PG&E Corp quarterly report, Q3 FY2018

PG&E Corporation 2018 Third-Quarter Form 10-Q Summary

Business context and reporting period

PG&E Corporation is a California holding company whose principal subsidiary, Pacific Gas and Electric Company, provides regulated electric and natural gas services in northern and central California. The combined, unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods. The business operates as one reportable segment and is primarily regulated by the CPUC and FERC.

Key financial metrics

PG&E Corporation consolidated	Q3 2018	Q3 2017	9M 2018	9M 2017
Operating revenue	$4,381 million	$4,517 million	$12,671 million	$13,035 million
Operating income (loss)	$696 million	$886 million	$(170) million	$2,488 million
Net income	$567 million	$553 million	$32 million	$1,542 million
Income available to common shareholders	$564 million	$550 million	$22 million	$1,532 million
Diluted EPS	$1.09	$1.07	$0.04	$2.98
Net margin	12.9%	12.2%	0.3%	11.8%
Operating margin	15.9%	19.6%	(1.3%)	19.1%

Non-GAAP earnings from operations were $582 million, or $1.13 diluted EPS, in Q3 2018 and $1.652 billion, or $3.19 diluted EPS, for the first nine months. These measures exclude items management considers nonrecurring or not representative of normal operations.

Electric revenue was $3.466 billion in Q3 and $9.729 billion year to date; natural gas revenue was $915 million in Q3 and $2.942 billion year to date.
Cash provided by operating activities was $4.236 billion for the first nine months, compared with $4.737 billion in 2017.
Capital expenditures were $4.592 billion year to date, compared with $3.938 billion in 2017. Management estimated approximately $6.5 billion of 2018 capital expenditures and $6.4 billion for 2019.
Cash used in investing activities was $4.617 billion; financing activities provided $362 million. Cash and cash equivalents were $430 million at September 30, 2018, versus $449 million at December 31, 2017.
At September 30, 2018, consolidated debt comprised $750 million of short-term borrowings, $193 million of current long-term debt, and $18.407 billion of noncurrent long-term debt. Total debt was approximately $19.35 billion.
PG&E Corporation and the Utility had $300 million and $2.913 billion, respectively, available under revolving credit facilities, for total availability of $3.213 billion. No revolving-credit borrowings or commercial paper were outstanding at quarter-end.
PG&E Corporation’s debt-to-capitalization ratio was 49.9%; the Utility’s was 49%. Both remained within applicable credit-facility covenants, and credit ratings remained investment grade despite multiple downgrades during 2018.

Material changes versus the prior comparable period

Year-to-date results were materially reduced by $2.5 billion of pre-tax estimated third-party wildfire claims recorded in the second quarter, partially offset by $385 million of probable insurance recoveries. Total wildfire-related claims, net of insurance recoveries, were $2.108 billion for the first nine months versus zero in 2017.
Wildfire-related legal and other costs were $120 million year to date, and cleanup and repair costs for the Northern California wildfires reached $308 million, including $145 million of capital expenditures.
Operating and maintenance expense increased $148 million, or 4%, year to date, driven by wildfire costs, higher liability insurance premiums, and environmental remediation expense, partly offset by a $38 million reduction in estimated gas-related capital disallowances and the absence of a 2017 Diablo Canyon-related disallowance.
Q3 operating revenue declined 3% year over year, while Q3 net income increased modestly. The quarter benefited from lower wildfire claims expense than Q3 2017, when the company recorded a $53 million net Butte fire charge.
Year-to-date operating cash flow declined $501 million, while capital expenditures increased $654 million. Common and preferred dividends remained suspended because of wildfire-related uncertainty.
The federal Tax Cuts and Jobs Act reduced the federal tax rate from 35% to 21%. The Utility recorded a $12 million tax benefit and reduced a related regulatory liability by $80 million during the first nine months of 2018.

Guidance, outlook, risks, contingencies, and unusual items

The filing provides capital expenditure estimates but no clear GAAP earnings or EPS guidance. Planned capital expenditures are approximately $6.5 billion in 2018 and $6.4 billion in 2019.
Management stated that the $2.5 billion Northern California wildfire accrual represents the low end of a reasonably estimable loss range. Additional losses are reasonably possible, but the upper end of the range could not be estimated. The accrual excludes potential fines, penalties, punitive damages, and certain fires for which a loss was not yet considered probable.
Wildfire liability insurance for the Northern California fires was approximately $840 million, while the recorded wildfire charge exceeded that amount. The company had recorded $372 million of Northern California wildfire insurance receivables at September 30, 2018.
Recovery of wildfire-related costs through the WEMA, CEMA, FHPMA, or future rate proceedings is not assured and could take years. SB 901 provides a framework for considering customer harm, cost recovery, and potential securitization, but the financial effect remains uncertain.
The Utility had a $294 million accrued Butte fire liability at September 30, 2018 and estimated probable total Butte fire losses of at least $1.1 billion, with an additional $200 million reasonably possible. Insurance coverage of approximately $922 million had been recorded as probable, with a $160 million receivable remaining at quarter-end.
The CPUC approved a $97.5 million settlement relating to alleged improper ex parte communications, including a $12 million payment, $12 million of city payments, and $63.5 million of foregone GT&S revenue requirements. A second phase remains unresolved.
FERC and CPUC rate cases remain material, including the TO18, TO19, TO20, 2019 GT&S, and 2020 general rate cases. The TO18 administrative law judge proposed a 9.13% return on equity versus the Utility’s 10.90% request; a final decision was expected in mid-2019.
The Utility is pursuing substantial wildfire prevention and grid-hardening activities. Rate recovery for many associated costs remains subject to separate regulatory approval. The Utility also expects Diablo Canyon Units 1 and 2 to retire in 2024 and 2025, respectively.
Key ongoing risks include additional wildfire claims, inverse-condemnation liability, regulatory disallowances, fines and penalties, environmental remediation, credit-rating downgrades, collateral requirements on commodity contracts, access to debt and equity markets, and potential dilution from future equity issuance.

Important facts an investor should verify

Whether subsequent wildfire claims, settlements, investigations, or court rulings require materially higher accruals than the $2.5 billion recorded.
Whether the CPUC authorizes recovery of wildfire, cleanup, insurance, CEMA, WEMA, and FHPMA costs, and the timing of any recovery or securitization.
The final outcomes of the Butte fire litigation, Northern California wildfire litigation, securities and derivative actions, and related criminal or regulatory investigations.
Actual cash payments for wildfire liabilities and the resulting effect on liquidity, capital structure compliance, debt capacity, and potential equity issuance.
Final CPUC and FERC decisions affecting authorized revenue requirements, return on equity, rate base, refunds, and capital disallowances.
Whether investment-grade credit ratings are maintained and whether any downgrade triggers additional collateral requirements or limits access to commercial paper and other financing.
Progress against the $6.5 billion 2018 and $6.4 billion 2019 capital expenditure plans and the timing of any dividend reinstatement.