PG&E Corp (PCG) 2014 Q1 法說會逐字稿

Good morning, and welcome to the PG&E first-quarter 2014 earnings conference call.

(Operator Instructions)

At this time, I would like to introduce your hostess, Sara Cherry with PG&E.

Thank you and enjoy your conference.

You may proceed Mrs.

Cherry.

Thank you, Lynn, good morning, everyone, thanks for joining us.

Before you her hear from Tony Earley, Chris Johns and Kent Harvey, I will remind you that our discussion will include forward-looking statements about our outlook for future financial results based on assumptions, forecasts, expectations and information currently available to Management.

Some of the important factors that could affect the companies actual financial results are described on the second page of today's slide deck.

We also encourage you to review the form 10-Q that will be filed with the SEC later today and the discussion of risk factors that appears there and in the 2013 annual report.

And with that, I will hand it over to Tony.

Thanks, Sara and good morning, everyone.

I will start off our remarks and then turn it over to Chris and Kent.

I'm going to cover our focus as a company.

Chris will discuss the current status of our operations and regulatory and legal matters and then Kent will conclude with financial results for the quarter.

Let me start with slide 3. Since my first day at PG&E, it's been clear to me that everyone here is united around our shared mission to operate a leading utility that delivers safe, reliable and affordable electric and gas service to our customers.

Our three objectives continue to be resolving the gas issues, positioning the Company for long-term success and partnering effectively with others to move the Company forward.

So on the gas regulatory front, we continue to await action by the California Public Utilities Commission law judges in the pending gas investigations.

But we have not waited to make significant improvements for the safety and reliability of our gas pipeline system.

As I've said before, it is vital that the Commission's final decision recognize that we compensated the victims to the civil proceedings and that we made substantial improvements in safety at a very significant cost to our shareholders.

Next, resolving the gas rate case -- general rate case, will allow us to continue the important work we've already begun.

We're going to be able to upgrade our gas and electric systems and generating assets and continue to grow.

As you know, we don't control the schedule but we expect to receive a proposed decision soon and we will look to the commission to reach a reasonable and timely final decision.

In our gas transmission business, we've filed a gas transmission storage rate case for 2015 and finally, the US Attorney's indictment of the Company under the federal Pipeline Safety Act was a development that we shared in detail earlier this quarter.

We just do not believe any employees intentionally violated the federal pipeline safety regulation and we believe that even where mistakes were made, employees were acting in good faith.

Turning to operations, in 2014 we've continued to see strong progress.

As a company, we've been focusing on steps to ensure the safety of our customers and one area where I'm pleased to see great progress in the first quarter was in the reduction of third-party damages to our gas and electric lines as a result of unsafe digging practices.

With respect to future success, our integrated planning process is now in it's third cycle, with plans for driving continuous improvements throughout the organization.

As we look forward, we continue to focus on superior execution of the work outlined in our rate cases and earning our authorized return this year, with the exception of the gas pipeline business and next year our objective is still to earn our authorize return for the entire enterprise.

With that, let me turn it over to Chris.

Thanks, Tony, and good morning, everyone.

I will begin my remarks with an update on our operations and then touch on regulatory developments.

Starting with gas operations, since 2011 we've successfully strength tested over 675 miles of pipe, replaced almost 130 miles, retrofitted more than 400 miles to allow for inline inspection and installed nearly 150 automated shutoff valves.

This work on the pipeline is the most expensive in the United States and demonstrates the Company's commitment to enhance the safety and integrity of our gas system.

This work has not been limited to the gas transmission business.

We've taken lessons learned and applied them throughout our operations.

We're finding and fixing issues in all areas of our operations, including our gas distribution system.

In our gas distribution system during the first quarter, one of our crews working on a distribution line upgrade accidentally caused a leak, which caused an explosion at a vacant house in Carmel.

Fortunately, nobody was injured.

We take this event very seriously.

The immediate steps we took included modifying our work procedures and hiring an independent third-party engineering firm to conduct a root cause analysis.

The expert firm released a report last week and concluded that the explosion could've been prevented by proper verification of the distribution line status and configuration prior to working on the line.

The report recommends a series of safety actions, which we've fully embraced and have already implemented or will begin implementing shortly.

We know the lessons learned from Carmel will make our operations even stronger and safer going forward.

In the electric businesses this quarter, we've now fully integrated about 500 new devices on our alliance to isolated outages and reroute power automatically in the event of a failure.

We've already seen positive results from this program.

Just since January 1st, we've avoided nearly 10 million customer outage minutes, or almost 100,000 sustained customer outages.

This is just one example of the work we're doing on our electric system to improve the reliability experienced by our customers.

