PG&E Corp (PCG) — Q3 2020 Earnings Call Transcript

Thank you, Rob. And thanks to those of you on the phone for attending. Joining us this morning are Bill Smith, our Interim Chief Executive Officer, and Chris Foster, Vice President and Interim Chief Financial Officer. Also joining us today are John Simon, Executive Vice President General Counsel and Chief Ethics & Compliance Officer; Michael Lewis, Interim President of Pacific Gas and Electric Company and Robert Kenney, Vice President of Regulatory and External Affairs. I want to remind you that our discussion today will include forward-looking statements about our outlook for future financial results, which are based on assumptions, forecasts, expectations, and information currently available to Management. Some of the most important factors that could affect the Company's actual financial results are described on the second page of today's third quarter earnings call presentation. The presentation also includes the reconciliation between non-GAAP and GAAP measures and could be found online along with other information at investor.pgecorp.com. We also encourage you to review our quarterly report on Form 10-Q that was filed with the SEC earlier today and the discussion of risk factors that appears there in our Q2, 10-Q and in the 2019 Annual Report on Form 10-K. With that, I'll turn it over to Bill.

Thanks, Matt, and good morning everyone. Thank you for joining us today. Before I cover the priorities for the quarter, I want to express our sympathy for all of those impacted by the devastating wildfires we’ve experienced in California. It’s been a historic and very challenging wildfire season for our customers. We’ve seen over 4 million acres burned in California with nearly 3 million acres burned in our service area. We thank the Governor’s office, CAL FIRE, California Office of Emergency Services, and all the first responders for their tireless efforts in keeping our communities safe. We continue to focus on executing a series of important changes at PG&E. These changes will help us live up to the commitments made as a part of our Chapter 11 emergency plan including our efforts to improve our operations and safety outcomes, reduce risk, and enhance our customer focus. This morning, I’ll touch on three key areas of focus for PG&E. First, improvements to our wildfire mitigation plan; second, our operational updates; and third, our executive leadership recruitment progress. Chris will then cover our financial updates and key regulatory cases. Looking at our wildfire mitigation plan, our highest priorities remain mitigating ignition risk, enhancing our situational awareness, and implementing public safety power shutoff or PSPS events in advance. We will initiate these events when absolutely necessary to protect public safety. As you can see on slide 4, we continue to be on track or ahead of our 2020 targets for system hardening, enhanced vegetation management, and installation of weather stations and high definition cameras. Our efforts over the last quarter have our weather station and camera installations back on track. We will respond to all such requests for information in the monitoring report. PG&E’s unit vegetation management inspections will share the monitoring of the court's goals in ensuring we operate a safe and reliable grid. While we acknowledge there are some areas where our comprehensive wildfire mitigation plan that we stood up in 2019 could improve, we do see some of the results somewhat differently than the letter provided by the monitor. We are unable to comment any further ahead of our response which will be filed on November 3rd. There is one aspect of the wildfire mitigation program that I'll give a detailed update on and that's our Public Safety Power Shutoff or PSPS program. We have done a lot since 2019 to increase cooperation with local authorities by hiring additional talent with emergency planning expertise. We also prioritized better communications with our customers this wildfire season. The technology improvements that will help us achieve our program goals are highlighted on slide 5. As we have in prior years, we'll continually evaluate conditions that include wind speed, humidity levels, and fuel moisture among other factors. When conditions warrant, we will implement power shut-offs as a last resort to keep our customers and communities safe. We have taken steps to minimize the impact of these events on our customers and we've executed five events so far this year. We have made our events smarter by leveraging technology, smaller by implementing sectionalizing devices, as well as temporary generation and shorter by increasing our post-event inspection capabilities. We've engaged with our communities