PG&E Corp (PCG) 2015 Q3 法說會逐字稿

Good morning, everyone. This is Janet Loduca. Thank you for joining us for the Pacific Gas & Electric Corporation third-quarter earnings call. Before I turn it over to Tony Earley, to want to remind you that our discussion today will include forward-looking statements about our outlook for future financial results, which is based on assumptions, forecasts, expectations and information currently available to Management. Some of the important factors that could affect the Company's 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 2014 annual report. With that, I'll hand it over to Tony.

Thank you, Janet, and good morning, everyone. Thanks for joining us. Our key focus areas remain unchanged. California continues to lead the US in driving clean energy policies and PG&E will play a critical role in helping to achieve the state's goals. We also know that safety must be at the core of all of our decisions and our commitment to that is unwavering. We continue to make progress towards resolving outstanding regulatory and legal issues while strengthening our safety and compliance programs. We believe that executing our strategies in these focus areas will provide the foundation for both operational and financial success.

I'm going to touch on some of the key developments this quarter before I turn it over to Kent to discuss our financial results. Geisha Williams and Nick Stavropoulos are also with us today and they will be available to take any questions that you have. In terms of our focus on clean energy, PG&E has a long history of action on climate change and we have been a vocal advocate for policies that will move us forward. In fact, I recently participated in a meeting with President Obama to talk about the actions PG&E is taking to help drive clean energy policy and greenhouse gas reductions. We supported Governor Brown's recent move to increase the renewable energy target to 50% by 2030 and we're confident that we can get there. We have been investing and electric grid to enable both utility scale renewables and the growing distributive resources such as rooftop solar, electric vehicles and energy storage.

During the quarter, we filed our proposals to update the current net metering rates. Our proposal supports the continued growth of rooftop solar while beginning the transition to a sustainable rate structure that also supports the necessary grid investments. Our 2017 general rate case includes detailed proposals for continued grid modernization to ensure that we have the visibility and flexibility we will need to enable all of the new distributed resources.

Our general rate case also supports our goal on delivering customer expectations by providing customers with safe, reliable and affordable service. Using a risk-based approach, we propose safety-related investments across the system, including replacing aging infrastructure, taking targeted actions to reduce risk and improving our emergency response. We have balanced the necessary investment with affordability. Average residential bills will increase less than 3% and will remain below the national average.

In terms of reliability, the most significant event this quarter were the fires in northern California. As you know, California is in its fourth year of a severe drought and we have been partnering throughout the year with Cal Fire and other stakeholders to address a challenge fire season. Our efforts have included things like increased patrols and vegetation management as well as enhanced emergency response coordination. At one point the state was simultaneously fighting three major wildfires across 300,000 acres of our service territory. In addition to restoring power to impacted customers, our crews came up with creative ways to meet our community's needs in a very challenging time.

So for example, we leveraged the new explorable power technology from our electric trucks to provide an evacuation shelter with backup electricity when it's generator failed. The response from our customers and other stakeholders has been positive and we are really proud of how safely and quickly our crews were able to perform the work. As we publicly reported, Calfire is investigating whether one of our electric lines could potentially have been the source of the Butte fire. That investigation is still under way and could take the quite a while to complete, so we don't have any updates on that at this time.

On the heels of the state's historic drought, we are now hearing forecasts about an El Nino winter, which could bring significant rainfall and cause mudslides and floods. Our team has been preparing for this possibility through a wide array of actions, including updating our meteorological models and performing drills that simulate potential flood scenarios.

Finally, in terms of resolving outstanding regulatory issues, we recently received a report from the Safety and Enforcement Division in the gas distribution record-keeping investigation. While the report identified a number of potential past violations, which we will be responding to in the next month, we were pleased to see that it also acknowledged the progress we have made to improve our records. Over the last few years, we have implemented a number of new procedures that have been informed by extensive benchmarking and industry best practices. As we've said from the beginning, we know we have more work to do to enhance our distribution records and practices and we are absolutely committed to getting that right.