In our energy supply organization, we've successfully completed another refueling outage at Diablo Canyon.

As is true every five years, 2014 includes scheduled refueling outages on both units of the plant, with the second outage coming in the fall.

Turning to regulatory matters, I will spend a few minutes on our three pending rate proceedings.

The first is our 2014 general rate case, where we are awaiting a proposed decision.

This rate case integrates a strong risk prioritization process and a focus on safety.

The Commission's consultants reviewed our request from a safety perspective.

The consultants' reports provided some constructive comments but also recognize the overall improvements we're making, including our integrated planning process that Tony talked about in risk management assessments as well safety improvements.

We look to the administrative law judge overseeing the GRC, and ultimately to the commission, to acknowledge the importance of our plans to improve the safety and reliability of our distribution systems and generation asset.

As a reminder, once the CPC issues a final decision, the revenue requirement change will be retroactive to the first year.

The second case is our gas transmission rate case, which we filed in December.

During the quarter, we filed a motion with the Commission to request that the revenue requirement of this gas transmission rate case be retroactive to January 1st, 2015, even though the final decision will come later.

We're pleased to have partnered with TURN and ORA to gain support for this important motion in the proceedings.

We expect a ruling on the motion in the next two months.

Finally, with TO 15, our electric transmission rate case, we continue to engage with other parties for settlement discussions in April and we will continue those conversations later this month.

With that, I will turn it over to Kent.

Thanks, Chris, and good morning.

I'll now walk through the results for the first quarter, which are summarized on slide 5. You can see that earnings operations were $0.54.

GAAP results reflecting the item impact and comparability for natural gas matters were $0.49.

The table at the bottom has the natural gas item in pretax dollars and you can see that pipeline-related expenses came in at $40 million for the quarter.

Keep in mind that work on the pipeline is seasonal.

We plan less work in the winter months and we do expect it to pick up significantly in future quarters.

Slide 6 shows the quarter-over-quarter comparison for earnings from operations and the main driver behind the $0.09 difference.

About $0.04 of it is due to the fact that, without a decision in our pending general rate case, we are not recovering the increase in depreciation and interest expense resulting from capital growth over the past year.

After the Commission approves the general rate case, which will be retroactive to January 1, we'd expect to recover these costs, and for that matter, turn a return on the larger authorized rate base.

This one is essentially a timing issue.

Another $0.03 is due to the increase in shares outstanding and the rest is due to a number of smaller items, some of which are also just timing.

So that's the summary of our first-quarter results.

As you know, we're not providing -- we've not provided guidance for earnings from operations for the year, given the pending general rate case and the gas investigation at the PUC.

However, on our last call we did provide some key inputs to assist you in developing estimates, such as ranges for CapEx, rate base, unrecovered gas costs and equity issuance.

We have not made any revisions to that information since last quarter and it is included in today's presentation.

On slide 7, you will see the estimated range for our item impacting comparability for natural gas matters remains at $350 million to $450 million pretax.

At the bottom, this is a reminder that these figures exclude future insurance recoveries, which obviously would net against these costs and exclude any additional fines or penalties resulting from the gas investigations that have not already been accrued.

Finally, during Q1 we issued a little over $300 million of common stock and we continue to target between $800 million and $1 billion of issuance for the year.

Keep in mind that, that range excludes any additional fines or penalties resulting from the gas investigations, which will be incremental to the range we've provided.

And with that, we will go ahead and open it up for questions.

(Operator Instructions)

Steve Fleishman, Wolfe Research.

Hi, everyone.

( multiple speakers ) I'll view of the lack of questions as a bullish contrarian sign ( laughter ). You mention that the Carmel independent report was out last week.

Has there been any reaction to that from other constituent policymakers?

Steve, this is Chris.

We have not heard anything and we haven't seen any reaction to it.

We've been aggressive about sharing it with the different policymakers and constituencies, so there has not been any reactions publicly yet.

Okay.

And then, just the $300 million of stock you've issued so far to date, how much of that -- do you know how much of that came out of your dribble versus your comp programs?

Yes, I've got the number here, Steve.

The majority was out of the dribble.

Our internal programs, I think, were in the $80 million range and the remainder was from the dribble.

Okay.

And the obvious question, are you getting any indications from anyone on timing of when you'll get an ALJ on the San Bruno issues?

This is Tony.

No, we still believe that here as we approach midyear we should get it, but obviously we don't control that and we are waiting.

We continue to focus on moving ahead and getting work done, because our belief is, the more work we get done the more we close out all of our gas issues, the better off we are.

Okay.

Great.

Thank you.

