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PG&E Corporation (PCG)

Q2 2012 Earnings Call· Wed, Aug 8, 2012

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Transcript

Operator

Operator

Good morning, and welcome to the PG&E Corporation Second Quarter Earnings Conference Call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. At this time, I would like to introduce your host, Gabe Togneri with PG&E. Thank you and enjoy your conference. You may proceed, Mr. Togneri.

Gabriel Togneri

Management

Thank you, Jackie. Hello everyone, and thanks for joining our call. Before you hear from Tony Earley, Chris Johns, and Kent Harvey, I’ll remind you that our discussion is going to include forward-looking statements based on assumptions and expectations reflecting information currently available to management. Some of the important factors that could affect the company’s results are described in Exhibit 1 located in the appendix of today’s slides. We also encourage you to review the discussion of risk factors that appears in our 2011 Annual Report and in the Form 10-Q that will be filed with the SEC later today. And with that, I’ll hand it over to Tony.

Tony Earley

Management

Well good morning everyone, and thank you for joining us. I’m going to provide some opening remarks, and then I’ll turn it over to Chris and Kent to cover operations and financials in more detail. On slide 2, you see the three key objectives that we have been talking about this year. I’ll speak to the first, resolving gas issues. We’ve been in settlement discussions regarding the regulatory proceedings. These are multiple proceedings, they are multiple parties, and they are complex issues. And beyond that, given where we are in the discussions, I just don’t think it’s helpful to go into any more detail about where we are. But I will say that if and when we have news to share, we will in fact share that at the appropriate time. We continue to believe that resolving the regulatory issues sooner rather than later would be beneficial for PG&E, our regulators, and our customers. So we will continue to push forward on that. I do want to comment on third party liability, our civil cases. We’re making lots of progress in resolving these claims. We’ve settled several more of the most serious cases, and our intent continues to be that we provide victims with fair compensation and doing that as soon as possible. Meanwhile, we continue to make good progress on our work in the field. As we’ve done this and as we’ve added new experienced leaders, we’ve identified some new work that we need to accomplish, and given all that we’re currently doing, it’s probably going to take several years to finish this new work as well. And Chris is going to describe that in more detail shortly. And as I’ve indicated in the past, there’s no quick fix, but we’re going to do whatever it takes to meet…

Chris Johns

Management

Great, thanks Tony, and good morning everyone. I’m going to provide the regulatory and then the operational updates that are summarized on slide 3. I’ll start with our General Rate Case Notice of Intent filing, which covers the gas and electric distribution and electric generation parts of the business. You’ll recall that the gas transmission and electric transmission are handled in other proceedings. The key themes in the general rate case filing are investing in our infrastructure and leveraging technology in order to improve operations and achieve significant gains in safety and reliability performance. The 2014 proposed revenue increase of $1.25 billion represents the funding necessary to cover operating expenses and provide for the annual costs associated with roughly $4 billion of infrastructure improvements. The capital expenditures in the general rate case should represent roughly two-thirds of the company’s total CapEx in 2014. The biggest percentage increase in the GRC filing is in the gas distribution area where we would be replacing a substantially greater number of older gas distribution lines than in the past, improving the technology we use to detect gas leaks, and significantly upgrading asset management capabilities. For electric distribution, we’ll be replacing more overhead electric lines based on their operating performance and installing more automation to limit the impact and duration of outages. The next step in the process is a full review of the filing by the Division of Ratepayer Advocates, followed ultimately by the filing of our formal application before the end of the year. Turning to the operations side, as you can see on this slide and the Appendix, we’re on track for many of our high-level operational performance metrics. We’ve also made substantial progress this quarter on several of our key initiatives. We validated and documented the Maximum Allowable Operating Pressure, or…

Kent Harvey

Management

Thanks, Chris, and good morning. As usual, I’m going to go through the results for the second quarter and discuss our outlook for the rest of 2012. I also plan to provide some observations about post-2012. I’m going to start on slide 4, which summarizes our results for the quarter. Earnings from operations were $0.81 per diluted common share, while GAAP results were $0.55 per share. The difference between the two is the item impacting comparability for natural gas matters which totaled $0.26 for the quarter. The components of that are broken out in the table at the bottom in pre-tax dollars. The pipeline-related costs totaled $128 million during the quarter, and include the pipeline validation and strength testing work in the field as well as our legal costs. In general, the field work has been on plan, although we continue to experience higher than planned legal costs. We also took an $80 million accrual during the quarter for third-party liabilities, and this reflects the results of the recent settlements reached which Tony discussed, as well as the latest information that we have about the remaining claims. It brings our total accrual for third-party liability claims since the accident to $455 million. The upper end of our estimate for third-party liability remains at $600 million. Finally, we booked insurance recoveries of $25 million for the quarter, bringing us to $135 million of insurance recovery booked since the accident. We continue to believe that a significant portion of the cost incurred for third party claims will be recovered through insurance, but we’ll wait until we’ve resolved claims with each carrier before booking future recoveries. Moving to slide 5, you can see the quarter-over-quarter comparison for earnings from operations including the primary factors that take us from $1.02 in Q2 last year…

