Good morning, and welcome to the PG and E First Quarter 2014 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 hostess, Sarah Cherry with PG and E. Thank you and enjoy your conference. You may proceed, Ms.
Cherry.
Thank you, Lynn. Good morning, everyone, and thanks for joining us. Before you hear from Tony Early, Chris Johns and Kent Harvey, I'll remind you that our discussion will include forward looking statements about our outlook for future financial results based on assumptions, forecasts, expectations and information currently available to management. Some of the important factors that could affect the company's actual financial results are described on the second page of today's slide deck. We also encourage you to review the Form 10 Q that will be filed with the SEC later today and the discussion of risk factors that appears there and in the 2013 annual report.
And with that, I'll hand it over to Tony.
Thanks, Sarah, and good morning, everyone. I'll start off our remarks today and then turn it over to Chris and Kent. I'm going to cover our focus as a company. Chris will discuss the current status of our operations and regulatory and legal matters. And then Kent will conclude with the financial results of the quarter.
Let me start with Slide 3. Since my first day at PG and E, it's been clear to me that everyone here is united around our shared mission to operate in a leading utility that delivers safe, reliable and affordable electric and gas service to our customers. Our three objectives continue to be resolving the gas issues, positioning the company for long term success and partnering effectively with others to move the company forward. So on the gas regulatory front, we continue to await action by the California Public Utilities Commission Law Judges in the pending gas investigations. But we have not waited to make significant improvements to the safety and reliability of our gas pipeline system.
As I said before, it's vital that the commission's final decision recognized that we compensated the victims to the civil proceeding and that we made substantial improvements in safety at a very significant cost to our shareholders. Next, resolving the gas rate case, will a general rate case will allow us to continue the important work we've already begun. We're going to be able to upgrade our gas and electric systems and generating assets and continue to grow. As you know, we don't control the schedule, but we expect to receive a proposed decision soon and we'll look to the commission to reach a reasonable and timely final decision. In our gas transmission business, we filed a gas transmission storage rate case for 2015.
And finally, the U. S. Attorney's indictment of the company under the Federal Pipeline Safety Act was a development that we shared in detail earlier this quarter. We just do not believe any employees intentionally violated the federal pipeline safety regulations. And we believe that even where mistakes were made, employees were acting in good faith.
Turning to operations. In 2014, we've continued to see strong progress. As a company, we've been focusing on steps to ensure the safety of our customers. And one area where I'm pleased to see great progress in the Q1 was in the reduction of third party damages to our gas and electric lines as a result of unsafe digging practices. With respect to future success, our integrated planning process is now in its 3rd cycle with plans for driving continuous improvement throughout the organization.
As we look forward, we continue to focus on superior execution of the work outlined in our rate cases and earning our authorized return this year with the exception of the Gas Pipeline business. And next year, our objective is still to earn our authorized return for the entire enterprise. So with that, let me
turn it over to Chris. Thanks, Tony, and good morning, everyone. I'll begin my remarks with an update on our operations and then touch on regulatory developments. Starting with gas operations. Since 2011, we successfully strength tested over 6 75 miles of pipe, replaced almost 130 miles, retrofitted more than 400 miles to allow for in line inspection and installed nearly 150 automated shutoff valves.
This work on the pipeline is the most extensive in the United States and demonstrates the company's commitment to enhance the safety and integrity of our gas system. And this work has not been limited to the gas transmission business. We've taken lessons learned and applied them throughout our operations. We're finding and fixing issues in all areas of our operations, including our gas distribution system. In our gas distribution system during the Q1, one of our crews working on a distribution line upgrade accidentally caused a leak, which caused an explosion at a vacant house in Carmel.
Fortunately, nobody was injured. We take this event very seriously. The immediate steps we took included modifying our work procedures and hiring an independent third party engineering firm to conduct a root cause analysis. The expert firm released their report last week and concluded that the explosion could have been prevented by proper report recommends a series of safety actions, which we fully embrace and have already implemented or will begin implementing shortly. We know the lessons learned from Carmel will make our operations even stronger and safer going forward.
