Financial Projections

 

Introduction¹

 

The following income and cash flow statements for the annual periods from January 1, 2020 through December 31, 2024 (the “Projection Period”) and the balance sheet as of the end of the year for each of the years 2020 through 2024 for the Debtors (“Consolidated Financial Projections”) are based on forecasts of operating results during the five-year period ending December 31, 2024.  Included below is a summary of key assumptions to the Consolidated Financial Projections (in each case, the “Assumptions”). The Consolidated Financial Projections and the Assumptions should be read in conjunction with the Plan and the Disclosure Statement.

 

The Debtors, with the assistance of their advisors, have prepared these Consolidated Financial Projections to assist the Bankruptcy Court in determining whether the Plan meets the feasibility test of section 1129(a)(11) of the Bankruptcy Code.

 

Other than limited information related to rate base and capital expenditures, the Debtors generally do not publish their projections or their anticipated financial position or results of operations.  Accordingly, the Debtors do not anticipate that they will, and disclaim any obligation to, furnish updated projections to holders of Claims or Interests, or to include such information in documents required to be filed with the U.S. Securities and Exchange Commission (the “SEC”) or otherwise make public such information.

 

The Consolidated Financial Projections have been prepared by the management of the Debtors, in consultation with the Debtors’ financial and restructuring advisors, Lazard Freres & Co. LLC and AP Services, LLC.  The Consolidated Financial Projections were not prepared to comply with the guidelines for prospective financial statements published by the American Institute of Certified Public Accountants or the rules and regulations of the SEC, and by their nature are not financial statements prepared in accordance with accounting principles generally accepted in the United States of America.

The Debtors independent accountants have neither examined nor compiled the accompanying Consolidated Financial Projections and accordingly do not express an opinion or any other form of assurance with respect to the Consolidated Financial Projections, assume no responsibility for the Consolidated Financial Projections and disclaim any association with the Consolidated Financial Projections.

The Consolidated Financial Projections do not reflect the impact of fresh start reporting in accordance with American Institute of Certified Public Accountants statement of position 90‑7, financial reporting by entities in reorganization under the Bankruptcy Code. The Debtors do not expect to be subject to fresh start reporting at or following the Effective Date.

The Consolidated Financial Projections contain forward-looking statements that are not historical facts, including statements about the beliefs, expectations, estimates, future plans and strategies of the Debtors, as well as forecasts based on our Plan which reflects settlements reached with various parties, regarding settlement of liabilities in connection with the 2018 Camp fire, 2017 Northern California wildfires and the 2015 Butte fire, the confirmation of the Plan on the Effective Date, the continuing availability of sufficient borrowing capacity or other financing to fund operations, the Utility’s participation in the statewide wildfire fund created by AB 1054, the Debtors’ anticipated sources and uses upon emergence from Chapter 11, the outcome of regulatory cases and the effect on earnings of such cases, projections of wildfire-related expenditures, anticipated regulatory and legislative policy, anticipated capital expenditures of the Debtors, anticipated costs of operations of the Debtors, efficiency initiatives, dividend payments (both Utility preferred stock and PG&E Corporation common stock), credit ratings and the various assumptions described in detail below. These statements are based on current expectations and assumptions, which management believes are reasonable, and on information currently available to management, but are necessarily subject to various risks and uncertainties. In addition to the risk that these assumptions prove to be inaccurate, factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include factors disclosed in PG&E Corporation’s and the Utility’s annual report on Form 10-K for the year ended December 31, 2019 and other reports filed with the SEC, which are available on PG&E Corporation’s website at www.pgecorp.com and on the SEC website at www.sec.gov. Additional factors include, but are not limited to, those associated with the Chapter 11 cases of PG&E Corporation and the Utility that commenced on January 29, 2019. PG&E Corporation and the Utility undertake no obligation to publicly update or revise any forward-looking statements, whether due to new information, future events or otherwise, except to the extent required by law.

