PG&E Corporation Form 10-Q Summary
Business Context and Reporting Period
Combined unaudited quarterly report for PG&E Corporation and its regulated subsidiary, Pacific Gas and Electric Company, for the three months ended March 31, 2013. PG&E Corporation is a holding company; the Utility provides electricity and natural gas services to approximately 5.2 million electric and 4.4 million natural gas distribution customers in northern and central California. Operations are primarily regulated by the CPUC and FERC, with nuclear operations overseen by the NRC.
Key Financial Metrics
| PG&E Corporation consolidated results | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenues | $3.672 billion | $3.641 billion | +0.9% |
| Operating income | $502 million | $487 million | +3.1% |
| Income before taxes | $356 million | $340 million | +4.7% |
| Net income | $242 million | $236 million | +2.5% |
| Income available to common shareholders | $239 million | $233 million | +2.6% |
| Diluted EPS | $0.55 | $0.56 | Down $0.01 |
| Operating margin | Approximately 13.7% | Approximately 13.4% | Improved |
| Net margin | Approximately 6.6% | Approximately 6.5% | Improved |
| Cash flow from operating activities | $869 million | $931 million | Down $62 million |
| Capital expenditures | $1.249 billion | $1.094 billion | +14.2% |
Electric revenue increased 1% to $2.798 billion, while natural gas revenue increased slightly to $873 million. Utility net income was $237 million versus $231 million in the prior-year quarter.
At March 31, 2013, PG&E Corporation had $278 million of cash and cash equivalents, $304 million of restricted cash, and total assets of $53.062 billion. Current liabilities were $7.048 billion and noncurrent liabilities were $32.190 billion. Debt, including short-term borrowings and current maturities, totaled approximately $13.4 billion. The Utility had $53 million of cash, $304 million of restricted cash, and approximately $12.9 billion of debt on the same basis.
PG&E Corporation had $120 million drawn under its $300 million revolving credit facility. The Utility had $368 million of commercial paper outstanding and $243 million of letters of credit under its $3.0 billion revolving facility. Both companies were in compliance with credit-facility covenants. On April 1, 2013, the facilities were amended and extended to April 1, 2018.
The quarterly dividend declared was $0.46 per PG&E Corporation common share. The Utility's earnings-to-fixed-charges ratio was 2.58, and its earnings-to-combined-fixed-charges-and-preferred-dividends ratio was 2.53.
Material Changes Versus Q1 2012
- Operating income increased despite higher purchased electricity costs, primarily because operating and maintenance expense and depreciation, amortization, and decommissioning expense declined.
- Cost of electricity increased 14% to $983 million, driven primarily by higher renewable-energy procurement and transmission costs. Purchased power volume increased to 10,886 million kWh from 10,290 million kWh.
- Operating and maintenance expense declined 2% to $1.336 billion. Natural gas matter costs not recoverable through rates fell to $62 million from $163 million, and environmental remediation costs declined following a significant Hinkley-related charge in 2012.
- Depreciation, amortization, and decommissioning expense fell 14% to $503 million, primarily because the $109 million amortization of an energy recovery bond regulatory asset was absent in 2013.
- Operating cash flow declined 7% to $869 million while capital expenditures increased 14% to $1.249 billion, producing materially negative free cash flow before financing.
- PG&E Corporation issued 10.8 million common shares for $426 million of net proceeds and contributed $370 million of equity to the Utility. The higher share count reduced diluted EPS despite higher net income.
- The Utility's authorized return on equity declined to 10.40% from 11.35%, effective January 1, 2013.
- PG&E Corporation's cash balance fell from $401 million at December 31, 2012 to $278 million at March 31, 2013; the Utility's cash balance fell from $194 million to $53 million.
Guidance, Outlook, Risks, and Unusual Items
- Management forecasts $400 million to $500 million of unrecoverable pipeline-related expenses during 2013, including $62 million incurred in the first quarter. It also forecasts approximately $250 million of additional unrecoverable safety and reliability costs across electric and gas operations.
- PG&E Corporation and the Utility have incurred approximately $1.9 billion of cumulative charges since the 2010 San Bruno accident for natural gas matters that were not recoverable through rates.
- The companies accrued at least $200 million for probable penalties related to pending CPUC investigations and self-reported gas-safety violations. The ultimate penalties could be materially higher, and the filing does not provide a reliable estimate of losses above the accrued amount.
- Approximately 160 San Bruno-related lawsuits involving about 480 plaintiffs remained outstanding at March 31, 2013. Cumulative third-party claims charges were $455 million, cumulative payments were $382 million, and reasonably possible additional claims were estimated at up to $145 million, excluding potentially material punitive damages.
- Environmental remediation liabilities increased to $954 million from $910 million. This included $217 million for Hinkley and $271 million for Topock. Undiscounted environmental costs could reach as much as $1.7 billion if contamination or required remediation is greater than anticipated.
- The Utility requested a $1.28 billion increase in 2014 base revenues, with additional requested increases of $492 million in 2015 and $504 million in 2016. These requests remain subject to CPUC review and are not guidance.
- FERC-authorized transmission rate changes became effective May 1, 2013, subject to refund. The Utility estimated approximately $158 million of additional annual transmission revenue based on a 9.1% transmission ROE.
- Management expects continued equity issuance to fund Utility capital needs and maintain the authorized capital structure. Future equity issuance could materially dilute PG&E Corporation EPS.
- The Utility's investment-grade credit rating supports its commodity-risk collateral position. A downgrade below investment grade could have required approximately $69 million of additional collateral at March 31, 2013.
- The companies face ongoing criminal, regulatory, civil, environmental, nuclear, rate-case, commodity-price, credit, weather, cyber, and financing risks. Management states that internal controls and disclosure controls were effective at quarter-end.
Investor Verification Checklist
- Track the outcome and penalties from the three CPUC gas-safety investigations, including any remedial actions and additional penalties beyond the $200 million accrual.
- Reconcile future San Bruno claims, punitive-damage exposure, insurance recoveries, and the potential additional $145 million of third-party losses.
- Monitor 2013 unrecoverable pipeline and safety spending against the $400 million to $500 million forecast and assess implications for equity financing.
- Review the 2014 GRC, FERC transmission rate case, and future gas transmission and storage rate proceedings for revenue recovery and authorized returns.
- Assess liquidity after the Utility's $1.249 billion quarterly capital program, upcoming debt maturities including $1.0 billion due in March 2014, and anticipated additional equity issuance.
- Update valuation assumptions for Hinkley, Topock, broader environmental liabilities, nuclear decommissioning obligations, and potential changes in regulatory cost recovery.