PG&E Corp annual report, FY2015

PG&E Corporation 2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015. The filing is an annual Form 10-K for PG&E Corporation and its wholly owned operating subsidiary, Pacific Gas and Electric Company; it is not a standalone quarterly filing, although fourth-quarter data is included. The business is a regulated electric and natural gas utility serving northern and central California.

Business Context

Pacific Gas and Electric Company generates, purchases, transmits, distributes, and delivers electricity and natural gas.
Rates are primarily regulated by the California Public Utilities Commission and the Federal Energy Regulatory Commission under cost-of-service and revenue-balancing mechanisms.
PG&E Corporation is a holding company dependent on distributions from the Utility to fund corporate obligations, dividends, and equity contributions.
The Utility had approximately 23,000 employees and served approximately 5.3 million electric and 4.4 million natural gas customers on average during 2015.

Financial Performance and Position

PG&E Corporation metric	2015	2014	Change
Operating revenues	$16.833 billion	$17.090 billion	Down 1.5%
Operating income	$1.508 billion	$2.450 billion	Down 38.4%
Net income	$888 million	$1.450 billion	Down 38.8%
Income available to common shareholders	$874 million	$1.436 billion	Down 39.2%
Diluted EPS	$1.79	$3.06	Down $1.27
Net cash from operating activities	$3.753 billion	$3.677 billion	Up $76 million
Capital expenditures	$5.173 billion	$4.833 billion	Up $340 million
Long-term debt, excluding current portion	$16.030 billion	$15.050 billion	Up $980 million
Total assets	$63.339 billion	$60.127 billion	Up $3.212 billion

Margins: Reported operating margin was approximately 9.0% in 2015 versus 14.3% in 2014. Net margin was approximately 5.3% versus 8.5%. The filing does not present a separate standardized quarterly margin discussion.

Electric operating revenue was $13.657 billion, broadly unchanged from 2014.
Natural gas operating revenue declined to $3.176 billion from $3.432 billion, primarily reflecting lower gas commodity prices and related balancing-account activity.
Operating and maintenance expense increased to $6.951 billion from $5.638 billion, principally because of the CPUC San Bruno-related Penalty Decision.
Depreciation, amortization, and decommissioning expense increased to $2.612 billion from $2.433 billion.
The effective tax rate was negative 3.1% for PG&E Corporation, compared with 19.4% in 2014, primarily because of regulatory flow-through tax benefits and lower pretax income.

Cash Flow, Debt, and Liquidity

Operating cash flow was $3.753 billion, compared with $3.677 billion in 2014.
Investing cash flow was negative $5.211 billion, including $5.173 billion of capital expenditures.
Financing activities provided $1.430 billion, including $1.123 billion of net long-term debt issuance and $780 million of common-stock proceeds.
Cash and cash equivalents declined to $123 million from $151 million at PG&E Corporation; the Utility held $59 million versus $55 million.
At year-end, PG&E Corporation had $300 million available under its revolving credit facility and the Utility had $1.9 billion available under its $3.0 billion facility, after considering outstanding borrowings and letters of credit.
Debt-to-capitalization ratios were 51% for PG&E Corporation and 50% for the Utility, below the 65% covenant limit.
The Utility issued $1.15 billion of long-term debt in 2015 and made $705 million of equity contributions to the Utility through PG&E Corporation.
Management forecast $600 million to $800 million of PG&E Corporation common-stock issuance in 2016, primarily to fund Utility equity contributions. Further issuance could dilute EPS.

Material Changes Versus 2014

The largest change was the $1.6 billion CPUC Penalty Decision related to natural gas transmission and the San Bruno accident. The 2015 income statement included $907 million of related charges: $400 million for a customer bill credit, $100 million for the state fine, and $407 million for probable capital disallowances.
The Utility paid the $300 million state fine in August 2015 and recorded a $400 million current liability for a customer bill credit expected to be provided in 2016.
Operating and maintenance expense increased by approximately $1.3 billion, while operating income fell by approximately $942 million.
Purchased-power cost declined to $4.805 billion from $5.266 billion, and natural gas cost declined to $663 million from $954 million, largely because of lower commodity prices and increased owned generation.
Capital expenditures increased by $340 million, and Utility investing cash outflow increased to $5.211 billion from $4.799 billion.
Long-term debt increased, while PG&E Corporation’s common shares outstanding increased to approximately 492.0 million from 475.9 million.
PG&E Corporation maintained its annual common dividend at $1.82 per share, or $0.455 per quarter.

Guidance, Outlook, Risks, and Unusual Items

2016 capital spending: The Utility estimated capital expenditures of $5.4 billion to $5.6 billion.
Pipeline-related costs: Management forecast $100 million to $150 million of unrecovered pipeline-related expenses in 2016, primarily for identifying and removing encroachments from transmission rights-of-way.
Rate cases: The pending 2015 Gas Transmission and Storage rate case included a requested $532 million annual revenue-requirement increase, subject to regulatory review and possible disallowances. The 2017 General Rate Case requested a $457 million increase over authorized 2016 base revenues.
Criminal prosecution: At filing, 13 federal felony counts remained against the Utility. Potential statutory fines totaled $6.5 million, while the government also asserted a potential alternative fine of approximately $562 million. No criminal-fine accrual had been recorded because such amounts were not considered probable.
Butte fire: The Utility faced approximately 27 complaints involving more than 600 plaintiffs. Estimated property, contents, and fire-suppression losses ranged from $350 million to $450 million, excluding potentially significant personal injury, business interruption, tree damage, and other claims. Insurance coverage was available, but sufficiency was uncertain.
Environmental matters: Environmental remediation liabilities totaled $969 million, including $300 million for Topock and $140 million for Hinkley. Undiscounted future environmental costs could reach $1.9 billion under adverse assumptions.
Diablo Canyon: The plant’s licenses expire in 2024 and 2025. Cooling-water requirements, lease renewals, seismic review, and potential regulatory changes could affect continued operations and the recovery of the Utility’s approximately $2.3 billion unrecovered investment.
Renewables and regulatory initiatives: Renewable energy deliveries represented 29.5% of bundled retail sales in 2015. California’s SB 350 raises the long-term renewable target to 50% of retail sales by the 2028–2030 compliance period and may increase procurement and compliance costs.
Regulatory accounting: At December 31, 2015, regulatory assets were approximately $9.3 billion and regulatory liabilities approximately $7.7 billion. Changes in the probability of recovery could materially affect earnings.

Key Facts Investors Should Verify

Final outcomes and cash costs of the CPUC Penalty Decision, including the remaining $689 million of capital disallowances and related remedial obligations.
Results of the federal criminal prosecution and the potential effect on fines, credit ratings, regulatory relationships, financing access, and equity dilution.
Final decisions in the 2015 Gas Transmission and Storage rate case and the 2017 General Rate Case, including the treatment of safety-related spending.
Actual liability, insurance recoveries, and settlement costs associated with the Butte fire and other wildfire claims.
Progress and cost estimates for Hinkley and Topock remediation, including the potential increase above the $969 million recorded liability.
Diablo Canyon license, cooling-water, coastal lease, and decommissioning developments, including possible impairment or accelerated retirement risk.
2016 capital expenditures, unrecovered pipeline costs, required equity issuance, and the resulting effect on PG&E Corporation’s EPS and dividend capacity.
The Utility’s ability to maintain investment-grade credit ratings and comply with debt covenants while funding safety, reliability, and environmental investments.