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The Consolidated Financial Projections, while presented with numerical specificity, are necessarily based on a variety of estimates and assumptions which, though considered reasonable by the Debtors, may not be realized and are inherently subject to significant business, economic, competitive, industry, regulatory, market and financial uncertainties and contingencies, many of which are beyond the control of the Debtors. The Debtors caution that no representations can be made or are made as to the accuracy of the Consolidated Financial Projections or to the Debtors’ ability to achieve the projected results. Some assumptions inevitably will be incorrect. Moreover, events and circumstances occurring subsequent to the date on which these Consolidated Financial Projections were prepared may be different from those assumed, or, alternatively, may have been unanticipated, and thus the occurrence of these events may affect financial results in a materially adverse or materially beneficial manner. The Debtors do not intend and do not undertake any obligation to update or otherwise revise the Consolidated Financial Projections to reflect events or circumstances existing or arising after the date of these Consolidated Financial Projections. Therefore, the Consolidated Financial Projections may not be relied upon as a guarantee or other assurance of the actual results that will occur. In deciding whether to vote to accept or reject the Plan, holders of Claims and Interests must make their own determinations as to the reasonableness of such assumptions and the reliability of the Consolidated Financial Projections.

These Consolidated Financial Projections were developed for purposes of the formulation and negotiation of the Plan and to enable the holders of Claims and Interests entitled to vote under the Plan to make an informed judgment about the Plan and should not be used or relied upon for any other purpose, including the purchase or sale of securities of, or Claims or Interests in, the Debtors or any of their affiliates.

Use of Non-GAAP Financial Measures

The Consolidated Financial Projections contain financial information based on “non-GAAP core earnings” in order to provide a measure that allows investors to compare the underlying financial performance of the business from one period to another, exclusive of non-core items.

“Non-GAAP core earnings” is a non-GAAP financial measure and is calculated as income available for common shareholders less non-core items. “Non-core items” includes items that management does not consider representative of ongoing earnings and affect comparability of financial results between periods. The Debtors use non-GAAP core earnings to understand and compare operating results across reporting periods for various purposes including internal budgeting and forecasting, short- and long-term operating planning, and employee incentive compensation. The Debtors believe that non-GAAP core earnings provides additional insight into the underlying trends of the business, allowing for a better comparison against historical results and expectations for future performance.

Non-GAAP core earnings is not a substitute or alternative for GAAP measures such as consolidated income available for common shareholders and may not be comparable to similarly titled measures used by other companies.

Select Assumptions for PG&E’s Financial Forecast 2020-2024

The Consolidated Financial Projections contained herein are based on, but not limited to, factors such as general business, economic, competitive, regulatory, market, financial and environmental conditions, as well as the assumptions detailed below.  Many of these factors and assumptions are beyond the control of the Debtors and do not take into account the uncertainty and disruptions of business that may accompany an in-court restructuring. Accordingly, the assumptions should be reviewed in conjunction with a review of the risk factors set forth in the Disclosure Statement and in the Debtors’ public filings.

General Assumptions

●

In light of the forms of distribution contemplated by the Plan (which include cash as well as new PG&E Corporation common stock and the new debt securities of the Utility), the Consolidated Financial Projections were developed on a consolidated basis rather than on a separate legal entity basis. The Consolidated Financial Projections were developed by management with the assistance of the Debtors’ advisors and are presented solely for purposes of the formulation and negotiation of the Plan in order to present the anticipated impact of the Plan. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness, or reliability of the information, opinions, or conclusions expressed herein.

●	The Consolidated Financial Projections assume that the Plan will be consummated in accordance with its terms and that all transactions contemplated by the Plan will be consummated on June 30, 2020.

●	The Consolidated Financial Projections assume that the Utility secures an investment grade rating from at least one rating agency on the secured debt of the Utility.

●

The Consolidated Financial Projections assume the achievement of various efficiency initiatives, including, among other things, resource planning, contract management, monetization of excess renewable energy, and real estate optimizations.  These efficiency initiatives reduce operating and capital expenditures by approximately $1 billion on average through 2024.