Dan Eggers, Credit Suisse.

Just thinking about timing for this year, with the GRC waiting on the PD and then formalization, can you remind me what the time distance or what would be the normal process once you have the PD to one too a final order in the GRC?

Just if we can try to figure out how much time we have left in this quarter before all the catch-up money goes into the third quarter or whenever that shows up?

Hi, this is Tom Bottorff.

I am responsible for regulatory affairs.

What we expect once the PD is issued, parties will have 20 days to comment, then there will be another 5 days for reply.

The earliest we get a final decision?

30 days, roughly, after the PD is issued.

Sometimes decisions can change or other issues can come up that cause delay, but the early it could be 30 days and it could be another month or two after that.

Okay.

So basically, if we don't have something in the next couple of weeks that we should assume that it should be a best case third-quarter pick up from an earnings perspective?

Yes.

I think that it's reasonable.

Okay.

And then on the criminal case as it stands out right now, there's been more talk of maybe going after some of these past profits rather than the per-violation costs.

Can you remind us again where your legal position is on that point?

And then, is this something that you think there's an opportunity to settle on or resolved or does this have to go through the court process?

Let me start off and then Hyun Park, our General Council, could go into it a little bit more detail.

There has been considerable confusion in the press about these alternative fines following the arraignment last month.

I just want to make it clear that the indictment documents do not include any requests for alternative fines and in talking to our lawyers, we strongly believe that the law says that in order to seek alternative fines at this point, the prosecutors would need to go back to the grand jury, file a new superseding indictment that specifically seeks alternative fines.

Whether they do that or not, we don't know whether they're going to do that, but none of it changes the underlying reality that fundamentally it's our belief that the criminal charges against the Company just are not merited.

Hyun, I don't know whether you want to say any more about that procedurally --

Dan, this is Hyun Park, General Counsel.

The point I want to make is that there are actually pretty high hurdles to seek an alternative fine, so what the government would have to do is, in addition to filing a brand-new superseding indictment, we believe that they would have to prove to a jury beyond a reasonable doubt that the criminal conduct occurred and that the specific conduct actually caused the loss or the gain that they're going to base the alternative fine on, and that they have to also prove beyond a reasonable doubt the amount of the loss or gain.

They also have to convince the court that the alternative fine would not unduly complicate or prolong the sentencing process.

They have to jump through a lot of hoops for that.

Do you see, given that and given otherwise that the comp will be smaller dollars relatively to anything else you guys have gone through, is there an opportunity here to settle this and just get it off the plate?

Well, we are always open to settlement on this and we will continue to look for opportunities going forward.

I think procedurally, right now, that the time is not right for that, but as we get through the initial phase of this proceeding, we will look through those opportunities.

Because you're right that the dollar figures are not big issues here.

And a guest just one last question, Tony.

You focused a lot on trying to improve the operating performance from third and fourth quartile outperforms up to higher levels.

Can you just give us an update where some of those bigger measure stand and maybe when we should expect to see good comparability for what you guys did last year relative to the industry.

Sure.

I will start off and then Chris can add some things.

You're exactly right.

I think 2.5 years ago when I got here, I characterized that we were solidly in the third and fourth quartile for a lot of our key metrics.

I'm really pleased to say that we are pushing up.

We've moved some of the metrics into the first quartile.

Even some of the more challenging ones are starting to push up to the median, which will push them from third to the second quartile.

Chris mentioned electric reliability.

We've had a string of, we're looking at probably the fifth year in a row this year where we will have record performance on the electric side of the business.

Next to Rob Liss and his team, really transformed the gas business from a solid fourth-quartile Company to one that's got some really positive things going on.

Maybe Chris or Nick can comment on some of the progress we've made.

Tony, this is Chris.

What I would say is, is that we've focused on a lot of the different areas.

We've talked about reliability on the electric side, having five years -- four years now and getting into a fifth year of setting new records for us that will get us into the second quartile nationally.

In addition, on the electric side we have been able to offset inflation in that organization last year and we have embedded that into the rate case because of the continuous improvement programs and I think that's really the key.

All the organizations have embedded continuous improvement programs and initiatives within the organization and it's helping them drive out costs and be able to do things like start to offset inflation and some of the other pressures that we've had.

Great.

Thank you, guys.

Michael Weinstein, UBS.

I just wanted to confirm when you're saying that there will be some recovery once the retroactive nature of the GRC falls in, that you're talking about the $0.04 there in the waterfall chart?

This is Kent.

What's happened is, in the past year, since the first quarter of last year, obviously we've had another year of CapEx on our rate base as well.

