PG&E Corp (PCG) 2017 Q2 法說會逐字稿

Good morning, and welcome to the PG&E Corporation 2017 Second Quarter Conference Call.

(Operator Instructions)

At this time, I would like to pass the call to Ann Kim.

Thank you and enjoy the conference.

You may proceed, Ms. Kim.

Thank you, Mallory, and thanks to those of you on the phone for joining us.

Before I turn it over to Geisha Williams, I 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.

The deck also includes a reconciliation between GAAP and non-GAAP measures.

We encourage you to review our quarterly report on Form 10-Q that will be filed with the SEC later today and the discussion of risk factors that appears there and in our 2016 annual report.

With that, I'll hand it over to Geisha.

Thanks, Ann.

Good morning, everyone.

I'm pleased to report that we had a very strong quarter, one that was marked by continued impressive operational performance, encouraging progress on the regulatory front and solid financial results.

I'll start this morning with an update on some important actions we've taken this past quarter to continue strengthening our safety culture and operations.

I'll then highlight some key investments we're making to enable us to meet our customers' evolving expectations while also keeping bills affordable.

And finally, I'll cover some of the recent steps we've taken to help advance California's clean energy economy and position PG&E for continued success.

After that, I'll turn things over to our Vice President and Chief Financial Officer, David Thomason, to walk us through the financials, as Jason Wells, unfortunately, has laryngitis, although he will be available for some questions.

Before we dive in, I'd like to review the final decision we recently received in the cost of capital case.

The decision sets our allowed return on equity at 10.25% through the end of 2019, which is critical given the nearly $6 billion in annual investments we'll be making in our gas and electric system over that same period.

Just as importantly, our customers will benefit through lower rates, a savings of roughly $100 million annually.

While I recognize it was a challenging process, in the end the cost of capital decision is yet another example of how coalitions can achieve effective solutions.

I'm gratified to add this to the list, alongside the Diablo agreement we announced last summer and the 2017 GRC all-party settlement.

Let's move now to a review of our safety and operational progress for the quarter.

As you may recall, in 2014 we were one of the first utilities in the world to be certified under both the ISO-55001 and PAS-55 safety standards.

Every 3 years, we have to go through a rigorous recertification process.

The critical requirement for recertification is to demonstrate continuous improvement.

Well, I'm happy to report that Lloyd's Register, the internationally recognized third-party auditor, recently recertified us in both ISO-55001 and PAS-55.

This is independent third-party confirmation of our continually improving safety culture and industry-leading asset management program, and it's something I'm extremely proud of.

I want to take this opportunity to congratulate and thank our teams on a truly great accomplishment, one that reflects our laser-like focus on safety, not just in the gas operations but across the company.

Staying on the theme of continuous improvement, I'd like to talk about the report that was issued in May and the CPUC safety culture OII.

We genuinely welcome and appreciate the thorough assessment and recommendations contained in the report.

It's encouraging that the CPUC's consultant recognizes the numerous improvements we've made as a company to our safety culture.

In fact, the first conclusion of the report affirms that, "PG&E employees at all levels are committed to safety." That speaks volumes about the culture we're building, and I couldn't agree more.

Safety is at the heart of everything we do here at PG&E.

Looking at the 68 specific recommendations in the report, most are fully consistent with our own safety plans.

While there are a few recommendations in the report that we believe warrant further consideration by the CPUC in the upcoming proceeding, we agree with the vast majority of the recommendations and plan to implement them by the middle of next year.

Moving on to our operational performance.

We had a number of highlights this past quarter, and I'd like to focus on one in particular.

This past June, most of California was hit by a historic heat wave.

Millions of customers experienced temperatures in the triple digits for nearly a week.

Demand on our system hit levels that we haven't seen in over a decade, reaching over 20,000 megawatts on June 22, just shy of our all-time system peak in 2006.

The good news is that less than 2% of our electric customers experienced a sustained loss of power during the peak outage day.

Our strong reliability performance was even more noteworthy, given that one of our Diablo Canyon units was in a planned refueling outage during the same period.

And in addition, at certain times during the heat wave, more than half of PG&E's energy supply was met with RPS-eligible resources.

This experience is a testament to the long-term investments we've made to modernize our system, and it demonstrates what we've been saying for quite some time, and that is, we can deliver the clean energy that our customers want and still provide great safety and reliability.