In the electric business this quarter, we've now fully integrated about 500 new devices on our lines to isolate outages and reroute power automatically in the event of a failure. We've already seen positive results from this program. Just since January 1, we've avoided nearly 10,000,000 customer outage minutes or almost 100,000 sustained customer outages. This is just one example of the work we're doing on our electric system to improve the reliability experienced by our customers. In our energy supply organization, we successfully completed another refueling outage at Diablo Canyon.
As is true, every 5 years, 2014 includes scheduled refueling outages on both units at the plant with the second outage coming in the fall. Turning to regulatory matters. I'll spend a few minutes on our 3 pending rate proceedings. The first is our 20 14 general rate case where we are awaiting proposed decision. This rate case integrates a strong risk prioritization process and a focus on safety.
The commission consultants reviewed our request from a safety perspective. The consultants' reports provided some constructive comments but also recognized the overall improvements we're making, including our integrated planning process that Tony talked about and risk management assessments as well as safety improvements. We look to the administrative law judge overseeing the GRC and ultimately to the commission to acknowledge the importance of our plans to improve the safety and reliability of our distribution systems and generation assets. As a reminder, once the CPUC issues a final decision, the revenue requirement change will be retroactive to the 1st of the year. The second case is our gas transmission rate case, which we filed in December.
During the quarter, we filed a motion with the commission to request that the revenue requirement for the gas transmission rate case be retroactive to January 1, 2015, even though the final decision will come later. We're pleased to have partnered with Tern and ORA to gain support for this important motion in the proceedings. We expect a ruling on the motion in the next 2 months. Finally, with TO-fifteen, our electric transmission rate case, we continue to engage with the other parties for settlement discussions in April, and we'll continue those conversations later this month. With that, I'll turn it over to Ken.
Thanks, Chris, and good morning. I'll now walk through the results for the Q1, which are summarized on Slide 5. You can see that our internal operations were $0.54 GAAP results reflecting the item in Technic comparability for natural gas matters were 0.49 dollars The table at the bottom has the natural gas item in pre tax dollars and you can see that pipeline related expenses came in at $40,000,000 for the quarter. Keep in mind that work on the pipeline is seasonal. We plan less work during the winter months and we do expect it to pick up significantly in future quarters.
Slide 6 shows the quarter over quarter comparison for earnings from operations and the main drivers behind the $0.09 difference. About $0.04 of it is due to the fact that without a decision in our pending general rate case, we're not recovering the increase in depreciation and interest expense resulting from capital growth over the past year. After the commission approved the general rate case, which will be retroactive to January 1, we'd expect to recover these costs. And for that matter, turn a return on a larger authorized rate base. So this one is essentially a timing issue.
Another $0.03 is due to the increase in shares outstanding and the rest is due to a number of smaller items, some of which are also just timing. So that's the summary of our Q1 results. As you know, we're not providing we've not provided guidance for earnings from operations for the year, given the pending general rate case and the gas investigations at the PUC. However, on our last call, we did provide some key inputs to assist you in developing estimates, such as ranges for CapEx, rate base, unrecovered gas costs and equity issuance. We've not made any revisions to that information since last quarter and it's included in today's presentation.
On Slide 7, you'll see the estimated range for our item impacting comparability for natural gas matters remains $3.50 to $4.50 pretax. At the bottom is the reminder that these figures exclude future insurance recoveries, which obviously would net against these costs and exclude any additional fines or penalties resulting from investigations that haven't already been accrued. Finally, during Q1, we issued a little over $300,000,000 of common stock and we continue to target between $800,000,000 $1,000,000,000 of issuance for the year. Keep in mind that that range excludes any additional fines or penalties resulting from the GAAP investigation, which will be incremental to the range we've provided. And with that, we'll go ahead and open it up for your questions.
