Background
It is important to note that investing properly in large public companies requires an extensive analysis of their financial and business data, since the most critical information is available. The given analysis report will mainly focus on Pacific Gas and Electric Company (PG&E), which specializes in the provision of electricity and natural gas. Investors ought to steer clear of putting money into PG&E because it operates inefficiently, depends too much on borrowing, and faces difficulties in covering its short-term obligations.
PG&E is a California corporate enterprise and holding company. It was founded in 1905, and the company “generates revenues mainly through the sale and delivery of electricity and natural gas to customers” (PG&E Corporation, 2023, p. 13). It has a ‘Triple Bottom Line’ mission, which includes categories such as ‘People,’ ‘Planet,’ and ‘Prosperity’ (PG&E Corporation, 2023). In other words, it wants to serve and empower its customers, communities, and workers while ensuring sustainability as well as profitability for its investors.
Competitors
With the California government keen on promoting sustainable energy and changing consumer behavior, many PG&E competitors are emerging. It is worth knowing that this company services two products: natural gas as well as electricity. In California, there is a massive shift when it comes to ditching fossil fuels for electric vehicles. This trend can be attributed to both how consumers feel and what regulations may govern sustainability moving forward.
PG&E does have a monopoly in certain regions but faces stiff competition from other investor-owned utilities elsewhere in the state due to California’s Direct Access (DA) arrangement policy, which enables such investor-owned utilities or IOUs (PG&E Corporation, 2023). This means that they all comply with specific guidelines regarding electricity supply and pricing.
The second category of competitors is Community Choice Aggregators (CCA). Under the law, these entities are allowed to deliver electricity to Californian residents and businesses (PG&E Corporation, 2023). The third group is comprised of energy storage and energy distribution providers, which specialize in the self-generation of electricity by the consumers themselves. For example, a company selling solar panels would belong to this group (PG&E Corporation, 2023).
The fourth category consists of government entities directly supplying electricity to consumers. The fifth type of competitor is natural gas provider companies, which compete with PG&E both on the electricity and natural gas fronts (PG&E Corporation, 2023). The last group is comprised of developer companies that construct electric transmission infrastructure independent of PG&E.
Corporate Scandals
PG&E has been involved in corporate scandals over the course of its operations. One of the major ones was about chromium-6 water contamination because the company decided to install an inhibitor of corrosion within its cooling system in 1952 (EJ Atlas, 2019). It was located near Hinkley, a town in San Bernardino, where its gas pipeline linked California and Texas (EJ Atlas, 2019). The chemical is well-known to be highly carcinogenic and dangerous to human health. As a result, the company had to pay legal settlements and buy out many nearby homes, which led to a massive decline in the Hinkley population.
Another devastating scandal was related to destructive wildfires, of which there were ten since 2015, and at least half of them were caused by PG&E (Penn et al., 2019). The corporation ignored safety regulations, which led to a tree falling on the cables and lines. As a result, massive wildfires were started, and it was a direct result of safety negligence and the pursuit of profitability (Penn et al., 2019). Although climate change is a strong factor, PG&E’s involvement cannot be overlooked.
The last major scandal related to PG&E was an explosion of its gas pipeline. It is stated that “a 2010 explosion of a PG&E gas pipeline killed eight people and destroyed a suburban neighborhood, prompting state and federal officials to investigate PG&E’s safety practices” (Penn et al., 2019, para. 9). In other words, both wildfires and explosions alone contributed to the deaths of people and wildlife as well as the destruction of homes and other buildings. If water contamination is taken into account, the death toll and damage become even greater since the effects of cancer only manifest themselves over longer periods.
Horizontal Analysis
Table 1 below contains the necessary data from PG&E’s financial reports from 2018 to 2022 in order to conduct horizontal analysis, vertical analysis, and ratio analysis. The horizontal analysis of revenue from 2018 to 2022 is as follows:
- Percentage Revenue Change = (21680 − 16759) / 16759) * 100 = 29.36% increase;
The horizontal analysis of net income from 2018 to 2022 is as follows:
- Percentage Net Income Change = (1814 − (−6837)) / (−6837)) * 100 = 126.53% increase;
Therefore, PG&E became more profitable and generated more revenue within the last five years.
Table 1: Data (in millions)
Vertical Analysis
The balance sheet vertical analysis is as follows:
- Total Liabilities as a Percentage of Total Assets: (Total Liabilities / Total Assets) * 100 = (95569 / 118644) * 100 = 80.55%
- Total Equity as a Percentage of Total Assets: (Total Equity / Total Assets) * 100 = (23075 / 118644) * 100 = 19.45%
The income statement vertical analysis is as follows:
- Net Income as a Percentage of Revenue: (Net Income / Revenue) * 100 = (1814 / 21680) * 100 = 8.37%, which is the net profit margin for PG&E in 2022.
Ratio Analysis
The ratio analysis will utilize the profitability, liquidity, solvency, and efficiency ratios. The calculations are as follows:
- Profitability: Net profit margin = net income/revenue * 100 = (1814 / 21680) * 100 = 8.37%
- Liquidity: Current ratio = current assets / current liabilities = (12815 / 15788) = 0.81
- Solvency: Debt to equity ratio = total liabilities / equity = (95569 / 23075) = 4.14
- Efficiency: Asset turnover ratio = sales / average total assets = (21680 / (118644 + 103327) / 2) = (21680 / 110985.5) = 0.20
Investing Recommendation
The horizontal analysis sends a positive signal about investing in PG&E. In the case of vertical analysis, although the company has a decent margin, it is financed mainly by liabilities. The latter means that there is a significant financial risk, which is not sustainable. The financial ratios indicate that PG&E is not efficient, relies excessively on debt, and struggles to meet its short-term liabilities, despite its good margin. If one additionally accounts for all major scandals, a potential investor should avoid investing in PG&E.
References
EJ Atlas. (2019). Groundwater contamination with chromium-6 in Hinkley, California. Web.
Penn, I., Eavis, P., & Glanz, J. (2019). How PG&E ignored fire risks in favor of profits?The New York Times. Web.
PG&E Corporation. (2023). Financials: Annual reports and proxy statements. Web.