With our strong operational performance in mind, I'd like to touch upon a couple of recent regulatory developments that help set the foundation for our future investments and will enable us to continue to deliver on our customers' evolving needs and expectations.

The first is the final decision on our 2017 General Rate Case, which approved the all-party settlement between PG&E and our intervenors, including consumer advocates TURN and ORA.

While this gives us a clear line of sight into our distribution and generation revenues for the next 3 years, it also enables our plans for making the infrastructure investments necessary to meet our customers' energy needs.

For example, the GRC authorizes CapEx increases related to electric reliability improvement, network cable replacement and capacity increases to support distributed generation resources.

These are the same types of investments that enabled us to provide safe and reliable service during the recent heat wave.

We're pleased with the outcome of the GRC decision, which approves 98% of our rate base request and provides us with the resources needed to support continued investment in the grid.

At the same time, we went into this rate case very mindful of the need to keep our customer bills affordable, and the outcome represents a fairly modest 1% increase in our authorized revenues for 2017.

The second regulatory development I'd like to mention this morning is our electric transmission case, TO19, the application which we filed yesterday at FERC.

We're seeking a $74 million increase in revenues starting in 2018 for such key capital investments as system reliability work and substation modernization.

It is through these types of investments and these continued investments in our grid that we can help ensure our system is stable and that we can continue providing the high-quality service that our customers have come to expect.

The last area I'll cover this morning is the work we're doing to position PG&E for success in the future energy markets.

In addition to the investments we're making to upgrade and modernize our grid, we are also leveraging our proximity to Silicon Valley to pilot new technologies and systems, in effect beta testing the grid of the future.

The rapid growth of both large-scale renewables and distributed energy resources, or DERs, means that we as a grid planner and operator we have to find ways of managing third-party assets that we don't own or don't control, assets such as private rooftop solar or electric vehicles.

We have to work on this as a system rather than look at these individual items in isolation.

In one of our many pilot projects, we're working with General Electric, Tesla Energy and Green Charge Networks to test a distributed energy resources management system on 3 interconnected feeders this summer.

The pilot includes private residential rooftop solar with smart inverters, residential battery storage, commercial industrial battery storage and a utility-scale battery storage facility that PG&E owns and 1 which has the capability to sell into the wholesale market.

What's unique about this pilot is that it gets right to the core of our grid modernization work, namely having visibility into all the resources that our customers are connecting to the grid and understanding how they respond when we as a grid operator need to manage them for the overall safety and reliability of the electric system.

Now in order to succeed in the future energy market, we not only need to invest in the right technologies and systems, we also need to have the right policies in place to help us achieve the state's clean energy goals.

You may recall that during our Q1 earnings call I mentioned the portfolio allocation mechanism or PAM filing that PG&E and the other California investor-owned utilities jointly submitted to the CPUC.

In the filing, we proposed to replace the power charge indifference adjustment with an updated approach that more fairly allocates costs and benefits between customers who choose CCAs or direct access and those who stay with their existing energy provider.

This is a critical issue where all parties recognize the need for reform.

On June 29, the CPUC voted out a new order instituting rulemaking to review, revise and consider alternatives to the power charge indifference adjustment.

While the CPUC at the same time dismissed the PAM application, we view the new OIR as a clear recognition of the need for reform to ensure that costs are fairly allocated to all customers in compliance with the state law.

The CPUC has recognized the issues with the current mechanism, and we will have the opportunity to advocate with the other IOUs for the types of reform that were included in the PAM application.

In closing, I want to reiterate that this has been a strong quarter.

We continue to make steady progress in our safety culture, and we provided impressive reliability for our customers despite a record-setting heat wave.

We also achieved a number of positive regulatory outcomes, including the General Rate Case and the cost of capital decision, which provide a solid foundation for the investments we will be making our system.

With that, let me thank you for joining us, and let me turn things over to David to walk us through the financials.

Thank you, Geisha, and good morning, everyone.

I'll start by covering our second quarter results and then provide a couple of updates to our guidance for 2017.

Slide 4 shows our results for the second quarter.

Earnings from operations came in at $0.86.

GAAP earnings, including items impacting comparability, are also shown here.

Pipeline-related expenses were $29 million pretax for the quarter.

Our legal and regulatory related expenses came in at $3 million pretax.

For the Butte fire, we recorded insurance recoveries of $46 million pretax this quarter, including the receipt of $32 million from one of our contractor's insurers.

