Good morning, and welcome to the G and E Corporation Investor Update 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 pass the conference over to your host, Chris Foster with PG and E. Thank you, and have a great conference. You may proceed, Mr.
Foster.
Thank you, Lisa, and thanks to those of you on the phone for joining us. Here in the room with me this morning are Geisha Williams, Nick Stavropoulos, Jason Wells, Simon and David Thomason. Before I turn it over to Geisha, I want to remind you that our discussion today will include forward looking statements about our expected charge and insurance receivable in connection with the October 2017 Northern California wildfires as well as other expectations, objectives, forecasts and estimates. Prior to our call, we filed a current report on Form 8 today with the SEC, a copy of which is available on our website. With that, I'll hand it over to Gesha.
Thank you, Chris, and good morning, everyone. As we filed our 8 ks today, I'll start by reviewing our continued efforts to address inverse condemnation. I'll then provide brief regulatory and operational updates. Jason will then cover some of the important details related to the accounting charge we expect to take this quarter and what this means from a financing perspective. This morning, we issued an 8 ks outlining our decision to record a $2,500,000,000 pretax non cash accounting charge.
As discussed in the 8 ks, which Jason will cover in greater detail, this charge is related to only certain wildfires and The low end of the range of estimated losses related to the devastating wildfires that affected Northern California in 2017. As a result of the flawed construct of inverse condemnation, which is strict liability, we have concluded that we are likely to incur a financial loss with Inverse condemnation places utilities in California in a role akin to a backstop insurance provider, Even if the company followed all applicable rules and regulations in managing their
infrastructure.
As an investor owned utility in the state of California, our goal is to change with other states so that investor owned utilities customers and shareholders are not financially harmed by inverse condemnation. Solving this issue requires tackling it on 3 fronts legislative, legal and regulatory. 1st on the legislative front, a few bills have passed the state Senate related to wildfires and there's a lot of work going on in the assembly here at the end of June with another push likely in August. And just yesterday, 2 wildfire related bills passed the Assembly Utilities and Energy Committee. Next on the legal front, you may have seen that earlier this week we filed a petition for review with the California Supreme Court related to The question of inverse condemnation in the Butte wildfire cases.
It's ultimately at the discretion of the Supreme Court whether to accept or deny our petition. We continue to believe that this is an important issue not only for PG and E, but for our entire state. As we've continued to reiterate, We will pursue all legal avenues to see that it is addressed. Now moving to the regulatory front, we have requested to the commission as it represents the critical work we perform for our customers. As we rely on the financial markets to Finance much of this work generally in the range of approximately $2,000,000,000 annually, we must carefully assess What do you do to help meet the state's bold clean energy goals?
While we continue to take every opportunity available to work with leaders and policymakers across the state To address the issue of inverse condemnation, I want to emphasize that we will always prioritize safety related work. The safety of our customers, communities and workforce continues to be our core responsibility. And with the 2018 fire Fire season already underway here in California. We remain focused on mitigating wildfire risk through continued operational efforts, which have required of significant engagement with our customers and local communities. As we've said before, this is a new normal for our state.
Last year's wildfire saw an unprecedented confluence of weather related conditions, including years of drought resulting in millions of dead trees, A record setting wet winter that spurred the growth of vegetation that then became abundant fuel after a record setting During the summer months, very low humidity and very high winds. Following the wildfires, We have bolstered wildfire prevention and emergency response efforts. Changes that we've made to our program to help continue to reduce wildfire risk and To help keep our customers safe include: 1st, we've installed 55 new weather stations out of the roughly 200 planned for this year. 2nd, as of June 1, we've disabled all manual reclosers within certain high fire threat areas and will operate the remaining reclosers remotely with a commitment to disable their functionality when very high fire risk conditions are met. 3rd, we have communicated with over 500,000 customers on our public safety power shutoff plan in areas designated by the CPUC as being at extreme risk for wildfire.
And finally, our wildfire safety operations center is up and running for this wildfire season. Before I turn it over to Jason, I just want to emphasize that we will continue to keep the financial community updated as we get additional clarity and work through
Thank you, Geisha, and good morning, everyone. Today, I'll cover the charge for the October 2017 wildfires that we plan to take in at the end of the Q2 as well as the underlying assumptions. I'll then address our current thinking around potential financing. And finally, I'll walk through next steps. I'll first start with the estimated $2,500,000,000 pre tax charge that we'll be reporting this quarter, which reflects the low end of a range of possible outcomes.