Tony Earley

Management

Well thanks, Kent. We have a number of challenges and uncertainties that we’re working our way through, and I know it can be frustrating that we can’t be more specific about timetables or predictions for all of the different regulatory proceedings, but that is the nature of the regulatory process. But I do believe we’re making good progress. We’re focused on resolving our outstanding issues and running the business well so we can be successful in the long run. We continue to get positive feedback from many of our constituents regarding the direction that we’ve been moving in. As a result, I believe the company has a promising future and an attractive value proposition over the long run. So with that, let me open it up for your questions.

Operator

Operator

(Operator Instructions) Our first question comes from the line of Mr. Michael Goldenberg with Luminus Management. Please proceed. Michael Goldenberg – Luminus Management: Good morning.

Tony Earley

Management

Good morning. Michael Goldenberg – Luminus Management: I wanted to get a better understanding on the equity issuance that you mentioned, the significantly higher versus 401(k) and DRIP. Can you provide some color as to how much of that is related to the substantially higher capital expenditures in the filing – rate case that you preliminarily filed for versus expenses and other things that are running above previous expectations that now will have to be plugged to equity?

Kent Harvey

Management

Michael, this Kent. We’re not at the point of providing any guidance for the future years, but I think you should be able to get a general sense of our CapEx levels and to determine from that sort of how much of that is driving year-over-year equity needs as compared to where you end up with looking at unrecovered costs, and those obviously hit our equities so they drive our equity needs in order to maintain the balanced capital structure. Michael Goldenberg – Luminus Management: Got it, okay. Thank you.

Operator

Operator

Thank you, Mr. Goldenberg. Our next question comes from the line of Mr. Greg Gordon with ISI Group. Please proceed. Greg Gordon – ISI Group: Thanks. First a quick follow-up on that question. In the normal course of business, Kent, what is the amount of equity that you issue through those programs?

Kent Harvey

Management

For the 401(k) and dividend reinvestment plan, we typically have issued between $200 million and $300 million per year. Greg Gordon – ISI Group: Okay. So you’re telling us that given the level of capital expenditures and everything else, that in the future to maintain your cap structure, you would expect to have to issue more than that?

Kent Harvey

Management

Yeah, significantly more. That’s right. Greg Gordon – ISI Group: Okay. Thanks. And then, is there anything that you all can tell us about the possibility, anything more you can talk about, about the possibility of resolving some or all of the outstanding pipeline matters via settlement at some point this year, or should we presume that it’s just too complicated and we’re going to have to see a litigated outcome?

Tony Earley

Management

Greg, this is Tony. It’s still my objective to try and wrap up all of those issues through a settlement by the end of the year, but as I said, this is one of the more complex proceedings I’ve been involved in. We’ve got three investigations, one rulemaking, we’ve got multiple parties, we’ve got the Attorney General, the U.S. Attorney, and several other prosecutors involved. So, it just takes time to work through the issues. Each has their own agenda, they want to make sure it gets covered in the agreement. But I think where we are here in August, I still think that we can accomplish my stated objective of trying to get it wrapped up by year end. Greg Gordon – ISI Group: Thank you, Tony.

Operator

Operator

Thank you Mr. Gordon. Our next question comes from the line of Hugh Wynne with Sanford C Bernstein. Please proceed. Hugh Wynne – Sanford C Bernstein: Hi. I wonder if you might just help me sort through some of the strands of your disclosure here regarding factors affecting EPS. Just two quick questions on that. The incremental spend that you mentioned on page three, or rather, I should say increased scope in incremental work that you mentioned on page three, is the implication of that solely the increase in incremental spend that you show on page seven from an anticipated $200 million to an anticipated $250 million continuing on then into 2013, or is there something else that we need to be on the lookout for by way of incremental CapEx or incremental costs that are somehow not reflected here?

