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Feb. 25, 2021, 8:39 a.m. EST

10-K: PG&E CORP

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(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

PG&E Corporation is a holding company whose primary operating subsidiary is Pacific Gas and Electric Company, a public utility serving northern and central California. The Utility generates revenues mainly through the sale and delivery of electricity and natural gas to customers.

The Utility's base revenue requirements are set by the CPUC in its GRC and GT&S rate case based on forecast costs. Differences between forecast costs and actual costs can occur for numerous reasons, including the volume of work required and the impact of market forces on the cost of labor and materials. Differences in costs can also arise from changes in laws and regulations at both the state and federal level. Generally, differences between actual costs and forecast costs affect the Utility's ability to earn its authorized return (referred to as "Utility Revenues and Costs that Impacted Earnings" in Results of Operations below). The Utility's base transmission revenue requirements are recovered through a formula rate approved by the FERC that trues up forecast and actual costs. For certain operating costs, such as costs associated with pension benefits, the Utility is authorized to track the difference between actual amounts and forecast amounts and recover or refund the difference through rates (referred to as "Utility Revenues and Costs that did not Impact Earnings" in Results of Operations below). The Utility also collects revenue requirements to recover certain costs that the CPUC has authorized the Utility to pass on to customers, such as the costs to procure electricity or natural gas for its customers. Therefore, although these costs can fluctuate, they generally do not impact net income (referred to as "Utility Revenues and Costs that did not Impact Earnings" in Results of Operations below). See "Ratemaking Mechanisms" in Item 1. Business for further discussion.

This is a combined report of PG&E Corporation and the Utility, and includes separate Consolidated Financial Statements for each of these two entities. This combined MD&A should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in Item 8.

Chapter 11 Proceedings and Emergence

On the Petition Date, PG&E Corporation and the Utility filed voluntary petitions for relief under Chapter 11 in the Bankruptcy Court. On the Effective Date, PG&E Corporation and the Utility emerged from Chapter 11, pursuant to the Plan, which was approved by the Bankruptcy Court in the Confirmation Order. However, certain parties have filed notices of appeal with respect to the Confirmation Order, including provisions related to the injunction contained in the Plan that channels certain pre-petition fire-related claims to trusts to be satisfied from the trusts' assets.

For more information about the Chapter 11 Cases, Chapter 11 emergence and the related transactions, see "Liquidity and Financial Resources" below and Notes 2, 5 and 6 of the Notes to the Consolidated Financial Statements in Item 8 of this 2020 Form 10-K.

Tax Matters

As a result of the Plan, which includes wildfire settlement payments made in the third quarter of 2020, PG&E Corporation had a federal net operating loss carryforward of approximately $28.5 billion and state net operating loss carryforward of $25.4 billion at the end of 2020.

Under Section 382 of the Internal Revenue Code, if a corporation (or a consolidated group) undergoes an "ownership change," net operating loss carryforwards and other tax attributes may be subject to certain limitations. In general, an ownership change occurs if the aggregate stock ownership of certain shareholders (generally five percent shareholders, applying certain look-through and aggregation rules) increases by more than 50% over such shareholders' lowest percentage ownership during the testing period (generally three years). PG&E Corporation's and the Utility's Amended Articles limit Transfers (as defined in the Amended Articles) that increase a person's or entity's (including certain groups of persons) ownership of PG&E Corporation's equity securities to more than 4.75% prior to the Restriction Release Date without approval by the Board of Directors. As discussed below under "Update on Ownership Restrictions in PG&E Corporation's Amended Articles," the calculation of the percentage ownership may differ depending on whether the Fire Victim Trust is treated as a qualified settlement trust or grantor trust.

As of the date of this report, it is more likely than not that PG&E Corporation has not undergone an ownership change, and consequently, its net operating loss carryforwards and other tax attributes are not limited by Section 382 of the Internal Revenue Code.

