PG&E Corporation Form 10-Q Summary
Business Context and Reporting Period
PG&E Corporation is a California holding company operating primarily through Pacific Gas and Electric Company, a regulated electric and natural gas utility serving northern and central California. The combined Form 10-Q covers the quarter and six months ended June 30, 2013. The statements are unaudited and should be read with the 2012 Form 10-K.
Key Financial Metrics
| PG&E Corporation | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Operating revenues | $3,776 million | $3,593 million | $7,448 million | $7,234 million |
| Operating income | $636 million | $467 million | $1,138 million | $954 million |
| Net income | $332 million | $239 million | $574 million | $475 million |
| Income available to common shareholders | $328 million | $235 million | $567 million | $468 million |
| Diluted EPS | $0.74 | $0.55 | $1.29 | $1.11 |
| Operating margin | 16.8% | 13.0% | 15.3% | 13.2% |
| Net margin | 8.8% | 6.7% | 7.7% | 6.6% |
For the six months, PG&E generated $1.459 billion of operating cash flow, compared with $2.174 billion in the prior-year period, and used $2.471 billion in investing activities, including $2.521 billion of capital expenditures. Financing activities provided $892 million, resulting in a $120 million decrease in cash and cash equivalents to $281 million at June 30, 2013.
- Total assets were $54.324 billion at June 30, 2013, up from $52.449 billion at December 31, 2012.
- PG&E Corporation held $281 million of cash and cash equivalents, including $305 million of restricted cash. The Utility separately held $61 million of unrestricted cash and $305 million of restricted cash.
- PG&E Corporation had $952 million of short-term borrowings, $1.288 billion of current long-term debt, and $11.917 billion of noncurrent long-term debt.
- The Utility had $692 million of commercial paper outstanding, $938 million of current long-term debt, and $11.917 billion of noncurrent long-term debt.
- The Utility’s six-month earnings-to-fixed-charges ratio was 2.91; the combined fixed-charges and preferred-dividends ratio was 2.86.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 5%; six-month revenue increased 3%. The increases were primarily related to authorized rate changes and higher pass-through revenues.
- Second-quarter operating income increased $169 million, or 36%, and six-month operating income increased $184 million, or 19%.
- Operating and maintenance expense decreased 12% in the quarter and 7% year to date, largely because of lower nonrecoverable natural-gas-related costs and the absence of the prior-year Diablo Canyon refueling outage costs.
- Depreciation, amortization, and decommissioning expense declined $90 million in the quarter and $171 million year to date, primarily because the energy recovery bond regulatory asset was fully amortized in 2012.
- Cost of electricity increased 24% in the quarter and 19% year to date, driven mainly by higher purchased-power costs, renewable-energy procurement, and market prices.
- Operating cash flow declined $710 million year to date, primarily because of timing and amount of tax payments and other working-capital movements, while capital expenditures increased $302 million.
- PG&E Corporation issued approximately 14 million common shares for $562 million of net proceeds and contributed $665 million of equity to the Utility. The higher share count reduced year-to-date diluted EPS by approximately $0.07 according to management’s reconciliation.
Guidance, Outlook, Risks, and Unusual Items
- Management forecast approximately $5.1 billion of Utility capital expenditures in 2013, including pipeline safety spending.
- The Utility forecast 2013 unrecoverable pipeline-related expenses of approximately $400 million to $500 million.
- The Utility requested a $1.207 billion increase in 2014 revenue requirements. The CPUC’s Division of Ratepayer Advocates recommended a $162 million decrease from 2013 authorized levels. A final 2014 general rate case decision was scheduled for late 2013.
- Three CPUC investigations related to the San Bruno accident and natural gas operations remained pending. On July 16, 2013, the CPUC Safety and Enforcement Division recommended a $2.25 billion penalty package, including a $300 million state fine and $1.95 billion of nonrecoverable safety and remedial costs. The company had accrued $200 million for probable state fines and stated that the final amount could be materially higher.
- Management estimated that adoption of the latest penalty recommendation could result in total past and future unrecoverable costs and fines related to natural gas transmission operations exceeding $4 billion.
- San Bruno third-party claims had produced $455 million of cumulative charges and $388 million of settlement payments. The company estimated up to $145 million of additional unresolved claims, before considering potentially unquantifiable punitive damages. Cumulative insurance recoveries were $329 million.
- Environmental remediation liabilities were $934 million at June 30, 2013, including $207 million for Hinkley and $270 million for Topock. Undiscounted future environmental costs could reach approximately $1.7 billion under adverse assumptions.
- The company faced ongoing federal, state, and local criminal investigations related to San Bruno. Potential civil or criminal penalties, remedial measures, reputational harm, and independent-monitor requirements could materially affect results and liquidity.
- The Utility entered seven renewable-energy power purchase agreements creating approximately $1.1 billion of commitments over five to twenty-five years.
- Credit facilities were extended to April 2018. PG&E Corporation had $260 million drawn under its $300 million facility; the Utility had $91 million of letters of credit outstanding and $2.217 billion of available capacity after commercial paper.
- Derivatives were used for non-speculative commodity risk management. Costs and gains or losses were generally passed through or deferred through regulatory accounts. A loss of investment-grade credit ratings could require approximately $16 million of additional net collateral based on the filing’s June 30 calculation.
Most Important Facts for Investors to Verify
- Final CPUC decisions on the three San Bruno-related investigations, including any fines, disallowances, and required remedial investments.
- Whether the $200 million accrued penalty is sufficient and the effect of any additional charges on earnings, cash flow, credit ratings, and equity issuance needs.
- Progress and final outcomes of San Bruno civil claims, insurance recoveries, punitive-damage exposure, and the criminal investigation.
- Final CPUC approval of the 2014 general rate case and future recovery of pipeline safety, operating, capital, and environmental costs.
- Execution of the $5.1 billion 2013 capital program and the resulting need for Utility debt and PG&E Corporation equity contributions.
- Hinkley and Topock remediation estimates, regulatory requirements, and the portion of costs recoverable from customers.
- Cash-flow conversion, given the decline in operating cash flow and capital expenditures exceeding operating cash generation during the first six months of 2013.