Geisha and Nick recently had a chance to share some of the actions we've taken to improve our safety culture at the California Public Utilities Commission's first-ever safety [en bunk]. This was an opportunity for all five commissioners, the presidents of California's investor-owned utilities and a number of interveners to talk about what each of the utilities is currently doing around safety and what changes the Commission might make to better incorporate safety into its proceedings. Nick and Geisha talked about the changes made by our Board of Directors to focus on safety, the strong link between our executive compensation programs and safety performance, our use of third-party experts and benchmarking and the way we engage our front line crews around safety. The Commission also had the opportunity to hear from other utilities and to start thinking about how to create common metrics to track and measure progress. I can tell you that we thought it was a really positive step forward in the conversation and we look forward to continuing the dialogue with all of the parties.

Before I turn this over to Kent, I just want to take a moment to thank him for all that he has done for PG&E. As you know, after 33 years with the Company Kent has decided to retire next year. Kent has done a tremendous job managing PG&E's financial activities during challenges that were some of the most complex in our industry. He has also been a great source of leadership and inspiration across the Company. We're working through the succession process right now and I'm thankful that Kent has agreed to stay on to ensure a smooth transition. Thank you, Kent and with that, I will turn it over to you.

Thank you, Tony. Good morning, everyone. I plan to first cover our results for the quarter and then I will go through our updated guidance. Let me say upfront that the complexity of our rate case timing issues has made it especially difficult for you to forecast quarterly results. However, we do expect solid results for the full year and you will see that when I get to guidance.

I will start with our quarterly results which is on slide 5. Earnings from operations were $0.84 in the third quarter and GAAP earnings, including our items impacting comparability, were $0.63. Our pipeline-related expenses in the quarter were $32 million pretax, or $19 million after tax shown in the table. This includes our costs to remediate encroachments on our pipeline rights of way and to complete the remaining expense work for our pipeline safety enhancement plan.

Our legal and regulatory related expenses in the quarter were $14 million pretax, or $8 million after tax in the table. Here we have our costs for litigation and enforcement activities related to natural gas matters and regulatory communications. Fines and penalties in the quarter were $142 million pretax as shown in the table below. This amount represents the disallowed capital work coming out of the final San Bruno penalty decision, which were accruing as we do the work. Finally, we received insurance recoveries in the quarter of $10 million pretax, or $6 million after tax as shown in the table above. I am pleased that we now resolved all San Bruno claims with our insurance carriers. In total, we recovered $515 million through insurance.

Moving to slide 6, you will see our quarter-over-quarter comparison of earnings from operations of $1.73 in Q3 last year and $0.84 in Q3 this year. This is where it gets a little complicated due to all of the timing issues. In Q3 last year, we recorded three quarters worth of revenue increase associated with our 2014 general rate case. That is the biggest difference from Q3 of last year, worth $0.47. $0.16 is associated with lower cost recovery this year due to the timing of the gas transmission rate case. As you know, a lot of our transmission work is seasonal and the Q3 amount reflects a higher level of activity in the summer months. When we receive a final decision in the case next year, the revenue increase will be retroactive to January 1, 2015.

$0.09 relates to the timing of taxes, which will reverse to zero by year end. $0.05 relates to regulatory and legal matters. This includes the impact of some favorable regulatory decisions in Q3 of last year, as well as some legal costs incurred in Q3 of this year. Another $0.05 is associated with an increase in shares outstanding and the impact here of share count is magnified by the fact that earnings in Q3 last year were so much higher as a result of booking three quarters worth of revenue increase to the GRC.

$0.03 relates to the disposition of SolarCity stock in Q3 last year. $0.09 relates to a variety of smaller miscellaneous items, many of which are timing. We have had positive miscellaneous items in the previous quarters. These factors are partially offset by a $0.05 increase due to growth and rate base earnings. That is it for our Q3 results.

