PG&E Corp (PCG) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by, and welcome to the PG&E Corporation Fourth Quarter and Full Year Earnings Call. (Operator Instructions) And please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Matt Fallon, Senior Director of Investor Relations. Sir, please go ahead.

Good morning, everyone. Thank you for participating in PG&E's fourth quarter earnings call. Joining us today are Patti Poppe, our Chief Executive Officer; and Chris Foster, Executive Vice President and Chief Financial Officer.

I want to remind you that today's discussion will include forward-looking statements about our outlook for future financial results. These statements are 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 fourth quarter earnings call presentation.

The presentation also includes a reconciliation between non-GAAP and GAAP measures The presentation can be found online, along with other information, at investor.pgecorp.com. We also encourage you to review our annual report on Form 10-K for the year ended December 31, 2021.

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

Thank you, Matt. Good morning, everyone. Thanks so much for joining us today.

Our performance in 2021 confirms my confidence in our future. One, we've got the right team in place who implemented our lean operating system, first, in wildfire, and then across the company. Two, we've established our regional service model to deliver for hometowns. Three, we met our major commitments in the 2021 wildfire mitigation plan by the end of the year and implemented programs resulting in a significant reduction in wildfire risk. Four, our federal probation period has ended. We're a safer company because of the improvements we've made in the past 5 years. We look forward to continuing to work closely with policymakers, agencies and regulators to rebuild trust through relentless focus on execution. We welcome the transparency and accountability that our customers should expect. And five, on our financials, we delivered right on our EPS target, $1 a share, the midpoint of our commitment for non-GAAP core earnings on a fully diluted basis. This is $1.08 on our basic share count consistent with reporting a GAAP loss.

We met our commitment to you, our investors; not more, not less, putting every penny to work for our customers. As you'd expect from us, we'll continue to manage the business efficiently to benefit our customers and provide predictable financial results to you, our investors, every year.

For 2022, our non-GAAP core EPS guidance is $1.07 to $1.13, up 7% to 13%, with a midpoint growth at 10%. Longer term, we're focused on delivering a total return of EPS growth plus dividend yield of at least 10% per year every year. This premium total return is driven by a simple but affordable model that you can see on Slide 4. We're making substantial necessary investments for our customers to improve the safety, resiliency and reliability of our service, including our aggressive undergrounding plan. To mitigate the customer impact of our higher investment growth, we're planning to reduce our nonfuel O&M expense by at least 2% every year. And we're fortunate to have sales growth that accelerates over the years ahead from electric vehicles, building electrification and more. And of course, we're making smart business decisions focused on optimizing our generation sources, efficient financing and minimizing the use of dilutive equity. Longer term, we expect the impact to our customers will be at or below inflation.

Everything we've accomplished in 2021 reflects our focus on the triple bottom line, serving people, the planet and California's prosperity, underpinned by our relentless pursuit of improving our performance. We'll continue to lead by that triple bottom line, driving our performance in 2022 and beyond.

Speaking of performance, to provide transparency and accountability, we'll be providing you with a report card each quarter. This is something you've been asking for and it is shown here on Slide 5. We'll provide you with specific metrics related to our wildfire efforts, our customers and our financials.

Specifically, we'll show the number of reportable ignitions, our progress on undergrounding, gas distribution main replacements, our nonfuel O&M cost reduction and several financial metrics. You'll see our progress across the business as we report out each quarter.

Our clear sky playbook works. And in 2021, we experienced how powerful it can be here at PG&E. One bread-and-butter example is an in-line inspection job that I visited a couple of weeks ago. Using our daily operating reviews and visual management tools, the project team installed 14 miles of in-line inspection capability. At the ribbon cutting, 2 local mayors and city council members shared with me how satisfied they were with the work and how we showed up for our hometowns; seamless cross-functional execution that is focused on our customers. Thanks to our DAS team for making it look easy, and it can be when we have an operating method that delivers consistent and predictable outcomes.

Our lean playbook also drove the execution of our wildfire mitigation plan, producing great results. Last summer, we reengineered our distribution lines to shut off power within 1/10 of a second when an object strikes the line or a fault occurs. We refer to this as enhanced power line safety settings or EPSS. In 2021, EPSS was enabled on 45% of the lines in our high-fire threat service area based on fuel risk and accessibility.

To be clear, EPSS is different from our public safety power shutoff program. which is based on proactively turning off lines and dangerous fire weather conditions, primarily high winds combined with low fuel moisture levels. We're planning on expanding our EPSS program in 2022 to up to 100% of our high-fire threat distribution miles. As a reminder, these settings are in place to address the risk of an ignition on a non-red flag warning day that also has dry conditions. The expansion of the program in 2022 provides a greater level of risk reduction. And we're also implementing enhancements to reduce the impact of EPSS on customers.

