PG&E Corp quarterly report, Q1 FY2017

PG&E Corporation Form 10-Q Summary

Business Context and Reporting Period

PG&E Corporation is a California holding company whose primary subsidiary, Pacific Gas and Electric Company, provides regulated electric and natural gas generation, transmission, distribution, and related services in northern and central California. The combined Form 10-Q covers the quarter ended March 31, 2017 and is unaudited. The businesses are primarily regulated by the CPUC and FERC, with nuclear operations overseen by the NRC.

Financial Results and Key Metrics

PG&E Corporation consolidated results	Q1 2017	Q1 2016	Change
Total operating revenue	$4.268 billion	$3.974 billion	+$294 million, or 7%
Operating income	$880 million	$95 million	+$785 million
Income before income taxes	$688 million	$(77) million	Improved by $765 million
Net income	$579 million	$110 million	+$469 million, or 426%
Income available to common shareholders	$576 million	$107 million	+$469 million
Diluted EPS	$1.13	$0.22	+$0.91
Net cash from operating activities	$1.574 billion	$1.088 billion	+$486 million
Capital expenditures	$1.216 billion	$1.229 billion	$(13) million

Operating margin was approximately 20.6% in Q1 2017 versus 2.4% in Q1 2016. The improvement primarily reflected lower operating and maintenance costs, including the absence of significant Q1 2016 Butte fire charges and disallowed capital costs, together with higher authorized revenues from rate cases. Interest expense increased to $218 million from $203 million, while the income tax provision was $109 million compared with a $187 million benefit in the prior year. The reported effective tax rates were approximately 17% in 2017 and 241% in 2016, reflecting the prior-year pretax loss and tax audit-related benefits.

Revenue increased mainly because natural gas revenue rose to $1.203 billion from $843 million, partially offset by lower electric revenue of $3.065 billion versus $3.131 billion. Natural gas costs increased to $325 million from $222 million, while electricity costs declined to $847 million from $950 million.

Management reported non-GAAP earnings from operations of $544 million, or $1.06 diluted EPS, in Q1 2017 versus $407 million, or $0.82 diluted EPS, in Q1 2016. The measure excludes items such as fines and penalties, pipeline-related expenses, Butte fire costs, legal and regulatory expenses, and certain rate-case revenue timing effects.

Liquidity, Debt, and Capital Resources

At March 31, 2017, PG&E Corporation had $164 million of cash and cash equivalents; the Utility had $60 million.
PG&E Corporation reported $763 million of short-term borrowings, $700 million of current long-term debt, and $16.813 billion of noncurrent long-term debt. The Utility reported $763 million of short-term borrowings, $700 million of current long-term debt, and $16.464 billion of noncurrent long-term debt.
The Utility issued $400 million of 3.30% senior notes due 2027 and $200 million of 4.00% senior notes due 2046. It also entered into a $250 million term loan maturing in February 2018 and repaid a previously issued $250 million term loan.
Available revolving credit capacity was $300 million for PG&E Corporation and approximately $2.7 billion for the Utility. The Utility had $263 million of commercial paper outstanding; PG&E Corporation had none.
Debt-to-total-capitalization ratios were 50% for PG&E Corporation and 49% for the Utility, below the 65% revolving-credit covenant limit. Both entities were in compliance with their covenants.
PG&E Corporation provided a $125 million equity contribution to the Utility and expects to issue $400 million to $600 million of common stock during 2017, primarily to support Utility capital expenditures. Additional issuance could dilute EPS.
Utility operating cash flow increased to $1.598 billion from $1.096 billion. Investing cash use was $1.235 billion, and financing cash use was $374 million, resulting in an $11 million decrease in cash.
The Utility estimates capital expenditures of approximately $6.0 billion in each of 2017, 2018, and 2019.

