PG&E Corp (PCG) — Q3 2016 Earnings Call Transcript

Thank you, everyone, and thanks to those of you on the phone for joining us. Before I turn it over to Tony Earley, I want to remind you that our discussion today will include forward-looking statements about our outlooks for future financial results, which 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 third quarter earnings and business update presentations. We also 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 the 2015 annual report. With that, I’ll hand it over to Tony.

Well, thank you, Janet. And thanks to all of you for joining us. We're going to do something a little different on today's call. We've resolved a number of regulatory and legal issues over the last several months. With the gas transmission and storage rate case decision, the all-party general rate case settlement, and the resolution of most of the San Bruno-related proceedings, we want to step back and review where we are and where we're heading. We plan to spend about half the time on today’s call with our prepared remarks. I'll start with a quick overview of our third quarter results and then share our vision for where the company is headed. We're also initiating 2017 earnings guidance today. So our presentation will take a little longer than usual, but we still expect to have about 30 minutes for questions at the end. So with that, let me turn it over to Jason to cover the third quarter results and then I'll talk more about our longer-term vision.

Thank you, Tony, and good morning everyone. I'm going to just start with the third quarter earnings presentation that we issued this morning and then we'll move to the business update presentation. Slide three shows our results for the third quarter. Earnings from operations came in at $0.94. I know this is lower than many of you expected, but we are reaffirming our guidance for earnings from operations for the full year. As I'll discuss more in a minute, the Q3 results are largely driven by timing items. Our third quarter GAAP earnings, including the items impacting comparability, were also shown on slide three. Pipeline-related expenses were $31 million pretax this quarter. The charge for legal and regulatory-related expenses was $23 million pretax, and fines and penalties were $67 million pretax, primarily related to the San Bruno penalty decision. We're showing $60 million pretax for the Butte fire-related costs, net of insurance, which are largely for legal costs associated with the Butte fire. We did not adjust our insurance receivable this third quarter. However, we do intend to seek recovery of all insured losses from our insurance carriers. And as a reminder, the current receivable should not be viewed as a ceiling on insurance recoveries. Moving to slide four, you'll see our quarter-over-quarter comparison of earnings from operations of $0.84 in Q3 of last year to $0.94 in Q3 of this year. As a result of the Phase 1 gas transmission storage rate case decision, we increased our rates in August to begin recovering the higher approved revenues. This resulted in $0.11 of higher revenues compared to Q3 of last year. We also continue to see a positive $0.05 for growth in rate concerns and regulatory and legal matters totaling a positive $0.05 for the quarter. Timing of taxes was $0.04 negative for the quarter, and as a reminder, this is purely a timing item that will net to zero by year end. As a result, you can expect to see a $0.20 pickup in the fourth quarter to fully offset the amount recognized through Q3. We also had $0.03 negative for an increase in outstanding shares and $0.04 negative for a number of miscellaneous items. Turning to slide five, we are reaffirming our guidance for earnings from operations of $3.65 to $3.85 per share. GAAP guidance is shown here as well. We are also reaffirming our expectation of roughly $800 million in equity issuance this year.