As you can see on Slide 6, once we implemented our enhanced power line safety settings, we saw an 80% reduction in ignitions on enabled circuits, which translates to a 40% reduction in ignitions across all high-fire threat districts. And as I said, in 2022, we're planning to adjust the program, so all of our high-fire threat distribution miles are capable of enhanced power line safety settings. We've learned a lot from our experience last summer. And we'll use that education to guide how we engineer these settings in 2022.

In addition to expanding our EPSS program in 2022, we continue to focus on our most impacted customers in our public safety power shutoff or PSPS program. As a reminder, our modeling shows that the protocols we had in place for the 2021 wildfire season would have reduced the number of impacted structures from 2012 to 2020 by 96%. And due to increased sectionalization and more localized weather forecasting, our 2021 protocols reduced customer impact from PSPS by 78% this year.

While we've developed an effectively scoped PSPS program, we expect this program to be less visible over time due to our focus on our enhanced vegetation management, our inspections, our repairs, our undergrounding and our microgrid work.

On that last point, PG&E brought our first remote microgrid online in 2021. This solution means that an overhead line is removed in a high-fire threat area, keeping our customers safe. We're pursuing additional microgrid opportunities as part of our comprehensive wildfire mitigation plan in 2022. When removing a line is infeasible, there are even more exciting tools in our toolkit. What we're exploring is the full potential of distributed energy resources and bidirectional charging electric vehicles that will offer resilience options for our customers. We can eliminate the trade-off between being safe and having power. That's the future, and we're making it happen here in California.

For the longer term, we're expanding our system hardening program. Today, we're providing the first look at the next 5 years of our undergrounding plan, here on Slide 8. It's big and it's bold. We're moving on our commitment to underground 10,000 miles of power lines in our high-fire risk areas.

Undergrounding is a strong long-term solution for PG&E to reduce wildfire risk in certain parts of our service area. As we'll outline in our 2022 wildfire mitigation plan, our goal is to substantially increase our underground miles each year, ramping up from 175 miles in 2022 to 1,200 miles in 2026. Of the nearly 600 miles we plan to complete by the end of 2023, our 50% -- over 50% are already scoped, construction-ready or under construction. We'll file an update to our 2023 general rate case, along with our 2022 wildfire mitigation plan, on February 25 to reflect this game-changing investment. And here's the good news. Undergrounding is a great example of our simple and affordable model in action. We invest in really high-value capital infrastructure and reduce our spend on temporary repairs and annual recurring expenses. Our update later this month will reflect the minimal impact to customers relative to our previous filings.

As you can see on Slide 9, our capital plan is larger from 2022 to 2026 than in previous 5 years. The need for significant investment across the system results from many factors, including continued safety investments in our gas system, property and building consolidation, technology adoptions to make our work more efficient, ongoing grid hardening and expansions and, of course, our undergrounding plan. And as I covered earlier, we will protect our customers from energy bills they cannot afford with a cost discipline that many of you would expect.

Before I hand it over to Chris, I'd like to close by reinforcing that we've met our commitments in 2021. We've laid the foundation to continue meeting our commitments in 2022, we significantly reduced wildfire risk and are making investments that serve our triple bottom line of people, planet and California's prosperity.

Now I'll hand it over to Chris to cover financial and regulatory items.

Thank you, Patti, and good morning, everyone. As Patti mentioned earlier, this is about operating results and financial results. We're hitting our stride on our financial outcomes, creating a solid path to becoming a premium utility. This means meeting our financial targets, delivering consistent regulatory outcomes and keeping an eye on the horizon. For us, that includes an improved emphasis on customer affordability, balance sheet health and enabling clean energy solutions for California.

Today, I'll cover 3 topics: First, our 2021 results, which we're right on target, and our 2022 guidance; second, areas of regulatory and legislative progress; and third, key elements of our strengthened 5-year plan, which balances a range of necessary investment opportunities in our hometown with a focus on affordability.

Let me now start with our 2020 highlights, then move into greater detail.

We met our non-GAAP core EPS guidance, landing at $1 for the year using our fully diluted share count assumed in our guidance or $1.08 using our basic share count consistent with our GAAP loss. We finished the year without issuing equity. We executed our first of 3 AB 1054 securitization transaction. We reached settlement agreements in our 2018 CEMA and 2020 WMCE cases. And we received a positive final outcome in our first WEMA application.

Slide 10 shows our results for both the fourth quarter and the year. Let's start with the share count used for Q4 2021 and full year GAAP and non-GAAP core earnings per share. As you can see, we're in a small gap loss position for 2021 due to our grantor trust election utilized for efficient tax planning. As a result of the GAAP loss, we're required to use basic shares outstanding to calculate both GAAP EPS and non-GAAP core EPS for the full year. Our full year guidance assumes non-GAAP core EPS of $0.95 to $1.05 per share using our fully diluted share count. So on a fully diluted basis, we landed right on our target of $1.

We were GAAP-positive for the quarter. So our Q4 GAAP and non-GAAP core EPS calculation reflects our fully diluted share count. Non-GAAP core earnings for the year came in at $2.1 billion. The noncore items listed here are consistent with the full year 2021 guidance range.