Material Changes Versus the Prior Comparable Period

Net income and EPS increased substantially because Q1 2016 included approximately $350 million of estimated Butte fire property-damage charges, $31 million of other Butte fire costs, and $87 million of disallowed capital charges. Q1 2017 included substantially lower Butte fire-related costs.
Operating and maintenance expense declined 25% to $1.504 billion from $2.010 billion; expenses that impacted earnings declined approximately 30%.
Revenue that impacted earnings increased 12%, primarily from CPUC and FERC-authorized rate increases and recognition of $102 million of retroactive 2015 gas transmission and storage revenues.
Operating cash flow improved by $486 million at PG&E Corporation and $502 million at the Utility, primarily due to higher authorized revenues and timing of customer collections and vendor payments.
PG&E Corporation’s quarterly dividend increased to $0.49 per share from $0.46 per share.

Guidance, Outlook, Risks, and Unusual Items

Management forecasts $80 million to $125 million of unrecovered pipeline-related expenses in 2017, primarily for identifying and removing transmission pipeline rights-of-way encroachments.
The 2017 General Rate Case remains subject to CPUC approval. The settlement agreement and alternate proposed decision contemplate revenue-requirement increases of $88 million in 2017, $444 million in 2018, and $361 million in 2019; the original proposed decision contemplated $86 million in 2017.
The Utility estimates that a pending cost-of-capital proceeding could reduce annual revenue requirements by approximately $100 million beginning in 2018, although the CPUC’s action and final impact remain uncertain.
Butte fire claims remain a major contingency. The Utility had accrued $646 million of third-party claims liability and recorded $582 million of insurance receivables at March 31, 2017. It believes a loss of at least $750 million is probable, but cannot reasonably estimate the upper end of potential losses. Aggregate Butte fire liability insurance coverage is approximately $900 million.
Cal Fire is seeking $87 million in firefighting costs, and the SED issued two Butte fire citations totaling $8.3 million after quarter-end. Approximately 55 lawsuits involving about 2,000 plaintiffs and 1,150 households or insurers were pending as of March 31, 2017.
The Utility accrued $13 million for certain financial remedies under a proposed CPUC settlement concerning ex parte communications. The proposed settlement provides for total financial remedies of $86.5 million, remains subject to CPUC approval, and could be modified or rejected.
Environmental remediation liabilities totaled $980 million, including Topock, Hinkley, former manufactured gas plant sites, and other facilities. The filing states that undiscounted future costs could increase by as much as $1 billion; approximately $696 million was expected to be recoverable through rates.
The Utility’s federal criminal conviction resulted in five years of corporate probation, five years of third-party monitoring, a $3 million fine paid in February 2017, and possible additional nonrecoverable compliance and monitoring costs.
PG&E plans to retire Diablo Canyon Units 1 and 2 when their operating licenses expire in 2024 and 2025, subject to CPUC approval. A CPUC proposed decision would adopt aggregate decommissioning costs of $3.5 billion versus the Utility’s requested $4.8 billion. The nuclear decommissioning trust had a fair value of approximately $3.1 billion.
Westinghouse, a sole-source nuclear fuel and outage-support provider, filed for Chapter 11 protection in March 2017. Supply, outage, contract, and replacement-power risks could be material, and the filing does not provide a clear estimate of potential costs.
Other key risks include ratemaking outcomes, safety enforcement, regulatory cost disallowances, wildfire liability, environmental costs, commodity prices, credit ratings, access to capital, cybersecurity, weather events, changing customer demand, community choice aggregation, and the ability to recover costs through rates.

Most Important Facts for Investors to Verify

Final CPUC decisions on the 2017 General Rate Case, ex parte communications settlement, cost of capital, and Diablo Canyon decommissioning.
Progress, settlement costs, trial outcomes, insurance recoveries, and additional claims related to the Butte fire.
Whether unrecovered pipeline, safety, environmental, and monitoring costs exceed current accruals and management forecasts.
The timing and amount of PG&E Corporation equity issuance and resulting dilution, together with the Utility’s ability to maintain its authorized capital structure.
Westinghouse’s ability to continue supplying nuclear fuel and outage services during bankruptcy proceedings.
Capital spending levels, rate-base recovery, regulatory balancing-account changes, and cash generation relative to the approximately $6.0 billion annual capital-expenditure forecast.