So we have been incurring, in the first quarter, a higher level of depreciation and our interest expense is higher.

Once we get the general rate case, we expected that it will provide revenues that will cover those costs as well as the fact that we will have an authorized rate base that will be higher and we will be able to earn a return on a higher authorized rate base.

You should see both the $0.04 recovery in a future period as well as just the return component on a higher level of rate base for 2014 as compared to 2013 in the last rate case.

Just to be clear, you're not delaying any capital spending right now.

The capital spending is going on, rate base is increasing, it's just not being recognized as such.

That's correct, and the key thing is that the PUC's decision, we do expect, will be retroactive to January 1 so we will get the revenues that we would've otherwise gotten during the first quarter.

There will just be booked in a later period.

And there's nothing unusual about that retroactivity.

That's kind of the standard way --

I just wanted to make sure there was not a delay in the spending that you would have to make up later on in the year, but it sounds like --

We've mainly been staying on our plan and our plan on the expense side for the time being was to stay relatively flat to last year with expenses pending the GRC outcome.

That's the path we've been on.

Okay.

Thank you very much.

Thank you, Mr. Weinstein.

Jim von Riesemann, CRT Capital.

Could you just walk us through -- I am not an attorney, so you can you just walk us through the process with the indictment and what goes on from here and maybe the expected timing for this whole process?

Yes.

This is Hyun Park.

Right now there is a status conference that is scheduled for June 2nd and I think the judge will, at that point, decide on some procedural schedules.

There will be discovery, there will be motion, there will be additional status conferences.

I think it's hard to predict how long the actual trial will take.

It is probably a year, two years, or could take longer than that.

There was a federal indictment in August of 2009 against a utility and from indictment to the actual jury verdict it took approximately 22 months.

That's an example that's out there.

Okay.

Where is this going to be tried?

Is this going to be tried in San Francisco?

And if so, do think you get a fair trial given all the media coverage of this?

We believe the trial will be here in San Francisco.

It's before a US federal district court judge.

We believe that we can get a fair trial and we will just have to work through this here in San Francisco.

And the last question is, aside from the penalties that might be considered, is there anything operationally that a conviction could have on the day-to-day operations of the Company?

Yes, so, some of the remedies that are available to a judge in sentencing in the event of a conviction is that the judge could order a monitor, a court-appointed monitor, and there are other reporting type of remedies that the judge can also order as well.

Nothing would impact your Certificate of Public Convenience and Necessity, is that correct?

Or should not impact, I should say.

I assume you're talking about our ability to operate our business?

Correct.

No.

Perfect.

Thank you.

Anthony Crowdell, Jefferies & Company.

Good morning.

Most of my questions have been answered.

Just one question.

When you think of the delays, we thought we'd be resolved right now, we are waiting for the ALJ in the San Bruno proceeding, yet the Company is still spinning capital.

Do you think the delay helps you when it comes to their proposed decision, their final decision, that maybe cooler heads are prevailing and the parties are seeing all the investment the Company is making, or do you think this delay is going to have no impact at all on a final decision?

I hesitate to speculate on the impact, but our view is that the more we improve the system the better off we are and I think the commissioners recognize that we have transform the system and have really taken it to a whole new level.

We're doing some things in the gas business that will be industry-leading -- are industry-leading.

We think that will be helpful when they are considering the appropriate penalty, because not only have we compensated the victims in the civil cases, but we have remedied a lot of the issues that were raised in the NTSB report and elsewhere.

Great.

Thank you.

Kit Konolige, BGC.

Thank you, good morning.

Most of my questions have been answered.

One quick question.

I think, Tony, you mentioned that you have support from TURN and ORA on the retroactivity concept for the gas transmission case?

Yes, that's correct, Kit.

When should we see a final indication from the Commission that, that would be retroactive?

And can you just give us a view of what the timing is for the full case?

This is Tom Bottorff.

With respect to that motion that seeks approval to settlement between ORA and TURN and our Company, that is expected within a month or two.

What we should see maybe a proposed (inaudible) in the next month or the month after.

The entire case, we do have a schedule that's been issued by the judge in the preceding and it calls for a final decision in the first quarter of 2015.

Great.

Okay, thank you.

Stephen Burr, Morgan Stanley.

It's actually Rajeev Lalwani.

The first question was just on as to whether or not there is any interaction between the criminal case and the state-level investigation as it relates to penalties, fines, so that there's no kind of double counting?

Ask maybe that, and then a follow-up.

We don't see any interrelationship.

They are independent proceedings.

And you know if there's no dialogue between the two or anything like that?

That, we don't know.

I'm sure there have been discussions.