Kent Harvey

Management

Hugh, this is Kent. The mention that’s on slide 3 which talks about rights of way issues identified, that actually ties to page – to slide 8, and that’s the incremental – that’s new spend in the pipeline area having to do with rights of way and integrity management. Also on slide 3, and this may be what you’re referring to, the increased scope of incremental work, that relates to slide 7 and the item that is mentioned as incremental spend and that is the work we’re doing across the utility that’s not specific to the pipeline which we’d previously estimated at $200 million this year and next year, and we’re saying that’s going to be $250 million. Hugh Wynne – Sanford C Bernstein: Good, okay. I think that’s clear. And then on page 7, you mentioned that you’ve requested PSEP to be included in rate base over 2012 through 2014 and you give the annual amounts. Is that included then in this authorized rate base number that you show up in 2012 and 2013?

Kent Harvey

Management

It is, yes. So you will – so you’ll want to keep that in mind and that’s why we provided you the details down below in the footnote. Hugh Wynne – Sanford C Bernstein: Okay, so the point that you’re making is that you’ve spent this money, but you actually don’t have the rate base revenues at this point, that it will be...

Kent Harvey

Management

Correct. Hugh Wynne – Sanford C Bernstein: Okay. And then just a final, quickly. You mentioned, or Tony mentioned that the Attorney General of the State of California and the U.S. Attorney were involved in the settlement discussions. Are the Feds and the California authorities then continuing to proceed with a criminal investigation of the case? Is that what we should read into that?

Tony Earley

Management

They have been involved – they have interviewed employees. Obviously, it’s not as high on their priority list as it is on ours to get this done, they’ve got lots of other things. So they’ve kind of gone in fits and starts involved in that, but we have reached out to try and get everybody involved in an overall settlement. Hugh Wynne – Sanford C Bernstein: All right. Thanks very much.

Operator

Operator

Thank you, Mr. Wynne. Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed. Michael Lapides – Goldman Sachs: Yeah, hi, maybe a few questions for Kent. Just curious, at the end of the quarter, how were some of your key balance sheet – how were some of your key balance sheet metrics, meaning like how much short-term debt did you have outstanding? What was debt-to-cap? And then, when we think about kind of cash requirements going forward, how much of what’s been accrued for third-party liabilities have actually been paid, and what are your expectations for things like, either Hinkley-related payments in the next – or CapEx related items in the next few years, et cetera?

Kent Harvey

Management

Yeah, Michael, in terms of – sort of major changes in cash in our balance sheet, I don’t think there’s anything very significant there. I think our amount of commercial paper outstanding is down by a few hundred million dollars since the end of last quarter. It’s – that’s kind of normal course of business for us. In terms of the cash requirements associated with – with things like third-party liabilities and stuff, we’ve accrued $455 million to date. I think the actual payments that have been made through the end of the second quarter were $145 million. And then again on the insurance side, we’ve booked $135 million of insurance. So we tend to pay those settlements as the settlements are concluded, and some of those are fairly recent. Michael Lapides – Goldman Sachs: Got it. And Tony, just – I’m seeing a lot of the items on page seven and on page eight, and just want to kind of get a feel – I think going back to the third quarter call, you may have made some comments about the goal is to get closer to earning your authorized ROE by 2014. Do you still view that as the goal, and are there any items that have been outlined here which clearly won’t be recoverable in rates by 2014?

Tony Earley

Management

Well, that is still our goal. I think the big driver for 2014 is going to be how the GRC, the General Rate Case comes out. That’s a large number, $1.25 billion, and we think that we’re able to justify that level of spending. But the results of that are going to dictate a large part our ability to achieve ROE returns then.

Kent Harvey

Management

And, this is Kent. The only other thing I’d add, obviously the General Rate Case covers electric and gas distribution and electric generation. In terms of gas transmission, that rate case is not until 2015. So our opportunity to true up costs there that are outside of the PSEP proceeding is really a year later in 2015. Michael Lapides – Goldman Sachs: So does that imply there’s a little bit of drag or a little bit of regulatory lag on the gas pipeline side?

Kent Harvey

Management

I think that would be a reasonable expectation. Michael Lapides – Goldman Sachs: Okay. Thank you, Kent.

Operator

Operator

Thank you, Mr. Lapides. Our next question comes from the line of Jonathan Arnold with Deutsche Bank. Please proceed. Jonathan Arnold – Deutsche Bank: Good morning, guys.

Tony Earley

Management

Good morning.

Chris Johns

Management

Good morning, Jonathan. Jonathan Arnold – Deutsche Bank: Quick question, on the $250 million number that you’re now giving for incremental spend that’s to continue into 2013, did I hear you correctly that you think you can offset that partly because you’ve had the low trend storm costs in 2012, but that we shouldn’t necessarily assume that that offset will continue into 2013, or do you have some other offset to the kind of incremental $50 million since last quarter?

