PG&E Corporation 2014 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
This combined, unaudited Form 10-Q covers PG&E Corporation and its principal operating subsidiary, Pacific Gas and Electric Company, for the three and nine months ended September 30, 2014. The Utility provides electricity and natural gas generation, transmission, distribution, and related services in northern and central California and is primarily regulated by the CPUC and FERC, with nuclear operations overseen by the NRC.
Key Financial Metrics
| PG&E Corporation | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Operating revenues | $4,939 million | $4,175 million | $12,782 million | $11,623 million |
| Operating income | $1,065 million | $291 million | $2,067 million | $1,429 million |
| Net income | $814 million | $164 million | $1,315 million | $738 million |
| Income available to common shareholders | $811 million | $161 million | $1,305 million | $728 million |
| Diluted EPS | $1.71 | $0.36 | $2.79 | $1.65 |
| Dividends declared per common share | $0.46 | $0.46 | $1.37 | $1.37 |
- Q3 operating revenue increased 18%; nine-month revenue increased 10%.
- Q3 operating margin was approximately 21.6%, versus 7.0% in the prior-year quarter. Nine-month operating margin was approximately 16.2%, versus 12.3%.
- Q3 net margin was approximately 16.5%, versus 3.9%; nine-month net margin was approximately 10.3%, versus 6.4%.
- Operating cash flow for the nine months was $2.96 billion, compared with $2.83 billion in 2013. Capital expenditures were $3.56 billion, compared with $3.88 billion.
- At September 30, 2014, PG&E Corporation had $139 million of cash and cash equivalents, $14.56 billion of long-term debt, and $426 million of short-term borrowings. Total assets were $57.88 billion and total equity was $16.03 billion.
- The Utility had $85 million of cash, $14.21 billion of long-term debt, and $426 million of short-term borrowings. Its revolving credit facilities totaled $3.0 billion, with $2.79 billion available after letters of credit and commercial paper.
Material Changes Versus the Prior Comparable Period
- Results benefited from the CPUC’s 2014 General Rate Case decision, which increased authorized 2014 revenue requirements by approximately $460 million, or 6.9%, and provided attrition increases of $324 million for 2015 and $371 million for 2016.
- Natural gas matters contributed approximately $220 million to Q3 and $193 million to nine-month year-over-year improvement in income available to common shareholders, primarily because of lower unrecoverable gas-related costs and the absence of certain prior-year charges.
- Operating and maintenance expense declined $292 million in Q3 and $264 million for the nine months, while depreciation, amortization, and decommissioning expense increased $148 million in Q3 and $223 million for the nine months.
- The effective tax rate was 12.6% for Q3 2014 and 20.4% for the nine months, compared with a Q3 benefit rate of 14.0% and a nine-month rate of 26.4% in 2013. The 2014 tax results included a $175 million Q3 reduction in tax expense from flow-through treatment of repair and other property-related deductions.
- PG&E Corporation issued $743 million of common stock during the nine months and contributed $705 million of equity to the Utility. The February 2014 equity distribution agreement, with $500 million of aggregate capacity, was fully used.
- The Utility issued $2.125 billion of senior notes during 2014 and repaid $539 million of long-term debt. PG&E Corporation issued $350 million of senior notes and repaid $350 million of senior notes.
- Regulatory balancing-account receivables increased to $1.96 billion from $1.12 billion at December 31, 2013, while long-term regulatory assets increased to $5.22 billion from $4.91 billion.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management estimated 2014 capital expenditures of approximately $5.1 billion, including Pipeline Safety Enhancement Plan expenditures.
- The Utility forecast 2014 unrecoverable pipeline-related expenses of $350 million to $400 million. Cumulative unrecoverable natural-gas-related charges since the 2010 San Bruno accident were approximately $2.6 billion at September 30, 2014.
- CPUС administrative law judges proposed total penalties of $1.4 billion related to approximately 3,700 alleged violations, including a $950 million state fine, a $400 million ratepayer refund, and at least $50 million of remedial measures. The decisions were not final and were appealed. The company had accrued $200 million for the minimum probable fines.
- The federal superseding indictment contains 28 felony counts. The maximum statutory fines total $14 million, while the alternative-fine theory could result in a fine of approximately $1.13 billion. No criminal-fine accrual was recorded because such amounts were not considered probable.
- Improper communications with CPUC personnel led to restrictions on ex parte communications, investigations by state and federal authorities, and delays to the 2015 gas transmission and storage rate case. The Utility requested a $555 million increase in 2015 revenue requirements, but the timing and outcome were uncertain.
- A proposed PSEP settlement would reduce expense funding by $23 million but would not reduce the requested $766 million of PSEP capital costs. The Utility had previously recorded $549 million of cumulative PSEP capital disallowance charges.
- Environmental remediation liabilities totaled $976 million, including $163 million for Hinkley and $294 million for Topock. Undiscounted environmental costs could increase to as much as $1.8 billion if contamination or remediation requirements exceed current estimates.
- The Utility received a $411 million federal tax refund in August 2014. It also recorded a $312 million customer refund obligation related to a settlement of disputed Chapter 11 energy claims.
- Other risks include drought-related power costs, commodity-price volatility, regulatory recovery and rate-case outcomes, potential dilution from future equity issuance, nuclear and environmental obligations, cybersecurity, distributed generation and net-metering effects, and possible loss of investment-grade credit ratings.
- The company adopted no new revenue-recognition standard during the period; it was evaluating the impact of ASU 2014-09, effective January 1, 2017.
Most Important Facts for Investors to Verify
- Final CPUC decisions on the proposed $1.4 billion penalty, related PSEP disallowances, and any additional fines or refunds.
- Progress and outcome of the federal criminal case and investigations involving CPUC communications, gas safety reports, the Carmel incident, and other enforcement matters.
- Final decisions in the 2015 gas transmission and storage and FERC transmission rate cases, including the effect on revenue recovery and regulatory accounting.
- Actual 2014 capital expenditures and unrecoverable pipeline-safety costs compared with management’s forecasts.
- Future PG&E Corporation equity issuance and resulting dilution, as well as the Utility’s ability to maintain its authorized 52% equity capital structure.
- Changes in environmental remediation estimates, especially for the Hinkley and Topock sites, and the extent of cost recovery through rates or insurance.
- Liquidity, credit ratings, debt maturities, and continued access to revolving credit and capital markets.