Good morning. Welcome to the PG&E first quarter 2014 earnings conference call. All lines will be muted during the presentation portions of the call, with an opportunity for questions and answers at the end. At this time, I would like to introduce your hostess, Sara Cherry with PG&E. Thank you and enjoy your conference. You may proceed, Ms. Cherry.
Thank you, Lynn. Good morning, everyone. Thanks for joining us. Before you hear from Tony Earley, 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. With that, I'll hand it over to Tony.
Thanks, Sara. 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 in regulatory and legal matters, and then Kent will conclude with the financial results of the quarter. Let me start with slide three. Since my first day at PG&E, it's been clear to me that everyone here is united around our shared mission to operate 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.
On the gas regulatory front, we continue to await action by the California Public Utilities Commission law judges in the pending gas investigations. We have not waited to make significant improvements to the safety and reliability of our gas pipeline system. As I've said before, it's vital that the commission's final decision recognize that we've compensated the victims through the civil proceedings and that we made substantial improvements in safety at a very significant cost to our shareholders. Next, resolving the gas rate case, well, 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, we expect to receive a proposed decision soon, we'll look to the Commission to reach a reasonable and timely final decision. In our gas transmission business, we filed the Gas Transmission and Storage rate case for 2015. 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, 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, one area where I'm pleased to see great progress in the first quarter 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 third 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 returns this year with the exception of the gas pipeline business. Next year, our objective is still to earn our authorized return for the entire enterprise. With that, let me turn it over to Chris.
Thanks, Tony, good morning, everyone. I'll begin my remarks with an update on our operations then touch on regulatory developments. Starting with gas operations. Since 2011, we've successfully strength tested over 675 miles of pipe, replaced almost 130 miles, retrofitted more than 400 miles to allow for inline 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. 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 first quarter, 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 verification of the distribution line status and configuration prior to working on the line. The 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 1st, we've avoided nearly 10 million 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 five 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 three pending rate proceedings. The first is our 2014 general rate case, where we are awaiting a proposed decision.
This rate case integrates a strong risk prioritization process and a focus on safety. The commission's consultants reviewed our request from a safety perspective. The consultant's 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 first 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 this gas transmission rate case be retroactive to January 1st, 2015, even though the final decision will come later. We're pleased to have partnered with TURN and ORA to gain support for this important motion in the proceedings. We expect a ruling on the motion in the next two months. Finally, with TO15, 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 Kent.
Thanks, Chris, and good morning. I'll now walk through the results for the first quarter, which are summarized on slide five. You can see that earnings from operations were $0.54. GAAP results, reflecting the item and tax incomparability for natural gas matters, were $0.49. 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 million 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 six 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 approves the general rate case, which will be retroactive to January one, we'd expect to recover these costs, and for that matter, to earn a return on a larger authorized rate base. This one's 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. That's the summary of our first quarter results. As you know, 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 seven, you'll see the estimated range for our item impact and comparability for natural gas matters remains at $350-$450 pre-tax. 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 the gas investigations that haven't already been accrued. Finally, during Q1, we issued a little over $300 million of common stock, and we continue to target between $800 million and $1 billion of issuance for the year.
Keep in mind that that range excludes any additional fines or penalties resulting from the gas investigation, which will be incremental to the range we've provided. With that, we'll go ahead and open it up for your questions.
Certainly. We will now allow questions from the phone line. Ladies and gentlemen, to ask a question, press star, followed by one on your touch tone keypad. If you would like to remove that question, press star followed by two. If you are using a speakerphone, please pick up the handset before using the keypad. Again, if you would like to ask a question, press star one. We will pause here briefly to allow questions to generate in queue. Once again, ladies and gentlemen, to ask a question, press star one. Our first question comes from the line of Steven Fleishman with Wolfe Research. You may proceed.
Yeah, hi, everyone.
Morning, Steve.
Hi. I'll 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-
joint policymakers?
Steve, this is Chris. We have not heard anything, and we haven't seen any reactions to it. We've been aggressive about sharing it with the different policymakers and constituencies. There hasn't been any reactions publicly yet.
Okay. Just the $300 million of stock you've issued so far to date, do you have how much of that came out of your DRIP versus your comp programs?