On slide 7, you will see our 2015 guidance. Previously, we have had a guidance range for earnings from operations of $2.90 to $3.10. Year to date, we have been trending towards the upper end of this range. Therefore, today we are narrowing our range to between $3.00 and $3.10. There are a few other changes to this slide. We have reduced our range for pipeline-related expenses and I will say more about that in a moment. We have also updated our insurance recoveries just to reflect the amount we have recovered in the quarter. Our resulting GAAP guidance is shown at the bottom of the table.

On slide 8, we have updated our 2015 CapEx assumptions from $5.5 billion previously to $5.3 billion. There are really two main reasons for this update. First, our response to the recent wildfires displaced some of our planned work in electric operations. And second, we're realizing some efficiencies in gas operations primarily related to our distribution pipe placement program. The other assumptions for 2015 on this slide remain consistent with what we have previously provided.

Slide 9 reflects the updated range for pipeline-related expenses that I mentioned earlier. You can see we have decreased the upper end of that range from $150 million to $125 million. The lower end remains at $100 million. You will recall that this item is primarily associated with our rights-of-way work and we continue to expect that the cost of the overall program will not exceed $500 million.

Moving on to slide 10, our total equity needs for 2015 remain the same at $700 million to $800 million. Through the end of Q3, we have issued roughly $700 million of equity. This includes about $350 million through a block trade done in August, about $75 million through our continuous equity offering program earlier in the year and then about $275 million through our internal programs. Those are our 401-k and dividend reinvestment programs. We do not expect to issue any additional equities this year other than through our internal programs.

Slide 11 shows our estimated CapEx through 2019. And other than the change to 2015 that I previously covered, the ranges for 2016 through 2019 remain the same. Slide 12 shows our estimates of authorized rate base through 2019. These are consistent with the CapEx ranges on the previous slide. As a result, we estimate that 6% to 8% annual growth in our authorized rate base over this period. As Tony discussed, California's clean energy policies and our focus on system safety and reliability are driving significant investment in the coming years and support this strong growth profile. I will stop here so that we can now open the lines for your questions.

(Operator Instructions)

Jonathan Arnold, Deutsche Bank.

Quick question, just on the CapEx and I guess therefore the rate base ranges. Could you talk to what it is in the base, the bottom end of the range? Is that just authorize spending?

And then the other things that you mentioned are what defines the shaded sections? Or is there some other way of being a little more clear about what exactly is in and out of the two pieces, two different levels?

Jonathan, this is Kent. Let me go through it by parts of the business, which really relate to the regulatory proceedings.

For the electric and gas distribution and generation, which is our general rate case, the high end reflects the amounts that we have requested in the 2017 general rate case. For gas transmission, the high end in 2017 reflects the amount that we requested in the gas transmission rate case. In 2018 and 2019, we have just kept that amount flat with the 2017 request.

For electric transmission, which is our TO case, we have really only requested an amount through 2016, our TO17 case and so our 2017 through 2019 levels are flat at the 2016 request. For the low-end, basically it's consistent with the low end though we have had out there already for 2016, for -- across the board.

Okay. And how about your distributions resource plan, for example? Where does that fit into this -- the range? Is that in the high end or not?

We did not have a specific ask in that proceeding, but a lot of those types of investments for automating the system and so forth are included in our general rate case. So those components are included in the overall ask and therefore in the overall range, the upper end of the range.

Okay. So put simply, if you got everything you've asked for in both of the big outstanding cases, you would come in at the high end?

That is correct. Of course, we will have updates because at some point we will file another gas transmission case for beyond 2017. And we will also file additional transmission on our owner cases for beyond 2016.

Great. Thank you, Kent. That was my questions. Thanks.

Dan Eggers, Credit Suisse.

Can I just ask about with the El Nino concerns about the storms in the preparations there? How do you guys address cost recovery if you end up with some disproportionally high storm costs this year -- next year? How would that affect the numbers as we think about ongoing earnings estimates?

This is Kent. We do have a balancing accounts treatment in our general rate case for major storms.

In addition, for things like the wildfires we just had, where in cases where the Governor declares a disaster area, we also have the ability to seek recovery through a catastrophic event memorandum account. There are a few different mechanisms that are in place in California.

