PG&E Corporation and Pacific Gas and Electric Company — 2015 Q3 Form 10-Q
Business context and reporting period
Combined unaudited quarterly report for the quarter and nine months ended September 30, 2015. PG&E Corporation is a holding company whose principal operating subsidiary, Pacific Gas and Electric Company, is a regulated electric and natural gas utility serving northern and central California. The companies are primarily regulated by the CPUC and FERC, with nuclear operations subject to NRC oversight.
Financial performance and liquidity
| PG&E Corporation metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Operating revenues | $4.550 billion | $4.939 billion | $12.666 billion | $12.782 billion |
| Operating income | $545 million | $1.065 billion | $1.303 billion | $2.067 billion |
| Net income | $310 million | $814 million | $750 million | $1.315 billion |
| Income available to common shareholders | $307 million | $811 million | $740 million | $1.305 billion |
| Diluted EPS | $0.63 | $1.71 | $1.53 | $2.79 |
| Dividends declared per common share | $0.46 | $0.46 | $1.37 | $1.37 |
- Operating margin was approximately 12.0% in Q3 2015 versus 21.6% in Q3 2014, and 10.3% for the first nine months versus 16.2% in the prior-year period.
- Nine-month operating cash flow was $2.942 billion, essentially flat with $2.957 billion in 2014. Capital expenditures were $3.662 billion, producing negative operating cash flow less capital expenditures of approximately $720 million.
- Cash and cash equivalents were $154 million at September 30, 2015, compared with $151 million at December 31, 2014. Restricted cash was $287 million.
- PG&E Corporation reported short-term borrowings of $881 million and long-term debt of $15.545 billion. The Utility reported the same short-term borrowings and $15.195 billion of long-term debt.
- At September 30, 2015, revolving credit availability was approximately $300 million for PG&E Corporation and $2.085 billion for the Utility, after outstanding commercial paper and letters of credit. Both companies were in compliance with applicable covenants.
- Utility earnings to fixed charges were 1.88x, and earnings to combined fixed charges and preferred dividends were 1.86x, for the nine months ended September 30, 2015.
Material changes versus the prior comparable period
- Q3 operating revenue decreased 8%; nine-month revenue decreased slightly. The quarterly decline primarily reflected the timing of the 2014 general rate case decision, which caused approximately $305 million of prior-period revenue to be recognized in Q3 2014, and the absence of approximately $35 million of PSEP-related revenue recognized in Q3 2014.
- Operating and maintenance expense increased $334 million, or 37%, in Q3 and $943 million, or 32%, in the first nine months. The principal driver was $142 million of Q3 and $770 million of nine-month charges associated with the CPUC Penalty Decision.
- Net income available to common shareholders fell 62% in Q3 and 43% for the first nine months. Diluted EPS declined to $0.63 from $1.71 in Q3 and to $1.53 from $2.79 for the first nine months.
- Natural gas costs declined substantially, to $50 million from $134 million in Q3 and to $442 million from $694 million for the first nine months, primarily due to lower natural gas prices and compliance costs.
- Interest expense increased by $28 million for the first nine months at PG&E Corporation and by $32 million at the Utility, primarily because of additional long-term debt.
- PG&E Corporation issued $689 million of common stock during the first nine months, including a $352 million net underwritten offering in August, and contributed $605 million of equity to the Utility. Shares outstanding increased materially, contributing to EPS dilution.
- The Utility issued $500 million of senior notes in June 2015 and increased its commercial paper program limit from $1.75 billion to $2.5 billion.
Guidance, outlook, commentary, risks and unusual items
- The CPUC Penalty Decision imposes total fines, customer credits, disallowed capital expenditures, safety-related costs and remedial measures of $1.6 billion. The Utility paid the $300 million state fine in August 2015 and recorded a $400 million current regulatory liability for a customer bill credit expected in 2016.
- The decision requires at least $689 million of the $850 million safety-program obligation to be spent on capital projects that cannot be included in rate base. Management cautions that the shareholder-funded obligation could exceed $850 million depending on how the CPUC classifies costs.
- The Utility forecasts unrecovered pipeline-related expenses of $100 million to $125 million in 2015, primarily for removing transmission pipeline right-of-way encroachments. Management also expects continued equity issuance to fund unrecoverable costs and maintain the Utility’s authorized capital structure.
- PG&E Corporation forecast 2015 common-stock issuance of $700 million to $800 million. The Utility forecast approximately $5.3 billion of 2015 capital expenditures and $5.3 billion to $5.8 billion in 2016.
- The 2015 Gas Transmission and Storage rate case seeks a 2015 revenue requirement of $1.263 billion, a $532 million increase over authorized amounts, plus proposed increases of $83 million in 2016 and $142 million in 2017. The filing indicates that no increase is likely to be recognized in 2015; the outcome could also determine additional safety-cost disallowances and any revenue disallowance related to improper CPUC communications.
- The 2017 General Rate Case application requests $8.373 billion of annual revenue requirements, $457 million above currently authorized 2016 amounts, and approximately $4 billion of average annual capital investment during 2017–2019. These requests remain subject to CPUC review.
- The Utility faces a federal criminal prosecution involving 28 counts related to pipeline safety and alleged obstruction of the NTSB investigation. The maximum statutory fine is $14 million, while the alternative fine alleged in the indictment could be approximately $1.13 billion. No criminal-fine accrual was recorded because management did not consider such amounts probable.
- Other material contingencies include CPUC investigations of gas distribution record-keeping, potential ex parte communications, safety culture and pipeline rights-of-way; possible refunds related to $104 million of prior energy-efficiency incentives; and potential liability from the September 2015 Butte Fire. The filing does not provide a clear estimate of potential losses for these matters.
- Environmental remediation liabilities totaled $946 million at September 30, 2015, with expected rate recovery of $678 million. Undiscounted future environmental costs could reach as much as $1.8 billion if contamination or remediation requirements are greater than anticipated.
- The Utility entered into additional renewable-energy and other power-purchase commitments of approximately $780 million over the next 25 years during the first nine months of 2015.
- California legislation signed in October 2015 increases renewable-energy requirements toward 50% of retail sales by the 2028–2030 compliance period. The Utility expects related procurement costs to be generally recoverable as pass-through costs, but may face penalties for noncompliance.
Most important facts for investors to verify
- Progress and final financial impact of the $1.6 billion CPUC Penalty Decision, including the $850 million safety-cost disallowance and the 2016 $400 million customer bill credit.
- Final CPUC decisions in the 2015 GT&S rate case, including revenue recovery, ex parte-communication consequences and classification of disallowed pipeline-safety costs.
- Results and potential fines or remedies from the federal criminal case, CPUC investigations, SED enforcement matters and the safety-culture investigation.
- Cause, insurance coverage and potential third-party claims associated with the Butte Fire and other wildfire events.
- Actual versus forecast capital expenditures, operating cash flow and future equity issuance, including the resulting dilution to PG&E Corporation shareholders.
- Recoverability and timing of environmental remediation costs, regulatory assets and balancing accounts, as well as the outcome of pending tax audits.
- Future rate-case approvals, the ability to maintain investment-grade credit ratings and continued access to debt and equity markets.