I want to emphasize at this point, there are no immediate debt and equity needs triggered from this accrual. This is driven primarily by our dividend suspension, which despite the has allowed us to stay within the minimum equity ratio requirement set by the CPUC. I'll now walk through some of the details for the charge we're planning to take. Accounting rules require us to report a loss if it's both probable and reasonably estimable. We considered a number of factors when evaluating whether or not we met these thresholds, including the current state of the law and inverse condemnation, information currently available to the utility, including our own fact finding efforts and Cal Fire's determinations of costs.
Based on these factors, we determined that we met the requirements to record a liability for 14 of the of the 16 fires for which Cal Fire has concluded its investigation, which were outlined in the 8 ks that we filed earlier this morning. Importantly, this accrual excludes the Tubbs fire, which Cal Fire has not yet reported on as well as the Atlas fire. I'll now turn to the assumptions we used to develop the accrual. The lawsuits that have been filed thus far reflect claims under both inverse condemnation as well as negligence theories. The potential losses depend on many different factors such as the cause of each fire, contributing factors like wind and humidity levels, The number, size and type of structures damaged or destroyed, fire suppression and cleanup costs, personal injury and other damages.
At this point, we are unable to reasonably estimate a high end of the range. This is due to a number of uncertainties, including inverse reform efforts at the legislature, not having access to the majority of the CAL FIRE investigative reports and not having access to all the evidence collected by CAL FIRE. In addition, there are a limited number of claims that have been filed thus far and those cases are in very early stages of discovery. So there are many unknowns. I'll transition now to how we're thinking about potential recovery for these costs.
To be clear, we are required to independently assess recovery separately from the liabilities that we're recording. In order to record a receivable on our balance sheet, there There are a number of considerations including an assessment of probability of recovery. Similar to the rules I outlined for a liability, we have to reach a high high threshold of confidence that we'll be able to eventually recover these costs. First, we've disclosed that the utility expects to record $375,000,000 pretax for insurance recoveries in the second quarter. This amount is based on a conservative assumption that each fire is treated as an individual event for purposes of insurance recovery.
We do intend to eventually seek recovery for the full value of our policies. 2nd, I'll discuss our ability to potentially recover these costs through rates, which we intend to pursue. There will likely be timing differences, however, between when we can accrue a liability and when we're able to record a regulatory asset from customers. Today, the commission is considering whether to approve our application for a wildfire expense memorandum account, which would allow us to begin tracking wildfire of the including claims costs that exceed insurance. While approval of that account would be a A positive indicator, given the precedent of the denial for cost recovery in the San Diego Gas and Electric Lima case, It would likely not provide us enough clarity to record a regulatory asset this quarter.
Additionally, the outcome of the CPC Safety and Enforcement Division investigations For each of these fires, we'll provide another important data point as we think about future cost recovery. Transitioning now to our view on financing. Today's charge will not result in any near term financing need and does not currently require the use of cash. However, as we look at more permanent financial solutions in the future, I I want to emphasize, we will continue to prioritize the health of our balance sheet as well as the interest of our shareholders. Looking ahead, our team is working to understand We will have access to the 11 investigation reports that have not yet been released as well as the evidence Cal Fire collected from all the fires.
It is important to note that we don't know yet when we'll have access to that information or when Cal Fire will announce its determination of the cause for the remaining fires. As I mentioned earlier, our remarks today related to the financial impact of the October 2017 wildfires are based on numerous underlying assumptions, which could change as additional facts unfold. But we felt it was important to communicate to the market now given our understanding of where we are and the information we have today. With that operator, we can open up the line for questions, but please recognize that our ability to respond to some questions may be limited.
First question comes from the line of Stephen Byrd of Morgan Stanley. Please proceed.
Good morning and thanks for taking my questions. Good morning, Steven.
I wanted to just at
a high level to understand, what triggers Recording the charge rather than get very specific. You mentioned a number of factors, but I guess as I'm thinking about it at a high level Under inverse condemnation, if you conclude that you are a cause of the fire, given the strict liability of inverse condemnation, that would presumably be enough Trigger some amount of a charge assuming again that there was real damage and quantifiable, etcetera. Is causation sort of a Key trigger behind your consideration of taking a charge?