Thanks, Jason. Let me turn to the business update presentation that we issued earlier this morning. I'd encourage all of you to have the presentation in front of you as I share my comments because I think it will be a little easier to follow along. As you can see on slide three, we're going to cover three areas today. First, I'm going to review the progress we've made over the last six years because we have come a long way. We know we still have more work to do, but I am really proud of what the team has accomplished and I want to share some of those results with you. Second, I'm going to talk about some of the things that really provide PG&E with a strategic advantage, and third, I'm going to talk about what's driving growth going forward. As part of that, Jason is going to review the 2017 earnings guidance as well as our updated CapEx and rate base guidance through 2019. Between our 6.5% to 7% rate base growth and our above-average dividend per share growth, we expect to deliver strong returns over the next several years. Turning to slide six, one of the things I'm most proud of is how we've embedded safety into our core governance structures. Safety is really the foundation of everything that we do. When I joined the company in 2011, we began a back-to-basic structure with safety at the forefront. Let me give you some examples of that. At the leadership level, we've supplemented our team with new board members and executives who bring significant utility experience. At the Boards of Directors, we brought on several former utility CEOs, and we brought in a whole new leadership team on the gas side of the business, starting with Nick Stavropoulos, who brings more than 35 years of experience in the gas industry. We've included bios for some of our leadership team in the appendix. In 2012, we became the first utility in the industry to publish a dashboard to track how we're performing on key public safety metrics such as emergency response times and reduction of gas dig-ins and electric wire downs. And that focus has driven significant operational improvements as I'll discuss in just a minute. Several years ago, we also restructured our short-term variable compensation plan so that 50% is now tied to our performance on public and employee safety. This incentive program applies to all of our management employees as well as some of our union-representative employees. And finally, we've done a lot of work on our safety culture. This is probably the most critical piece because it's our culture that ultimately drives the performance that we're looking for. Part of our strategy has been to install a continuous improvement mindset by encouraging employees to identify gaps and opportunities and then close them through benchmarking and process improvement. We've also adapted the nuclear industry's corrective action program across the company to make it easy for employees to report things that need to be fixed. In fact, employees can now report corrective action items through a simple app on their smart devices. And we've created a number of awards to publicly recognize employees when they do speak up so that we're encouraging and reinforcing that behavior. All of these efforts have really paid off. As you can see on slide seven, we've achieved industry-leading performance on a number of gas safety metrics. We've reduced our emergency response time and gas dig-ins by about 40%. And we've virtually eliminated our leak backlog by completely redesigning our approach to finding and repairing leaks, including deploying sophisticated new technologies that are a thousand times more sensitive than traditional detection equipment. We've replaced or upgraded hundreds of miles of distribution and transmission pipeline. We're the first utility in the country to be certified under PAS 55, ISO 55001, and RC 14001 for asset management programs. And we're the first company in the U.S. to meet the rigor of the American Petroleum Institute 1173 standard for pipeline safety and safety culture. So I couldn't be more proud of how the team has turned the gas business around. We've also made tremendous improvements on the electric side of the business. As you can see on slide eight, our emergency response performance is now in the first quartile, and as a result of our investments in smart meters, automatic switches, and circuit upgrades, we've delivered seven straight years of record-breaking electric reliability. Our customers are experiencing fewer and shorter outages than ever before. All of these improvements are really reflected in our customer satisfaction scores. While we still have more work to do, our JD Power results across all customer classes have increased steadily since 2012 as you can see on slide nine. The improvements we've made in safety and reliability over the last six years have put us in a position to deliver strong financial results going forward. Earlier this year, we announced our first dividend increase in six years, and we've committed to achieving a roughly payout ratio by 2019. Combined with our expected rate base growth, we're confident we can deliver a strong overall return for our shareholders. Turning to section 15, California continues to be a leader on energy policy. The state is now targeting to reduce greenhouse gas emissions to at least 40% below 1990 levels by 2030. To get there, California will be increasing renewables to 50%, doubling energy efficiency, and electrifying the transportation sector. And PG&E will continue to be a critical partner in helping the state achieve its energy policy goals.

Thank you, Tony. I’m going to finish up today’s presentation by reviewing our 2017 earnings guidance and updated CapEx and rate base guidance through 2019. Turning to slide 25, our 2017 guidance on an earnings from operations basis is $3.55 to $3.75 per share. We are also providing ranges for the items impacting comparability, which I will return to in a minute after we review the guidance assumptions on slide 26. Starting in the upper left corner, you will see we are assuming capital expenditures of roughly $6 billion. We’ve included the breakdown by rate case here. In the upper right corner, our estimated weighted average rate base is about $34.3 billion for the year. Both the CapEx and rate base assumptions are within the ranges provided last quarter. In the lower left corner, we continue to assume a CPUC authorized equity ratio of 52% and a return on equity of 10.4%. Finally, in the bottom right corner, we list some of the other factors we believe will affect 2017 earnings from operations. Our guidance assumes that both the GRC settlement and a proposed Phase 2 decision in the gas transmission rate case are approved without material change. And you will recall that we do not seek recovery in the gas transmission rate case for about $50 million of costs in 2017. We are also showing a positive item here for incentive revenues and other benefits, which include things like our energy efficiency programs. I will note that we are no longer showing a positive item for tax benefits, consistent with the guidance we previously provided. And we continue to expect that CWIP earnings will be offset by below-the-line costs, which include things like charitable contributions, advertising, and certain environmental costs.