Certainly. We will now allow questions from the phone lines. Our first question comes from the line of Steve Fleishman with Wolfe Research. You may proceed.
Yes. Hi, everyone.
Good morning, Steve.
Hi. I view the lack of questions as a bullish contrarian sign. Just you mentioned that the Carmel independent report was out last week. Has there been any reaction to that from other constituent policymakers?
Steve, this is Chris. We have not heard anything and haven't seen any reaction to it. I mean, we've been aggressive about sharing it with the different policymakers and constituencies. So there hasn't been any reactions publicly yet.
Okay. And then just the $300,000,000 of stock you've issued so far to date, how much of that do you even have how much of that came out of your dribble versus your kind of programs?
Yes. I've got the numbers here, Steve. The majority was out of the dribble. Our internal programs, I think, were in the $80,000,000 range and the remainder was from the dribble.
Okay. And the obvious question, just are you getting any indications from anyone on timing of when you'll get an ALJ on the San Bruno issues?
This is Tony. No, we're we still believe that here as we approach mid year, we should get it. But obviously, we don't control that. And we're just waiting. But we continue to focus on moving ahead getting work done.
Because our belief is the more work we get done, the more we close out all of our gas issues, the better off we are.
Okay, great. Thank you.
Thank you, Mr. Fleishman. Our next question comes from the line of Dan Eggert with Credit Suisse. You may proceed.
Hey, good morning guys. Just thinking about timing for this year with the GRC waiting on the PD and formalization. Can you remind me what the time distance or what would be the normal process once you have the PD to once you have a final order in the GRC just so we can try and figure out if how much time we have left in this quarter before all the catch up money goes into the Q3 or whenever that shows up?
Yes. Hi, this is Tom Bodowar. I'm responsible for regulatory affairs. What we expect once the PD is issued, parties will have 20 days to comment, then there'll be another 5 days for reply. So the earliest you get final decision is 30 days roughly after the PD is issued.
Sometimes decisions can change or other issues can come up that cause delay. But the earliest could be 30 days and it could be another month or 2 after
that. Okay. So basically, if we don't have something in the next couple of weeks, then we should assume that it's going to be a best case third quarter pickup from an earnings
perspective? Yes. I think that's reasonable.
Okay. And then on the criminal case as it stands out right now, there's been more talk of maybe going after some of these past profits rather than the per violation costs. Can you remind us again where your legal position is on that point? And then is this something you think there's an opportunity to settle on or resolve or does this have to go through the core process?
Let me start off and then Yoon Park, our General Counsel, could go into a little bit more detail. But there has been considerable confusion in the press about these alternative funds following the arraignment last month. So I just want to make it clear that the indictment documents do not include any request for alternative fines. And in talking to our lawyers, we strongly believe that the law says that in order to seek alternative fines at this point, the prosecutors would need to go back to the grand jury, file a new superseding indictment that specifically seeks alternative fine. Whether they do that or not, we don't know whether they're going to do that, but none of it changes the underlying reality that fundamentally it's our belief that the criminal charges against the company just are not merited.
Again, I don't know if they want to say anymore about that pretty materially. Yes. Dan, this
is Kyun Park, General Counsel. And I guess the point that I want to make is that there are actually pretty high hurdles to seek an alternative fine. So what the government would have to do is, in addition to filing a brand new superseding indictment, we believe that they would have to prove to a jury beyond a reasonable doubt that the criminal conduct occurred and that the specific conduct actually caused the loss or the gain that they're going to base the alternative fine on And that the they have to also prove beyond a reasonable doubt the amount of the loss or gain. They also have to convince the court that the alternative fine would not unduly complicate or prolong the sentencing process. So they have to jump into a lot of moves for that.
Do you see given that and given otherwise the comparable to smaller dollars relative to the else you guys have gone through, Is there an opportunity here to settle this and just get it off the plate?