In 2019, $6.75 billion of the liability to be paid to the Fire Victim Trust in PG&E Corporation's common stock was accrued by the Utility. Because the corresponding tax deduction generally occurs no earlier than payment, the Utility established a deferred tax asset for the accrual in 2019. On July 1, 2020, the Utility issued to the Fire Victim Trust 477.0 million shares of PG&E Corporation's common stock. On the date of transfer, the shares transferred to the Fire Victim Trust were valued at $4.53 billion, $2.2 billion less than the $6.75 billion that had been accrued as a liability in the Condensed Consolidated Financial Statements. Therefore, in the quarter ended June 30, 2020, the Utility recorded a charge of $619 million to adjust the measurement of the deferred tax asset to reflect the tax-effected difference between the accrual of $6.75 billion and the tax deduction of $4.53 billion for the transfer of PG&E Corporation's shares to the Fire Victim Trust.

In addition, the tax deduction recorded reflects PG&E Corporation's conclusion as of December 31, 2020 that it is more likely than not that the Fire Victim Trust will be treated as a "qualified settlement fund" for U.S. federal income tax purposes, in which case the corresponding tax deduction will have occurred at the time the PG&E Corporation common stock was transferred to the Fire Victim Trust. In January 2021, PG&E Corporation received an IRS ruling that states the Utility is eligible to make a grantor trust election for U.S. federal income tax purposes with respect to the Fire Victim Trust and addressed certain, but not all, related issues. As discussed further below under "Update on Ownership Restrictions in PG&E Corporation's Amended Articles," PG&E Corporation believes benefits associated with "grantor trust" treatment could be realized, but only if PG&E Corporation and the Fire Victim Trust can meet certain requirements of the Internal Revenue Code and Treasury Regulations thereunder, relating to sales of PG&E Corporation common stock. PG&E Corporation expects to elect grantor trust treatment, subject to entering into a definitive agreement with the Fire Victim Trust. There can be no assurance that such an agreement will be reached or that PG&E Corporation will be able to avail itself of the benefits of a grantor trust election.

At December 31, 2020, PG&E Corporation's Consolidated Financial Statements reflect "qualified settlement fund" treatment. If PG&E Corporation were to make a "grantor trust" election for the Fire Victim Trust, the Utility's tax deduction will occur instead at the time the Fire Victim Trust pays the fire victims and will be impacted by the price at which the Fire Victim Trust sells the shares. The value of the deduction may be materially different than the value of the deduction if the Fire Victim Trust were to be treated as a "qualified settlement fund." Additionally, $5.4 billion of cash and $4.54 billion of PG&E Corporation common stock, in the aggregate $10.0 billion that was transferred to the Fire Victim Trust in 2020 will not be deductible for tax purposes until the trust pays the fire victims. Consequently, PG&E Corporation's net operating loss will decrease by approximately $10.0 billion and result in a $1.3 billion charge, net of tax, decreasing net deferred tax assets by $1.3 billion on its Consolidated Financial Statements for activity through December 31, 2020. PG&E Corporation will subsequently recognize income tax benefits and the corresponding deferred tax asset as the Fire Victim Trust sells the shares.

Update on Ownership Restrictions in PG&E Corporation's Amended Articles

The Plan contemplates that the Fire Victim Trust will be treated as a "qualified settlement fund" for U.S. federal income tax purposes, subject to PG&E Corporation's ability to elect to treat the Fire Victim Trust as a "grantor trust" for U.S. federal income tax purposes instead. Based on the facts known to date, PG&E Corporation believes benefits associated with the "grantor trust" treatment could be realized for U.S. federal income tax purposes. (See "Tax Matters" above for more information.)