●

The Consolidated Financial Projections also assume that: (1) there will be no material change in legislation or regulations, or the administration thereof, that would have an unexpected effect on the operations of the Debtors; and (2) there will be no change in generally accepted accounting principles in the United States that would have a material effect on the reported financial results of the Debtors.

 

Assumptions Underlying Revenue Projections and Cost Recovery

Base Revenue

The Consolidated Financial Projections assume:

●

Base revenues for electric distribution, natural gas distribution and electric generation operations are consistent with the Utility’s proposed settlement agreement (the “2020 GRC Settlement”) filed on December 20, 2019 with the California Public Utility Commission (“CPUC”) in its 2020 General Rate Case (“GRC”) for 2020-2022.  Spending for wildfire-related programs included in the 2020 GRC Settlement associated with system hardening, vegetation management, public safety power shutoffs and excess liability insurance, is anticipated to be well above amounts specified, and this incremental spending is recoverable through balancing accounts up to a two-year lag.  Base revenue for the years 2023 and 2024 assumes an increase in authorized annual revenue requirement sufficient to cover the forecasted GRC costs and authorized rate of return.

Incremental Wildfire-Related and Other Costs

 

The Consolidated Financial Projections assume full recovery of wildfire-related costs currently deferred as regulatory assets on the balance sheet and additional future spending beyond the programs included in the 2020 GRC Settlement:

 

●

Full recovery over the Projection Period of approximately $2.5 billion of costs related to restoration, prevention, and insurance that are on the Utility’s balance sheet as deferred costs as of December 31, 2019.  Interim rate relief and accelerated will be granted by the CPUC allowing approximately $1.4 billion of these costs to be recovered in 2020 and 2021 on an accelerated basis.

●

Consistent with the Utility’s settlement agreement in the Order Instituting Investigation into the 2017 Northern California Wildfires and the 2018 Camp Fire (the “Wildfire OII”) submitted to the CPUC on December 17, 2019, the Utility will receive no recovery of costs totaling approximately $1.675 billion contemplated by the Wildfires OII settlement relating to certain wildfire-related costs and shareholder-funded system enhancement initiatives. On February 27, 2020, a Presiding Officer’s Decision (POD) was issued in the Wildfire OII proceeding which proposes modifications to the settlement agreement (as so modified, the “Revised Settlement”) that would add $462 million of disallowances for wildfire mitigation ($198 million) and system enhancement initiatives ($64 million), and a payment to the state general fund ($200 million). The Revised Settlement, if accepted, is subject to Bankruptcy Court approval.  Parties have 30 days to appeal the POD.  PG&E is still evaluating its options, including appeal. The impact of the modifications to the settlement proposed by the POD is not reflected in the Consolidated Financial Projections. The impact of the modifications to the settlement proposed by the POD on the Consolidated Financial Projections, if implemented, would be a decrease in earnings available for common stock and cashflow in 2020 as it relates to the payment to the general fund.  Additionally, the proposed disallowed wildfire mitigation and system enhancement costs would impact earnings available for common stock primarily in 2020 and 2021, and cash flow impacts from the loss of anticipated revenue would be expected to impact future years. The modifications to the settlement proposed by the POD, if implemented, would also require any tax savings associated with the shareholder payments under the settlement agreement to be applied to wildfire mitigation expenses that would otherwise have been recovered from ratepayers when realized.  The initial settlement of $1.675 billion and the additional $262 million established by the POD are assumed to be tax deductible and the resulting tax savings could be as much as $542 million based on the company’s 28% effective net tax rate.   The realization of these tax savings depend on many other variables and the timing of the savings is expected after 2024.