and our customers to implement changes that incorporate their feedback. While we have improved in 2020 versus 2019 in making these events less disruptive, we continue to learn from each event. To make our program smarter, we collect fuel moisture data and incorporate it into our fire spread modeling. This data is an important indicator, along with wind speeds, in assessing fire conditions in real-time. We utilize the fuels data along with forecasting work we do in collaboration with the National Weather Service to determine where we need to implement a PSPS event. Our next priority to improve the program is to make the impacted customer footprint smaller. We have pre-positioned temporary generation in regions that are prone to shut-off events. We installed 600 sectionalizing devices which were in place by the end of August. In addition, we've added an islanding configuration at the Humboldt Bay and Caribou generating stations which allow almost 70,000 customers to stay online. Those customers would have been shut-off in 2019. This is one example of how we've implemented lessons learned from previous wildfire seasons. These actions allowed us to meet our goal of a one-third reduction in customers impacted in our first events. In order to make outages shorter, we've increased our aerial patrol abilities through additional helicopters and fixed-wing aircraft. We now have access to more than 60 helicopters to help us meet our goal of a 50% faster restoration time versus 2019. I'd like to touch on a couple of other areas of PSPS implementation where we've increased our focus in 2020. This includes our coordination with county and city emergency managers and our outreach to customers. In December, we started holding town hall listening sessions with city managers, first responders, and residents. At these sessions, PG&E senior leaders listened to the local stakeholders and started working on plans to improve coordination for the 2020 PSPS events. Our team then held subsequent discussions where we worked through local plans for these events based on the information we learned in the listening sessions. As an example of change made resulting from these listening sessions, we increased the local presence of PG&E personnel who coordinate with emergency managers. These important employees serve as a single point of contact for individual counties and cities during a power shutoff event. On the customer side, we've also made significant changes in response to lessons learned in 2019. We conducted webinars focused on wildfire safety initiatives in the counties we serve. We ask questions and receive valuable feedback which we've used to address the concerns and needs of our customers on a county-by-county basis. We've worked hard on three specific areas related to customer engagement during PSPS events. The first is our notification system. The second is our website, and the third is customer resources provided by PG&E. With regard to our notification system, we work to notify customers with an initial watch notification message as early as 48 hours prior to an event. The PSPS watch will be upgraded to a warning when forecasted conditions show that a safety shutoff will be necessary. Warning notifications are sent approximately 4 to 12 hours in advance of an event. These messages also include an expected restoration time. Outage and restoration information is updated throughout the event. We improved our messaging and direct response to customers’ feedback from last year. Second, on our website improvements, we have moved pge.com from our data centers to the cloud where we tested the site to levels well beyond the demand we saw during our peak usage in 2019. Our enhanced web capability allows for customers to look up shutoff times and estimated restoration times by address. This information is available as early as two days before an event occurs. We have also increased the number of our community resource centers during PSPS events. In our first event this year, we had 50 community resource centers available for analogies impacting 172,000 customers. By comparison in 2019, we had 80 centers for 1 million customers impacted. These centers provide a place for customers to go during power shutoffs and are equipped with charging stations, bottled water, and other necessities. All of these locations comply with COVID safety protocols. We expect to have incremental opportunities to leverage technology to improve our wildfire mitigation plans and our PSPS implementation. We continue to incorporate feedback from our community leaders and our customers to improve these events. With respect to updates and next steps on wildfire filings, as we indicated before, we anticipate a decision on our safety