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 2019 | End of 2018 | |
| Residential buildings | 4847 | 5051 |
| Commercial enterprises | 4756 | 4908 |
| Industry | 1493 | 1532 |
| Agriculture | 1106 | 1234 |
| Illumination of streets and highways | 67 | 72 |
| Other | 168 | −720 |
| Total revenue from segment customers | 12 437 | 12 077 |
| Revision of accounting | 303 | 636 |
| Segment revenue as a whole | 12 740 | 12 713 |
Company revenues in the “Natural gas” segment by customer type, in millions of dollars
| End of 2019 | End of 2018 | |
| Residential buildings | 2325 | 2042 |
| Commercial enterprises | 605 | 537 |
| Transportation services | 1249 | 1511 |
| Other | 123 | 75 |
| Total revenue from segment customers | 4302 | 3805 |
| Revision of accounting | 87 | 242 |
| Segment revenue as a whole | 17 129 | 17 760 |
Source: Company’s annual report, p. 143. 143
The company’s financial performance over three years in millions of dollars
| 2019 | 2018 | 2017 | |
| Revenue of the electric segment | 12 740 | 12 713 | 13 127 |
| Revenue of the gas segment | 4389 | 4047 | 4011 |
| Total revenue by segment | 17 129 | 16 760 | 17 138 |
| 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 | −9699 | 2846 |
| Interest income | 82 | 74 | 30 |
| Interest payments | −912 | −914 | −877 |
| Other income | 239 | 426 | 119 |
| Reorganization costs | −320 | – — | – — |
| Profit before tax | −11 029 | −10 113 | 2118 |
| Tax deduction or tax payable | −3407 | −3295 | 427 |
| Total profit | −7622 | −6818 | 1691 |
Source: Company’s annual report, pp. 122
Generation and purchase of energy by the company by types of its own sources-producers
| Nuclear power | 41,7% |
| Small hydropower plants | 2,2% |
| Large hydropower plants | 26,3% |
| Fossil fuel | – — |
| Solar power | 0,7% |
| Total | 70,9% |
Generation and purchase of energy by the company by types of small third-party sources-producers
| Renewable energy | 0,6% |
| Non-renewable energy | – — |
| Total | 0,6% |
Generation and purchase of energy by the company by types of third-party water sources-producers
| Small hydropower plants | 0,1% |
| Large hydropower plants | – — |
| Total | 0,1% |
Generation and purchase of energy from other third parties
| Renewable energy sources | 23,8% |
| Large hydropower plants | 4,6% |
| Non-renewable energy sources | – — |
| Total | 28,4% |
The tables show the percentage of 35,956 GWh. Source: Company Annual Report, p. 21
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 2020 | July – September 2019 | January – September 2020 | January – September 2019 | |
| Revenue of the electric segment | 3810 | 3554 | 10 285 | 9292 |
| Revenue of the gas segment | 1072 | 878 | 3436 | 3094 |
| Total revenue by segment | 4882 | 4432 | 13 721 | 12 386 |
| The cost of electricity | 1114 | 1070 | 2418 | 2506 |
| The cost of gas | 90 | 68 | 508 | 515 |
| Operating expenses | 2290 | 2206 | 6398 | 6235 |
| Compensation expenses | 25 | 2548 | 195 | 6448 |
| Costs of possible consequences | 120 | – — | 293 | – — |
| Loss of value of assets or putting equipment out of service | 845 | 840 | 2574 | 2433 |
| Total operating expenses | 4484 | 6732 | 12 386 | 18 137 |
| Operating profit or loss | 398 | −2300 | 1335 | −5751 |
| Interest income | 5 | 8 | 33 | 62 |
| Interest payments | −391 | −52 | −844 | −215 |
| Other income | 102 | 62 | 299 | 199 |
| Reorganization costs | −137 | −73 | −1937 | −256 |
| Profit before tax | −23 | −2345 | −1114 | −5961 |
| Tax deduction or tax payable | −109 | −729 | 394 | −1932 |
| Total profit | 86 | −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 2020 | July – September 2019 | January – September 2020 | January – September 2019 | |
| Residential buildings | 1862 | 1557 | 4092 | 3839 |
| Commercial enterprises | 1455 | 1481 | 3537 | 3568 |
| Industry | 453 | 466 | 1135 | 1085 |
| Agriculture | 657 | 496 | 1149 | 844 |
| Illumination of streets and highways | 17 | 17 | 51 | 50 |
| Other | −148 | −82 | 54 | −391 |
| Total segment revenue | 4296 | 3935 | 10 018 | 8995 |
| Revision of accounting | −486 | −381 | 267 | 297 |
| Segment as a whole | 3810 | 3554 | 10 285 | 9292 |
The company’s revenues in the gas segment by customer type, in millions of dollars
| July – September 2020 | July – September 2019 | January – September 2020 | January – September 2019 | |
| Residential buildings | 303 | 249 | 1795 | 1764 |
| Commercial enterprises | 90 | 92 | 434 | 461 |
| Transportation services | 259 | 264 | 902 | 950 |
| Other | 27 | −98 | −153 | −303 |
| Total segment revenue | 679 | 507 | 2978 | 2872 |
| Revision of accounting | 393 | 371 | 458 | 222 |
| Segment as a whole | 1072 | 878 | 3436 | 3094 |
Company revenues by segment in millions of dollars
| July – September 2020 | July – September 2019 | January – September 2020 | January – September 2019 | |
| Electricity | 3810 | 3554 | 10 285 | 9292 |
| Gas | 1072 | 878 | 3436 | 3094 |
| Total | 4882 | 4432 | 13 721 | 12 386 |
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
| GWh | Percentage of sales | |
| Biomass | 1322 | 3,7% |
| Geothermal sources | 539 | 1,5% |
| The Wind | 3412 | 9,5% |
| Hydropower | 827 | 2,3% |
| Solar power | 4574 | 12,7% |
| Anyway. | 10 674 | 29,7% |
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.