David, this is Jason. There are a number of factors that we balance when we think about the accounting threshold of probability. But I would say given the Low threshold of strict liability as a result of inverse condemnation causation is one of the key areas that we did focus on. Understood. And you may not
be able to say too much about Atlas, but it's definitely gather a lot of interest that you're not taking A charge for that fire and yet Cal Fire had indicated your equipment was involved and they saw a potential violation. Is there any color you can provide around Why you reached a different conclusion on Atlas?
Steve, John Simon. What I can tell you is, I think as you know these fires are complex. In Atlas, Cal Pharm mentioned there's Multiple ignition points based on what we know today. We haven't reached a conclusion that a loss on Atlas It's probable as we learn more. That could change, but that's where we are now.
Okay, great. And then last one for me is on NUNES. The report was a little bit ambiguous in terms of whether the equipment involved in Nunn's was yours or Is there anything further you can say about that? I know it's part of the central LNU complex, but nonetheless, it's a pretty significant part. So just curious if there's any color you can provide on that.
Steven, this is Jason. For the Nunn Spire, I do think the report referenced secondary Overhead conductor, which is generally sort of a low voltage line from the utility. So, in effect, the report Just concluding that it was one of our electric lines as the cause for the fire.
Okay. Thanks. I'll turn it over to others. Thank you.
Thank you. Our next question comes from the line of Praful Mehta of Citigroup. Please proceed.
Thanks so much. Thanks for taking my question. The first thing, in your 8 ks, you say related to Tubbs and Atlas, At this point, you've concluded that a loss arising from those fires is not probable. Can you just clarify what that means in the context of this 8 ks?
Ruffalo, good morning. This is Jason. What I would say is, Cal Fire hasn't released its Conclusion on the cause of the Tufts fire nor is it at least any underlying evidence. And so I think it's early To assess the potential cause for Tufts, so we have not yet reached the threshold from accounting standpoint as to the probability The Tubbs fire was caused by utility equipment. On Atlas, as John mentioned, it's a complex fire, and we need to see more information before we can That's the probable loss from an accounting standpoint.
Got you. So your statement that the loss arising is not probable It's not no reflection of your internal investigation or anything else. It's basically because you don't have enough information at this point.
That's right. I mean, as we've talked about in the past, South Fire retains evidence as part of its investigation. An important data point, while not absolutely just positive, but an important data point is will be Cal Fire's conclusions, specifically related to Tubbs as well as our ability to look at the underlying evidence when it's ultimately released.
Got you. Thanks. And then there have been news reports of bankruptcy filings as something that's come up More in terms of news filings. Is there any color or context you can provide around that? What is the any reference to that that you can give us?
Yes. Hi, Praful. This is Geisha. I would say that you have to realize that many of the lawmakers here in California vividly remember the energy In risk condemnation presents to the financial health of the California IOUs. What we're doing is we're working every day with legislators It's helping them understand the broader context for the implications that this very bad policy can have and the kind of implication can have on a utility like ours financial condition.
That's the kind of discussions we've been having with our legislators.
Got you. Fair enough. That's helpful context. And then finally, just quickly, in terms of range of charges, clearly, you're saying that You can't provide an upper end or you don't have clarity on upper end. In terms of the lower end, which this $2,500,000,000 charge reflects, How should we read into it that the base case is X% above that?
Like how did you kind of come up with The lower end in this case and what does that mean for a reasonable scenario for let's say a midpoint range?
Praful, this is Jason. I would say that this low end represents what we think is a reasonably possible outcome of the potential loss. As you can appreciate, given all of the pending litigation, we're not going to be in a position to provide details on the underlying assumptions, but we did take into Obviously, a variety of data points including previous history at arriving at the low end of the range that we announced if needed.
Got you. Thanks so much guys.
Thank you. Our next question comes from the line of of Julien Dumoulin Smith of Bank of America. Please proceed.
[SPEAKER JULIEN DUMOULIN SMITH:] Hi, good morning. Can you hear me?
Good morning, Julien. Yes.
Excellent. So just following on a couple of specific questions here. I wanted to follow-up on tubs. With respect to the equipment itself and I suppose some of the incident reports regarding customer owned equipment, How do we think about the risk of other equipment being taken into the surrounding area near Tubbs? Are you required to file for that?
Obviously, some earlier indications Indicated that you hadn't had any of your equipment taken as part of that, I suppose.