Moving to Slide 11. This shows the quarter-over-quarter comparison for non-GAAP core earnings of $596 million or $0.28 in the fourth quarter. We are pleased with the $0.11 of improvement here and, in particular, the $0.02 represented by operating cost enhancements in the fourth quarter. These savings are reflective of our enhanced focus on implementing better long-term solutions, allowing us to reduce costs and resulting in a more sustainable and affordable plan for our customers.

Now to a few updates on regulatory matters. On the debt side, we completed our initial AB 1054 securitization transaction during Q4 2021 for $860 million. You can expect a similar transaction later this year once we work through the next regulatory proceeding. Over the next couple of years, we expect to issue total securitization under the AB 1054 legislation up to $3.2 billion in the cap that was previously established with the timing of issuances tied to the timing of the qualified spend. We view this as an important component of the capital plan to reduce cost for customers while we invest in wildfire risk mitigation work.

Our separate rate-neutral securitization has also been approved by the CPUC. As a reminder, the use of proceeds from this transaction will allow us to retire $6 billion of temporary debt at the utility that has funded those payments in the interim. We are still working through the legal challenge that has been filed, but we are focused on issuing the securitization quickly once it is resolved and are hopeful to start issuing a first series as early as the second quarter of 2022.

Additionally, during 2021, we continue to make progress on settling our outstanding cost recovery requests for wildfire-related investments. As previously highlighted, we filed a settlement agreement for our 2020 WMCE case, and we received a final decision on our first WEMA application during 2021. Additionally, on November 4, we filed a settlement with the CPUC for 90% of our request in the 2018 CEMA case. As you can see here on Slide 12, we expect to start seeing cash flows from these settled rate cases starting this year.

I also want to touch briefly on the next steps in our cost of capital proceeding. On December 24, the CPUC issued a scoping memo in the 2022 cost of capital case, which narrowed the scope to a review for just this year. Specifically, the CPUC will consider whether there are extraordinary events that warrant a departure from the cost of capital mechanism and whether to leave the cost of capital components at pre-2022 levels for the year 2022. Additionally, the scoping memo clarifies that this proceeding does not replace our requirement to file a full application for test year 2023, which we'll do in April. The CPUC has not set a date for a final decision. And as we indicated in our application, we believe a reasonable outcome is to continue to currently authorized cost of capital because the COVID-19 pandemic and related government response warrant a departure from the cost of capital mechanism for 2022.

Patti touched on our 2023 general rate case and the updated testimony we will be filing later this month in conjunction with our 2022 wildfire mitigation plan. As a reminder, this is our first GRC in a first -- on a 4-year cycle and our first GRC to incorporate costs for our gas transmission and storage facilities. The scoping memo calls for hearings this May and a final decision in the second quarter of 2023.

Let's move to Slide 13 and look ahead to this year and the next 5 years, where we'll continue to focus on the triple bottom line.

Guidance for 2022 represents consistency, including our focus on limiting equity needs while continuing to make progress to resolve legacy issues. For 2022, we are providing a range for non-GAAP core EPS guidance of $1.07 to $1.13, maintaining our 10% earnings per share growth. For 2022, we estimate our equity issuance needs in the range of $100 million to $400 million.

As Patti touched on, we have substantially updated our 5-year plan. Let's go ahead and move to Slide 14, where we provide our refreshed 2022 to 2026 projections. There is much to share in this improved plan, including earnings per share growth will continue on the 10% path in the near term and will transition into an EPS growth plus dividend yield of at least 10% as we grow into our dividend upon reinstatement. Our rate base CAGR goes from 8.5% to 9%. This growth includes our current estimates over this period, including the kicking off of our undergrounding program. This plan is consistent with what will be reflected in our upcoming February 25 filings. It also includes investments in remote grids and system modernization to expand our preparedness for electrification. We also retain our commitment to reducing debt at the holding company in the coming years with targeted reductions of $2 billion by the end of 2023. The continued suspension of the common stock dividend will support these debt reductions.

The overall financing plan has been developed with our long-term FFO-to-debt targets in mind as we look to achieve mid- to high-teens levels in 2024. As Patti mentioned, our capital investment program is focused sharply on critical customer needs. We can finance this and make it affordable for our customers, and we intend to manage this over time to maintain customer impacts around the level of inflation in California. Starting this year, we plan to reduce nonfuel O&M costs by 2% every year. Our O&M costs used to increase every year. And over time, we anticipate low growth due to electrification to help spread our costs over a larger base, and we'll make good business decisions to more efficiently provide generation and more efficiently finance the enterprise. This enhanced approach for us at PG&E helps us deliver for our hometown and for our investors. We'll execute against this 5-year plan using our lean operating system, where we can better seek out waste elimination and make the work easier for our coworkers. There's a lot of work to do, and it can be done more simply.

