01—Abstract
Summary
Summary of the 10-K filed February 16, 2017. Cited figures are marked; the original filing is the authoritative source.
PG&E Corporation and its primary operating subsidiary, Pacific Gas and Electric Company (the Utility), filed this combined Form 10-K for fiscal 2016.
PG&E Corporation reported 2016 operating revenues of $17,666 milliona and net income of $1,407 million, with income available for common shareholders of $1,393 million, or $2.78 diluted EPS, versus $874 million and $1.79 in 2015. The Utility's 2016 results were materially shaped by items that management excluded from 'earnings from operations,' most notably $750 million of accrued third-party claims related to the Butte fire, $307 million of after-tax fines and penalties, and $130 million of GT&S capital disallowances. Earnings from operations were $1,884 million, or $3.76 per share, according to the filing's non-GAAP reconciliation.
The filing is dominated by enforcement and litigation risk. The Utility was convicted on six felony counts in the federal criminal trial, was sentenced on January 26, 2017 to five years of corporate probation, a five-year third-party monitor and a $3 millionb fine, and chose not to appeal. The Utility also faces an ex parte communications proceeding in which it states it is probable the CPUC will impose penalties, and the Department of the Interior is reviewing whether the Utility should be debarred from federal contracting.
The Utility believes it is probable that it will incur a loss of at least $750 millionc from the Butte fire, against approximately $900 million of third-party liability insurance and $625 million of recorded probable insurance recoveries. PG&E Corporation states it expects to issue $400 million to $600 million of common stock in 2017, which could be materially dilutive to EPS. On the regulatory side, the 2017 General Rate Case settlement proposes a $88 million revenue requirement increase for 2017, down from $319 million requested, with a final CPUC decision expected in the first half of 2017.
The filing also describes a proposed reduction of the authorized ROE from 10.40% to 10.25% under a cost of capital petition for modification, and a Diablo Canyon retirement application with licenses expiring in 2024 and 2025. The Utility's capital expenditures are estimated at approximately $6.0 billiond in each of 2017, 2018 and 2019.
02—Key points
Key Highlights
- Reported 2016 diluted EPS of $2.78 (net income available for common shareholders $1,393 million), up from $1.79 in 2015; the company's non-GAAP earnings from operations were $3.76 per share.
- Butte fire: the Utility accrued $750 million for probable third-party claims and recorded $625 million of probable insurance recoveries; liability insurance totals approximately $900 million.
- Federal criminal conviction on six felony counts (January 26, 2017 judgment): five-year corporate probation, a five-year third-party monitor, a $3 million fine, and no appeal.
- Pending CPUC ex parte communications proceeding covering 164 communications; the Utility states it is probable the CPUC will impose penalties, with amounts not estimable.
- 2017 GRC settlement proposes a $88 million 2017 revenue requirement increase versus $319 million requested; final CPUC decision expected in the first half of 2017.
- PG&E Corporation forecasts $400 million to $600 million of common stock issuance in 2017, with potential material dilution to EPS, and Utility capital expenditures of approximately $6.0 billion per year in 2017 through 2019.
- Diablo Canyon retirement joint proposal at licenses' expiration in 2024 and 2025; unrecovered investment in Diablo Canyon was $1.7 billion at December 31, 2016.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 16, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $17.67B$16.83B | +4.9% |
| Operating Income | $2.08B$1.51B | +37.9% |
| Interest Expense | $829.00M$773.00M | +7.2% |
| Net Income | $1.39B$888.00M | +56.9% |
| EPS (Basic) | $2.79$1.81 | +54.1% |
| EPS (Diluted) | $2.78$1.79 | +55.3% |
| Shares Outstanding (Basic) | 499.00M484.00M | +3.1% |
| Shares Outstanding (Diluted) | 501.00M487.00M | +2.9% |
05—Questions
Frequently Asked Questions
How did PG&E's 2016 earnings compare with 2015, and what drove the difference?
Net income available for common shareholders rose to $1,393 million ($2.78 diluted EPS) from $874 million ($1.79) in 2015. The filing's reconciliation shows that 2016 results absorbed items management excluded from earnings from operations, including $307 million after-tax of fines and penalties, $137 million of Butte fire costs net of insurance, and $130 million of GT&S capital disallowances. Earnings from operations, a non-GAAP measure, were $1,884 million ($3.76 per share) compared with $1,519 million ($3.12) in 2015.
What is the financial exposure from the Butte fire?
The Utility believes it is probable it will incur a loss of at least $750 million for potential damages, and it accrued that amount. It recorded $625 million of probable insurance recoveries and holds liability insurance of approximately $900 million, but the insurance may not be sufficient. The Utility says it is reasonably possible losses could exceed $750 million, but it cannot yet estimate the upper end of the range. Its counsel is pursuing coverage under its two vegetation management contractors' policies, and recoveries from those policies are uncertain.
What are the consequences of the federal criminal conviction?
On January 26, 2017, the court sentenced the Utility to five years of corporate probation, oversight by a third-party monitor for five years (with early termination possible after three years), a $3 million fine, advertising requirements and community service. The Utility has decided not to appeal. The filing notes that non-compliance with probation could create material unrecoverable costs, and that the Department of the Interior's debarment review, which the Utility expects to be completed by the end of 2017, could require an amended administrative agreement and independent monitors.
How could the outcome of enforcement matters affect shareholders?
The filing says that if the Utility incurs material fines or unrecoverable costs, it would need incremental equity contributions from PG&E Corporation to restore its authorized 52% equity capital structure. PG&E Corporation would then likely issue common stock, which could materially dilute EPS. PG&E Corporation also notes that its ability to pay dividends depends on Utility distributions, and that its dividend payout target is 55% to 65% of earnings, with a target of approximately 60% by 2019.
What is the outlook for ratemaking and the cost of capital?
The 2017 GRC settlement, if approved, would increase 2017 revenue requirements by $88 million, $444 million in 2018 and $361 million in 2019, with a third attrition year for 2020 contested. A cost of capital petition for modification would reduce the authorized ROE from 10.40% to 10.25% beginning January 1, 2018; the Utility estimates this would reduce its annual revenue requirement by approximately $100 million. The capital structure of 52% common equity, 47% long-term debt and 1% preferred would remain unchanged.
06—Continue