Thank you. The next question.

Tony, with electric vehicle charging station decision that is kind of deviation from what you guys seem have in message from the Governor as far as his priorities are concerned. A, how do think this is going to work out from meeting the Governor's rules on vehicles? Second, when you look at the DRP is there disconnect between the goals of the Governor and what Commission's proving to be supportive of you guys investing in?

Obviously, we thought that our initial proposal was totally consistent with the Governor's goals on electric vehicles. I think the Commission felt it was overly aggressive and wants to phase it in.

In terms of our spending estimates, since it takes a while to gear up, it really doesn't affect any of the numbers that Kent is talking about. We just want to get the program up and running. We think that once we get it running, we will show that it is very well received and is consistent with the electric vehicle strategy in California. It was disappointing we didn't get the full green light but we are going to continue to work to get still a fairly aggressive program out there.

And then what it means as far as the pacing of DRP capital. Is there going to be more of a test for each one of these new initiatives along the way rather than maybe a more wholesale buy in of what you need to do to accomplish the bigger state goals?

I think Kent just said a minute ago, the DRP capital is spread among the various regulatory cases. Our general rate case has some of it in and that is where it will be addressed. It is being addressed now. We've submitted that case and it will go through the hearing progress.

I don't expect a separate rate making proceeding for DRP. DRP expenditures will be rolled into various other proceedings.

One last question, just with the Edison case where the manufacturing tax deductions, they're trying to slap them as a reduction in rate base and ex-rate case to claw back those earnings. How is that affecting you guys from maybe the way you're thinking about recognizing those earnings, those benefits during this GRC process? And if there was a precedent that the Commission was pulling those back, would you guys need to change how you're recognizing them in your numbers?

This is Dinyar Mistry, the Controller. We have taken a look at the Edison PD and we think that our situation is different from Edison's.

We just filed our 2017 GRCs so prospectively the Commission will consider our request over there. At this point in time, we don't anticipate changing our credence.

Okay. Very good. Thank you.

Steve Fleishman, Wolfe Research.

First of all, Kent, I guess an early good-bye. We will miss you.

Secondly, on the similar question regarding the Edison PD on their GRC. Is there any policy issues there that concern you with all relative to your case?

The major issue we have seen has been the repairs issue, which Dinyar just addressed. We do think we are in a little bit different situation. That is the biggest one we have been watching.

Great. And then the -- maybe just on the criminal case. I know there has been a lot of activity. Can you maybe just give us an update on whether any of the allegations have been thrown out at this point and do we still have some kind of trial in March of next year?

This is Tony. Let me start off and then I will let Hyun jump in.

Those of you who have been involved in major litigation, this is just a pretrial motion stage. There is a lot of activity going on. There will continue to be more activity leading up to the trial.

The trial is still scheduled for next spring. We will see what happens as we get closer to it. Hyun, why don't you comment on where we are.

Steve, we did file a number of motions. And all of the motions have been submitted to the judge. We are just waiting for the judge to issue his rolling on our motions.

Great. On the GT&S case, I know there is oral arguments today, but in terms of -- is there any relevant updates there in terms of potential outcomes we should be aware of?

This is Steve Malnight from Reg Affairs. Really, we don't have any additional updates. The timing still looks like next year for the case and we will look for the oral argument later today.

Okay. Thank you.

Michael Weinstein, UBS.

Congratulations, Kent, by the way. When do you guys think you will be in a position to discuss 2016 guidance and dividend policy?

That is something that we look at every time I am with my Board of Directors, we discuss that dividend policy. We have not tied it to any specific outcome at the Commission. What we're focusing on is what is right time to address that.

I am well aware that our investors have been very patient on this. We are committed to getting our dividend in line with our peers, but it has to be at the right time and we continue to assess that.

In terms of timing of guidance, I did say we are looking towards hopefully getting back in a regular rhythm with guidance. I would like to think we will be in a position to do that in the first quarter.

Great. Just one follow-up question on the repairs deduction issue. Can you just refresh how are you guys treating it and how -- is there any simple way to explain why your situation is different than Edison's?