If PG&E Corporation were to make a "grantor trust" election with respect to the Fire Victim Trust, then any shares owned by the Fire Victim Trust would effectively be excluded from the total number of outstanding equity securities when calculating a person's percentage ownership for purposes of the 4.75 percent ownership limitation in PG&E Corporation's charter. For example, although PG&E Corporation had 1,984,683,820 shares outstanding as of February 22, 2021, only 1,506,940,230 shares (the number of outstanding shares of common stock less the number of shares held by the Fire Victim Trust) would count as outstanding for purposes of the ownership restrictions in the Amended Articles. As of February 22, 2021, to the knowledge of PG&E Corporation, the Fire Victim Trust had not sold any shares of PG&E Corporation common stock.

Summary of Changes in Net Income and Earnings per Share

PG&E Corporation's net loss attributable to common shareholders was $1.3 billion in 2020, compared to $7.7 billion in 2019. PG&E Corporation recognized charges of $56 million and $195 million, net of probable insurance recoveries, for claims in connection with the 2020 Zogg fire and the 2019 Kincade fire, respectively, for the year ended December 31, 2020, compared to charges of $11.4 billion for claims in connection with the 2018 Camp fire, the 2017 Northern California wildfires and the 2015 Butte fire for the year ended December 31, 2019. Additionally, PG&E Corporation recognized $1.1 billion of expense related to the Backstop Commitment Premium Shares and $452 million of expense related to the Additional Backstop Premium Shares for the year ended December 31, 2020, with no similar amounts in 2019.

Key Factors Affecting Financial Results

PG&E Corporation and the Utility believe that their financial condition, results of operations, liquidity, and cash flows may be materially affected by the following factors:

The Uncertainties in Connection with Any Future Wildfires, Wildfire Insurance, and AB 1054. While PG&E Corporation and the Utility cannot predict the occurrence, timing or extent of damages in connection with future wildfires, factors such as environmental conditions (including weather and vegetation conditions) and the efficacy of wildfire risk mitigation initiatives are expected to influence the frequency and severity of future wildfires. To the extent that future wildfires occur in the Utility's service territory, the Utility may incur costs associated with the investigations of the causes and origins of such fires, even if it is subsequently determined that such fires were not caused by the Utility's facilities. The financial impact of future wildfires could be mitigated through insurance, the Wildfire Fund or other forms of cost recovery. However, the Utility may not be able to obtain sufficient wildfire insurance coverage at a reasonable cost, and any such coverage may include limitations that could result in substantial uninsured losses depending on the amount and type of damages resulting from covered events. In July and August 2020, the Utility renewed its liability insurance coverage for wildfire events in the aggregate amount of $867.5 million (subject to an initial self-insured retention of $60 million), comprised of $825 million for the period of August 1, 2020 to July 31, 2021 and $42.5 million in reinsurance for the period of July 1, 2020 through June 30, 2021. Various coverage limitations applicable to different insurance layers could result in material uninsured costs in the future depending on the amount and type of damages resulting from covered events. The Utility will not be able to obtain any recovery from the Wildfire Fund for wildfire-related losses in any year that do not exceed the greater of $1.0 billion in the aggregate and the amount of insurance coverage required under AB 1054. In addition, the policy reforms contemplated by AB 1054 are likely to affect the financial impact of future wildfires on PG&E Corporation and the Utility should any such wildfires occur. The Wildfire Fund is available to the Utility to pay eligible claims for liabilities arising from future wildfires and serves as an alternative to traditional insurance products, provided that the Utility satisfies the conditions to the Utility's ongoing participation in the Wildfire Fund set forth in AB 1054 and that the Wildfire Fund has sufficient remaining funds. (See "Insurance Coverage" in Note 14 of the Notes to the Consolidated Financial Statements in Item 8.)