We've already seen success in 2021. Recall that we targeted savings of roughly $1 billion each year. The outcome for 2021 had us at roughly $1.6 billion in savings. We achieved savings well above that prior target of $1 billion, reflecting good business decisions with improved unit cost performance and transactional savings. The operational savings achieved this year include around $560 million from efficiencies gained by renegotiating electric construction contracts with third parties, among other efforts, and we're just getting started.

As a team, we are determined to execute well on both the operational and financial plan we set out to benefit all components of the triple bottom line and drive prosperity for our state and investors.

I'll close by reiterating that we've delivered against the financial plan for 2021. Our focus has been and will continue to be on addressing the critical need to reduce wildfire risk in the near term while running the business effectively for the long term. Our stronger 5-year plan puts us on that path. We're investing in needed wildfire mitigation, improving our balance sheet and making the right investments to deliver clean energy safely to our customers.

With that, I'll go ahead hand it back to Patti.

Thanks, Chris. And as we've discussed, a lot has happened here at PG&E in 2021 that create the launching pad for 2022. As most of you know, I like to tell stories, so here we go. I have one more.

A couple of weeks ago, on one of my field visits, I stopped at our service center in Auburn. I heard a familiar story from one of our coworkers who lives in Plaster County with a PG&E distribution line on his property. Due to various work processes that should have been coordinated, he's had inspectors on his property 4 times, tree crews on his property 3 times and wood management crews another 3 times. That is 10 visits in a little over a year.

Now right after I groaned in frustration, I clapped and I say, "Okay, team. Step outside. Let's go." On this job, we could have reduced our cost by 20%, simply by having a better work plan. Similar jobs in 2021 cost PG&E $1 billion. Just think of how much better we can do and how our customers will benefit as we reduce the waste and, therefore, the cost in our processes.

I feel that momentum and potential every day. That's just one opportunity of many that I've encountered in my time here at PG&E. Opportunities to reduce costs, opportunities to improve our customer relationships, opportunities to deliver as the hometown team.

We're excited about what we've accomplished in 2021 and where we're going in 2022 and beyond. We're further mitigating wildfire risk by expanding our enhanced power line safety setting program and launching our undergrounding initiative. We've got the right operating system in place to deliver industry-leading financial growth, fueled by the important safety and resiliency-driven infrastructure investments funded by our cost savings, our growing load and good management practices to keep customer bills affordable. This is a new era at PG&E without trade-offs. We can serve customers and you, our investors without a compromise.

Thank you all for your time, and thank you for supporting the great work being done here at PG&E. Operator, please open the line for questions and answers.

(Operator Instructions) We have the first question comes from the line of Steve Fleishman from Wolfe Research.

So just on the -- a couple of questions on the undergrounding plan. With -- how should we think about how much you might actually be doing the work before you have full -- before you have approval for it? And just how you're thinking about that?

Well, Steve, nice to hear your voice. We have already approved filings for our hardening work. And so we're biasing the plan now to include more undergrounding. We have 211 -- or we have 14 miles done to date already this year, which we're excited about. We continue to make progress.

We have -- so as we look forward to future filings, we'll continue to -- and you'll see in our wildfire mitigation plan, which we file February 25, what our plan is for the future of undergrounding year-by-year as we've described in the deck today. But that will then be approved in the coming years.

We've actually been asked to update the GRC to reflect the inclusion of undergrounding. And I think the part that's most exciting for people is that we can make those additional undergrounding miles when we factored into our total capital plan with minimal impact on our original filing in terms of cost for customers. And so we can both make it safe and keep it affordable. And we're excited about that progress.

Great. And just could you maybe give a little more color on when you look at the 5-year plan undergrounding in years 3 to 5 start becoming pretty big numbers and capital. Just how you're thinking about funding it? And are you looking at kind of something other than straight balance sheet financing?

Sure. Steve, it's a couple of things we're looking at there. As you can imagine, the equity driver itself is going to ultimately depend on where we end up on that CapEx. But just stepping back, you can imagine we do have a couple of leverages as we look forward. First is going to be the amount of holding company debt that we retain as one lever. That gives us some good flexibility in those outer years. I think the second would be just the assumption for how quickly we choose to ramp up the dividend. So we're giving ourselves, I think, some good levers there in the out years to kind of try to manage any potential -- any financing pressures.

Okay. And then one other just technical question. The $5 million GAAP loss for '21, does that mean you're not eligible for S&P 500 inclusion until we get past the next quarter?

Yes. Sure, Steve. Happy to clarify that one. We did have a GAAP loss in Q3, right, that we had pointed to was going to occur. We have a positive Q4, right? So that would mean that the most recent quarter is GAAP-positive as it's looked at by S&P.

So really, the 2 metrics that we've got to meet at this stage are the most recent quarter being GAAP-positive and the sum of the 4 most recent quarters, GAAP-positive in terms of the ability to have S&P inclusion. And then it's really just the -- that qualitative factor that's harder to put a timeline on, as you can imagine, which is another entity has to fall out of the S&P for us to have eligibility to go in.