certification request at the CPUC by the end of this month. We believe we provided all the necessary information and we hope to see that outcome any day now. As a reminder, the prior certification we received last year remains in place. Looking forward, we will take the learnings from our wildfire mitigation plans as well as our PSPS adjustments and will reflect them in our 2021 wildfire mitigation plan filing. Last week, the wildfire safety division gave all three IOUs a February deadline for that submission. One additional note on operations: we were notified earlier in the month that CAL FIRE has taken possession of PG&E equipment as a part of their ongoing investigation into the cause of the Zogg fire which was west of Redding, California. Given the early stage of the investigation and the fact that we haven't had an opportunity to review the assets retained by CAL FIRE, there is limited additional information to provide today. We are fully cooperating with CAL FIRE in its investigation and will provide more information on the Zogg fire at the appropriate time. In addition, on Monday we filed a response to Judge Alsup's request for information on the Zogg fire. We will not comment any further as we do not want to get ahead of the CAL FIRE investigation. While our electric operations are certainly an area of focus given our effort to mitigate wildfire risk, I also want to highlight the continued good work done by our gas operations team. One of the major initiatives to make our gas system safer is to enable in-line inspections. This method is preferable to traditional hydrostatic testing in a couple of ways. It eliminates the need for a line to be taken out of service for testing and it's safer than hydrostatic testing which can compromise the strength of the pipe. In terms of day-to-day operations, our gas odor average response times and our third-party dig-in rates are at the upper end of industry standards. These are two areas of focus to ensure we provide safe and reliable gas delivery. I want to mention two facilities that we opened in 2017 that have helped us improve our gas operations. These centers were opened in direct response to a comprehensive evaluation of our operations. First, in 2017 we opened the Center for Gas Safety which has expansive lab space that allows us to test new technologies. Second, we opened our Gas Safety Academy. Here we offer the gas operations team a training space that simulates various gas emergencies we encounter in our territory. These two centers were opened to ensure that we have given our operations team the necessary technology and training facilities to drive continuous improvement. We will look to the practices we have implemented within our gas business and our wildfire mitigation efforts to continue to inform our path forward. While we accomplished a lot in increasing safety and reducing risk, we continue to work hard to improve. The last item I'd like to cover is the progress we're making on open executive leadership roles. We remain on track to name a new CEO as well as a President Utility by the end of the year. We've also kicked off a national search for a CFO. All three of these key singular leadership searches are being supported by the same firm that will help with the alignment of abilities and backgrounds. We are fortunate to have Chris Foster taking the lead as interim CFO. Chris is leading a very strong finance department while we conduct our search for a permanent CFO. These leaders will build off a few recent hires that are very exciting. Those include Francisco Benavides our Chief Safety Officer, Sumeet Singh our Chief Risk Officer, and Ajay Waghray as our Chief Information Officer. These three recent additions to the PG&E team reflect our commitment to change. We will continue to operate with a focus on safety and risk while continuously looking for new ways to implement technology to increase efficiency. To build on that a bit, I'd like to share a recent initiative that we've kicked off. We are taking a focused look at our operations. We will look to operate more efficiently and improve our relationship with our customers by creating an enterprise approach to asset management, adopting consistent work management practices, and implementing tools to measure, track, and monitor our customer experience. We'll have more to share on this initiative as we move into 2021. In closing, I want to express my appreciation for all PG&E frontline employees. Our employees are navigating a difficult operating environment and they continue to execute on safety, risk reduction, and reliability programs across electric and gas systems. With that, I'll turn it over to Chris to cover our financials and some key regulatory cases.