However, the impact of AB 1054 on PG&E Corporation and the Utility is subject to numerous uncertainties, including the Utility's ability to demonstrate to the CPUC that wildfire-related costs paid from the Wildfire Fund were just and reasonable, and whether the benefits of participating in the Wildfire Fund ultimately outweigh its substantial costs. Finally, even if the Utility satisfies the ongoing eligibility and other requirements set forth in AB 1054, for eligible claims against the Utility arising from wildfires that occurred between July 12, 2019 and the Utility's emergence from Chapter 11 on July 1, 2020, the availability of the Wildfire Fund to pay such claims would be capped at 40% of the amount of such claims. (See "Wildfire Fund under AB 1054" in Note 14 of the Notes to the Consolidated Financial Statements in Item 8.)

The Uncertainties Regarding the Impact of Public Safety Power Shutoffs. The Utility's wildfire risk mitigation initiatives involve substantial and ongoing expenditures and could involve other costs. The extent to which the Utility will be able to recover these expenditures and potential other costs through rates is uncertain. The PSPS program, one of the Utility's wildfire risk mitigation initiatives outlined in the 2019 WMP and included in the 2020-2022 WMP, has been the subject of significant scrutiny and criticism by various stakeholders, including the California governor, the CPUC and the court overseeing the Utility's probation. On November 12, 2019, the CPUC issued an order to show cause against the Utility related to implementation of the October 2019 PSPS events, and on November 13, 2019, the CPUC instituted an OII to examine California's IOUs late 2019 PSPS events and to consider enforcement actions. In their comments submitted to the CPUC on October 16, 2020 in the OII to Examine the Late 2019 Public Safety Power Shutoff Events, TURN, an intervenor in this proceeding, proposed that the CPUC should treat each customer affected by a PSPS event, for which the IOU has not adequately demonstrated that the benefits outweigh the public safety risks, as a separate offense. Under the CPUC rules, each offense would be subject to a penalty of no less than $500 and no more than $100,000. On October 30, 2020, Cal Advocates, an intervenor in the Order to Show Cause Against the Utility Related to Implementation of the October 2019 PSPS Events proposed financial penalties against the Utility of $166 million. If adopted by the CPUC, such penalties could be expected to have a material impact on PG&E Corporation's and the Utility's financial condition, results of operations, liquidity, and cash flows. The PSPS program has had an adverse impact on PG&E Corporation's and the Utility's reputation with customers, regulators and policymakers and future PSPS events may increase these negative perceptions. In addition to the 2019 PSPS events, the Utility initiated several PSPS events in the third and fourth quarters of 2020 and one in January 2021 and expects that additional PSPS events will be necessary in future years. (See "OII to Examine the Late 2019 Public Safety Power Shutoff Events" and "OIR to Examine Electric Utility De-energization of Power Lines in Dangerous Conditions" in "Regulatory Matters" below.)

The Costs and Execution of Other Wildfire Mitigation Efforts. In response to the wildfire threat facing California, PG&E Corporation and the Utility have taken aggressive steps to mitigate the threat of catastrophic wildfires, the spread of wildfires should they occur and the impact of PSPS events. PG&E Corporation and the Utility incurred approximately $2.6 billion in connection with the 2019 WMP and incurred approximately $2.9 billion in 2020 in connection with the 2020-2022 WMP. Although the Utility may seek cost recovery for certain of these expenses and capital expenditures, the Utility has agreed in the Wildfires OII not to seek rate recovery of certain wildfire-related expenses and capital expenditures that it has incurred or will incur in the amount of $1.823 billion in future applications.

While PG&E Corporation and the Utility are committed to taking aggressive wildfire mitigation actions, if additional requirements are imposed that go beyond current expectations, such requirements could have a substantial impact on PG&E Corporation's and the Utility's financial condition, results of operations, liquidity and cash flows. For example, the Court overseeing the Utility's probation in connection with the Utility's federal criminal proceeding has imposed numerous obligations on the Utility related to its business and operations. The success of the Utility's wildfire mitigation efforts depends on many factors, including on whether the Utility is able to retain or contract for the workforce necessary to execute its wildfire mitigation actions. (See "U.S. District Court Matters and Probation" and "2020 General Rate Case" below and "Order Instituting Investigation into the 2017 Northern California Wildfires and the 2018 Camp Fire" in Note 15 of the Notes to the Consolidated Financial Statements in Item 8.)

