PG&E Corporation 2017 Form 10-K Summary
Business context and reporting period
PG&E Corporation is a California holding company whose primary subsidiary, Pacific Gas and Electric Company, provides regulated electricity and natural gas generation, transmission, distribution, and delivery services in northern and central California. This combined Form 10-K covers the fiscal year ended December 31, 2017; fourth-quarter results are included in the annual filing.
- PG&E Corporation had approximately 23,000 employees and 514.8 million common shares outstanding at year-end.
- The Utility served approximately 5.4 million electric and 4.5 million natural gas customers on average during 2017.
- The business is primarily regulated by the CPUC and FERC, with the NRC overseeing nuclear operations.
Financial performance and key metrics
| PG&E Corporation, $ millions except per-share data | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenues | 17,135 | 17,666 | (3.0%) |
| Operating income | 2,956 | 2,177 | +35.8% |
| Net income | 1,660 | 1,407 | +18.0% |
| Income available to common shareholders | 1,646 | 1,393 | +18.2% |
| Diluted EPS | $3.21 | $2.78 | +15.5% |
| Operating margin | 17.2% | 12.3% | +4.9 percentage points |
| Net margin | 9.7% | 8.0% | +1.7 percentage points |
Revenue declined primarily because of lower electric revenue and regulatory balancing-account activity, partly offset by higher natural gas revenue. Operating income benefited from materially lower Butte fire charges, fewer disallowed charges, and higher transmission revenues.
- Utility income available for common stock was $1.677 billion, compared with $1.388 billion in 2016.
- Utility operating revenues were $17.138 billion; electricity contributed $13.127 billion and natural gas $4.011 billion.
- Utility operating and maintenance expense decreased to $6.329 billion from $7.352 billion, while depreciation, amortization, and decommissioning expense increased to $2.854 billion from $2.754 billion.
- PG&E Corporation’s effective tax rate was 23.6%, compared with 3.8% in 2016, primarily reflecting the Tax Cuts and Jobs Act transition adjustment.
- Year-end total assets were $68.012 billion and shareholders’ equity was $19.220 billion.
- Consolidated long-term debt, excluding the current portion, was $17.753 billion, up from $16.220 billion.
Cash flow, liquidity, debt, and capital spending
- Utility operating cash flow increased to $5.916 billion from $4.344 billion, while capital expenditures were $5.641 billion.
- Utility net cash used in investing activities was $5.650 billion; net cash provided by financing activities was $110 million.
- Utility cash and cash equivalents increased to $447 million from $71 million.
- At December 31, 2017, PG&E Corporation and the Utility had $168 million and $2.901 billion, respectively, available under revolving credit facilities.
- Commercial paper outstanding was $132 million for PG&E Corporation and $50 million for the Utility.
- Debt-to-total-capitalization ratios were 50% for PG&E Corporation and 49% for the Utility, below the 65% covenant limit.
- Management estimated Utility capital expenditures of approximately $6.3 billion in 2018 and $6.0 billion in 2019.
- PG&E Corporation issued $416 million of common stock and contributed $455 million of equity to the Utility during 2017.
- The boards suspended PG&E Corporation common dividends and Utility preferred dividends in December 2017 because of wildfire-related uncertainty. PG&E Corporation declared $1.55 per share for 2017, but there is no assurance when dividends will resume.
Material changes versus the prior comparable period
- GAAP earnings improved despite a $147 million one-time provisional tax expense from the Tax Cuts and Jobs Act and $49 million of after-tax Northern California wildfire-related costs.
- Butte fire-related costs, net of insurance, were $36 million in 2017 versus $137 million in 2016; the Utility’s probable Butte fire loss estimate increased to at least $1.1 billion from $750 million.
- 2017 included $47 million of Diablo Canyon-related disallowances, compared with substantial San Bruno and gas-transmission capital disallowances in 2016.
- Interest expense increased to $888 million from $829 million because of additional debt issuance.
- The Tax Act reduced the federal corporate tax rate from 35% to 21%, required deferred-tax remeasurement, and is expected to reduce Utility revenue requirements by approximately $500 million annually beginning in 2018.
- The CPUC reduced the Utility’s authorized return on equity from 10.40% to 10.25% beginning January 1, 2018.
- PG&E’s renewable deliveries represented 33.1% of bundled retail sales in 2017, exceeding the 27% annual requirement.
Guidance, outlook, risks, contingencies, and unusual items
- The most significant uncertainty is the October 2017 Northern California wildfires. The Utility incurred $219 million for restoration and repairs through year-end, including $97 million of capital expenditures, but had not accrued a liability for potential third-party wildfire losses because the investigations were preliminary and losses were not considered probable or reasonably estimable.
- Potential wildfire exposure includes property damage, personal injury, wrongful death, fire suppression, evacuation, medical costs, penalties, interest, and attorneys’ fees. Insurance coverage for third-party wildfire liability was approximately $800 million, which could be insufficient.
- The Butte fire liability remains material. The Utility had accrued $561 million of third-party claims liability at year-end and recorded $922 million of probable insurance recoveries; additional claims from state and local agencies remained uncertain.
- The Utility faces ongoing CPUC, FERC, federal, and state investigations, including safety-culture, ex parte communications, pipeline rights-of-way, and other safety and compliance matters. The Utility also remained subject to five years of federal probation and third-party monitoring following its 2017 criminal conviction.
- Diablo Canyon Units 1 and 2 are scheduled for retirement in 2024 and 2025. The Utility reported $1.7 billion of unrecovered investment at year-end and expects substantial future decommissioning activity.
- Environmental remediation liabilities were $1.039 billion, with potential undiscounted future costs materially higher if contamination or remediation requirements exceed current estimates.
- Total contractual commitments were $78.781 billion, including $43.912 billion of power, gas, and nuclear-fuel purchase commitments and $32.007 billion of Utility long-term debt obligations including interest.
- Management forecasts $35 million to $60 million of unrecovered pipeline-related expenses in 2018, primarily for identifying and removing transmission pipeline rights-of-way encroachments.
- Management expects customer rate reductions from tax reform to precede the benefit of lower federal tax payments, potentially reducing operating cash flow and increasing financing needs. PG&E expects to resume federal tax payments in 2020, subject to future results.
- Deloitte issued unqualified opinions on the financial statements and internal controls but included an emphasis-of-matter paragraph regarding possible material wildfire losses or penalties.
Most important facts for investors to verify
- Progress and findings from Cal Fire, CPUC, and other investigations into the Northern California wildfires, including any determination of Utility responsibility.
- Potential wildfire liabilities, insurance recoveries, regulatory cost recovery, inverse-condemnation exposure, and the status of the WEMA and CEMA proceedings.
- Changes in credit ratings, access to commercial paper and revolving facilities, collateral requirements, and compliance with debt covenants.
- Timing and outcome of dividend reinstatement and the amount of future equity issuance or dilution required to support the Utility.
- Final CPUC implementation of Tax Act revenue reductions and the effect on cash flow, rate base, and earnings.
- Outcomes of the 2019 GT&S, TO18, and TO19 rate cases, including potential refunds or reductions to requested revenue requirements.
- Additional Butte fire claims, environmental remediation estimates, pipeline disallowances, enforcement penalties, and costs associated with Diablo Canyon retirement.