Chris Johns

Management

Hey Jonathan, this is Chris. And you’re right, when we look at this year, we’ve had the lighter storm season. We’ve also had some tax benefits and some other savings that we’ve focused on and that’s been able to offset that. And we anticipate that that level of spend will continue into next year. I mean, obviously, we’re always looking for ways to continually improve on there, but we wanted to make sure that you all were alerted to that higher level. Jonathan Arnold – Deutsche Bank: So as the higher level continues to be offset, unless something else materializes, it doesn’t necessarily.

Chris Johns

Management

That’s true. Jonathan Arnold – Deutsche Bank: Okay. And then secondly on – in the first quarter, you had $7 million – sorry, $0.07 a share of miscellaneous items that were positive that you said you thought would reverse over the course of 2012, and obviously, that didn’t show up as a driver in this second quarter. Is it – do you still anticipate that through the balance of the year? Any comment on that?

Kent Harvey

Management

Yeah, Jonathan, this is Kent. We do still have the same view of that, and that was a lot of – a number of small items that, many of which were timing in nature. So we do anticipate that trending down during the rest of the year. Jonathan Arnold – Deutsche Bank: Okay. And then finally, Kent, if I may, just on your comments around equity, are those, those are sort of premised on the 52% that you requested in the Cost of Capital case, and I would presume, firstly is that correct, and secondly, does that comment change significantly depending on where that shakes out?

Kent Harvey

Management

Yeah, no, I think that’s reasonable. I think that would be a driver if we ended up with a different authorized equity ratio. There really aren’t indications that’s going to be the case at this point. We filed obviously for 52%. We think it makes a lot of sense from a credit perspective and otherwise. And we noticed last night when the interveners filed their testimony, I think everyone did 52% common equity, as well. So, we’re at least in alignment on that dimension of the case. Certainly, we’re not at alignment in terms of the recommended ROEs that they proposed. And – but that’s no surprise. Jonathan Arnold – Deutsche Bank: Okay. Then Tom, just one final thing. The – there was a date in the schedule in the OIR for a proposed decision I think yesterday as well. Is it a reasonable working assumption that given you said you’re still in settlement talks that there will not be a PD in the meantime, or any kind of help you can give us on what to expect there?

Tom Bottorff

Analyst

Yeah, this is Tom Bottorff from Regulatory Relations. We haven’t heard anything different from the PUC on the schedule from when that proposed decision would come out. We have no indication that it’s scheduled to come out on that date, either. Jonathan Arnold – Deutsche Bank: Okay. Thank you.

Operator

Operator

Thank you, Mr. Arnold. Our next question comes from the line of Tom O’Neill with Green Arrow. Please proceed. Tom O’Neill – Green Arrow: Good morning. I was just curious if you could review the longer term dividend policy, and just whether we should recalibrate that if CapEx levels are approved as proposed?

Tony Earley

Management

Well, let me just reiterate. We’re committed to the dividend. We believe that’s an important part of the value proposition for a company like ours. But in terms of policy, we can’t revisit what we’re going to do until we get some major things behind us, like the gas proceedings, we’ve got cost of capital, we’ve got to take a look at some indication of where the general rate case is going to be going before we would be able to say any more about policy going forward. So, what we’ve been saying is we’re committed to the dividend, but we’re going to have to resolve a couple of these major issues before we start to give you some guidance on what you might expect. Tom O’Neill – Green Arrow: Okay, understood. Thanks.

Operator

Operator

Thank you Mr. O’Neill. Our next question comes from the line of Steve Fleishman with Bank of America. Please proceed. Steve Fleishman – Banc of America: Yeah, hi. Can you hear me?

Tony Earley

Management

We can, Steve, yeah. Steve Fleishman – Banc of America: Hi, Tony. Just one clarification on the settlement discussions. When you say you’re targeting to have a resolution by the end of the year, are you targeting a settlement by then or approval by the PUC of a settlement by then?

Tony Earley

Management

I think you’re cutting too fine a line, there. Steve Fleishman – Banc of America: But it could be several – you know, three, four, or five months?

Tony Earley

Management

You know, it could, or it could go very quickly. It probably depends on how many parties you can get to sign on. Is it a heavily contested settlement, or is it one where you’ve got a number of parties? So, I’ve said I want to try and get them wrapped up by year end. Either one of those would be real progress, if we just got an agreement, even if it wasn’t yet approved by the Commission. Steve Fleishman – Banc of America: At one point you had mentioned the two year anniversary of San Bruno as a potential kind of goalpost on this. Is that – should we not really focus on that as a potential goalpost date on this?