Well, we are always open
to settlement on this and we'll continue to look for opportunities going forward. I think procedurally right now that the time isn't right for that. But as we get through the initial phase of this proceeding, we'll look for those opportunities because you're right, the dollar figures are not big issues here.
And I guess just one last question, Tony. You focused a lot on trying to improve the operating performance from 3rd and 4th quartile performance up to higher levels. Can you just give us an update where some of those bigger measures stand and maybe when we should expect to see good comparability for what you guys did last year relative to the industry?
Yes, sure. I'll start off and Chris can add some things. You're exactly right. I think two and a half years ago when I got here, I characterized it as we were solidly in the 3rd and 4th quarter for a lot of our key metrics. And I'm really pleased to say that we're pushing up.
We moved some of the metrics into the 1st quartile. Even some of the more challenging ones are starting to push up to the median, which will push them from 3rd to the 2nd quartile. Chris mentioned electric reliability. We've had a string of we're looking at probably the 5th year in a row this year where we will have record performance on the electric side of the business. Nick Stavropoulos and his team have really transformed the gas business from a solid 4th quartile company or one that's got some really positive things going on.
And maybe Chris or Nick can comment on some of the progress we made.
Yes, Tommy. This is Chris. And what I would say is that we focused on a lot of the different areas. We've talked about reliability on the electric side, having 5 years 4 years now and getting into a 5th year of setting new records for us that will get us into the 2nd quartile nationally. In addition, on the electric side, we've been able to offset inflation
in that
organization last year, and continuous improvement programs. And I think that's really the key. All the organizations have embedded continuous improvement programs and initiatives within the organization that is helping them drive out costs and be able to do things like start to offset inflation and some of the other pressures that we've had.
Great. Thank you, guys.
Thank you, Mr. Eggers. Our next question comes from the line of Michael Weinstein with UBS. You may proceed.
Hi. I just wanted to confirm the when you're saying that there'll be some recovery once the retroactive nature of the GRC falls in. Are you talking about the $0.04 there in the waterfall chart?
Yes. This is Kent. So what's happened is in the past year since the Q1 of last year, obviously, we've had another year of CapEx on a rate basis growth. So we have been incurring in the Q1 a higher level of depreciation and our interest expense is higher. Once we get the general rate case, we expect that it will provide revenues that will cover those costs, as well as the fact that we will have an authorized rate base that will be higher and we'll be able to earn a return on a higher authorized rate base.
So you should see both the $0.04 recovery in the future period as well as just the return component on a higher level of rate base for 2014 as compared to 2013 in the last rate case.
So just to be clear, you're not delaying any capital spending right now. The capital spending is going on, rate base is increasing, it's just not being recognized as such?
That's correct. And the key thing is that the PUC's decision, we do expect will be retroactive to January 1. So we will get the revenue for it that we would have otherwise gotten during the Q1. They'll just be booked in a later period. And there's nothing unusual about that retroactivity.
The standard way.
Right, right. I just want to make sure there wasn't a delay in the spending that you'd have to make up, I guess, later on in the year, but it sounds like
We've mainly been staying on our plan and our plan on the expense side for the time being was to stay relatively flat to last year with the expenses pending the GRC outcome and that's the path we've been on. Okay. Thank you very much.
Thank you, Mr. Weinstein. Our next question comes from the line of Jim Von Reisman with CRT Capital. You may proceed.
Could you just walk us through the I'm not an attorney. So can you just walk us through the process with the indictment and what goes on from here and maybe the expected timing for this whole process?
So this is Hyun Park. So right now, there is a status conference that's scheduled for June 2. And I think the judge was at that point decide on some procedural schedules. There will be discovery, there will be motion, there will be additional status conferences. I think it's hard to predict how long the actual trial will take.
It's probably a year, 2 years or
it could take longer than that.
There was a federal indictment in August of 2,009 against a utility. And from indictment to the actual jury verdict, it took approximately 20 2 months. So that's an example that's out there.