But just to clarify that second piece that -- because this is the last 4 quarters this year, that you don't meet that second metrics you're going to wait until at least maybe the next quarter (inaudible).

We have the next question comes from the line of Jonathan Arnold of Vertical Research.

Just one, I think, from the footnote to the slide, it says you're effectively assuming current cost of capital and equity ratio across the business in your '22 guidance. And so I would also like to verify that, that's correct.

And secondly, just the sort of how are you thinking about potentially different outcomes there and how that would sort of fall within the range that you've given us? Would you be able to -- expect to be able to offset that? Would you expect to able to be still delivering at 10% through pulling other levers and maybe that?

Yes. Great question, Jonathan. As you might expect, Jonathan, there's lots of puts and takes in any given year, and this is one. And we would expect to find another way to achieve our financial commitments.

And so we're planning conservatively, putting together plans in the event that the cost of capital proceeding does not go the way that we think it should. We're very optimistic about our filing and think that we've made a compelling argument. But of course, we'll plan accordingly. As I like to say, Jonathan, we'll ride the rollercoaster so you don't have to.

Okay. And then just one other thing, this 2% to 4% sort of longer-term customer rate, I guess that's customer bill impact. I think you described that as longer term. Could we talk a little about the near term and how that sort of calibrates against that broader target?

Yes. As you can imagine, we've got a lot of plans in place that we're working to reduce our O&M and reduce our cost structure. We do have our current rate filing as already in flight for the next 4 years. As we look at what the rate implications of that filing, it's on average about 4% per year. It tapers down in the latter half of the plan. And we expect to continue to be able to build this muscle to keep our rates affordable.

We do think that our rates are affordable. We believe that our -- the value offered to customers is significant. And so it's truly on us to continue to make the business more efficient, find ways of reducing costs. And one of the things I'm excited about here in California is actual load growth. That's a nice phenomenon. And we see with electric vehicles and electrification as well as customer growth, we've got a lot of opportunities here to continue to grow in California. And that's another offset to unit cost for customers going forward.

So this is an important muscle for us to develop here at PG&E. And as I mentioned in my opening remarks, I see lots of opportunity everywhere I go across the system for ways that we can improve the customer experience and reduce the cost to deliver.

Great. Okay. And then maybe one quick follow-up, because you said, Chris, to Steve, you talked about how quickly you ramp up the dividend being a lever you can pull for financing the incremental capital. Would you -- that would appear to imply you still anticipate starting it in that kind of mid-next year time frame, assuming the earnings play out the way they -- versus the cumulative target, I guess.

That's accurate, Jonathan. We'd still be looking at a situation where we'll hit that $6.2 billion in non-GAAP core earnings threshold that allow us to turn it back on. I just think at this stage, you can imagine I can't really get ahead of the decision we'll be making with the Board on the exact level of reinstatement, but we would certainly be eligible, again, roughly mid next year in looking forward to being able to turn it back on. But as you can imagine, just given the plans in front of us, we will be -- it's safe to assume, right, we'd be growing into that dividend.

We have the next question comes from the line of Shahriar Pourreza of Guggenheim Partners.

This is actually Constantine here for Shahriar. Congrats on all the accomplishments in '21. As we are thinking about the undergrounding that you're presenting today, can you elaborate on the inputs from any kind of bids or RFIs that drove the formation of the 3,600 target and the kind of cost levels that you're presenting? How does that fit within the 10,000-mile goal previously stated? And do you see some opportunities to improve or accelerate without crowding any investment?

Yes, great question. We -- a couple of things. We have current active undergrounding projects as we speak, and they range in their cost to complete. And we have some that are today in the $2 million a mile range. We have some that are more than that.

And so we're working to find the best methods and systems. We don't have a unit cost negotiated yet with a contractor for the full scope of the 10,000 miles. We're working on identifying what is that path forward. But one of the things that's exciting about the RFI that we did conduct a request for information, we got a lot of new technologies that are being deployed across the globe presented to us here.

For example, some boring equipment that's being used in Germany to underground transmission lines. It's pretty exciting stuff, which gives us confidence as we ramp up and scale this program with the right equipment, with the right partners, with the right work process, we can dramatically reduce our costs every year on the undergrounding scope and scale.

So we have a lot more meat to put on the bones as we move forward. But again, we'll share more specifics on our cost forecast and the near-term plans with our wildfire mitigation plan we're filing on the 25th of February.

And if I could just build on that Constantine, we really don't see this as crowding out the work, right? The beauty of this is that as Patti mentioned earlier, we've already got that ability in the underlying general rate case and in our subsequent rate case to put forward system hardening investments. So we're going to pull out some of what would previously have been, the overhead line miles we would have been putting in, and are putting in better risk reduction with the undergrounding mileage you're putting in instead.

So the risk and efficiency is better. The safety for our customers has improved. And ultimately, what you'll see is we're also going to have a true-up that goes in alongside that wildfire mitigation plan filing on February 25. that trip will show you that in the end, this is really where the rubber meets the road, that we will be able to put forward a plan that has minimal impact to customers while still going after this aggressive undergrounding effort on behalf of our customers in the state.

