Good afternoon and welcome to the PG and E First Quarter Earnings Conference Call. At this time, I would like to introduce your host, Gabe Taniari with PG and E. Thank you and have a good conference. You may proceed, Mr. Taniari.
Thanks, Lynn, and welcome to our call and thanks for making time in what we know is a busy day of company calls and conferences. The earnings release that we put out earlier today is posted on our website along with the supplemental earnings tables we'll be covering and including the Reg G reconciliations. The information is available in the today. I'll remind you that our prepared remarks and the Q and A session that follows will include forward looking statements based on assumptions and expectations reflecting information currently available to management. And as outlined in more detail in our press release and SEC reports, actual results may differ materially from those forward looking statements.
Important factors that can affect actual results are described in the reports we file with the SEC, including risk factors and other factors described in our annual report on Form 10 ks for the year ended December 31, 2009 and our Form 10 Q reports. Leading the discussion today will be Peter Darby, Chairman, CEO and President of PG and E Corporation and Kent Harvey, Senior Vice President and CFO. Chris Johns is out of town attending his son's graduation. So we send out our congratulations to Ryan Johns. Other key members of the team as usual will participate in the Q and A session.
And now I'll turn things over to Peter Darby.
Thanks, Gabe, and thank you all for joining us today on the phone and on the webcast. We appreciate your interest in PG and E as always. And this morning, we reported solid results for the quarter. Earnings from operations came in at 0.79 dollars per share. Looking ahead, we're reaffirming guidance for 20.1011.
Kent provide the details behind the quarter's financial results in a minute. I'm going to focus my remarks on updates and progress on some key
key
As you know, the case is proceeding and we're looking forward to the start of hearings next month. Late Wednesday, the division of ratepayers advocates filed its testimony in the case, which Kent will cover in his remarks. We've put a lot of time and effort into this case and it's been prepared by an experienced management team. We believe we put forward a good case and plan to work constructively with the commission staff and other parties as we proceed. 2 weeks ago, we received CPUC approval to own and operate up to 2 50 megawatts of new solar PV generation.
That decision also authorizes another 2 50 megawatts that will be purchased from 3rd parties under long term contracts. We already have 2 megawatts that have been up and running since last year under utility ownership. We expect construction on additional megawatts to begin later this year. Moving to the FERC, in our annual transmission owner case, TO-twelve, we've reached an all party settlement and have requested final FERC approval. The settlement sets an annual retail rate based revenue requirement of 875,000,000 dollars This is an increase of almost $100,000,000 over the current amount and will fund necessary infrastructure work on the transmission system.
Finally, at our investor conference, we talked about our focus on PG and E's E's increasing rates for higher volumes of usage. Our concern is that in recent years, the rates in the upper tiers have increased much more than the lower tiers and have gotten too high. In that regard, we reached a proposed settlement with the DRA intern 2 weeks ago that would eliminate the 5th and highest rate tier altogether. We believe we're on track to obtain CPUC approval of this rate change in June before the we're addressing that through our GRC Phase 2 rate design proposal. In this application, we proposed eliminating the 4th tier to get a more balanced and equitable three tier structure.
Our highest residential rate would then be comparable to both Southern California Edison and San Diego Gas and Electric. The result would be a fair rate structure, one that reflects the actual cost to serve different groups of customers, while still providing the right motivation for energy efficiency. We believe these various regulatory developments demonstrate that in general, PG and E's priorities continue to be aligned with those of policymakers, regulators and with the interests of our customers. We know that many of you are focused on the regulatory environment in California and are looking for signs that it remains do. Their actions over the years have demonstrated a pragmatic and constructive approach to energy policy in California.
That is a policy guided by a vision of world class electric and gas infrastructure. We believe there continues to be clear signs that the regulatory environment remains on track, the most recent example being the solar PV decision. Commitment to you is that we'll work hard to maintain the support of key policymakers for our programs and plans. And now we're going to turn it over to Kent Harvey, who's going to discuss the financial results in more detail. Kent?
Thanks, Peter, and hello, everybody. For the Q1, PG and E Corporation earned $303,000,000 or $0.79 per diluted common share in earnings from operations. This compares to $246,000,000 or $0.66 per diluted share for earnings from operations for the Q1 of last year. On a GAAP basis, we earned $258,000,000 or 0.67 dollars per diluted common share and that compares to $241,000,000 or $0.65 per share last year. The $0.13 increase in earnings from operations was a result of a number of factors and they're summarized in table 4 of the supplemental earnings package.