We do now that in the course of US attorneys investigation they were looking at a lot of materials that were developed in the PUC case and I would assume that there been some discussions, but we've really see these as separate proceedings.

Okay.

Understood.

The second question was just more on investment potential longer-term.

I know you have a 7% to 11% annual rate base forecast, but any thoughts on whether or not you think that can continue longer-term?

And then, any thoughts on whether or not earnings could follow that closely?

And that was it.

Rajeev, this is Kent.

I think it's fair to assume that the infrastructure investment we are making at a pretty good clip is not going to be done during the next -- upcoming general rate case period.

We continue to see a lot of opportunity to invest in our existing system, to upgrade it both from a liability and safety.

This is Tony.

Let me add, I think from a general standpoint we're getting a good consensus of thought leaders around California that A, we need to invest in infrastructure, not only to remedy some of the issues we had in gas, but also to take advantage of new technologies.

Chris talked about the fabulous performance improvement in our electric business and a lot of that is being driven by coupling the technology of smart meters with automated switching devices.

We've only just scratched the surface on using the data that we're developing out of those smart readers.

I think there's a lot of excitement of thought leaders about making sure we continue those investments here in California.

And then, Kent, just a follow-up on that as it relates to earnings growth.

Do generally think your rate base growth and earnings growth would be closer?

Do expect a big delta just from equity needs, et cetera?

We have not provided equity guidance longer-term but I think we have given you guys the tools to come pretty close to estimating it.

We do anticipate that we will continue to have equity needs, so that will impact what the EPS profile looks like going forward.

Got it.

Thanks.

Travis Miller, Morningstar.

I wonder if you could characterize the timing and why it's taken so long at the FURC on the transmission case and how that might back up your next few transmission cases or effect investment?

Hi.

This is Tom Bottorff.

If you are addressing TO 15, our FURC transmission rate case, it is really not off schedule to any significant degree at this point.

Settlement discussions are ongoing.

We would expect to file TO 16 in July.

We will see, but I think there's still a good chance TO 15 can be settled prior to that.

This is Chris.

I think that's generally in line with our last several years with the TO filings.

Okay.

And then, would you expect any impact or any further delays based on FURC -- potential FURC rulings in the North East case or the MISO case in terms of ROEs?

No.

We would not.

Okay.

Great.

Thanks a lot.

(Operator Instructions).

Michael Lapides, Goldman Sachs.

I just want to make sure -- kind of catch up a little bit on some of the rate case dockets, the general rate case and the GT&S one.

Can you talk to us a little bit about what won't be recoverable as a result of both cases?

Meaning, what will still be kind of a potential drag on traditional rate base math for you even after you get the GT&S order?

This is Kent, and let me just take the gas transmission stuff.

I think in that case we have not requested the rights-of-way work, which you know is a five-year program, one year of which is behind us, so we're in the second year that program.

Our estimate for the full five years was roughly $500 million.

Those dollars would not be recovered and those will continue in 2014, 2015, 2016, and 2017.

And then I would say the other ones, there are two smaller pieces that we decided not to seek recovery of in the gas transmission case and each one of them is roughly $25 million per year for the three-year rate cycle.

One has to do with a certain remedial corrosion work and the other one has to do with hydrostatic testing of post-61 pipe.

Those are really items that we have not sought recovery in the gas transmission case.

Can you help us understand, when we think about the combination of your GRC as well as the GT&S cases, what the bridge between the O&M you are requesting as a result of both cases versus kind of historical levels?

Well, I guess the way I say is from an earnings perspective, maybe one way you want to think about it is, prior to this year we have been consciously spending about $250 million in excess of what we were recovering in those cases.

That's putting aside the gas item impact in comparability but in our normal operations, about $250 million.

Those -- that's essentially the gap from an earnings perspective that we are trying to address and the combination of the two rate cases.

Obviously, the general rate case is the bigger piece of that.

And, finally, can you rehash for us what is the level of capital spending under PSEP that you won't be recovering in rates going forward?

I think that's about $500 million that doesn't get recovered.

Of future capital spend or spend that's already occurred?

Some of that is spend that has already occurred but we've accrued the total amount.

The rest of it will occur this year, because the PSEP program reaches it's conclusion at the end of 2014.

Got it.

Okay, thanks, Kent.

Much appreciated.

Sure.

There are currently no additional questions waiting on the phone lines.

Thanks, Lynn.

I think I will wrap it up.

Thanks everyone for participating and don't hesitate to call me with follow-up questions.

Have a great day.

Ladies and gentlemen, thank you for attending the PG&E Corporation 2014 earnings conference call.

This now concludes the conference.

Enjoy the rest of your day.