Hi. Good morning. Regarding the financing plan for 2017 and equity, are we essentially at a point where we are only funding the core business, or are we not addressing any balance sheet issues that still persist?

Hey. Good morning, Steve. The 2017 equity guidance plan does assume that we continue to fund some unrecovered costs, which are primarily related to the clearance of our rights-of-way, our gas transmission business. Otherwise, the major driver of the equity plan is our CapEx and the needs of our CapEx spending.

And how much is that, is it $100 million or is it a different rights-of-way for $75 million?

We are estimating between $80 million to $125 million for the year.

Okay. And then one other high-level question. Tony, you mentioned in terms of the affordability stuff, you have a lot of your old PPA contracts rolling off over the next five years?

That’s correct.

My recollection is some of these probably are pretty high pricing. So, I’m just curious how much potential rate headroom that creates over the long term or any kind of just sense of that?

Our goal is to maintain a rate trajectory that aligns with inflation, and we have several strategies to achieve this. One focus is improving efficiencies within our operations. Additionally, the cost of purchased power plays a significant role. You are right that some of the early renewable contracts we signed about ten years ago were much more expensive, and while these don't directly impact our bottom line, they do influence affordability as they affect customer bills. We are actively addressing these issues. Furthermore, we have various balancing accounts that may not immediately impact our bottom line but provide additional flexibility for the capital investments we plan to make over the next decade.

Okay. Thank you.

So, we have CCA activity going on at various stages of development or at various stages of considerations. Some of the CCAs, some of the communities present larger amounts of loads than others and so it’s really a probabilistic view of trying to figure out when certain CCAs are going to happen, what kind of load might affect the partner. Now, remember that they would only be responsible for providing the energy, the energy side of the business. We would still be responsible for the T&D business. So, as we look at our load projections, it is kind of difficult to pinpoint it down to a particular number in terms of what we might be able to see from CCAs. It can move pretty quickly, and in other cases, we see CCAs taking longer, sometimes up to 18 months or 24 months. So it’s a bit fluid is how I would answer that.

Cost of capital or any settlement discussions are confidential. But what I would say in terms of the embedded benefit for cost of that is roughly around $75 million a year. That’s kind of what we are currently experiencing. Now, I will have to see how rates move and what our upcoming issuances look like. Geisha Williams will comment on that.

Hi, Julien. This is Geisha. So, we have CCA activity going on at various stages of development or at various stages of considerations. Some of the CCAs, some of the communities present larger amounts of loads than others and so it’s really a probabilistic view of trying to figure out when certain CCAs are going to happen, what kind of load might affect the partner. Now, remember that they would only be responsible for providing the energy, the energy side of the business. We would still be responsible for the T&D business. So, as we look at our load projections, it is kind of difficult to pinpoint it down to a particular number in terms of what we might be able to see from CCAs. It can move pretty quickly, and in other cases, we see CCAs taking longer, sometimes up to 18 months or 24 months. So that’s a bit fluid is how I would answer that.

We continue to expect to see recovery for all of our insured losses from insurers. There will be a timing lag between points in which we recognize the charge for the costs, when we actually paid those and when we collect them. Since they are mostly timing-related items, we’d expect to try to finance as much as possible with short-term financing.

What I'd like to add too is, if you look at the role of the regulator, I mean, they ultimately want to ensure that we're delivering safe and reliable service to our customers. And so, when you look at the slide deck that's been put together and you look at the type of improvement that we've made over the last five or six years, we feel good about it, and we think it’s a foundational basis of conversation with our regulators about the good work that we've done. So, I think that it's about making sure you're delivering great service to your customers and that in turn ultimately we believe leads to improved relationships with our regulator as well.

It continues to remain our objective to earn our authorized return on equity. What I will say is the gas transmission and storage Phase 1 decision created some challenges for us in terms of mandated work levels and certain cost gaps. However, we are going to continue to drive efficiencies to offset these challenges to enable us to earn our authorized return. So, I think that should be the focus: earning the authorized return on equity across the enterprise as a whole.