Thank you Bill and good morning everyone. I plan on covering four items which are highlighted as the key takeaways. First, we are on track and reaffirming the five-year earnings guidance we set last quarter. This is reflective of the consistent growth we anticipate over the coming years. Second, I'll provide an update on our insurance coverage, the impact of COVID, and our financing needs. Third, I'll highlight meaningful progress on our regulatory cases that provide additional revenue clarity. Lastly, I'll briefly cover the third quarter results. Starting with our earnings guidance elements, we've updated our GAAP earnings guidance range slightly for 2020 to reflect a loss between $1 and $1.06 per share. We are reaffirming non-GAAP core earnings per share guidance as well as our earnings factors for both 2020 and 2021. Specifically in 2020, we are guiding to non-GAAP core earnings of $2 billion for the year or approximately a $1.62 - $1.63 per share. This is based on weighted average shares of roughly 1.25 billion in 2020. The drivers of variants from earning are authorized return remain unchanged. Also noted here are the key assumptions underlying 2020 guidance. This includes receiving a final decision in the 2020 general rate case in the fourth quarter. Our guidance is also consistent with the TO20 formula rate settlement and assumes approval of our separate AFUDC waiver request reflected in this settlement in the fourth quarter. I'll come back to these regulatory items to provide more color. Moving to non-core earnings guidance which is broken out on the same slide. We've made a couple of adjustments to these items. Our range for bankruptcy and legal costs increased by $30 million to the range of $2.66 billion to $2.7 billion. The increase to the range reflects a final adjustment required to the fair value of the equity backstop fee based on the share price at the beginning of July. Additionally, for investigation remedies and cost recovery, we have lowered the forecasted spend from $300 million to $230 million for the year. Roughly $30 million of this decrease is permanent and we will apply it towards the wildfire OII spend requirement. The remaining difference is timing items that will impact 2021 non-core spend. We have increased the guidance for 2019 10-K fire related costs by $20 million to approximately $170 million for the year. During the third quarter, we received information from potential claimants including insurance segregation claims that led to an increase in our accrual from $600 million to $625 million pre-tax. As it relates to the concave fire, we continue to not have access to CAL FIRE's investigative report or the evidence they have collected. We've also included a pickup of $50 million for the category prior period net regulatory recoveries. This category includes three items. First, we've included revenues related to the 2011 GTS capital audit consistent with previous guidance. This quarter we've also added a pickup for the 2019 impact of our modified AFUDC filing partially offsetting the first two items are prior year revenue reductions that are associated with FERC's recent order on TO18 and the TO20 settlement now pending with FERC. Our full year guidance for the amortization of the wildfire fund contribution remains the same. Moving to 2021 guidance, we continue to see non-GAAP core earnings of $2.1 billion to $2.3 billion for the year or approximately $0.95 to $1.05 per share. This non-GAAP core earnings target is $275 million to $425 million below our authorized levels. This range is mostly comprised of interest expense of $275 million to $325 million. Additionally, net below the line and spend above authorized will taper off as we carry out additional efficiency measures. This includes revisiting contracted work such as contracts for wildfire mitigation and brings us to our range of $0 million to $100 million there. Next, I'll cover updates on our non-core asset sales, insurance coverage, and the impact of COVID-19, and the effect of these items on our financing needs. As we mentioned in our second quarter call, we are considering selling a set of small non-core assets. We remain early in the process there, but we have made some progress on that front. If successful in 2021, the impacts from such a transaction could reduce the high end of our $450 million to $750 million forecasted equity range for the year. We've also filed an application with the CPUC for approval to sell our San Francisco office complex fulfilling the commitment we set out in our plan for the organization. Based on an illustrated sale price of $1 billion shown in our application, a benefit of $600 million would flow back to customers. We are looking at 2021 for the likely timing of the sale. Moving to our wildfire insurance, we have made progress in accessing over $100 million of additional coverage since the second quarter. That puts the wildfire liability insurance component of our overall insurance portfolio at up to $868 million in coverage for the period. With regard to the impact of COVID-19, we continue to experience higher uncollectible costs during the year as well as incremental operating costs. Roughly $90 million has been recorded to memorandum accounts created to track COVID-related costs for collection in future periods. When combining the impact of higher insurance costs, the timing of the general building office sale, and the timing of recovery for COVID-19 costs, we foresee a short-term cash need in the fourth quarter that we anticipate will be met