Assumptions Underlying Regulatory and Policy Projections

 

The Consolidated Financial Projections assume:

 

●

The Utility’s authorized Return on Equity will be 10.25% (as authorized through 2023 by the CPUC in its final decision issued December 19, 2019) throughout the Projection Period.  The Consolidated Financial Projections also reflect a capital structure that is consistent with the terms of the Restructuring Support Agreement (the “Noteholder RSA”) dated January 22, 2020, resulting in a weighted-average cost of debt of approximately 4.3%2 upon PG&E Corporation’s and the Utility’s emergence from Chapter 11.

●

Consistent with the terms of AB 1054, an initial contribution by the Utility to the Go-Forward Wildfire Fund established thereunder of $4.8 billion upon emergence, to be amortized over ten years and ongoing contributions by the Utility to the Go-Forward Wildfire Fund of $193 million per year over the Projection Period.

●	The payment of various penalties by the Utility, including general fund payments, shareholder-paid initiatives, and agreements not to seek rate recovery for specified expenses pursuant to the following Orders Instituting Investigation (“OIIs”):

●

Locate & Mark OII:  In February 2020, the presiding officer in this OII issued a decision modifying the settlement agreement between the Utility and the CPUC submitted on October 3, 2019.  Consistent with the terms of the settlement agreement, as modified, the Consolidated Financial Projections assume payments and unrecovered expenses by the Utility in the amount of $110 million during 2020-2022.

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The financing assumptions underlying the Consolidated Financial Projections are consistent with the Utility’s testimony filed with the CPUC on January 31, 2020 in connection with the CPUC’s Plan of Reorganization OII.  The Consolidated Financial Projections assume total sources of funding and corresponding uses of approximately $59 billion ($57.65 billion upon emergence), as summarized in the following tables:

 

Expected Sources (in millions)
Equity issuance for cash		$	9,000
Equity issued into Fire Victim Trust (as defined below)			6,750
New PG&E Corporation Debt			4,750
Reinstated Utility Debt			9,575
New Utility Notes			23,775
Insurance Proceeds			2,200
Cash immediately prior to Emergence			1,600
Deferred Wildfire Claims Settlement			1,350
Total Sources		$	59,000
Expected Uses (in millions)
Payment to holders of wildfire-related claims		$	24,150
2017/2018 Wildfire Claims Settlement (Deferred Payment)			1,350
Contributions to Go-Forward Wildfire Fund pursuant to AB 1054			5,000
Repayment of Debtor-In-Possession Financing			2,000
Pre-petition Debt to be repaid or reinstated			22,180
Trade Claims and Other Costs			2,300
Accrued Interest			1,270
Cash immediately following Emergence			750
Total Uses		$	59,000

 

●

The Consolidated Financial Projections assume, in connection with PG&E Corporation and the Utility’s exit financing, that the CPUC will authorize the exclusion of $6 billion of temporary New Utility Notes from the Utility’s capital structure.  The Consolidated Financial Projections further assume that the CPUC will authorize the securitization of $7 billion of wildfire-related claims costs by March 31, 2021 that will be rate-neutral on a net present value basis to customers, the proceeds of which will be used to retire the $6 billion of temporary New Utility Notes and to make payments as part of the $1.35 billion deferred settlement to the trust to be established under the Plan for the benefit of holders of wildfire-related claims (“Fire Victim Trust”).  The authorization to securitize $7 billion of wildfire claims on an NPV neutral basis results in a $2.1 billion charge at inception as a result of an undiscounted regulatory liability associated with revenue credits funded by the NOL monetization.  Securitization revenues, revenue credits, and interest expense on the $7 billion of securitized debt are fully offset by net amortization of the securitization regulatory asset and undiscounted regulatory liability.

●	The securitization proposal reflected in the forecast includes revenue credits of $1.15 billion in 2021 and $397 million in 2022 that are not funded by NOL monetization. The timing and amounts of customer credits are still to be determined and are subject to material change and regulatory approval.