They include an increase of $0.06 per share relative to 2,009 because there was no refueling outage at Diablo Canyon during Q1 of this year. An increase of $0.05 related to higher revenues associated with our authorized rate based investments, an increase of $0.02 due to positive market performance in our non pension benefit trust, another 0 Q1. And finally, an increase of $0.03 in miscellaneous reflecting a number of smaller net positive items. These $3 resulting from the severe storms we experienced during the quarter, which required significant restoration work and a reduction of $0.02 due to increased shares outstanding as compared to a year ago. Let me now briefly walk you through the items impacting comparability, which totaled $0.12 during the quarter.
For this, I'll refer you to our Reg G reconciliation table, which is table 2 in our supplemental earnings package. One item impacting comparability is a $0.05 charge associated with the recently enacted federal healthcare law, specifically the elimination of a tax deduction associated with the Medicare Part D contributions for post retirement medical plans. I'm sure you've heard about this from others, but the loss of the deduction means that we have to reduce the deferred tax asset on our balance sheet resulting in a one time charge. The other item our plan, which we expect will total $0.09 for the year. With 1 quarter down, we believe we're on track for the year and we're reaffirming our guidance today for earnings from operations for both 20 10 and 20 11.
Guidance for 2010 remains at $3.35 to $3.50 per share and guidance for 20.11 remains at $3.65 to 3 $8.5 per share. I'll remind you that our guidance is based on various assumptions discussed at our analyst conference, terms of our financing outlook overall, including our equity needs, from my perspective there really are no significant updates since our investor conference 2 months ago. Our CapEx program got off to a bit of a slow start in Q1 due to the January storms I mentioned as well as some permitting and other delays. At this point, we expect to make up most of it as the year progresses. As Peter mentioned, we received approval of the solar photovoltaic program and we had shown a 20.10 CapEx range at our investor conference of between $0,000,000 $160,000,000 for this item.
However, given the timing of the decision, which was a bit later than we had hoped, but also the procedural requirements that were included in the final decision, we expect our 20.10 CapEx spending for this program to be at the lower end of that range, perhaps up to year. Obviously, we're still awaiting regulatory decisions on the cornerstone program and the Manzano wind project. So there isn't much new on those at this point. As planned, we did resume equity issuance from our 401 and DRIP programs in March and we continue to expect that we'll issue between $100,000,000 $200,000,000 of equity through these programs by the end of the year. This will likely be sufficient to meet our 20 20 $27,000,000 which is about 21% of our request.
This is pretty similar to past GRCs. For example, in Edison's last case, I think DRA's recommendation was about 18% of what Edison requested. It's clear that there are substantial differences from what we believe is necessary to provide the level of service our customers want. CRA's recommendation for our 2011 revenue requirement is $874,000,000 lower than our request and the biggest categories are lower O and M expenses of about $445,000,000 lower A and G G of individual items make up each one of these categories. And we're still digging into their testimony so that we can understand their logic for each recommendation.
But I'll give you a quick expense example in my own organization. DRA recommended funding for our tax department of 0. And the rationale is that the corporation rather than the utility is the legal entity that files the return. So even though our tax department is actually in the utility and the utility accounts for the vast majority of our taxes, DRA argues that their costs should not be included in utility rates. DRA's lower capital related revenue requirements reflect proposed reductions in CapEx and rate base.
The biggest differences in CapEx are in electric distribution, IT and other support areas like fleet and real estate. In terms of attrition for 20122013, DRA came in substantially below our numbers and this appears to be based on a simplistic application of CPI escalation across the board and without consideration of rate base growth. So that's DRA. Now as as interveners with rebuttal testimony and then the GRC hearings will begin in the latter half of June. They're scheduled to conclude by mid July and then briefs would be filed in August.
So the schedule overall calls for the said, we continue to believe that our request is reasonable and well supported and obviously we'll keep you informed of our progress in the months ahead. Now I'll turn it back over to Peter.
Thanks, Kent. I'd like to wrap up with a brief but timely set of comments on climate and energy legislation. Policymakers are now at a critical point in the effort to advance a bill this year. We feel it's important to underscore our view that passing a smart federal climate and energy bill and setting a price on carbon emissions is critical. It's necessary to create clarity for business and consumers.
It's necessary to drive investment that will support a competitive low carbon environment. And it's also necessary to begin moving in this direction sooner, not later. We recognize the headwinds that have been buffeting the current efforts in Washington over the past few weeks. That said, we count ourselves among the large group of major companies and other groups who believe that this issue is simply too important not to address. As a result, we continue to urge action this year in Congress together with our many partners in U.
S. CAP, the Clean Energy Group as well as other organizations. And we remain hopeful that the good progress that was underway in the Senate will come to fruition. And now we're ready to take your
cooling tower decision and what impact that will have on your generation? And then secondly on the CPUC brouhaha about rec trading and how you see that impacting your business?
