PG&E Corporation and Pacific Gas and Electric Company: 2010 Q3 Form 10-Q
Business context and reporting period
Combined quarterly report for PG&E Corporation, the holding company, and Pacific Gas and Electric Company, its regulated utility serving northern and central California. The filing covers the three and nine months ended September 30, 2010, with comparisons to the corresponding 2009 periods. The Utility served approximately 5.2 million electric distribution customers and 4.3 million natural gas distribution customers.
Key financial metrics
| PG&E Corporation consolidated | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Operating revenues | $3,513 million | $3,235 million | $10,220 million | $9,860 million |
| Operating income | $503 million | $607 million | $1,816 million | $1,776 million |
| Net income | $261 million | $321 million | $859 million | $957 million |
| Income available to common shareholders | $258 million | $318 million | $849 million | $947 million |
| Diluted EPS | $0.66 | $0.83 | $2.19 | $2.49 |
| Operating margin | 14.3% | 18.8% | 17.8% | 18.0% |
| Net margin | 7.4% | 9.9% | 8.4% | 9.7% |
Operating revenues increased 9% in the quarter and 4% for the nine-month period, primarily reflecting higher authorized base revenues and pass-through collections. The Utility’s electric revenues were $2,857 million in Q3 and $7,882 million for nine months; natural gas revenues were $656 million and $2,338 million, respectively.
Profitability declined despite higher revenue. Q3 operating income fell 17%, while nine-month operating income increased modestly. The principal adverse item was the San Bruno accident, which reduced income available to common shareholders by approximately $141 million after tax. Other nine-month headwinds included $45 million after tax of costs supporting a June 2010 ballot initiative and a $19 million after-tax charge related to the elimination of Medicare Part D subsidy tax deductibility.
At September 30, 2010, PG&E Corporation reported total assets of $45.3 billion, cash and cash equivalents of $347 million, total debt and energy recovery bonds of approximately $13.2 billion, and total equity of $11.3 billion. The Utility reported cash of $119 million, long-term debt of $10.4 billion, current short-term borrowings of $986 million, and total equity of $11.6 billion.
Cash flow, capital spending, debt, and liquidity
- PG&E Corporation generated $2.32 billion of operating cash flow during the first nine months, down from $2.81 billion in 2009. The Utility generated $2.35 billion, down from $2.69 billion.
- Capital expenditures were $2.79 billion, compared with $3.02 billion in 2009. Net cash used in investing activities was $2.80 billion for PG&E Corporation and $2.76 billion for the Utility.
- Financing activities provided $297 million to PG&E Corporation and $191 million to the Utility. PG&E Corporation paid $492 million of common dividends; the Utility paid $537 million to PG&E Corporation and $11 million of preferred dividends.
- At September 30, the Utility had $586 million of commercial paper outstanding, $400 million drawn under its $1.9 billion revolving facility, $289 million of letters of credit, and $750 million of additional revolving capacity undrawn. Total reported credit-facility availability was $1.512 billion.
- The Utility issued $250 million of 5.8% senior notes due 2037 and $550 million of 3.5% senior notes due 2020 during the period. It issued an additional $250 million of floating-rate senior notes due October 2011 on October 12, 2010, after the quarter end. The $400 million revolving-facility borrowing outstanding at September 30 was repaid on October 29, 2010.
- PG&E Corporation converted $247 million of convertible subordinated notes into 16.4 million common shares; the notes were no longer outstanding at September 30.
Material changes versus the prior comparable period
- Q3 net income decreased 19% and diluted EPS decreased from $0.83 to $0.66. Nine-month net income decreased 10% and diluted EPS decreased from $2.49 to $2.19.
- Operating and maintenance expense increased 17% in Q3, principally because of $238 million of San Bruno-related costs, including a $220 million provision for third-party claims. For nine months, operating and maintenance expense increased 1%.
- Depreciation, amortization, and decommissioning expense increased 11% in Q3 and 9% for nine months, reflecting higher capital additions.
- Operating cash flow declined primarily because of increased collateral payments related to commodity risk management and lower tax refunds compared with 2009. The decline was partly offset by the absence of the $700 million disputed-claims payment made in 2009.
- Total long-term regulatory assets increased to $5.7 billion from $5.5 billion at year-end 2009, while long-term regulatory liabilities increased to $4.4 billion from $4.1 billion.
Guidance, outlook, risks, contingencies, and unusual items
No formal earnings guidance is provided in the filing. Management expects future results to depend heavily on CPUC and FERC decisions, cost control, recovery of authorized expenditures, capital-market access, and the timing and amount of San Bruno-related payments and insurance recoveries.
- San Bruno accident: A September 9, 2010 gas-transmission pipeline rupture caused eight deaths, numerous injuries, and extensive property damage. NTSB and CPUC investigations were ongoing. The Utility accrued $220 million for third-party claims and estimated exposure could reach $400 million. Liability insurance was approximately $992 million above a $10 million deductible, but no insurance recovery was recorded.
- Regulatory proceedings: A proposed 2011 general-rate-case settlement would increase 2011 revenue requirements by $395 million, below the Utility’s $1.1 billion request. Approval and effective timing remained uncertain. A pending FERC transmission case sought a $1.0 billion annual revenue requirement, subject to refund.
- Environmental and nuclear matters: Environmental remediation liabilities were $608 million, with undiscounted future costs potentially reaching $1.1 billion. Compliance with California once-through-cooling requirements could require substantial spending; management estimated Diablo Canyon cooling towers could cost as much as $4.5 billion, although the Utility believed they should not be required.
- SmartMeter: The Utility had incurred $1.9 billion of the authorized $2.2 billion project cost and expected total costs could exceed authorization. Recovery of costs above authorized thresholds was uncertain. Approximately 6.9 million meters had been installed.
- Other commitments: Undiscounted future power-purchase obligations totaled $66.0 billion, natural gas supply, transportation, and storage obligations totaled $1.2 billion, and nuclear fuel commitments totaled $1.6 billion. The Utility also committed approximately $1.4 billion over 15 years for Ruby Pipeline capacity.
- Regulatory and market exposure: The Utility had $577 million of potential additional collateral requirements if credit-related derivative triggers were activated. Its reported 12-month value-at-risk for gas transportation and storage was $14 million.
Most important facts for an investor to verify
- Whether San Bruno claims, penalties, infrastructure costs, and required safety investments remain within or exceed the $220 million accrual and $400 million estimated third-party-claims exposure.
- The timing and collectability of insurance recoveries and whether regulators permit recovery of related costs through customer rates.
- Final CPUC decisions on the 2011 general rate case, gas transmission and storage rates, energy-efficiency incentives, and pipeline-safety requirements.
- Actual operating cash flow after collateral movements, disputed-claims settlements, tax payments, and San Bruno-related expenditures.
- Debt maturities, commercial-paper reliance, revolving-credit availability, covenant compliance, and the effect of future equity contributions or share issuance.
- Potential cost and operational consequences of Diablo Canyon environmental requirements, SmartMeter cost overruns, renewable-energy mandates, and environmental remediation.