●

The Consolidated Financial Projections assume that the equity commitment premium due under the equity backstop letters will equal 119 million shares of PG&E Corporation common stock, payable on the Effective Date.  Assuming that the Debtors implement the capital structure described above by drawing on the equity backstop commitments and based on the Debtors’ forecasted Normalized Estimated Net Income (as defined in the equity backstop commitment letters), the value of the equity commitment premium would be approximately $1.2 billion at the currently estimated Backstop Price (as defined in the equity backstop commitment letters). The value of the equity commitment premium could exceed this amount in the event that PG&E Corporation successfully consummates a marketed equity offering or rights offering in lieu of drawing on the equity backstop commitments or if the Debtors implement an alternative capital structure, under certain conditions.

●

The Consolidated Financial Projections assume that the Debtors will face no incremental wildfire liabilities related to pre-petition wildfires beyond the $25.5 billion of wildfire-related claims that the Debtors have committed as of the date hereof to pay under the Plan pursuant to various settlement agreements with the holders of wildfire-related claims.  The Consolidated Financial Projections further assume the Debtors will not face any liabilities related to postpetition wildfires that are not covered by insurance.

●

Common dividends are assumed to be restored once Utility equity ratio achieves 52% on a regulatory basis and are moderated to allow PG&E Corporation debt reduction throughout the forecast period. This assumption does not reflect a commitment on the Board or management’s part to a specific future dividend policy.

●	The Consolidated Financial Projections assume that additional equity is raised in 2021.  This financing need may either be met through equity issuance or maintaining Holding Company debt levels.

INCOME STATEMENT		2020				2021				2022				2023				2024
Net Operating Revenues			15,512				15,408				16,866				18,256				19,028
Memo: Total Cost of Energy			3,400				3,716				3,684				3,450				3,490
Operating Expenses
Operating and maintenance			(8,807	)			(8,869	)			(8,700	)			(8,921	)			(8,972	)
Depreciation, amort. & decommissioning			(3,444	)			(3,693	)			(3,916	)			(4,229	)			(4,510	)
Net securitization regulatory deferral							(1,083	)			265				(137	)			(142	)
Total Operating Expenses			(12,251	)			(13,645	)			(12,351	)			(13,287	)			(13,624	)
Operating Income			3,261				1,763				4,515				4,970				5,405
Total Interest Expense			(1,296	)			(1,759	)			(1,843	)			(1,918	)			(1,969	)
State Wildfire Insurance Fund Contribution and Prepayment Amortization			(672	)			(672	)			(672	)			(672	)			(672	)
Other Income/(Expense), net			(1,479	)			(166	)			(166	)			(180	)			(193	)
Income Before Income Taxes			(186	)			(834	)			1,834				2,200				2,571
Income tax provision			232				793				24				(73	)			(187	)
Preferred dividend requirement			(14	)			(14	)			(14	)			(14	)			(14	)
TOTAL EARNINGS AVAIL FOR COMMON STOCK			32				(55	)			1,844				2,113				2,370
Non-GAAP Core Earnings Adjustments
Bankruptcy and Legal Costs			1,487				28
Investigation Remedies and Delayed Cost Recovery			110				42				48
GT&S Capital Audit			(191	)
Amortization of Wildfire Insurance Fund Contribution			484				484				484				484				484
Net Securitization Inception Charge							1,539
NON-GAAP CORE EARNINGS			1,922				2,038				2,376				2,597				2,854