This was partially offset by legal costs of $17 million, for a net favorable impact of $29 million pretax for the quarter.

Finally, we have a new item this quarter related to charges associated with the planned closure of Diablo Canyon.

During the quarter, we reached a settlement with parties in our joint proposal to retire Diablo Canyon, along with several other intervenors, which provides clarity on the recovery of previously incurred license renewal costs and costs incurred for projects that will be canceled as a result of the retirement.

As part of that settlement agreement, we have recorded a $47 million pretax charge for the unrecoverable portion of these costs in the second quarter.

This settlement agreement was filed with the CPUC in May, and we expect a final decision later this year.

Moving on.

Slide 5 shows the quarter-over-quarter comparison for earnings from operations of $0.66 in Q2 last year and $0.86 in Q2 of this year.

Consistent with last quarter, we were $0.15 favorable due to the timing of 2015 GT&S rate case decision, which was received in August of last year.

This year-to-date favorable variance of roughly $0.30 will fully reverse in the fourth quarter.

Rate base earnings were $0.07 for the quarter.

Since we did not receive the 2017 GRC decision until May of this year, our second quarter results reflect 2 quarters of incremental GRC rate base earnings.

You can expect to see about $0.05 in rate based earnings for each of the next few quarters for a total of $0.20 for the full year.

A number of small miscellaneous items totaled $0.04 positive for the quarter, most of which is timing related and is expected to reverse by year end.

There were 2 additional items from the 2017 GRC decision that contributed to a negative $0.04.

As we mentioned last year, our GRC revenues were adjusted in 2017, resulting in a loss of incremental tax repair benefits of roughly $0.25 annually, including $0.07 this quarter.

This was partially offset by $0.03 favorable for incremental revenues to recover depreciation and interest costs that we incurred in the first quarter.

Lastly, we had $0.02 negative related to the issuance of shares.

Transitioning now to Slide 6. Today, we are reaffirming our guidance for earnings from operations of $3.55 to $3.75 per share.

On Slide 7, we've outlined the underlying assumptions for that guidance.

I'll reiterate that it remains our objective to earn the CPUC-authorized return on equity across the enterprise in 2017.

One adjustment to our plan that I'll note here is we are reducing our 2017 CapEx range from approximately $6 billion to roughly $5.9 billion, which primarily reflects the shift in some of our gas transmission and distribution work into 2018.

At the same time, we have increased the CapEx forecast for 2018 to $6.1 billion, on Slide 10, to reflect this adjustment.

Turning now to Slide 8. There are a few changes in our items impacting comparability in 2017.

Butte fire-related insurance recoveries net of legal costs reflect recorded proceeds and costs through the second quarter.

The shareholder derivative settlement was approved by the court on July 18, and we expect to record a net benefit of $65 million pretax in the third quarter.

Lastly, we've included the $47 million for the Diablo Canyon-related charges that I mentioned earlier.

Moving now to Slide 9. I'm pleased to share that the high end of our equity range has decreased from $600 million to $500 million.

With 2 quarters under our belt, we have better line of sight into our financing plans for the year, coupled with the shift in some capital to 2018.

On Slides 10 and 11, we've updated our CapEx and rate base to reflect the changes I shared earlier.

Additionally, as Geisha mentioned, we filed our TO19 case with FERC yesterday, which includes a roughly $200 million increase to CapEx over our TO17 settlement.

This is reflected in the high end of our CapEx and rate base ranges.

Finally, let's move on to Slide 12.

At the end of May, we announced that we were raising our quarterly dividend $0.04, to $0.53 per share.

On an annual basis, this increases our dividend by 8%, from $1.96 per share to $2.12 per share.

This is another step in our commitment to target a 60% dividend payout ratio by 2019.

I'll close by echoing Geisha's comments about how pleased we are with the results this quarter.

With favorable regulatory decisions in 2 of our most important cases, the General Rate Case and cost of capital, great reliability despite a record heat wave and we're continuing to provide shareholder value with another increase to our dividend.

We continue to be confident in our ability to deliver on our plans as we evolve with a changing energy landscape.

And while we aren't providing guidance beyond 2017, our objective is to earn the recently authorized return on equity across the enterprise for 2018 and 2019.

With that, let's open up the line for questions.

(Operator Instructions) Our first question comes from the line of Jonathan Arnold with Deutsche Bank.