Yeah, I've got the numbers here, Steve. The majority was out of the DRIP. Our internal programs, I think, were in the $80 million range, and the remainder was from the DRIP.
Okay. 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. Obviously, we don't control that. We're just waiting, but we continue to focus on moving ahead and 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 Daniel Eggers 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 then 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 how much time we have left in this quarter before all the catch-up money goes into the third quarter or whenever that shows up?
Yeah. Hi, this is Tom Bottorff. 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 five days for reply. The earliest we can get a final decision is 30 days, roughly, after the PD is issued. Sometimes decisions can change or other issues can come up that cause delay. The earliest could be 30 days, and it could be another month or two after that.
Okay. 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. 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? Is this something you think there's an opportunity to settle on or resolve, or does this have to go through the court process?
Let me start off, then Hyun Park, our General Counsel, should go into a little bit more detail. There has been considerable confusion in the press about these alternative fines following the arraignment last month. I just want to make it clear that the indictment documents do not include any request for alternative fines. 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 fines. 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. Fundamentally, it's our belief that the criminal charges against the company just are not merited.
Again, I don't know whether you want to say any more about that procedurally what has to be done.
Dan, this is Hyun Park, General Counsel. I guess the point that I want to make is that there are actually pretty high hurdles to seek an alternative fine. 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. 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. They have to jump through a lot of hoops for that.
Do you see, given that and given otherwise that comparably smaller dollars relative to anything 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. We'll continue to look for opportunities going forward. I think procedurally right now that the time isn't ripe for that. 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.
I guess just one last question, Tony. You've focused a lot on trying to improve the operating performance from third and fourth 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?
Yeah, sure. I'll start off. 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 third and fourth quartile for a lot of our key metrics. I'm really pleased to say that we're pushing up. We moved some of the metrics into the first quartile. Even some of the more challenging ones are starting to push up to the median, which will push them from third to the second quartile. Chris mentioned electric reliability. We're looking at probably the fifth year in a row this year where we will have record performance on the electric side of the business. Nickolas Stavropoulos and his team have really transformed the gas business from a solid fourth quartile company to one that's got some really positive things going on.
Maybe Chris or Nick can comment on some of the progress we've made.
Yeah, Tony. This is Chris. What I would say is that we've focused on a lot of the different areas. We talked about reliability on the electric side, having 4 years now and getting into a fifth year of setting new records for us that'll get us into the second quartile nationally. In addition, on the electric side, we've been able to offset inflation in that organization last year. We've embedded that into the rate case because of the continuous improvement programs. 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 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?
Yeah, this is Kent.
Okay.
What's happened is in the past year, since the first quarter of last year, obviously we've had another year of CapEx and our rate base has grown. We have been incurring, in this first quarter, 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. You should see both the $0.04 recovery in a 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.
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. The key thing is that the PUC's decision, we do expect will be retroactive to January 1. We will get the revenues for it that we would have otherwise gotten during the first quarter. They'll just be booked in a later period.
There's nothing unusual about that retroactivity.
Right.
That's kind of the standard way it's been done.
Right. I just wanted 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. It sounds like-
No, 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 Riesemann with CRT Capital. You may proceed.
Good afternoon. Good morning, I guess.
Morning, Jim.
Morning.
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?
Hyun, why don't you?
Yeah. This is Hyun Park. Right now there is a status conference that's scheduled for June 2nd, and I think the judge will, 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, two years, or it could take longer than that. There was a federal indictment in August of 2009 against a utility. From indictment to the actual jury verdict, it took approximately 22 months. 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? If so, do you think you can get a fair trial given all the media coverage of this?
We believe the trial will be here in San Francisco. It's before a United States District Court judge, and we believe that we can get a fair trial. We'll just have to work through this here in San Francisco.
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?
Yeah. 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 court-appointed monitor. 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? Shouldn't impact, I should say.
I assume you're talking about our ability to operate our business.
Correct.
Yeah. No.
Okay. Perfect. Thank you.
Thank you, Mr. von Riesemann. Our next question comes from the line of Anthony Crowdell with Jefferies. You may proceed.
Good morning. Most of my questions have been answered. Just one question. When you think of the delays, we thought we'd be resolved right now. We're waiting for the ALJ in the San Bruno proceeding, yet the company's still spending capital. Do you think the delay helps you when it comes to the proposed decision or final decision that maybe cool heads are prevailing and the parties are seeing all the investment the company's making? You think this delay is going to have no impact at all on a final decision?