		2020				2021				2022				2023				2024
ASSETS
Current Assets
Cash and Cash Equivalents			757				1,096				752				677				647
Accounts Receivable			2,788				2,721				2,937				3,166				3,283
Regulatory Balancing Accounts, net of Liabiltiies (1)			747				1,619				1,677				1,040				743
Prepaid Expenses, Inventories and Collateral			1,742				1,836				1,920				1,993				2,057
Total Current Assets			6,035				7,272				7,286				6,876				6,730
Net Property, Plant and Equipment			66,340				71,347				75,809				80,991				85,277
Other Noncurrent Assets
Nuclear Decommissioning Assets			3,291				3,409				3,527				3,645				3,763
Wildfire Fund Contribution			4,320				3,840				3,360				2,880				2,400
Regulatory Assets and Other			8,804				8,551				8,343				8,372				8,568
Total Other Noncurrent Assets			16,415				15,800				15,230				14,897				14,730
TOTAL ASSETS			88,790				94,418				98,325				102,764				106,738
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable			2,152				2,140				2,063				2,005				1,986
Short Term Borrowing			1,720				2,000				2,000				2,000				2,000
Other Current Liabilities			1,648				1,853				1,631				1,421				1,350
Accrued Wildfire Liability (Gross)			1,350				0				0				0				0
Total Current Liabilities			6,870				5,992				5,694				5,426				5,336
Noncurrent Liabilities
Deferred Income Taxes			(320	)			(1,112	)			(1,148	)			(1,084	)			(909	)
Long-term debt			37,843				34,690				35,961				36,936				37,061
Memo: HoldCo Portion of Long Term Debt			4,750				3,500				3,100				2,900				2,250
Securitized bonds			0				7,676				8,287				8,864				9,403
Regulatory Liabilities			9,716				11,250				11,527				12,436				13,426
Asset Retirement Obligations			6,002				6,161				6,320				6,320				6,320
Other			6,099				6,086				6,328				6,673				7,005
Total Noncurrent Liabilities			59,340				64,752				67,276				70,144				72,306
Shareholders' Equity
Total Shareholders' Equity			22,328				23,422				25,103				26,941				28,845
Noncontrolling Interest - Preferred Stock of Subsidiary			252				252				252				252				252
Total Shareholders' Equity			22,580				23,674				25,355				27,193				29,097
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY			88,790				94,418				98,325				102,764				106,738

		2020				2021				2022				2023				2024
CASH FLOW STATEMENT
Cash Flows From Operations:
Net Income			46				(42	)			1,858				2,127				2,384
Depreciation and Amortization			3,439				3,683				3,907				4,219				4,500
Net Amortization of Securitization Regulatory Assets and Liabilities							(1,054	)			(265	)			137				142
Share-Based Equity Backstop Commitment Premium			1,222
Wildfire Insurance Fund Amortization			480				480				480				480				480
Wildfire Insurance Fund Contribution			(4,800	)
Change in Deferred Taxes			(232	)			(793	)			(36	)			64				175
Changes in Operating Assets and Liabilities			52				192				(374	)			(340	)			(208	)
Change in Balancing Accounts and Regulatory Assets			(221	)			1,452				125				815				479
Other Noncurrent Assets and Liabilities			110				42				39				55				25
Change in Other Working Capital			155				50				68				(71	)			(57	)
Payment of Liabilities Subject to Compromise, net of Insurance Proceeds			(25,547	)			(1,350	)
Net Cash from Operations			(25,295	)			2,661				5,802				7,485				7,921
Investing Activities:
Capital Expenditures			(8,086	)			(8,140	)			(7,730	)			(8,702	)			(8,015	)
Net Change in Nuclear Decommissioning Funds			(118	)			(118	)			(118	)			(118	)			(118	)
Proceeds from Asset Sales			1,322				0				0				0				0
Net Cash Used In Investing			(6,882	)			(8,258	)			(7,848	)			(8,820	)			(8,133	)
Financing Activities:
Holding Company Financing			19,850				(100	)			(400	)			(200	)			(650	)
Short and Long Term Utility Debt Issued (Matured/Repurchased)			11,552				(1,626	)			1,668				1,172				772
Securitization Bonds Issued			0				7,676				611				576				540
Preferred Dividends Disbursed			(42	)			(14	)			(14	)			(14	)			(14	)
Common dividends			0				0				(164	)			(275	)			(466	)
Net Cash Provided by Financing			31,360				5,936				1,701				1,259				182
NET CHANGE IN CASH			(817	)			339				(344	)			(75	)			(30	)