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Bankruptcies and clean energy: how PG&E’s business works

PG&E (NYSE: PCG) is an American utility company. It is unprofitable and has already declared bankruptcy a couple of times. Nevertheless, even it has its strengths.

What’s going on here

Readers have long asked us to begin parsing the reporting and business fundamentals of U.S. issuers. 

Often in reporting companies numbers are rounded, so the totals in the charts and tables may not add up

What they make money on

It is a utility company that supplies electricity and natural gas in California. The company serves approximately 5.5 million customers and is ranked fifth in the top 10 electricity suppliers in the U.S. by the number of customers.

The company operates only in the United States and only in California.

Company revenue in the “Electricity” segment by customer type, in millions of dollars

End of 2019End of 2018
Residential buildings48475051
Commercial enterprises47564908
Industry14931532
Agriculture11061234
Illumination of streets and highways6772
Other168−720
Total revenue from segment customers12 43712 077
Revision of accounting303636
Segment revenue as a whole12 74012 713

Company revenues in the “Natural gas” segment by customer type, in millions of dollars

End of 2019End of 2018
Residential buildings23252042
Commercial enterprises605537
Transportation services12491511
Other12375
Total revenue from segment customers43023805
Revision of accounting87242
Segment revenue as a whole17 12917 760

Source: Company’s annual report, p. 143. 143

The company’s financial performance over three years in millions of dollars

201920182017
Revenue of the electric segment12 74012 71313 127
Revenue of the gas segment438940474011
Total revenue by segment17 12916 76017 138
The cost of electricity−3095−3828−4309
The cost of natural gas−734−671−746
Managing and maintaining a working condition−8750−7153−6383
Compensation of the consequences of fires−11 435−11 771– —
Loss of asset value, depreciation or withdrawal of equipment−3233−3036−2854
Operating expenses in total−27 247−26 459−14 292
Operating profit or loss−10 118−96992846
Interest income827430
Interest payments−912−914−877
Other income239426119
Reorganization costs−320– —– —
Profit before tax−11 029−10 1132118
Tax deduction or tax payable−3407−3295427
Total profit−7622−68181691

Source: Company’s annual report, pp. 122

Generation and purchase of energy by the company by types of its own sources-producers

Nuclear power41,7%
Small hydropower plants2,2%
Large hydropower plants26,3%
Fossil fuel– —
Solar power0,7%
Total70,9%

Generation and purchase of energy by the company by types of small third-party sources-producers

Renewable energy0,6%
Non-renewable energy– —
Total0,6%

Generation and purchase of energy by the company by types of third-party water sources-producers

Small hydropower plants0,1%
Large hydropower plants– —
Total0,1%

Generation and purchase of energy from other third parties

Renewable energy sources23,8%
Large hydropower plants4,6%
Non-renewable energy sources– —
Total28,4%

The tables show the percentage of 35,956 GWh. Source: Company Annual Report, p. 21

Revenue and profit for the last 12 months in billions of dollars, bottom line margin as a percentage of revenue. Source: Macrotrends

Conjuncture Company

The company’s main money comes from the energy consumption of residents, so despite the crown-crisis disruptions in the industry, the company’s overall revenue has increased this year – because people have been spending more time at home, which has led to increased energy consumption.

In this regard, a new round of coronavirus restrictions and reduced population mobility in California just might benefit PG&E’s business.

Financial performance of the company in millions of dollars

July – September 2020July – September 2019January – September 2020January – September 2019
Revenue of the electric segment3810355410 2859292
Revenue of the gas segment107287834363094
Total revenue by segment4882443213 72112 386
The cost of electricity1114107024182506
The cost of gas9068508515
Operating expenses2290220663986235
Compensation expenses2525481956448
Costs of possible consequences120– —293– —
Loss of value of assets or putting equipment out of service84584025742433
Total operating expenses4484673212 38618 137
Operating profit or loss398−23001335−5751
Interest income583362
Interest payments−391−52−844−215
Other income10262299199
Reorganization costs−137−73−1937−256
Profit before tax−23−2345−1114−5961
Tax deduction or tax payable−109−729394−1932
Total profit86−1616−1508−4029