This is Dinyar again. So, the rate making for repairs is that customer rates are reduced for taxes that aren't really pay to the IRS. That is fundamental principle of the flow-through rate making. To the extent that there is a forecast difference between what was in the rate case and what actually occurs, during that rate case period, up or down, that forecast difference affects the bottom line.

I would say the primary difference between us and the Edison case is that in the Edison PD it indicated that its previous GRC request was based on a different methodology for calculating the tax repairs than was actually applied during that period. For us, we have applied the same methodology for our actuals that we use to develop the forecast. I think that is probably the key difference.

That is very helpful. Thank you very much.

Michael Lapides, Goldman Sachs.

Just curious when you think about longer term, do you expect to be a company that winds up growing earnings kind of in pace with rate base growth? Is there anything structural that can make it something different than that over time?

Michael, this is Kent. I think at the levels of rate-based growth and CapEx, frankly, that we are having right now do require some equity issuance.

Generally you'd see earnings grow with rate base, but you'd have to net out whatever equity issuance you need to support that level of CapEx. At lower levels, you can see that but we are at high levels and I do think that requires some level of equity issuance.

Got it. Okay.

Second, Tony, you made the comment about talked to the Board about dividend and dividend policy. Can you dive a little bit into the -- when you think about dividend policy, are we talking a payout ratio, a growth rate, a dividend yield target relative to the peer group? I'm just going to think about what are the metrics you and the Board are looking at when you all have the discussions about dividend policy.

This is Kent. I will just say, generally probably the primary metric we look out is payout ratio. We look at industry and it is pretty nicely clumped, so it is pretty easy to see where the industry is and we are a bit below that. That is the primary issue we will be addressing.

Got it. Thank you. Much appreciated.

Hugh Wynne, AllianceBernstein.

Two questions. One, I was just wondering if you might bring us up to date on any developments that could shed light on potential outcomes of the gas distribution records OII? And then similarly whether there been any develops with respect to the Cal Fire investigation into the origins of the Butte bush fire?

Let me comment on Cal Fire. Their investigation is ongoing. We are cooperating with them. We don't have any updates.

Traditionally, those investigations take quite some time because it is hard because all the evidence is burned up. It takes a lot of work to figure out exactly what happened.

With respect to the proceedings, Steve, you -- I don't think we have any updates there.

We don't really have any updates on the OII. I saw the SED filing, as was mentioned earlier. We will file our rebuttal testimony in November and then we would expect hearings on that in January, first part of the year.

Thank you.

Brian Chin, Bank of America Merrill Lynch

Question on dividend, going back to that. Given some of the changes that will take place in the C suite over the next 12 months, does that to some degree make you think that you ought to maintain flexibility on the dividend until the next set of C suite executives comes in? Or does that not factor into your thinking about how you think about the timing of a dividend policy going forward?

I don't think it has any connection at all to dividend policy. Dividend policy is based upon our financial situation and our assessment of what is going on in the regulatory front and doesn't have anything to do with the C suite changes.

Okay. Understood.

Secondly, on the cost to capital mechanism and the proceedings that will come up next year, it seems like mechanically the numbers are shaping out where an extension, perhaps, may not be too difficult of a suggestion two different stakeholders. I guess what I'm wondering is, are you aware of any issues out there that may prevent some of the stakeholders from wanting to consider an extension of the current mechanism? Any issues that may need to be worked through that could prevent that and instead make a full-blown cost of capital proceeding take place?

Brian, this is Kent. As you alluded to, the normal process would have us file a cost to capital application next spring. That would be for rates effective January 2017.

I think what you are alluding to, I think everybody knows that last year we and the other parties all agreed to extend the existing cost to capital as well as trigger mechanism by one year. The question is, will that happen again this year?

I just say we are open to exploring that again given that, as you said, forecast bond rates have not changed all that much since the proceeding was originally litigated. Whether or not that occurs depends on the extent to which all the parties are able to reach agreement.