That's excellent color. I appreciate that very much. And as you noted in the multiyear financial plan, can you elaborate on the drivers for the 10% EPS and dividend yield? And how does that incorporate the new 9% rate base growth kind of financing needs versus prior guidance? And are there any assumptions in there around reinstating the dividend?

Sure thing. We definitely have a high-level assumption that's within the details of the 5-year plan. I certainly can't guide the specificity today because we have just made that assumption. I don't want to get ahead of that decision by management and the board.

But what I would offer is, again, you can see this year that we certainly -- we're already kicking off a substantial doubling -- or more than doubling of undergrounding mileage in terms of that effort as well as continuing our key safety and reliability investments. We've got a moderate equity need that we disclosed today. And our goal, again, going forward, Constantine, would be to ensure that we're finding that right balance. And that's going to be about making sure that we're pulling forward the work to get the work done efficiently, but doing so in a way that's, from a financing standpoint, efficient as we go.

Excellent. And a really quick follow-up on a related note in terms of the O&M profile and the 2% target. Is there a specific cadence in the reduction, especially as you start seeing some benefits around WMP and undergrounding in the tail end versus the front end of the plan?

No, we're shooting, Constantine, to do -- our goal is to shoot for 2% a year. We're going to work that every year. There's a lot of effort and -- underway and a lot of opportunities that we see going forward. So we're going to work that every year.

Though your intuition is right. Undergrounding is a perfect example of that simple and affordable model. It's capital-intensive because it's the right kind of long-term infrastructure that the system needs to be resilient in these conditions here in California. And it reduces then the need to rely on annual vegetation management and other annual expenses.

So we really have the opportunity here to demonstrate our simple and affordable model through undergrounding. So you're spot on, on that.

We have the next question comes from the line of Julien Dumoulin-Smith of Bank of America.

So just on this 2% nonfuel O&M cost reduction, what's the gross number? What's the starting point that you're starting with offsetting here? Just want to understand how meaningful of a program that you've got underway.

I know you threw out the $1 billion number of cost savings at least on just work process here at the outset in the script. But just high level, how much inflation are you otherwise looking at to offset here as a baseline that result in a net minus 2 here?

Sure. Thank you. It's substantial. Again, previously, what we guided to is taking that roughly $1 billion out of the business a year. Our target last year was $1 billion. We came through at $1.6 billion. We're pivoting now to this non-fuel O&M view, which will be all in. Think about it as roughly a total $10 billion amount that we'll be working down, right, over time. So 2% year-over-year. No matter where inflation stands right, our focus is going to be taking up that 2% productivity levels to improve themselves. As well as you heard us mention some of these large contracting efforts being ones where we can take out, in some cases, as we did last year, hundreds of millions of dollars in costs as we go. So that's really going to be the focus of the enterprise: year-over-year productivity in the field as well as making sure from a sourcing and contracting standpoint, we're really doing our best to get the best pricing possible.

Got it. And speaking of getting the best pricing possible here, I mean, how much confidence like -- I think about the confidence intervals in terms of achieving the new undergrounding cost metrics per mile that you've laid out, both near term and long term. I mean how much confidence can you have in those numbers just considering the amount of inflation and inflation in some of the input commodities here? And how do you think about potentially putting parameters or hedging around those especially through near and medium-term work here.

Well, I think our contracting strategy on our undergrounding work is going to obviously be very important, and we'll be working that out in the coming months. We have confidence, Julien, because we're doing it today. We have projects that are coming in at $2 million a mile today. And that's with, what I would say very rudimentary methods that we haven't deployed the best technology because we don't have the scale to deploy the technology.

In fact, I was out on a job and I was talking to one of our providers of the trenching equipment. And I said to him, "Hey, is this your best stuff that we're using?" He said, "Heck, no, I have much better equipment that we could be using." I said, "Well, why isn't it here?" He said, "Because you don't have scale. You're not running enough miles underground to make it worth for me to bring my best equipment. You scale up and I can help reduce the cost and the speed and the time to deliver."

So it's pretty interesting. I go back to my old school industrial engineering, Julien, and I know that with scale, we can improve the unit cost. So knowing that we can do $2 million a mile on certain jobs today, I know at scale, we can do that with the right equipment, process, partners and work plan.

And sorry, just to clarify, have you run these numbers by the commission staff, et cetera, just in terms of the new cost metrics that you're talking about today? I know that this has been a gradual unveil, if you will.

Yes. We certainly had conversations with staff about our plans and where we're headed, but our formal filing comes on February 25. And that's when we'll get formal feedback from all the key stakeholders.

We have the next question comes from the line of Michael Lapides of Goldman Sachs.