Source: Company Quarterly Report, p. 10. 10

Company revenues in the electric segment by customer type, in millions of dollars

July – September 2020July – September 2019January – September 2020January – September 2019
Residential buildings1862155740923839
Commercial enterprises1455148135373568
Industry45346611351085
Agriculture6574961149844
Illumination of streets and highways17175150
Other−148−8254−391
Total segment revenue4296393510 0188995
Revision of accounting−486−381267297
Segment as a whole3810355410 2859292

The company’s revenues in the gas segment by customer type, in millions of dollars

July – September 2020July – September 2019January – September 2020January – September 2019
Residential buildings30324917951764
Commercial enterprises9092434461
Transportation services259264902950
Other27−98−153−303
Total segment revenue67950729782872
Revision of accounting393371458222
Segment as a whole107287834363094

Company revenues by segment in millions of dollars

July – September 2020July – September 2019January – September 2020January – September 2019
Electricity3810355410 2859292
Gas107287834363094
Total4882443213 72112 386

Source: Company Quarterly Report, p. 37

“He killed the dog again.”

PG&E even recently the was in bankruptcy, which dragged on for almost several years, but everything seems to have ended safely in the summer of 2020. All in all, the company’s stock looks like an extremely unreliable investment. But there is one nuance.

PG&E’s status as one of the largest electricity providers in California allows it to be reborn again and again. That’s what made it rise from the dead this summer, even though it had earlier declared bankruptcy. The company has been hit with huge fines for the benefit of victims of fires that were directly or indirectly caused by the company, and has been required to strengthen its infrastructure to protect against fires. So far, these payments are within the company’s means.

The reasons for the U.S. justice’s loyalty to the company are simple: if the company goes bankrupt, millions of people who are now served by the company will instantly be left without electricity, which is fraught with big problems. In theory, of course, PG&E can be nationalized, and, in theory, this is a reasonable and justifiable step – but in practice, Americans very rarely go for this.

The company also has a powerful bonus: it is a major supplier of clean energy in California. Maybe the company is being, and will continue to be, saved precisely because it is an important promoter of California’s transition to clean energy sources.

Clean energy sources in the company’s sales structure

GWhPercentage of sales
Biomass13223,7%
Geothermal sources5391,5%
The Wind34129,5%
Hydropower8272,3%
Solar power457412,7%
Anyway.10 67429,7%

Source: Annual report, p. 22

In general, the situation with the company reminds me a lot of the story of the Californian city of Vernon. It is a city of about 110 people with about 50,000 employees, mostly migrants. The city enjoys its status as a municipality and uses its standards of industrial operation and emissions, which have not changed since the 1950s. This all leads to environmental poisoning. The state periodically tries to strip the city of its municipality status to stop this outrage. But the city immediately has money for lawyers and lobbyists, so it stays that way. PG&E is like Vernon on a scale whose defenders are more powerful than its opponents.

But fines and expenses for strengthening the company’s infrastructure gobble up all the profits – the company only came out in the last quarter in the black. And here, of course, one should not count on a quick return of dividends, which PG&E cancelled more than three years ago. The lack of dividends greatly reduces the attractiveness of the company’s stock, because investors often go into the utilities sector just because of the hope of dividend payments backed by stable cash flow. Of course, PG&E has revenue stability, but with the current situation in its finances the return of dividends will not be very soon.

In any case, the company has the heaviest debt load: it owes $74.5 billion, of which $13.3 billion has to be paid within a year. If there are new large-scale fires in California – and they happen all the time – the company will again be able to make justified claims, and it will again declare bankruptcy.

Summary

PG&E looks like an extremely speculative investment. Even I would not risk investing in this stock. On the other hand, the news about the return of dividends will allow to pump up the quotations. Oh, and the company’s political protection factor is a strong bonus.

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