with short-term debt. We do not see these items changing our equity needs. I will now shift to covering a few significant updates on the regulatory front. We've made progress in a few areas that keep us on the path to achieving the guidance ranges we set out last quarter. I'll start with FERC. Two weeks ago, we filed a settlement in the transmission owner 2020 rate case that is subject to approval by FERC. We are pleased with the outcome and the support of the broad set of settling parties. There are few elements to the settlement that I'll highlight. First, we establish an all-in return on equity of 10.45% and a capital structure that is 49.75% equity. These factors remain in place through 2023. The settlement establishes our first formula rate case that brings clarity with the annual expense throughout process and additionally the settlement outlines a modified AFUDC waiver filing with FERC that if approved will allow us to apply a higher equity ratio on AFUDC back to May of 2019. That is being reviewed by FERC staff on a separate track and we assume completion of that review by the end of Q4. I'll now shift to the cases of the CPUC. Last week we received a proposed decision on our 2020 general rate case. The outcome is largely similar to the multi-party settlement we reached last December and does not impact our 2020 or 2021 earnings guidance. The total $9.1 billion revenue requirement was unchanged. The proposed decision does include changes to the cost recovery process for liability insurance, vegetation management, and wildfire mitigation capital and expense. Specifically, the proposed decision would require us to file separate applications for the recovery of costs above 130% of the authorized amount. It also proposed reductions to the authorized wildfire mitigation capital costs. These are considered AB 1054 related capital spend and are at the magnitude of roughly $900 million over two years. These amounts were already excluded from our rate base forecast so we do not anticipate a change in our rate base projection. The timing of this proposed decision should keep us on track for a final decision by the end of the year, which aligns well with the previous statutory deadline of December 13th set forth by the CPUC in June. We've also sought recovery for roughly $1.3 billion of 2017 through 2019 costs through our recent wildfire mitigation and catastrophic events or WMCE filing at the CPUC. Related to these costs, we received a decision in our SEMA case last week that allows us to recover roughly $450 million beginning in December. Now the wildfire mitigation catastrophic events or WMCE filings become the path to recover the remaining costs. On our securitization filing, hearings begin in December at the CPUC and based on the procedural schedule, we anticipate the case could wrap up in the second quarter of 2021 with a securitized debt offering closely following. We will also be separately preparing our AB 1054 related securitization filing after we receive the final decision in the 2020 general rate case. Looking forward, the last area I'd like to touch on due to the broad public policy focus in California is vehicle electrification. The transportation sector remains the largest emitter of greenhouse gases accounting for roughly 40% of the total for the state. So the need for emission reductions in this sector as part of meeting our statewide carbon reduction goals is clear. Our customers’ excitement for electric vehicles continues to be reflected in consistent adoption levels. More than 300,000 electric vehicles plug into PG&E's grid representing one out of every five electric vehicles nationwide and we see additional growth due to the increasingly competitive space among OEMs. Our current CPUC approved EV charging infrastructure portfolio is one of the largest of any utility in the United States. At this time, we have installed roughly 3,500 ports as part of our phase one for the electric vehicle charge network filing at the CPUC and as an indicator of our customers’ interest, this program is more than three times oversubscribed. The Governor recently issued an executive order for zero emission passenger vehicles by 2035 and medium heavy duty vehicles by 2045 and in support of the state's clean energy goals, we anticipate submitting a 10-year transportation electrification plan by early 2022. Now I'd like to transition to our third quarter financial results. Non-GAAP core earnings per share for the year came in at $1.6 billion and is consistent with our full year guidance. GAAP earnings including non-core items are also shown here. The non-core items are consistent with the full year 2020 guidance I mentioned. Moving on, the quarter-over-quarter comparison for non-GAAP core earnings of $590 million or $1.11 in the third quarter of last year and $461 million or $0.22 this year. The primary drivers were an increase in shares outstanding from our July 1st equity rate interest expense as well as two timing items that are each expected to reverse. The first is the 2020 general rate case costs recovery and the second is the timing of taxes. With the full quarter behind us after the bankruptcy, we're now very focused on executing well on the operational and financial plan we set out. We have a strong earnings projection ahead of us that is supported by the regulatory outcomes that I discussed and we are excited for the long-term opportunities provided from our state's focus on clean energy technology. With that operator could you please open the lines for questions?