The Timing and Outcome of Ratemaking Proceedings. The Utility's financial results may be impacted by the timing and outcome of its FERC TO18 and TO19 rate cases, WMCE application, and its ability to timely recover costs not currently in rates, including costs already incurred and future costs tracked in its CEMA, WEMA, WMPMA, FRMMA, CPPMA, VMBA, WMBA, and RTBA. The outcome of regulatory proceedings can be affected by many factors, including intervening parties' testimonies, potential rate impacts, the Utility's reputation, the regulatory and political environments, and other factors. The Utility's ability to seek cost recovery will also be limited as a result of the outcome of the Wildfires OII. (See Notes 4 and 15 of the Notes to the Consolidated Financial Statements in Item 8 and "Regulatory Matters" below.)

The Impact of the 2019 Kincade Fire. Claims related to the 2019 Kincade fire that were not satisfied in full as of the Effective Date were not discharged in connection with emerging from Chapter 11. On July 16, 2020, Cal Fire issued a press release stating that it had determined that "the Kincade fire was caused by electrical transmission lines owned and operated by Pacific Gas and Electric (PG&E)." Accordingly, if PG&E Corporation or the Utility were determined to be liable for the 2019 Kincade fire, such liabilities could be significant and could exceed or be excluded from the amounts available under applicable insurance policies or the Wildfire Fund under AB 1054, which could have a material impact on PG&E Corporation's and the Utility's financial condition, results of operations, liquidity and cash flows. As of December 31, 2020, PG&E Corporation and the Utility had recorded a loss of $625 million for the 2019 Kincade fire (before available insurance), which amount corresponds to the lower end of the range of reasonably estimable probable losses, but does not include all categories of potential damages. If the liability for the 2019 Kincade fire were to exceed $1.0 billion, it is possible the Utility would be eligible to make a claim to the Wildfire Fund under AB 1054 for such excess amount, subject to a 40% cap on the amount of such claim. As of December 31, 2020, the Utility had also recorded an insurance receivable for $430 million. (See "2019 Kincade Fire" in Note 14 of the Notes to the Consolidated Financial Statements in Item 8 for more information.)

The Impact of the 2020 Zogg Fire. There have been numerous wildfires in the Utility's service territory during the 2020 wildfire season. If the Utility were alleged or determined to be a cause of one or more of these wildfires, this allegation or determination could have a material effect on PG&E Corporation's and the Utility's financial condition, results of operations, liquidity, and cash flows. On October 9, 2020 Cal Fire informed the Utility that it had taken possession of Utility equipment as part of Cal Fire's ongoing investigation into the 2020 Zogg fire. The investigation is preliminary and Cal Fire has not issued a determination of cause, but if PG&E Corporation or the Utility were determined to be liable for the 2020 Zogg fire, such liabilities could be significant and could exceed or be excluded from the amounts available under applicable insurance policies or the Wildfire Fund under AB 1054, which could be expected to have a material impact on PG&E Corporation's and the Utility's financial condition, results of operations, liquidity and cash flows. As of December 31, 2020, PG&E Corporation and the Utility had recorded a loss of $275 million for the 2020 Zogg fire (before available insurance), which amount corresponds to the lower end of the range of reasonably estimable probable losses, but does not include all categories of potential damages. As of December 31, 2020, the Utility had also recorded an insurance receivable for $219 million in connection with the 2020 Zogg fire. (For more information see "2020 Zogg Fire" in Note 14 of the Notes to the Consolidated Financial Statements in Item 8.)