Okay. Where is this going to be tried? Is this going to be tried in San Francisco? And if so, do you think you can get a fair trial given all the media
coverage of this? So we believe the trial will be here in San Francisco before a U. S. Federal District Court Judge. And we believe that we can get a fair trial.
And we'll just have to work through this here in San Francisco.
And then the last question is, aside from the penalties that might be considered, is there anything operationally that a conviction could have on the day to day operations of the company?
Yes. So some of the remedies that are available to a judge in sentencing in the event of a conviction is that the judge could order a monitor, a court appointed monitor. And there are other reporting type of remedies
that the judge could also order as well.
Nothing would impact your certificate of public convenience and necessity, is that correct?
Or shouldn't impact, I should say?
I assume you're talking about our ability to operate our business?
Correct.
Yes. No.
Okay. Perfect. Thank you.
Thank you, Mr. Von Reissen. Our next question comes from the line of Anthony Crawdell with Jefferies. You may proceed.
Good morning. Most of my questions have been answered. Just one question. We think of the delays we thought would be resolved right now. We're waiting for the ALJ on in the San Bruno proceeding, yet the company is still spending capital.
Do you think the delay helps you with when it comes to the proposed decision or final decision that maybe cooler heads are prevailing and the parties are seeing all the investment the company is making or you think this delay is going to have no impact at all on a final decision?
Well, I hesitate to speculate on the impact, but our view is that the more we improve the system, the better off we are. And I think the commissioners recognize that we have transformed the system and have really taken it to a whole new level. And we're doing some things in the gas business that will be industry leading or are industry leading. And we think that will be helpful when they're considering the appropriate penalty because not only have we compensated the victims in the civil cases, but we've remedied a lot of the issues that were raised in the NTSB report and elsewhere.
Great. Thank you.
Thank you, Mr. Croddel. Our next question comes from the line of Keith Konalich with BGC. You may proceed.
Thank you. Good morning.
Good morning, Kate. Just most
of my questions have been answered. One quick question. I think, Tony, you mentioned that you have support from TURN and ORA on the retroactivity concept for the gas transmission case?
Yes, that's correct.
And so when should we see a final indication from the commission that, that would be retroactive? And can you just give us a view of what the timing is for the full case?
Yes, this
is Tom Bodowar. With respect to that motion that seeks approval of settlement between ORA and a turn in our company, That's expected within a month or 2. So we should see maybe a post within the next month or the month after. The entire case, we do have a schedule that's been issued by the judge in the proceeding and it calls for a final decision in Q1
of 2015.
Mr. Konalich. Our next question comes from the line of Stephen Byrd with Morgan Stanley. You may proceed.
Hey, it's actually Rajeev Lalwani. First question was just on the as to whether or not there's any interaction between the criminal case and the state level investigation as it relates to penalties, fines, so that there's no kind of double counting? Maybe that and then a follow-up.
We don't see any
dialogue between the 2 or anything like that?
That we don't know. I mean, I'm sure there have been discussions. We do know that in the course of the U. S. Attorney's investigation, they were looking at a lot of materials that were developed in the PUC case.
And I would assume that there have been some discussions, but we really see these as separate proceedings.
Okay, understood. And second question was just more on investment potential longer term. I know you've got a 7% to 11% annual rate base forecast, but any thoughts on whether or not you think that can continue longer term? And then any thoughts on whether or not earnings could follow that closely?
And that was it? Rajeev, this is Kent. I think it's fair to assume that the infrastructure investment we're making at a pretty good clip is not going to be done during the next this upcoming general rate case period. So we continue to see a lot
of opportunity to invest in our existing system to upgrade it both for reliability
I mean, good good consensus of thought leaders around California that, A, we need to invest in infrastructure, not only to remedy some of the issues we had in GAAP, but also to take advantage of new technologies. Chris talked about the fabulous performance improvement in our electric business. And a lot of that's being driven by coupling the technology of smart meters with automated switching devices. And we've only just scratched the surface on using the data that we're developing out of those smart meters. And I think there's a lot of excitement of thought leaders about making sure we continue those investments here in California.