Okay. We're going to start with Jack Keenan, our Chief Operating Officer. He's going to address the first part of that question with respect to cooling towers.
Correct. Good morning. As you're aware, the State Water Resources Board did approve its policy to limit the use of 1 through cooling. It does affect 2 of our generating stations, the first of which is at Humboldt. We have 2 small generating stations that use gas.
Those plants right now are in the process of being replaced by a new station up at Humboldt which is under construction which will go in online this year. So shutting that unit down by the end of this year was in our present plans. So we'll have no effect on the new station which uses air cool. The second plant that this affects is our nuclear station and the waterboard was very considerate when it took into account how this would affect the California nuclear stations. And in fact, for Diablo Canyon, the date of compliance is actually 2024.
And initially what they will do is a study that will take up to 3 years, which will determine whether or not the cost that they've used in estimating what it would take to convert Diablo Canyon to an alternate technology is a reasonable cost or whether it would be wholly out of proportion to the cost that the Board considered. So that would be the first step. In addition to that, they will then look at whether it's feasible to permit the technology environmental impact would be reasonable for that area because it would have considerable environmental impact such as we build cooling towers. So ultimately, we believe that we will continue to
to
part of the question that relates to renewables and RECs.
Thank you for the question. This is Fang. I oversee energy procurement. As you know, in March of this year, the CPC issued a decision authorizing the trading of renewable energy credits. And a tradable renewable energy credit refers to a certificate that demonstrate the proof of procurement of the green attribute that is separate from the renewable energy.
Recently, on May 6, the CPUC voted to state its early decision that that REx while it is concerning this issue and we expect the commission to further consider this issue in its June meeting. At the current time, the inability to use REx will reduce our ability to use out of state renewable energy.
Leslie, I heard you try to come in there.
Yes. Well, does that impact your ability to meet your renewable targets if you're not able to use those out of state REX?
It would 14% in 2,009 of renewable energy and what we have mentioned earlier in the year that we expect to have 17% to 19% in the 2010 on a delivery basis. We also have talked about in the past that we have the ability to use flexible compliance, which allows us to use makeup deliveries to extend the 20% throughout the year 2013. So the 20% is very challenging and we're working very hard at it and we are hopeful we can get to the 20%.
And then I just had a follow-up on that cooling tower thing. You said they were going to do a 3 year study, a cost benefit analysis, the feasibility of permitting and environmental impact. Will they do that all the power plants in the state or are they just doing it for the nuke? How are they sort of going through that process?
That's 3 year study applies to the 2 nuclear facilities in California.
Okay. Thank you.
Welcome, Leslie.
Thank you, Ms. Rich. Our next question comes from
the line of Michael Lapides with Goldman Sachs. You may proceed.
Hey, guys. Congrats a good quarter. Actually, I have two questions. One related to the REX issue. That is what happens to contracts you've already signed, but maybe aren't yet taking delivery of renewable power from for out of state renewable facilities?
I'm thinking of, I don't know, maybe solar plants in Nevada that could serve you something like that?
Fang?
The contract we have signed and also have been approved by the PUC, it's my understanding that these will qualify and continue to count as renewable energy. And we have a few contracts in front of the PUC pending their approval that also falls in this category. And we're certainly hopeful that the commission will approve them and count them toward renewable energy.
So I mean, if I'm the owner of one of those facilities and I signed it off take agreement with you, I assume there's been no change to kind of my economics?
That's my expectation.
Okay. Second question relates to the rate case and really the timing of changes on the PUC. As I understand that at least 1, probably 2 members of the commission will roll off at the end of the year. If your GRC runs the same length that the Southern Cal Edison one did its last go around where it went into March the following year. Would that mean 2 new commissioners would rule on it?
Or would 2 commissioners kind of get grandfathered into that? How would that play out?
We're going to have Tom Bodorf, the Head of our regulatory relations address that question. Tom?
Yes. Thank you, Peter. There's a couple of ways this can play out. First, the governor does not need to appoint 2 commissioners to replace them in order to receive a decision on our general rate case. So if there are 3 commissioners in place in January or February of next year, as long as the majority of those 3 vote on the decision, then it can be issued.
The other option is, of course, the governor can issue 2 more, and we can have a full commission vote or maybe just one. So anywhere from 3 to 5 necessary to get a decision.
Our next question comes from the
line of Lohsane Johan with RBC Capital Markets. You may proceed.
Thank you. Just following up on Michael's question, what happens if there's 4 commissioners and it's a 2 two
tie? Yes. In that event, there would be no decision. So we would have to wait for a subsequent action by the commission. We need at least a majority of those present to rule in favor to receive a decision.