Tony Earley

Management

It certainly continues to be a driver of trying to move things along. Here we’re about a month away, it may not be – well, certainly you’re not going to get total resolution by then, but it continues to be in everyone’s mind that we’d like to make a lot of progress by then. Steve Fleishman – Banc of America: Thank you.

Operator

Operator

Thank you Mr. Fleishman. Our next question comes from the line of Travis Miller with Morningstar Securities Research. Please proceed. Travis Miller – Morningstar Securities Research: All right, thanks. With the docket right now – all the dockets right now on the CPUC, what’s your sense for where you stand for each of these proceedings in line in the queue, and how would you rank each one of the four outstanding in the regulatory calendar that you guys give there?

Tom Bottorff

Analyst

This is Tom Bottorff again. The rulemaking is the furtherest along, and it has – again, we have proposed decisions scheduled for release this month. That hasn’t happened yet. We’re not sure when it will happen. But it calls for a final decision as early as September. But again, I don’t see that on a track where that’s likely to happen, but that’s what the current schedule calls for. The three investigations are all on similar timelines right now. PG&E has filed its responses. We expect rebuttal testimony from the staff in August, and hearings will probably take place either in late August or early September. So the procedural timeline for the three investigations have probably proposed decisions by the end of this year or early January, and final decisions in the first quarter of 2013. Travis Miller – Morningstar Securities Research: And is it reasonable to expect that those will be on time?

Tom Bottorff

Analyst

As of now, they’ve been on schedule, yes. So if they – absent a settlement, I’d expect those schedules to proceed on that timeline. Travis Miller – Morningstar Securities Research: Okay, great. Thanks a lot.

Operator

Operator

Thank you, Mr. Miller. Our next question comes from the line of Anthony Crowdell with Jefferies. Please proceed. Anthony Crowdell – Jefferies: Good morning. You may have addressed this already, but I was wondering if the company could comment if they’ve been successful in maybe getting all of the OII’s wrapped up into like one settlement discussion. I know maybe on the previous earnings call, you mentioned that was your goal or that was your hope. Could you give any status on that?

Tony Earley

Management

You know, as I said before, these are complex issues. We are trying to get a global settlement, but I really don’t want to get into the details of the discussions. Anthony Crowdell – Jefferies: Great. Thank you.

Operator

Operator

Thank you, Mr. Crowdell. Our next question comes from the line of Ashar Khan with Visium Asset Management. Please proceed. Ashar Khan – Visium Asset Management: Hi, how are you doing? I just wanted to -you were trying to point out directionally the earnings. Is it fair you’re saying from what I heard, 2013 is down versus 2012 of course because of the ROE issue, and even the rate increase and everything is not going to offset the rate base increase, not going to offset of course lower ROE, what you’re predicting. But then you’re expecting 2014 to be higher than 2013, and can you point out whether you expect 2014 to be equal to 2012, higher or lower? Can you give any kind of indication from that perspective?

Kent Harvey

Management

Are you referring to overall, like earnings from operations? Ashar Khan – Visium Asset Management: That’s correct.

Kent Harvey

Management

Well, I think the key drivers in 2013 that I mentioned were the fact that there will be some reduction in the ROE that’s authorized. And then in addition to that, we do have the cumulative impact of dilution, some year-over-year dilution because of the equity issuance that’s happening throughout this year, for example, and will be outstanding for all of next year. Probably one of the bigger factors in 2014 is that it’s a General Rate Case which will affect our authorized rate base and it will affect our ability to earn an authorized return given that we’re doing incremental spend this year and next year in the $250 million range. So, we are looking to the General Rate Case as a way for us to address a lot of the activities that we’re doing over the next few years and to make sure that our revenues are aligned with what we think we ought to be doing on our system. Ashar Khan – Visium Asset Management: Okay, understood. But is there any guidance that you can give in terms of – I know I guess we don’t know what will come out in the rate case, but are you pointing that 2014, any directionally guidance of 2014 versus 2012?

Kent Harvey

Management

We’re not providing guidance for either year at this point. Ashar Khan – Visium Asset Management: Okay, okay. Thank you.

Operator

Operator

Thank you, Mr. Khan. (Operator Instructions)

Tony Earley

Management

Jackie, is that an indication that there are no further questions?

Operator

Operator

Yes, sir. And there are currently no additional questions waiting from the phone lines.

Tony Earley

Management

All right, in that that case, I would like to thank everybody for spending some time with us today. I know it’s a very busy earnings season and this is towards the tail end. So, have a great day. Thanks again.

Operator

Operator

Ladies and gentlemen, thank you for attending the PG&E Corporation’s second quarter earnings conference call. This now concludes the conference. Enjoy the rest of your day.