PG&E 2012 Annual Report Download - page 55

of providing service and a reasonable return on its investment in future periods, the Utility may be required to
discontinue the application of regulatory accounting for portions of its operations. If that occurs, the related
regulatory assets and liabilities would be charged against income in the period in which that determination was made
and could have a material impact on PG&E Corporation’s and the Utility’s future financial condition and results of
operations.
As a holding company, PG&E Corporation depends on cash distributions and reimbursements from the Utility to meet its
debt service and other financial obligations and to pay dividends on its common stock.
PG&E Corporation is a holding company with no revenue generating operations of its own. PG&E
Corporation’s ability to pay interest on its outstanding debt, the principal at maturity, and to pay dividends on its
common stock, as well as satisfy its other financial obligations, primarily depends on the earnings and cash flows of
the Utility and the ability of the Utility to distribute cash to PG&E Corporation (in the form of dividends and share
repurchases) and reimburse PG&E Corporation for the Utility’s share of applicable expenses. Before it can distribute
cash to PG&E Corporation, the Utility must use its resources to satisfy its own obligations, including its obligation to
serve customers, to pay principal and interest on outstanding debt, to pay preferred stock dividends, and meet its
obligations to employees and creditors. The Utility’s ability to pay common stock dividends is constrained by
regulatory requirements, including that the Utility maintain its authorized capital structure with an average 52%
equity component. Further, the CPUC could adopt the SED’s financial recommendations made in its January 12,
2012 report on the San Bruno accident, including that the Utility ‘‘should target retained earnings towards safety
improvements before providing dividends, especially if the Utility’s ROE exceeds the level set in a GRC.’’ PG&E
Corporation’s and the Utility’s ability to pay dividends also could be affected by financial covenants contained in
their respective credit agreements that require each company to maintain a ratio of consolidated total debt to
consolidated capitalization of at most 65%. If the Utility is not able to make distributions to PG&E Corporation or
to reimburse PG&E Corporation, PG&E Corporation’s ability to meet its own obligations could be impaired and its
ability to pay dividends could be restricted.
PG&E Corporation could be required to contribute capital to the Utility or be denied distributions from the Utility to the
extent required by the CPUC’s determination of the Utility’s financial condition.
The CPUC imposed certain conditions when it approved the original formation of a holding company for the
Utility, including an obligation by PG&E Corporation’s Board of Directors to give ‘‘first priority’’ to the capital
requirements of the Utility, as determined to be necessary and prudent to meet the Utility’s obligation to serve or to
operate the Utility in a prudent and efficient manner. The CPUC later issued decisions adopting an expansive
interpretation of PG&E Corporation’s obligations under this condition, including the requirement that PG&E
Corporation ‘‘infuse the Utility with all types of capital necessary for the Utility to fulfill its obligation to serve.’’ The
Utility’s financial condition will be affected by the amount of costs the Utility incurs that it is not allowed to recover
through rates, the amount of third-party losses it is unable to recover through insurance, and the amount of penalties
the Utility incurs in connection with the pending investigations and future citations for self-reported violations. After
considering these impacts, the CPUC’s interpretation of PG&E Corporation’s obligation under the first priority
condition could require PG&E Corporation to infuse the Utility with significant capital in the future or could
prevent distributions from the Utility to PG&E Corporation, or both, any of which could materially restrict PG&E
Corporation’s ability to pay principal and interest on its outstanding debt or pay its common stock dividend, meet
other obligations, or execute its business strategy. Further, laws or regulations could be enacted or adopted in the
future that could impose additional financial or other restrictions or requirements pertaining to transactions between
a holding company and its regulated subsidiaries.
PG&E Corporation’s and the Utility’s financial condition, results of operations, and cash flows will be affected by their
ability to continue accessing the capital markets and by the terms of debt and equity financings.
The Utility relies on access to capital and credit markets as significant sources of liquidity to fund capital
expenditures, pay principal and interest on its debt, provide collateral to support its natural gas and electricity
procurement hedging contracts, and fund other operations requirements that are not satisfied by operating cash
flows. See the discussion of the Utility’s future financing needs above in ‘‘Liquidity and Financial Resources.’’ PG&E
Corporation relies on independent access to the capital and credit markets to fund its operations, make capital
expenditures, and contribute equity to the Utility as needed to maintain the Utility’s CPUC-authorized capital
structure, if funds received from the Utility (in the form of dividends or share repurchases) are insufficient to meet
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