It has to be an
absolute, okay. I saw in another company's presentation that expectation for the Pacific Connector was 2014 commercial date of operation. Is this something that PG and E has agreed to? Or is this something that they're kind of speculating on their own without any kind of real confirmation?
Yes, Lassonde, this is Gabe. As to the operation date of Pacific Connector, it's really going to be dependent on the ability of the terminal to sign up long term contracts to supply gas to the terminal and then the corresponding long term capacity commitment on the pipeline. So that's going to dictate what the operations date could be for both the terminal and the pipeline.
Has it even been approved?
Yes. Both the terminal and the pipeline received their FERC certificates in December of last year, but that does not resolve some remaining state and local permits that the project is still going after.
Okay. That's what I thought. There's this issue of PG and E being sued by, I think it's the consumer ratepayer advocacy department again about community aggregation that PG and E is interfering with this process for a particular community. Do you have any kind of thoughts and comments on that?
Tom, do you want to address
that? Yes. Parties have taken issue with some of our activities on CCA, but I think most recent action was that on behalf of the commission, a letter issued by the executive director who provided clarification on how we should engage in soliciting customers with respect to asking them to opt out of the CCA's program and remain with the utility. So I think at this point, the program continues, both the utility and the Community choice aggregator can seek to inquire with customers with respect to what kinds of options they would prefer, but we're guided by the rules in the letter that the Executive Director issued. So no real big deal?
I don't see it as a big deal.
Okay. Last question, I guess this is for Wang. Gas prices and power prices are probably at the bottom of the foreseeable future. Any chance PG and E comes in and starts layering in purchases of both power and gas for much longer periods than you normally would to secure a very cheap price?
Well, thank you for the question. We're going to stay the course, not try to speculate market prices. We have an approved hedging program for both gas and electricity, and we're going to keep implementation of these programs.
So I see you're viewing that as a speculation and you don't want to do that?
That's correct.
I understand. Thank you.
Thank you, Mr. Zhuoheng. Our next question comes from the
the
regards to the rate at which the CapEx was deployed in the Q1, can you what was the weather event that stalled the spend? And should we think that the delay of spending was in one specific area like smart metering?
We'll just proceed once you tell us.
We now have Gabe Tungari rejoining.
Hi, everybody. I apologize for the inconvenience. I'm not quite sure what happened, but our phone got hung up. We're told that everybody is still on the line with us. So we're going to go ahead and answer the question that Kevin asked regarding CapEx.
Yes. And this is Kent Harvey. I mentioned CapEx being a little behind in the Q1 from our plans and of the factors was that we had very severe winter storms in January. And so obviously our workforce was focused on service restoration as instead of planned capital expenditure programs. The other factors that affected our CapEx in the Q1 was we did have some permitting and other delays.
And maybe I think my final point was just that for the most part, we think that we will make up for this during the year and largely be back on plan by the end of the year. We'll keep you posted as the debt obviously as the year progresses.
Next question?
There are currently no additional questions waiting from the phone line. I'm sorry, we do have a question from the line of Dan Ager with Credit Suisse. You may proceed.
Hi, sorry, this is Kevin again. So how is the
service restoration cost getting booked,
I guess?
Well, that was one of the factors, Kevin, that I talked about in the Q1 results was that we did have higher expenses during the quarter for storm related costs. Overall, our quarter was positive in terms of earnings from operations compared to a quarter, Q1 of last year, but that was one of the mitigating factors was
3% charge, Kevin.
Okay. And so we should expect the catch up to be equally spread out
between the 3 remaining quarters? Yes.
Okay. And then do we
have any clarity on the use of bonus depreciation to offset equity in
Penn? Kevin, this is Kent also again. We don't at this point. It's still pending in Washington. And so we hope we're going to get some clarity in the next month or 2, but we don't have any further clarity than we did at the beginning of March.
Okay. And then lastly with Cornerstone, did you receive the proposed decision in March or April?
No, we've not yet received a proposed decision for Cornerstone.
And when are we expecting that?
Anytime.
And so has the final decision got pushed back from June July to August or so?
Tom, maybe you can just kind of comment on your outlook for it. Yes. So we're expecting a proposed decision this month and
it could be on the expecting a proposed decision this month and it could be on the commission's agenda 30 days following that. So we're expecting a final decision probably in
There are currently no additional questions waiting from the phone lines.
All right. Well, in that case, I'll apologize again for the technical difficulties. I'm sure it's been a long week for everybody. Have a wonderful weekend, which includes Mother's Day on Sunday. And if you happen to be in Florida at the AGA conference in a week and a half, you'll see me and Chris Johns there.
Have a great weekend, everybody.