I actually had a couple of things. One is really a mnemonic or language question, which is in your text around the EPS CAGR, this is the first time, I think, where you referred to it as of a total return proposition long term, so EPS plus a yield. If I go back and look at the third quarter decks and some of the ones previously, it was just an EPS CAGR, no mention of the combo yield. I know that's a really small difference. Can you just walk us through what drove that language change?

No. Absolutely, Michael, and good to hear from you. This is absolutely one of the key components of the 5-year plan. I'd really think about it, and that's one. I think there's probably 3 things we're really focused on today. The first is shifting from that EPS CAGR generically to a total return scenario where as we turn the dividend back on, right, and we'll grow that dividend toward the back half of those years, we're looking instead of just that generic EPS guide as a CAGR. What we're saying is a consistent 10% return at least over that time period. So it's a significant shift.

I think the second is our increased focus on cost and cost efficiencies, right? Previously, when we had last guided on overall customer bill impact trajectory, we were talking in the neighborhood of roughly 5%. What we're talking about today, as Patti mentioned, is closer to 4% and we're going to keep working that down.

And I think the third piece is just the underlying risk reduction is what we're trying to convey today. The body of work is going to mean better risk reduction in the near term, which is the very large expansion of our EPSS program, which is immediate risk reduction once we get that ready on the system and to the long-term risk reduction that comes from undergrounding. So those are really the 3 key components of the financial plan and operating plan.

Right. I just -- I want to come back to the EPS CAGR portion of it. And I hate to harp on this, but if this is now including a 10% total return projection, like that's the long-term goal, but it includes a dividend yield. Did you -- does that basically imply relative to what you put out at second quarter and third quarter as kind of a 10% EPS CAGR, that you're basically reducing the EPS CAGR because part of that total return, if I'm kind of moving towards 10%, is the eventual future dividend yield?

That's essentially correct, Michael. Again, we're really shifting ultimately to the total return model. We're going to reinvest in the enterprise where we need to, to keep costs low and put ourselves in line with premium peers at a total return level.

Got it. And then 1 thing just on the customer bill. Can you -- commodity prices are up. I know you all have control over a lot of things in the bill. You also don't have -- there are a lot of things in the bill, your tables in the K are great on that, that you don't really have as much control of. Can you talk about just over the next year or so, what the move in commodities has done in the total bill?

Yes. So as we look at particularly natural gas, that's been a big driver. We're proud of the fact that we've been able to minimize the impact to customers on that. When some of the commodity prices are up 90%, we've been able to protect our customers closer to a 10% to 12% impact of the commodity. And that's because we've got good storage resources. We have a really aggressive purchasing strategy so that we prevent those big real-time spikes from hitting our customers.

We have the next question comes from Jeremy Tonet with JPMorgan.

It's actually Rich Sunderland on for Jeremy. Can you hear me?

We sure can.

Maybe just starting on the 2022 equity. Can you speak to your timing expectations there and what drives the high and low ends of the range?

Sure. Happy to cover it for you. At this point, nothing specific on timing just because, again, as you can imagine, we're always trying to take a conservative look at this, Rich.

Last year, as you recall, right, we had guided to 0 to $400 million. Pleased that we landed at 0 last year. Ultimately, what we're looking at are a couple of drivers. First, would be at its highest order. We're going to continue to work through legacy wildfire cases, right? We've got the commitment there to ensure we're continuing to make progress with the communities on individual claims that are there.

I think the other one is just going to be assumptions on some of the recoveries that we've got here and the materials that we're showcasing today for prior wildfire recoveries as well.

So in line at this point for the appropriate timing on proposed decisions on prior recoveries. And we'll continue to work our way through some of the legacy claims as well.

Got it. And then just thinking about the expanded EPSS how do you see an interplay with PSPS used this year? Just how do you see that wider rollout impacting the need to implement PSPS?

Yes, it's a great question. We're continuing to learn and optimize the use of both of those very important tools. I do want to remind -- and thanks for the prompt here, Rich. I want to remind everyone listening that the system is safer today because we know that we can rely on PSPS and EPSS under multitudes of conditions. Regardless of weather. Regardless of drought, we can protect our customers.

Now we know that PSPS is a tool of last resort, and we only use it when the conditions warrant. But we do have a model that when we look rearward and we can see the previous -- our current algorithm against previous conditions, we would have prevented 96% of structures loss between 2012 and 2020. That is a significant safety mitigation.

But we're pretty excited about EPSS and what we learned last year and the dramatic reduction in ignitions on those circuits where we enabled EPSS.

So keep in mind, EPSS is enabled even on a dry -- non-windy day, on a non-red flag day. When we know the conditions are ripe for a fire spread, we can enable those settings, and we've -- we're in the process of engineering and preparing to have 100% of our high-fire threat miles able to utilize the EPSS standards.

So that's pretty exciting for us. I think it's an important combination of risk mitigants that really enable us to keep people safe today.

We have the next question comes from the line of Gregg Orrill of UBS.

I was wondering if you could come back to the rate neutral securitization and sort of how you're thinking about the steps there and the timing for implementing that?