Could you just speak to what's driving the delay in the gas spending, the $100 million that you moved out of '17 into '18?

Jonathan, this is Jason.

It really is -- we started to bundle some of our work on our gas transmission and distribution business so that we could better execute that work.

As a result, this is really just sort of a timing shift where the final execution of that work will fall into 2018.

That's why we're really just highlighting its timing and nature.

Okay.

And the lower equity is sort of partly that and partly -- and better -- other things by the sound of it?

That's right.

I mean, we have better visibility to our financing plan with 2 quarters under our belt.

So we have a final decision in the GRC.

We've resolved a number of our pending items impacting comparability which we started the year with.

So we have a better line of sight to the equity needs for the full year here in 2017.

Okay.

So I'll try not to ask something else that'll burn out Jason's voice.

But the -- can you talk -- on Diablo, obviously, you have the settlement and the charge this quarter.

Can we -- can you talk about where that proceeding sits?

And I remember there was a piece of it that used to relate to -- and a replacement that got pulled out of the current case.

And just is this -- should we view this charge as sort of the end of the first phase effectively?

And how do we think about the second phase?

Jonathan, this is Steve Malnight.

In terms of where the proceedings sit, so yes, we -- the record in the proceeding is now closed, and we're awaiting a proposed decision from the judge.

It has evolved and changed pretty substantially since it was originally filed.

So as you noted, we filed a settlement with the joint parties to withdraw some of the procurement that we have proposed to do in this proceeding and instead defer that to the commission's integrated resource plan proceeding.

So we still have the energy efficiency replacement that is in this case, but we've deferred the remainder to the IRP.

In the case, we still have the costs for the employee retention programs as well as the retraining programs.

We have the community mitigation payments that we proposed.

And as David mentioned in the call, we recently filed an additional settlement that resolved some of the uncertainty around -- that would resolve some of the uncertainty around both the license cost recovery as well as canceled projects.

So at this point, we're awaiting a proposed decision from the judge on all of those items.

Our next question comes from the line of Praful Mehta with Citigroup.

So my first question was on the power indifference charge and the indifference adjustment around CCAs.

Just want to understand a little bit more around the progress on that and when do you see timing of something happening around adjustments for that clause and how you think that plays out over time?

Yes, so this is Steve Malnight again.

Let me just give a quick update on that.

As we mentioned, in the original proceeding the power cost indifference adjustment, the PCIA, is really designed to ensure that the state law is fulfilled to maintain indifference as some customers choose to leave bundled service and go to either CCAs or direct access.

As we have pointed out, and as I think the joint utilities pointed out, the current mechanism as it stands today does not fully allocate those costs.

So for us, about 35% of those costs really remain with bundled customers, which needs to be corrected, as CCAs continue to become a bigger and bigger part of load.

With the PCIA OIR that the commission recently launched, we view that as a real positive.

The commission's clearly recognized the need for reform in that proceeding and has laid out some guiding principles that highlight the need to really maintain what we call bundled customer indifference which ensures that the state law is followed.

So the commission has not yet issued a schedule, but in many different proceedings and areas, they have mentioned the desire to handle this on an expedited basis and move through that quickly.

So we're very hopeful that, that comes to pass.

And we'll see and follow this proceeding as it goes.

I would expect it will hopefully be resolved sometime in 2018.

Got you.

And then secondly, on the cost of capital, I know we have the good outcome around the 2019 time frame.

But just to understand from an ROE perspective and your authorized equity perspective, do you think that will be tougher to maintain your authorized equity at current levels going forward?

And in terms of ROEs, do you think there's a risk at that time in terms of where the ROEs come out and how do you think that plays out?

Praful, this is Jason.

I think it's way too early to tell.

I mean clearly when we litigate cost of capital they're going to look at the equity ratio; they'll look at our return on equity; they'll look at the adjustment mechanism.

But frankly, I think it's just way too early in the process to think about what's going to happen 2 years down the road.

Our next question comes from the line of Michael Lapides with Goldman Sachs.

Couple of CapEx questions.

Just in the TO cases, and if you don't mind address TO18 and TO19, the one that just got filed.

What is the CapEx for those TO cases relative, I think it's to the roughly $1.1 billion that you're assuming in 2017?

Michael, this is Jason.

In TO18, we filed for a CapEx of $1.3 billion.

As you know, that case is still pending.