Julian, it's John. I think what You can go on is what we put in our EIR related to tubs and that's really all we know at this point. And in that EIR, generally what we said is Cal Fire took possession of Customer owned equipment and there was no apparent damage to PG and E equipment. We really don't know More than that, if Cal Fire is looking at equipment that's not PG and E's and someone else's Beyond what we said, we wouldn't know and wouldn't be required to comment on that.
All right. Excellent. And then perhaps moving beyond Can you comment a little bit on, well, I suppose the financing options and specifically around the potential waiver with the CPUC? How do you think about employing HoldCo debt given the situation?
Yes. Thanks, Julian. This is Jason. As you can imagine, we're very early in this process and so it's hard to provide Specificity as to financing plans, but I'll share with you a couple of principles. If the accrual changes in the future such that We fall below the minimum equity ratio that we're required to maintain.
We would file a capital structure waiver with the CPUC. We think that's in our customers' best interest as our cost of capital right now is very high. And We'd like better clarity of the status of inverse reform efforts as well as better clarity as to the total financing need in the future. And so we would A capital structure waiver, if we were to dip below the minimum equity ratio. What's important about that is it's considered to be approved until the commission acts upon it.
In terms of more permanent financing, as I said, it's really early, but we're committed to preserving the balance sheet health of the company while respecting the interests of our shareholders. And that's about all I can share just given how early we are in this process.
Excellent. And then just finally, if you could elaborate a little bit, how do you think about the scaling of the claims filed here? So obviously, this is based on known claims back to you sort of at this point in time. Clearly, given the experience with Butte, that can increase over time. How do you think about the risk of given what transpired with Butte and how much of that is sort of reflected in the 2.5?
Julian, this is Jason again. We took we try to take into consideration the full range of potential loss using what information was available to us today, including full number of structures that were damaged, as I mentioned, among Other factors. But as I said and as you pointed out, we're early in the claims process. There's a 2 year statute of limitations and a 3 year statute of the And as we saw from Butte, we saw a number of claims come in, particularly at the end of the 2 year window for statute of limitation. So We try to do our best to represent what we anticipate to be the full number of claims that will be filed against the company, But we'll need more time to confirm completeness as the statutes expire.
Excellent. All right. Thank you. I'll leave it there.
Thank you. Our next question comes from the line of Steve Fleishman of Wealth Research Group. Please
Yes. Hi, good morning. Now that the, I guess, fire reports or at least the summary CAL FIRE Reports have been out for a few weeks. Any better sense on the legislator leadership reaction and any impact it you might have on ability to get legislation done this session?
Yes, Steve. Hi, this is Geisha. Thanks for that question. At the end. I'll be upfront.
We do acknowledge that things will likely be more difficult for us on the legislative front given the negative media and of the headlines and so forth. But the fact remains that the inverse condemnation is just simply bad public policy and it threatens the financial health of all of the California investor owned utilities. And by extension, and I think this is really important, the state's clean energy agenda. So the other thing I would say is, Again, we're in an increased wildfire risk sort of situation. This is going to be a perennial issue.
And legislators, I believe, remain open to And the impact of this bad public policy has. So we continue to engage with them. Our focus is very much on continuing to engage with We continue to advocate for the importance of reforming inverse condemnation this year.
Okay. And then just in terms of the charge, How are you dealing with the aspect, if at all, of kind of the violation part of it? Is that kind of incorporated in any way or is that hard to estimate?
This is Jason. We don't know what the basis of the allegations or violations are Currently based on because Cal Fire hasn't yet released those reports. So instead, when we thought about calculating the reasonable claims against the company. And as I said, claims are filed against the company under both the theory of inverse condemnation as well as the theory of negligence.
Okay. And then last question, just I'm assuming they may not know this, but just Any sense of timing of the CAL FIRE report on tops?
Not yet. We continue to wait just like everybody else.
Okay. Thank you.
Thank you. Our next question comes from the line of Michael Lapides of Goldman Sachs. Please
Hey, guys. Maybe a little bit of a difficult question or at least my first one is, if would there be a way to figure out or to estimate What the charge you would have taken today would be if there wasn't inverse condemnation. So the charges would just be for kind of normal related damages, etcetera, if you were in any of the other 49 states of the union?
Michael, good morning. This is Jason. Given the pending litigation, we're not going to break down Kind of any of the details of the assumption, but I will just emphasize that given the fact that inverse condemnation as it currently exists Apply to a concept of strict liability for the company that was a key determination in terms of crossing the accounting threshold of a probable loss Got it.