Good morning. Just I guess a question on the fire victim fund. Have you gotten any indication from them on their intentions in terms of the shares they own and any plans for basically what the plans are for those shares going forward?

Hi, good morning Steve. We haven't at this point. What you'll see in our Q2 is that we did point out that as of October 20th the information the company has is that the trust has not sold any shares. So that really is the update on that for. I think at this stage obviously given that the fire victims trust is a substantial shareholder of the company we do our best to communicate openly with them as well to help make sure that they're aware of events around the company but at this stage can't really speculate on how they're thinking about share issuances in the future.

Okay. Can you clarify whether they were blacked out at all or anything or just not?

No, sure Steve, I think it's a fair question. The dynamics there that you should think about going forward are that the registration rights agreement that we do have with the trust provides for blackout periods, some demand rights provisions, and other things but largely those attributes would not be really in the public domain. Those would be exchanges of information between the company and the fire victims’ trust. Certainly at this stage our interests are very aligned and so we would want to collaborate with the trust as appropriate should they undertake an unwritten offering.

Okay, second question just and this is I don't know how well you can answer this but we've had a lot of events this season and you've done several PSPS and obviously most of them work very well. We do have this Zogg event, but then a lot of successful events in terms of avoiding issues. So could you, is there any color you can give on just kind of political regulatory feedback you're getting on your activities so far?

Hi Steve. This is Bill Smith. Thanks for the question. I think that generally speaking people understand the nature of the challenge that we are facing and feedback has been relatively good from our key stakeholders. No one likes to see us have to do this, but I've seen, in fact, some articles that kind of recognize that this is about public safety and I think as unfortunate as this season has been if you look at the early part of the season and the number of wildfires we had that had nothing to do with utilities of any kind I think it showed the public in general that this is a much broader issue than PG&E. And I think the state of California has said something approaching 9,000 fires so far this year. So I think there's a better acceptance this year of the nature of the challenge. We've been getting some pretty good feedback from all the key stakeholders that were executing well and I would like to say that in the events that we've had this year while we're still doing some of the final tallies from this latest event. But there have been well over a hundred cases where we found debris and other things into our lines that had we not taken the proactive steps to implement a PSPS could have or would have likely started a fire. So I think that obviously you point out the Zogg issue we've got to learn more about that but I would say, generally speaking, what we're doing is working and I think people appreciate that it's for their safety and the safety of the communities.

Great. Just one last quick one, just on the management hires that you're working on. I know can't probably give specifics but just given that these are obviously three very important roles, could you give us some color on the types of people you're looking at for these different roles or at least are we going to know these people any color there would be helpful?

Yes. Well without giving any detailed specifics, I think what I would say is we're looking for people with experience and a strong commitment to safety and operational effectiveness and basically operational excellence. So I'm really pleased at how that whole process is coming along. So just stay tuned, but it's come along quite well and very much according to our plan.

Sure. So there are a few different ways to look at it. I think stepping back what I think you're interested in and I want to be sure I'm responsible are kind of categories as a way to contemplate this. Some categories would be earnings impacting, others would be more specific to benefits to customers. As we look forward to the next few years, some of those categories we've talked about include things like renewable energy credits. Anytime you look at kind of the energy side of the business in that way, we're always searching for savings to make sure that we're cost competitive on behalf of customers. So I think benefits that you would see there would accrue to customers. We also continue to evaluate additional surplus property assets largely similar treatment there in a number of those cases where if there's a developed area there. Many of those benefits would also accrue back to customers. You can imagine that conversation is really evolving in real-time as we look at the COVID-19 impacts and how to think about the future state of kind of the footprint of the company. Obviously that's the case with our future move as well to Oakland and moving our primary headquarters there as well. As we think about some of these other elements of work process improvement that Bill alluded to, I think you could see a split there, but ultimately we see that as being a driver for us going forward in terms of achieving cost savings that will allow us to in the future earn our authorized return as we've guided to in 2022.

Sure Ryan. So this is really just an element of time passage and us getting better information over time. At this stage what we had referenced, we're having conversations as you can imagine with some of the different entities and in particular what we noted were the segregation claims themselves we have better data than we had before as you recall with prior, as you may recall with prior wildfires in prior years the California office of insurance had disclosed a greater level of granularity which provided one means by which to have additional input. In this situation we have now improved data as it relates to the segregation claims in particular and that allowed us to update our accrual at this stage.

Well thank you all for your interest in PG&E and thank you for joining us on the call today. If you have any follow-up questions please don't hesitate to reach out to investor relations. Thank you.