PG&E Corp quarterly report, Q2 FY2018

PG&E Corporation and Pacific Gas and Electric Company — Q2 2018 Form 10-Q

Business context and reporting period

Combined quarterly report for the three and six months ended June 30, 2018. PG&E Corporation is a holding company whose principal subsidiary, Pacific Gas and Electric Company, provides regulated electricity and natural gas services in northern and central California. The businesses are primarily regulated by the CPUC and FERC, with nuclear facilities overseen by the NRC. Financial statements are unaudited and prepared under U.S. GAAP.

Financial performance and condition

PG&E Corporation consolidated	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Operating revenues	$4.234 billion	$4.250 billion	$8.290 billion	$8.518 billion
Operating income (loss)	$(1.465) billion	$735 million	$(866) million	$1.602 billion
Net income (loss)	$(980) million	$410 million	$(535) million	$989 million
Loss available to common shareholders	$(984) million	$406 million	$(542) million	$982 million
Diluted EPS	$(1.91)	$0.79	$(1.05)	$1.92

Revenue declined modestly year over year: 0.4% in the quarter and 2.7% year to date.
Operating margins were negative because wildfire-related claims, net of insurance recoveries, totaled $2.125 billion in Q2 and $2.118 billion year to date, compared with net recoveries in 2017.
Operating and maintenance expense increased to $1.786 billion in Q2 from $1.605 billion and to $3.390 billion year to date from $3.129 billion. Depreciation, amortization, and decommissioning expense also increased 5% in both periods.
Non-GAAP earnings from operations were $601 million, or $1.16 diluted EPS, in Q2 2018, compared with $440 million, or $0.86, in Q2 2017. Year-to-date non-GAAP earnings were $1.070 billion, or $2.07 diluted EPS, versus $984 million, or $1.92.
Six-month cash flow from operating activities was $2.753 billion, compared with $2.756 billion in 2017. Capital expenditures were $2.897 billion, up from $2.474 billion, producing net investing cash outflow of $2.895 billion.
Cash and cash equivalents were $517 million at June 30, 2018, compared with $449 million at December 31, 2017. PG&E Corporation reported total debt of approximately $19.3 billion, including short-term borrowings and current debt; total equity was $19.1 billion.
Revolving credit availability totaled $2.552 billion: $250 million at PG&E Corporation and $2.302 billion at the Utility. Both companies were in compliance with debt covenants, and debt-to-capitalization ratios were 51% and 50%, respectively.
Common dividends were suspended beginning in the fourth quarter of 2017; no common dividends were declared or paid in the first six months of 2018.

Material changes versus the prior comparable period

The principal change was recognition of a $2.5 billion pre-tax charge for estimated third-party claims related to 14 Northern California wildfires, partially offset by a $375 million probable insurance recovery. The net wildfire-related income-statement impact was $2.125 billion.
At June 30, wildfire-related claims liabilities totaled $2.860 billion, including $2.500 billion for the Northern California wildfires and $360 million for the Butte fire.
PG&E recorded a $593 million income tax benefit in Q2 and a $542 million benefit year to date, compared with tax provisions in 2017, primarily because 2018 results included pre-tax losses. The effective tax rate was 37.9% in Q2 and 51.0% year to date.
Six-month operating cash flow was broadly unchanged despite the net loss because the wildfire claims accrual increased operating cash flow by $2.299 billion; capital expenditures increased by approximately $423 million.
Debt financing activity included $650 million of Utility revolver borrowings, a new $250 million Utility term loan, and a new $350 million PG&E Corporation term loan used to redeem $350 million of senior notes.
Credit ratings were downgraded by Fitch, S&P, and Moody’s during the first quarter, with an additional S&P downgrade in the second quarter. Ratings remained investment grade at June 30.

Guidance, outlook, commentary, and risks

Management estimated 2018 Utility capital expenditures of approximately $6.3 billion and 2019 capital expenditures of approximately $6.0 billion.
The Utility expects future wildfire insurance coverage of approximately $1.0 billion to $1.5 billion beginning August 1, 2018, with annualized premiums of approximately $350 million, about $225 million higher than prior annualized premiums. Recovery of premiums above authorized revenue requirements remains subject to regulatory approval.
The CPUC authorized a Wildfire Expense Memorandum Account to track specified wildfire liability, legal, insurance, and financing costs, but the authorization did not grant rate recovery. Separate CPUC approval will be required.
Management stated that additional wildfire losses are reasonably possible but could not estimate the amount above the $2.5 billion accrued. The accrual excludes potential penalties, fines, punitive damages, and certain fires for which loss was not yet considered probable.
Wildfire insurance coverage for third-party liability was approximately $840 million, subject to retentions and occurrence-related limitations. Management warned that potential wildfire losses could materially exceed insurance coverage and that recovery through customer rates is uncertain and could take years.
As of July 20, 2018, approximately 270 Northern California wildfire complaints involving at least 2,900 plaintiffs had been identified, along with subrogation claims, government claims, derivative lawsuits, and two securities class actions. Litigation and investigations remain at an early or unresolved stage.
The Butte fire liability was estimated at at least $1.1 billion, with an additional $200 million reasonably possible. The Utility had recorded $922 million of probable insurance recoveries, and received an additional $100 million reimbursement in July 2018.
The CPUC approved a settlement involving $97.5 million of financial remedies related to ex parte communications, including a $12 million payment to the California General Fund, $12 million of city payments, and $63.5 million of foregone GT&S revenue requirements. A second phase remains unresolved.
The 2020 general rate case filing deadline was extended to January 1, 2019. Major unresolved proceedings include the 2019 GT&S rate case, FERC transmission rate cases, the 2018 CEMA application, the CPUC safety-culture investigation, and wildfire legislation.
Diablo Canyon retirement remains planned for 2024 and 2025. The CPUC authorized retirement-related recovery amounts below those requested by the Utility, and additional legislative and regulatory actions remain possible.
Environmental remediation liabilities totaled $1.096 billion at June 30, 2018. Management disclosed potential additional undiscounted costs of up to $293 million at Topock, $136 million at Hinkley, $534 million at former manufactured gas plants, $142 million at certain generation and disposal sites, and $95 million at fossil-fuel sites.
The filing states that the adoption of the revenue-recognition standard and other 2018 accounting standards had no material impact. Lease accounting is expected to increase balance-sheet assets and liabilities upon adoption in 2019, without a material income-statement or cash-flow impact.

Most important facts for investors to verify

Whether additional wildfire claims, fines, penalties, punitive damages, or investigation findings require material charges beyond the $2.5 billion accrued.
The amount, timing, and collectability of insurance recoveries, including the $375 million Northern California wildfire receivable and the $840 million policy limits.
Whether the CPUC or other regulators approve recovery of wildfire, CEMA, WEMA, insurance, environmental, and other extraordinary costs, and the timing of any collections.
Future liquidity needs, access to debt and equity markets, covenant compliance, credit-rating changes, collateral requirements, and potential shareholder dilution.
The status and outcome of Northern California wildfire litigation, Butte fire proceedings, the CPUC safety-culture investigation, securities litigation, and related regulatory enforcement matters.
Final outcomes of the 2019 GT&S, 2020 GRC, FERC transmission, PCIA, CEMA, wildfire legislation, and Tax Act-related rate proceedings.
Whether suspended dividends can be reinstated and whether PG&E Corporation can continue receiving distributions from the Utility while maintaining the Utility’s authorized capital structure.