term loan. At June 30, $1.5 billion was borrowed, $521 million of letters of credit was outstanding, and aggregate availability was $3.479 billion. The facilities mature in December 2020, with a potential extension to December 2021 subject to conditions.
Six-month cash flow was supported by $2.757 billion of operating cash flow and $1.468 billion of financing cash flow, including DIP borrowings, partially offset by $2.434 billion of investing cash outflow. Cash increased by $1.791 billion during the period. Management estimates 2019 and 2020 capital expenditures of approximately $7.1 billion and $7.0 billion, respectively.
Material changes versus the prior comparable period
- Revenue declined 6.9% in Q2 and 4.1% for the six months, largely due to lower electric revenue and Chapter 11-related regulatory treatment.
- Q2 net loss attributable to common shareholders increased by $1.569 billion; the six-month loss increased by $1.878 billion.
- Wildfire-related claims expense increased by $1.775 billion in Q2 and $1.782 billion year to date. The company recorded additional charges of $1.9 billion for the 2018 Camp fire and $2.0 billion for the 2017 Northern California wildfires.
- Operating and maintenance expense that affected earnings increased 26% in Q2 and 31% year to date, driven by enhanced inspections and repairs and wildfire clean-up and repair costs.
- Interest expense declined substantially because PG&E stopped accruing interest on pre-petition debt after the January 29 bankruptcy filing. Contractual interest of approximately $405 million related to debt subject to compromise was not recorded through June 30.
- Reorganization expense was $56 million in Q2 and $183 million year to date, primarily professional fees and financing costs associated with Chapter 11.
- Operating leases were recognized on the balance sheet beginning January 1, 2019, adding approximately $2.8 billion of right-of-use assets and lease liabilities.
- Cash from operating activities was broadly unchanged year to date, while investing cash use declined because of lower capital expenditures. Financing cash flow increased primarily because of the DIP term loan.
Outlook, commentary, risks and unusual items
Bankruptcy and going concern. Management stated that substantial doubt exists regarding the companies’ ability to continue as going concerns. The financial statements were prepared on a going-concern basis without adjustments that might result from the bankruptcy outcome. The ultimate treatment of pre-petition liabilities, equity interests and creditor claims remains indeterminate and depends on a confirmed Chapter 11 plan.
Wildfire exposure. Recorded wildfire liabilities at June 30 were $18.112 billion, comprising $12.4 billion for the 2018 Camp fire, $5.5 billion for the 2017 Northern California wildfires and $212 million for the 2015 Butte fire. The company described these amounts as the low end of reasonably estimated probable losses. Potential liabilities related to the 2018 and 2017 fires could exceed $30 billion, excluding potential punitive damages, fines, penalties and future claims.
The company recorded aggregate liabilities of $17.9 billion for the 2018 Camp fire and 2017 Northern California wildfires, including $8.5 billion for subrogated insurers, $7.5 billion for individual claimants, $1.0 billion under agreements with public entities and $900 million for clean-up and fire suppression costs. The company warned that the subrogated-insurer settlement negotiations could result in a substantial additional accrual.
Probable insurance recoveries recorded through June 30 were $1.38 billion for the Camp fire and $842 million for the 2017 fires. Management expects losses to substantially exceed available insurance. Regulatory recovery of wildfire costs remains uncertain, and the CPUC’s July 8, 2019 decision effectively barred a Chapter 11 utility from accessing the Customer Harm Threshold while in bankruptcy; PG&E filed for rehearing in August.
AB 1054 and the Wildfire Fund. PG&E elected to seek participation in California’s new Wildfire Fund for eligible wildfires occurring after July 12, 2019. Participation requires Bankruptcy Court approval, emergence from Chapter 11 by June 30, 2020, regulatory approvals and other conditions. The Utility estimates an initial contribution of approximately $4.8 billion and annual contributions of approximately $193 million. Management expects total participation costs to exceed $6.7 billion and states that the financial impact could be material.
Regulatory and legal matters. The CPUC opened an investigation alleging 27 violations related to 12 of the 2017 fires. The company believes penalties are probable but cannot estimate the amount. The Utility also faces a criminal investigation into the Camp fire, an SEC investigation into wildfire disclosures and accounting, probation-related oversight, gas locate-and-mark proceedings, rate cases and possible corporate-structure changes. The company’s federal probation conditions restrict dividends until applicable vegetation-management requirements are met.
Operations and investment. The Utility incurred $485 million of enhanced and accelerated inspection and repair costs in the first six months and $989 million of wildfire clean-up and repair costs through June 30. Management expects substantial additional wildfire-safety spending and proposed up to $28 billion of infrastructure investment over 2019-2022. Recovery of many wildfire mitigation, insurance and clean-up costs requires future regulatory approval.
Cash dividends on common and preferred stock remain suspended, and PG&E does not expect to pay cash dividends during the Chapter 11 cases. William D. Johnson became CEO and president effective May 2, 2019, and the boards were substantially reconstituted.
Most important facts for an investor to verify
- Status, timing and terms of a confirmed Chapter 11 plan, including treatment of $42.6 billion of liabilities subject to compromise and existing equity.
- Final allowed wildfire claims, additional accruals, insurance recoveries and the outcome of settlement negotiations with individual and subrogated claimants.
- Whether PG&E can obtain regulatory recovery or financing for legacy wildfire costs, particularly after the CPUC Customer Harm Threshold decision.
- Bankruptcy Court approval and ultimate economics of participation in the Wildfire Fund, including the approximately $4.8 billion initial contribution and $193 million annual contribution.
- Outcomes of the CPUC wildfire investigation, Camp fire criminal investigation, SEC investigation, probation proceedings and other enforcement matters.
- Availability and cost of DIP and exit financing, adequacy of liquidity through emergence, and compliance with DIP covenants.
- Actual capital expenditures, wildfire-safety spending and the recoverability of CEMA, WEMA, FHPMA, FRMMA and WPMA balances.
- Decisions in the 2020 general rate case, cost-of-capital proceeding, gas transmission and storage rate case, and FERC transmission proceedings.
- Whether insurance coverage remains available at commercially reasonable prices and whether uninsured losses or higher premiums can be recovered from customers.