The Impact of the COVID-19 Pandemic. PG&E Corporation's and the Utility's financial condition, results of operations, liquidity and cash flows have been and could continue to be significantly affected by the outbreak of COVID-19. The principal areas of near-term impact include liquidity, financial results and business operations, stemming primarily from the ongoing economic hardship of the Utility's customers, the moratorium on service disconnections for residential and small business customers, the CPUC's "Emergency Authorization and Order Directing Utilities to Implement Emergency Customer COVID-19 Protections" and an observed reduction in non-residential electrical load. The Utility continues to monitor the overall impact of the COVID-19 pandemic; however, the Utility expects a significant impact on monthly cash collections as long as current circumstances persist. This impact to liquidity may be partially offset by reductions in discretionary spending or potential regulatory impacts. As of December 31, 2020, PG&E Corporation and the Utility had access to approximately $2.8 billion of total liquidity comprised of approximately $261 million of Utility cash, $223 million of PG&E Corporation cash and $2.4 billion of availability under the Utility and PG&E Corporation credit facilities. Other potential impacts of COVID-19 on PG&E Corporation and the Utility include operational disruptions, workforce disruptions, both in personnel availability (including a reduction in contract labor resources) and deployment, delays in production and shipping of materials used in the Utility's operations, a reduction in revenue due to the cost of capital adjustment mechanism, the potential for higher credit spreads and borrowing costs and incremental financing needs. As discussed below under the heading "COVID-19 Pandemic Protections Memorandum Account," the Utility has established a memorandum account for tracking costs related to the CPUC's emergency authorization and order, which, as of December 31, 2020, was $84 million. The Utility intends to seek recovery of this balance in a future application, subject to CPUC reasonableness review. For more information on the impact of COVID-19 on PG&E Corporation and the Utility, see "PG&E Corporation's and the Utility's financial condition, results of operations, liquidity and cash flows have been and could continue to be significantly affected by the outbreak of the COVID-19 pandemic" in Item 1A Risk Factors in Part I.

PG&E Corporation and the Utility expect additional financial impacts in the future as a result of COVID-19. PG&E Corporation and the Utility continue to evaluate the overall impact of COVID-19 and their analysis is subject to change.

The Outcome of Other Enforcement, Litigation, and Regulatory Matters, and Other Government Proposals. The Utility's financial results may continue to be impacted by the outcome of other current and future enforcement, litigation, and regulatory matters, including those described above as well as the outcome of the Safety Culture OII, the sentencing terms of the Utility's January 27, 2017 federal criminal conviction, including the oversight of the Utility's probation and the potential recommendations by the Monitor, and potential penalties in connection with the Utility's safety and other self-reports. (See Note 15 of the Notes to the Consolidated Financial Statements in Item 8.) In addition, the Utility's business profile and financial results could be impacted by the outcome of recent calls for municipalization of part or all of the Utility's businesses, offers by municipalities and other public entities to acquire the electric assets of the Utility within their respective jurisdictions and calls for state intervention, including the possibility of a state takeover of the Utility. PG&E Corporation and the Utility cannot predict the nature, occurrence, timing or extent of any such scenario, and there can be no assurance that any such scenario would not involve significant ownership or management changes to PG&E Corporation or the Utility, including by the state of California. Further, certain parties filed notices of appeal with respect to the Confirmation Order, including provisions related to the injunction contained in the Plan that channels certain pre-petition fire-related claims to trusts to be satisfied from the trusts' assets. There can be no assurance that any such appeal will not be successful and, if successful, that any such appeal would not have a material adverse effect on PG&E Corporation and the Utility.

The Uncertainties in Connection with a Potential Enhanced Oversight and Enforcement Process. On November 24, 2020, the Utility received a letter (the "Letter") from the President of the CPUC, related to the Utility's vegetation and asset management activities and the CPUC's Enhanced Oversight and Enforcement Process. If the Utility is placed into the Enhanced Oversight and Enforcement Process, it will be subject to additional reporting requirements, monitoring, and oversight by the CPUC. . . .

Feb 25, 2021

COMTEX_381715418/2041/2021-02-25T08:39:07

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