PG&E Corp quarterly report, Q1 FY2014

Business Context and Reporting Period

PG&E Corporation is a holding company whose primary operating subsidiary, Pacific Gas and Electric Company, is a regulated electric and natural gas utility serving northern and central California. The combined Form 10-Q covers the three months ended March 31, 2014, with comparisons to March 31, 2013. Financial statements are unaudited and prepared under U.S. GAAP for interim reporting.

Key Financial Metrics

PG&E Corporation, $ millions except per share data	Q1 2014	Q1 2013	Change
Total operating revenues	$3,891	$3,672	+6%
Operating income	$484	$502	-4%
Net income	$230	$242	-5%
Income available to common shareholders	$227	$239	-5%
Diluted EPS	$0.49	$0.55	-11%
Dividends declared per common share	$0.46	$0.46	Flat
Net cash from operating activities	$771	$869	-11%
Capital expenditures	$1,197	$1,249	-4%

Operating margin was approximately 12.4% in Q1 2014 versus 13.7% in Q1 2013. Net margin was approximately 5.9% versus 6.6%. The decline in EPS also reflects a higher weighted-average diluted share count of 460 million versus 435 million.

Electric revenue increased to $3,001 million from $2,799 million; natural gas revenue increased to $890 million from $873 million.
Cost of electricity increased to $1,210 million from $983 million, primarily reflecting higher purchased power costs and fuel costs.
Operating and maintenance expense decreased to $1,299 million from $1,338 million, including lower unrecoverable natural-gas-related expenses.
Depreciation, amortization, and decommissioning expense increased to $538 million from $503 million due primarily to capital additions.
The effective tax rate decreased to approximately 30% from 34%, principally because of higher deductible software development costs.

Balance Sheet, Debt, and Liquidity

PG&E Corporation held $108 million of cash and cash equivalents at March 31, 2014, compared with $296 million at December 31, 2013. The Utility held $68 million, compared with $65 million.
PG&E Corporation had $930 million of short-term borrowings and $13,965 million of long-term debt at March 31, 2014. The Utility had $882 million of short-term borrowings and $13,616 million of long-term debt.
Revolving credit facilities totaled $3.3 billion, with $930 million of commercial paper outstanding and stated availability of $2.291 billion, after considering commercial paper and letters of credit.
In February 2014, PG&E Corporation issued $350 million of 2.40% senior notes due 2019 and the Utility issued $900 million of senior notes due 2024 and 2044. The proceeds were used principally to refinance debt and fund capital expenditures and general corporate purposes.
PG&E Corporation issued 8 million common shares for net proceeds of $302 million and contributed $250 million of equity to the Utility during the quarter. Management expected additional equity issuance during 2014.

Cash Flow and Capital Requirements

PG&E Corporation generated $771 million of operating cash flow, used $1,189 million in investing activities, and received $230 million from financing activities, resulting in a $188 million decrease in cash. The Utility generated $779 million of operating cash flow, used $1,192 million in investing activities, and received $416 million from financing activities.

The Utility forecast 2014 capital expenditures of approximately $5 billion to $6 billion, including pipeline safety investments.
Lower operating cash flow reflected higher purchased power costs and lower income tax refunds.
The Utility’s authorized capital structure consisted of approximately 52% equity and 48% debt and preferred stock.

Material Changes Versus the Prior Comparable Period

Revenue increased, but operating income and net income declined because expense growth, particularly purchased power and depreciation, exceeded revenue growth.
Income available to PG&E Corporation common shareholders fell $12 million, and diluted EPS declined $0.06, with approximately $0.03 of the EPS decline attributable to the higher share count.
Management attributed the earnings change primarily to a $13 million after-tax benefit from lower natural gas matter expenses, a $5 million benefit from rate-base growth, a $20 million negative impact from timing of 2014 GRC expense recovery, a $3 million per-share dilution effect from additional shares, and other unfavorable items.
Unrecoverable pipeline-related expenses were $40 million in Q1 2014 versus $62 million in Q1 2013. Cumulative unrecoverable natural gas matter charges reached approximately $2.519 billion at March 31, 2014.
Net cash from operating activities decreased by $98 million at PG&E Corporation and $128 million at the Utility.

Guidance, Outlook, Risks, and Unusual Items

Management forecast $350 million to $450 million of 2014 pipeline-related expenses that would not be recoverable through rates.
The 2014 general rate case was pending. PG&E requested a 2014 revenue requirement of approximately $7.8 billion, or $1.16 billion above comparable 2013 authorized revenues; the Office of Ratepayer Advocates recommended a revenue requirement below the 2013 authorized level. Any approved changes were expected to be effective retroactively to January 1, 2014.
PG&E requested a 2015 gas transmission and storage revenue requirement of $1.29 billion, an increase of $555 million over 2014 authorized revenues.
Three CPUC investigations related to natural gas operations and the 2010 San Bruno pipeline rupture remained unresolved. The Safety and Enforcement Division recommended a $2.25 billion penalty, while the company had accrued $200 million for the minimum probable state-fund fine. The final amount could be materially higher.
On April 1, 2014, the Utility was charged in a 12-count federal criminal indictment alleging violations of pipeline safety requirements. The indictment sought approximately $6 million in fines; the Utility pleaded not guilty.
The Utility had recorded $549 million of cumulative charges for PSEP capital costs expected to exceed recoverable amounts and could incur additional charges if costs were disallowed.
Environmental remediation liabilities totaled $893 million, including $266 million for Topock and $181 million for Hinkley. Management disclosed that undiscounted future environmental costs could reach as much as $1.7 billion under adverse assumptions.
Remaining Chapter 11 disputed claims, including accrued interest, totaled $870 million, supported by $291 million of restricted cash held in escrow.
California drought conditions were expected to increase electricity costs because of reduced hydroelectric generation and higher natural gas prices. Management expected procurement costs to remain recoverable through rates, subject to regulatory mechanisms.
The company entered into renewable energy power purchase agreements creating approximately $300 million of commitments over the next 20 years.

Most Important Facts for Investors to Verify

Outcome and timing of the three CPUC investigations, including potential fines, disallowed PSEP costs, operational remedies, and any effect on future rate recovery.
Progress and financial consequences of the federal criminal prosecution and other gas-safety investigations, citations, and litigation.
Final CPUC decisions on the 2014 GRC and 2015 gas transmission and storage rate case, including retroactive revenue recovery.
Actual 2014 unrecoverable pipeline expenses and capital expenditures compared with management’s forecasts.
Need for additional PG&E Corporation equity issuance, potential shareholder dilution, and the Utility’s ability to maintain its authorized capital structure.
Changes in environmental remediation estimates, insurance recoveries, disputed claims, and other contingent liabilities.
Liquidity, commercial paper utilization, credit ratings, covenant compliance, and access to debt markets.