I hesitate to speculate on the impact, but our view is that the more we improve the system, the better off we are. I think, the commissioners recognize that we have transformed the system and have really taken it to a whole new level. We're doing some things in the gas business that will be industry leading or are industry leading. 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. Crowdell. Our next question comes from the line of Kit Konolige with BGC. You may proceed.
Thank you. Good morning.
Good morning.
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.
When should we see a final indication from the Commission that that would be retroactive? Can you just give us a view of what the timing is for the full case?
This is Tom Bottorff. With respect to that motion that seeks approval of settlement between ORA and TURN and our company, that's expected within a month or two. We should see maybe a proposed decision next month or the month after. The entire case, we do have a schedule that's been issued by the judge on the proceeding, and it calls for a final decision in the first quarter of 2015.
Great. Okay. Thank you.
Thank you, Mr. Konolige. Our next question comes from the line of Stephen Byrd with Morgan Stanley. You may proceed.
Hey. It's actually Rajiv Alwani. First question was just 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 interrelationship. They're independent proceedings.
Okay. Do you know if there's no dialogue between the two or anything like that?
That we don't know. I'm sure there have been discussions. We do know that in the course of the US Attorney's investigation, they were looking at a lot of materials that were developed in the PUC case. I would assume that there have been some discussions, but we really see these as separate proceedings.
Okay. Understood. Second question was just more on investment potential longer term. I know you've got a 7%-11% annual rate base forecast, any thoughts on whether or not you think that can continue longer term? Then any thoughts on whether or not earnings could follow that closely? That was it.
Rajiv, 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 upcoming general rate case period. We continue to see a lot of opportunity to invest in our existing system to upgrade it both for reliability and safety.
This is Tony. Let me add to that. I think from a general standpoint, we're getting a 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 gas, but also to take advantage of new technologies. Chris talked about the fabulous performance improvement in our electric business, a lot of that's being driven by coupling the technology of smart meters with automated switching devices. We've only just scratched the surface on using the data that we're developing out of those smart meters. I think there's a lot of excitement of thought leaders around making sure we continue those investments here in California.
Okay. Kent, just to 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? Do you expect a big delta just from equity needs, et cetera?
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. We do anticipate that we'll continue to have equity needs. That will impact what the EPS profile looks like going forward.
Got it.
Thank you. Our next question comes from the line of Travis Miller with Morningstar. You may proceed.
Thanks. Good morning.
Good morning.
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.
Yeah. Hi, this is Tom Bottorff. If you're addressing TO15, 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, we'll see. I think there's still a good chance TO15 can be settled prior to that.
Yeah. This is Chris. I think that's generally in line with our last several years' worth of TO filings.
Okay. 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 would not.
Okay, great. Thanks a lot.
Thank you, Mr. Miller. Once again, ladies and gentlemen, if you'd like to ask a question, press star one. 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&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&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 five-year program, one year of which is behind us. We're in the second year of that program. Our estimate for the full five years was roughly $500 million. Those dollars would not be recovered. Those will continue in 2014, 2015, 2016, and 2017. I would say the other ones, there are two smaller pieces that we decided not to seek recovery of in the gas transmission case, and each one of them is roughly $25 million per year for the three-year rate cycle. One has to do with certain remedial corrosion work, and the other one has to do with hydrostatic testing of post 61 pipe.
Those are really the items that we've not sought recovery in the gas transmission case.
Can you help us understand, when we think about the combination of your GRC as well as the GT&S cases, what the bridge between the O&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 million in excess of what we were recovering in those cases. That's putting aside the gas item impacting comparability, but in our normal operations, about $250 million. That's essentially the gap from an earnings perspective that we're trying to address in the combination of the two rate cases. Obviously, the general rate case is the bigger piece of that.
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 there's about $500 million that doesn't get recovered.
Of future capital spend or spend that's already occurred?
Some of that is spend that's already occurred, but 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 2014.
Got it. Okay. Thanks, Kent. Much appreciated.
Sure.
Thank you, Mr. Lapides. 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. 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&E first quarter 2014 earnings call. This now concludes the conference. Enjoy the rest of your day.