Okay. One other thing, just kind of looking at thinking about you talked a little bit about how this Today's charge would not drive you because it's a non cash charge at this point, would not drive you to need to access The Capital Markets. Just curious, at what point do you think you'll actually have cash outflows related to all of this? Is there a way to get arms around when the cash part of this all starts? And also just given how some of your multiple public securities Maybe trading lately.
Your what is the availability to external capital sources?
I would say Michael and I'll get it started here that it's going to be years. I think this is going to be a long and complex of the integration process. And so I think in terms of cash out the door, it will be years. How I can't quantify how many years that will be. Relating to your second question, Jason, do you want to take that?
Michael, we still are despite the recent downgrade by S We're still rated as investment grade. Companies with our credit routinely have access to the capital markets, albeit maybe At more expensive rates than we would have in the past, but we do anticipate having ready access to The market should we look to finance any of the cash flows in the future.
Got it. And then last thing, all three California utilities, if I remember correctly, are supposed to have a cost of capital review next year for implementation in 2020. Is there given that several of the California utilities, the cost of capital has changed a lot in the last 12 months, Is there any thought in just trying to get an extension of that, or kind of put that on the back burner? Are the interveners and the customer groups or the commission Given all that all else that's on the table right now, willing to kind of table that?
Michael, thanks for the question. We're gearing To file the cost of capital application next spring in 2019, but our focus right now is really on reforming the reverse combination at the legislative level. It is critical that we as a state address the risk of inverse condemnation so that we can moderate The cost of financing on our business and that's probably going to be one of the most critical areas of focus in the near term as opposed to an extension
Thank you. Our next question comes from the line of Christopher Turnure of JPMorgan. Please proceed.
Good morning. Jason, I just wanted to kind of clarify some of your earlier comments On the legal bar here, it sounds like you have on at least several of these fires very, very little information. The The only new thing that has occurred for many of them in the past 3 weeks is that we have basically one sentence Inverse condemnation driven booking of these liabilities, is that fair that you have very, very little information and the binary bar here is very low?
What I think is difficult is that we're dealing with maybe upwards of 21 separate events. So I wouldn't necessarily Look at it as a singular threshold. I think what we have to do is take into consideration all of the information available to us. And so we've talked in the past that the company has conducted extensive fact finding efforts. But During those extensive fact finding efforts, we haven't had access to all the evidence that Cal Fire has retained.
We haven't had the value of the perspective of Cal Fire's beliefs as to the cause and origin of fires. And so to your point in the second quarter, Cal Fire's conclusions coupled with the other information we had was sufficient for us to reach that trigger of a threshold of probability from an accounting perspective.
I guess from maybe a more comprehensive legal perspective, If you're missing evidence from a site, and Cal Fire has possession of that, has been in charge of the investigation, can your Ancillary efforts towards cause be sufficient to draw that conclusion here?
I really think it's going to be a combination of all the factors. We really do need to consider Our own fact finding efforts as well as Cal Fire's perspectives, I wouldn't wait one versus the other. I think each one of these buyers is complex, and we need to look at the totality of information available to the company To reach the inclusion, particularly from an accounting standpoint on probability.
Okay. Absolutely. I appreciate that you guys are in a very difficult position here. My second question is just on the legal process. Geisha, I think you had mentioned a higher court involvement now.
Can you maybe elaborate on exactly what's occurred there in the past couple of days or weeks?
Christopher, it's John. This week, we filed an appeal with the California Supreme Court on the Butte trial court's denial of our motion To dismiss inverse condemnation, what happens next is the Supreme Court, it's Discretionary, as Geshe mentioned, but considers whether to hear that appeal. The timeframe on when they'll tell us whether they'll hear the appeal or not is 2 months, sometimes it can be a bit longer. There's basically three things that could happen. The Supreme Court could say, we'll listen to that appeal.
So we'll ask the parties to brief it further. The Supreme Court could say, we want the intermediate Court of Appeals to hear that appeal. So they'll ask the Court of Appeals to hear it and then we'll brief it there or the California Supreme Court could just outright deny our request.
Got it. That's very helpful. Thank you.
Chris, thanks for those questions. And I wanted to just thank everyone for joining for our call This morning, I thought we had some great questions. Everyone have a safe day and thanks a lot. Thank you, Lisa.
Thank you. This now concludes the conference. Enjoy the rest of your day.