Okay.
And then, Kent, just a follow-up on that. As it relates to just earnings growth, do you generally think your rate base growth and earnings growth would be close? Or do you expect a big delta just from equity needs, etcetera?
Well, we haven't provided equity guidance longer term, but I think we have given you guys the tools to come pretty close to estimating it. And we do anticipate that we'll continue to have equity needs. So that will impact what the EPS profile looks like going forward. Got it. Thanks.
Our next question comes from the line of Travis Miller with Morningstar.
I wonder if you could characterize the timing and why it's taken so long, I guess, at the FERC on the transmission case and how that might back up your next few transmission cases or affect investment?
This is Tom Botto. If you're addressing TO-fifteen, our FERC transmission rate case, it's really not off schedule to any significant degree at this point. Settlement discussions are ongoing. We would expect to file TO16 in July. So we'll see.
But I think there's still a good chance TO15 to be settled prior to that.
Chris, I mean, I think that's generally in line with our last several years' worth of TO filings.
Okay. And then would you expect any impact or any further delays based on potential FERC rulings in the Northeast case or the MISO case in terms of ROEs?
No, we wouldn't have it.
Okay, great. Thanks a lot.
Thank you, Mr. Miller. Our next question comes from the line of Michael Lapides with Goldman Sachs. You may proceed.
Hey, guys. Just want to make sure trying to catch up a little bit on some of the rate case dockets, the general rate case and the GT and S one. Can you talk to us a little bit about what won't be recoverable as a result of both cases? Meaning, what will still be kind of a potential drag on traditional rate base math for you even after you get the GT and S order?
Well, this is Kent. And let me just take the gas transmission stuff. I think in that case, we have not requested the rights of way work, which you know is a 5 year program, 1 year of which is behind us. So we're in the 2nd year of that program. And our estimate for the full 5 years was roughly $500,000,000 So those dollars would not be recovered.
And those will continue in 2014, 2015, 2016 and 2017. And then I would say the other ones, there are 2 smaller pieces that we decided not to seek recovery of in the gas transmission case. And each one of them is roughly $25,000,000 per year for the 3 year rate cycle. One has to do with certain remedial corrosion work and the other one has to do with hydrostatic testing of post-sixty one pipe. And those are really the items that we've not saw from recovery in the gas transmission case.
And can you help us understand when we think about the combination of your GRC as well as the GT and S cases, what the bridge between the O and M you're requesting as a result of both cases versus kind of historical levels?
Well, I guess the way I would say it from an earnings perspective, maybe one way you want to think about it is prior to this year, we've been consciously spending about $250,000,000 in excess of what we were covering in those cases. That's putting aside the GAAP item impacting comparability, but in our normal operations, about 2 $50,000,000 And those that's essentially the gap from an earnings perspective that we're trying to address in the combination of the two rate cases. And obviously, the general rate case is the bigger piece of that.
And finally, can you
rehash for us just what's the level of capital spending under PSEP that you won't be recovering in rates going forward?
I think that's about $500,000,000 that doesn't get recovered.
Of future capital spend or spend that's already occurred?
Some of that is spend that's already occurred, we've accrued the total amount and the rest of it will occur this year, because the PSEP program reaches its conclusion at the end of 20 14.
Got it. Okay. Thanks, Ken. Much appreciated. Sure.
Thank you, Mr. Lupides. There are currently no additional questions waiting from the phone lines.
Thanks, Lynn. I think we'll wrap it up. Thanks very much everyone for participating and don't hesitate to call us if you have any follow-up questions. Have a great day.
Ladies and gentlemen, thank you for attending the PG and E First Quarter 2014 Earnings Call. This now concludes the conference. Enjoy the rest of your day.