I guess at this point you're not aware of any specific issues that may cause one or two of the stakeholders to say, we really ought to revisit this despite the mathematics looking fairly similar versus last year?

If I were, I wouldn't be talking about it with investors.

Understood. Lastly, there has been a lot of consolidation happening in the industry.

If, Tony, you could give just your quick thoughts on consolidation, how you think about it in the industry here. A lot of your peers have been using their balance sheets and I think it's safe to say that the California utilities are in much better balance sheet position than others. Just your latest thoughts there?

Generally, we don't comment on specific on M&A opportunities. I will say, one interesting observation, though, is everyone is buying a gas company. We've already got 4.5 million gas customers, so I think we are in pretty good shape.

Excellent. Thank you very much.

Greg Orrill, Barclays.

You mentioned that as you get out to 2017 and 2018 your forecast for rate base on -- your forecast includes flat assumptions for the gas and electric transmission. Is there maybe, since you are going to update it at some point, is there a better modeling assumption that we might use? Would those updates get you to the higher end of rate base growth that you are thinking about?

This is Kent. We have just done that because it is a fairly mechanical way to do it. We don't want to call future cases that we have not yet filed.

You can apply judgment to it. You can look at our historic track record, what we have been over the last few years, adjust that. Whatever you think is appropriate. We just try to keep it simple and objective when we present it to you for your consideration.

Thank you.

We have a follow-up question from the line of Michael Lapides.

Thank you for taking my follow-up. Real quick, on the rate base chart, or exhibit, slide 12, that still excludes the incremental quip that actually generates some earnings. I think that is the number of around $1 billion -- $1.7 billion, $1.8 billion, somewhere in that range.

You have commented historically that, that earnings from quip, while not in rate base, would largely be offset by corporate costs that aren't recoverable in rates. Do you still see that trend or is there the potential to manage some of those corporate costs down over time?

This is Kent again. No, I think nothing has really changed there. I think that is a reasonable assumption to make going forward.

I think -- I have said several times, a lot of stuff that we do is below the line is really important to the longer-term success of the Company and our financial. It includes our advertising, a lot of our charitable contributions, just bread-and-butter for a utility and we're going to continue to make those necessary investments.

Got it. Thank you, Kent. Once again, congratulations.

Thanks, Michael.

Travis Miller, Morningstar.

Going back to the long-term outlook for CapEx and that discussion, what is the impact from SB 350? How long out and is that included in any kind of near-term CapEx or GRC? Just your thoughts around that.

SB 350 really, one of the primary components of it is the RPS requirements in the state. Generally, we have already been on track to meet the 33% RPS. This would now take us to 50% eventually. We do that primarily through long-term contracting. It doesn't have a direct implication for our own CapEx, which are primarily our distribution and transmission businesses.

Although I will add one place we may see some opportunities is in additional transmission out there. We have been successful in the competitive transmission bidding process here in California in the last couple of years. We continue to intend to stay involved in that process.

But all of that is outside any of the years that we have been showing on the sides, because recall that the current 33% is a 2020 objective. And so the new SB 350 requirements will start showing up in the 2020s and you'd see transmission in that time frame. I think the only conclusion you can draw is, given California's commitment to a clean energy environment, it's going to require the utilities to have continued investment to upgrade the system.

Thanks. The [difference will be] -- what is your appetite right now for X California, outside of California or unregulated type of investments? Obviously, the SolarCity moves you have made here seem to be a pullback on that front. What's your thoughts and appetites for that unregulated type of investment?

We continue to look at those opportunities. I think I have said this before, the California affiliate roles make it very difficult to start from scratch. Because it is very hard to take your utility expertise and without taking them away from the utility and moving them to a totally separate company and they can't even talk to their colleagues back at the old businesses. It is hard to justify it when we have so many growth opportunities in the utility right now.

Okay. Great. Appreciate the thoughts.

Thank you. There are currently no additional questions waiting from the phone lines.

This is Janet again. I want to thank everyone for joining us and we hope you have a safe day. Thank you.