Sure thing. Gregg, looking basically at this point is just a reminder, this is -- at this stage, already has had the 2 approvals at the CPUC [of 5 nothing both]. And so we're currently in the appeals process through the courts at this stage. Currently looking at the earliest Q2 execution time frame just in terms of what we're seeing the appeals process kind of work its way through, still intend to execute this year, allowing us to take out that $6 billion in operating company debt.

Next question, we have the line of Stephen Byrd of Morgan Stanley.

I wanted to just talk about EPSS expansion in 2022 and just wanted to check in terms of whether there are any approvals or other processes. Or do you feel fairly confident that, that should be relatively straightforward to roll out more broadly in '22?

Well, we will obviously file it as part of our wildfire mitigation plan. We are moving forward and enabling the circuits. Some of the challenges we had early last year when we did what we call our hotline tag process, which is different than our full EPS-engineered coordinated settings that we're installing now. They had a significant impact on a small handful of customers who had multiple outages that were long because it would take out a really long stretch of a circuit, and we'd have to patrol it to make sure that it was safe before we reenergize. We've much dramatically improved our ability to address those challenges by coordinating the settings, engineering it so that a much smaller portion of the line is deenergized when it's made contact with something. Whether it's a tree or an animal that would cause a spark, we are de-energizing it 1/10 of a second, which is incredible. But then much shorter spans of lines so the patrol is much faster and the restoration is much faster.

And so certainly, we'll work with our regulators to make sure they're comfortable with our approach here and that filing will reflect that. But we're pretty bullish that this is a very, very important transformation of the safety and derisking of our system on behalf of customers. And that is something we're pretty excited about.

That's helpful color. And then just one other for me on the load growth discussion that you all laid out. You all laid out 1% to 3% load growth. How do you think about the -- and how do you factor in, I guess, the impacts of potential sort of customer loss of load from distributed generation, whether it's for commercial customers, residential, et cetera? How does that factor into your thinking on load growth?

Yes. So when we're talking about load growth, we're talking about wires growth. We do see that distributed solar actually is an important part of the mix here in California, both from a resiliency perspective as well as that peak mitigation, particularly when combined with storage, which, Stephen, you and I have talked about EVs many times. But I'm pretty excited about the bidirectional charging capacity of these new electric vehicles that are on the road today. And the combination of that storage with distributed energy and -- certainly has an impact, you could describe on load. But I think of it much more as a key enabler to the kind of supply that customers want, that's resilient, that can serve a peak demand and reduce the number of flex alerts we have here in California and make our supply more reliable. And at the same time, electrification and those EVs still does grow demand.

So net-net, that's where we come out on this 1% to 3% over time of electric load growth even with those distributed resources. It's a pretty exciting combination of technologies.

Next question, we have the line of Mr. Ryan Levine of Citi.

How is it determined that the target 3,600 underground mileage for undergrounding is appropriate that was laid out in the plan today? Is there any color you're able to share?

Well, as we've mentioned publicly, we've announced that we're going to do 10,000 miles. And so what we have challenged ourselves and what we're forecasting we're going to do is essentially doubling the miles every year. So in 2020, we did 75 miles. In 2022 -- or in 2021, we did 75 miles. In 2022, we're shooting for 175. And then we'll grow that double, double, double each year until we get up to about that 1,200 range which we think would be a reasonable level.

Now I say all that to say we have to prove that out. We have to do it. We have to actually execute on those plans. And we felt like that was the sort of ramp given the feedback we've received through our request for information from global contractors that we could conceivably deliver.

But obviously, that all has to be approved through our regulatory filings and more to come on that as we work with key stakeholders across the state to make sure that, that plan is one that everyone supports.

And then a follow-up. What would be the time line for PG&E to get more concrete bids on the cost of undergrounding given there was more information that was received at this point?

Yes. That will be coming in the coming months. We've got to first align with stakeholders on the volume we're looking at, then we'll do the bids. And we'll have a pretty comprehensive contracting strategy for how we'll complete that work and with whom we'll partner and what portions of that we'll in-source, what we'll outsource, et cetera. We're building out that plan as we speak.

There are no further questions at this time. I would now like to turn the call over back to Ms. Patti Poppe.

Thanks, Mel. Thank you, everyone, again, for joining us today. I just want to reiterate that we have really taken very positive steps forward on our wildfire risk. The combination of EPSS and PSPS in the near term today makes the system safer. Hardening the system, reimagining it with undergrounding as our, really, backbone of our hardening program going forward gives us a lot of confidence going forward on our ability to keep people safe.

I think the other thing I really want to leave you with is that our simple but affordable model is the path to both keep people safe and to deliver for investors. So we think there's no trade-off here. We can have the important capital work done, offset by cost savings and load growth and other smart management techniques, we'll work to deliver for customers every single day and for you, delivering predictable outcomes for investors.

This is a new era at PG&E, and we can't wait to take the ride along with you. So thanks so much for tuning in today. Be safe out there.

Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you all for participating. You may now disconnect.