Hearing is next -- the first quarter next year.

Currently, we're forecasting spend for this year on our electric transmission business of $1.1 billion.

That compares to what we filed in TO19 of a CapEx of $1.4 billion.

So you filed for TO18 of $1.3 billion, TO19 of $1.4 billion.

If you were to get actually get that CapEx spend, that adds another $500 million to $600 million to your CapEx and then after bonus, [P&A] and all that good stuff, it kind of creates an uplift potentially to rate base?

It does create potential upside.

But obviously, we're going to have to work through the hearings process, and we just filed the TO19 case.

So we'll have to work through what we anticipate to be settlement discussions early on, and I think a lot of this will be tied up to the resolution of TO18.

Got it.

Okay.

And finally, Geisha, when you look at other opportunities for rate base growth, and you lay several out on the slides, which ones do you think have the potential to be the most material?

Meaning when I think about it on a dollar of capital invested, which ones do you see that are not in your current CapEx forecast where you could see, hey, that could wind up being a pretty big number over time?

Yes, the ones we've talked about historically which are outside this period is what ultimately happens with the high-speed rail, what ultimately happens with some of these really large state-sponsored projects.

I think that provides an opportunity.

More near term, I continue to think that there's great opportunity around electrification of transportation.

I think at this continued improvement or opportunity for us to continue making investments in our bread-and-butter work, modernizing the electric lines and modernizing our pipes.

So longer term, it's the things that are outside the range, like the high-speed rail, short term it's our bread-and-butter work.

Our next question comes from the line of Anthony Crowdell with Jefferies.

Just quickly, you talk about earning a 10.4% on the entire enterprise.

As you shift into a lower ROE with this cost-of-capital extension, is that a good metric to use for the whole enterprise earning a 10.25%?

Or do we expect, as Michael just brought up, as the transmission rate base maybe continues to grow is the ability to earn above the 10.25%?

Yes, we're still signaling to earn the CPUC-authorized return on equity in '18 and '19, which is 10.25%.

We did file a TO19 for 10.75%.

That's the 10.25% plus the 50 basis point adder for participant in the competitive transmission process.

But the electric transmission rate base still represents a little less than 20% of the overall rate base.

So that differential isn't very significant to earnings.

Our next question comes from the line of Travis Miller with Morningstar Capital Group.

You answered my primary question on Diablo Canyon earlier.

But if we step back and think about the next however many years here before the proposed closure, at what point do you get clarity in terms of recovering any kind of stranded capital costs that haven't been depreciated or then potentially a bigger issue on the decommissioning costs?

Travis, this is Steve Malnight again.

So thanks for the question.

I should say another important part of the existing proposal that I failed to mention before actually is the mechanism to ensure that the rate base for Diablo Canyon is appropriately depreciated through the rest of its useful life.

So under our proposal, the -- we will put in place the mechanisms to ensure that the depreciation is fully recovered in that plant by the time it shuts down.

So that's part of the proposal we have now.

On the decommissioning, as you know, that's going to be a very long-term endeavor at Diablo Canyon as we go through that.

We have regular proceedings to look at the cost of decommissioning.

We recently had the decision in the current case that did not fully support our estimated cost.

But we will have the opportunity in 2018 to come back and refile that.

And as a part of our plans for decommissioning, we're now going to be conducting a site-specific study, which will look in detail at the estimated cost.

So we will be litigating that again in 2018.

Okay.

And when you talk about the fully recovered depreciation over this next period if you receive the terms of the settlement it would, accounting wise, increase depreciation but then you would collect those back from ratepayers through higher rates.

Is that what would happen on a very high level?

Yes, this is David Thomason.

We have already actually been depreciating Diablo to fully recover the asset balance by the end of its current license term.

So there's no increase necessarily in depreciation as a result of that path.

Okay.

So you would be at a 0 rate base number by that time.

Correct.

So 2.2 roughly in Diablo rate base today, we hope to be -- or plan to be at 0 by the end of the current license term.

Our next question comes from the line of Ashar Khan with [Visium] Fund Management.

My questions have been answered.

All right.

All right, well, this is Ann.

It appears we have gone through the queue of questions.

So thanks, everyone, for joining us this morning.

We wish you a safe and happy day.

Ladies and gentlemen, thank you for attending that PG&E Corporation 2017 Second Quarter Conference Call.

This now concludes the conference.

Enjoy the rest of your day.