Good morning, and welcome to the PG&E Corporation Investor Update 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 pass the conference over to your host, Christopher Foster with PG&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, John 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-K with the SEC, a copy of which is available on our website. With that, I'll hand it over to Geisha.
Thank you, Chris. Good morning, everyone. Since we filed our 8-K today, I'll start by reviewing our continued efforts to address inverse condemnation. I'll 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-K outlining our decision to record a $2.5 billion pre-tax non-cash accounting charge. As discussed in the 8-K, which Jason will cover in greater detail, this charge is related to only certain wildfires and reflects 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 respect to certain fires. 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 the state's approach to inverse condemnation, as California is currently an outlier. We're working to align California 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 three fronts: legislative, legal, and regulatory. First, on the legislative front, a few bills have passed the State Senate related to wildfires.
There's a lot of work going on in the Assembly here at the end of June, with another push likely in August. Just yesterday, two wildfire-related bills passed the Assembly Committee on Utilities and Energy. Next, on the legal front, you may have seen that earlier this week, we filed a petition for review with the Supreme Court of California 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&E but for our entire state. As we've continued to reiterate, we will pursue all legal avenues to see that it is addressed.
Moving to the regulatory front, we have requested, as part of our prudent financial planning efforts, a delay in filing our 2020 General Rate Case for up to four months to January 1st, 2019. The GRC is the largest and one of the most important cases we present to the Commission, as it represents the critical work we perform for our customers. We rely on the financial markets to finance much of this work, generally in the range of approximately $2 billion annually, we must carefully assess future investments given the uncertainty that inverse condemnation creates. The financial markets also provide capital for the important work that we as a company 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. With the 2018 fire season already underway here in California, we remain focused on mitigating wildfire risk through continued operational efforts, which have required significant engagement with our customers and local communities.
As we've said before, this is a new normal for our state. Last year's wildfires 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 heat 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 programs to help continue to reduce wildfire risk and to help keep our customers safe include, first, we've installed 55 new weather stations out of the roughly 200 planned for this year. Second, as of June 1st, 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.
Third, 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. 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 some of the outstanding uncertainties. With that, Jason will now walk you through our 8-K disclosure in more detail.
Thank you, Geisha. Good morning, everyone. Today I'll cover the charge for the October 2017 wildfires that we plan to take in the second quarter, as well as the underlying assumptions. I'll address our current thinking around potential financing, and finally, I'll walk through next steps. I'll first start with the estimated $2.5 billion pre-tax charge that we'll be recording 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 charge, 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 record 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 on inverse condemnation, information currently available to the utility, including our own fact-finding efforts, and CAL FIRE's determinations of cost. Based on these factors, we determined that we met the requirements to record a liability for 14 of the 16 fires for which CAL FIRE has concluded its investigation, which were outlined in the 8-K 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. 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 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 threshold of confidence that we'll be able to eventually recover these costs. First, we've disclosed that the utility expects to record $375 million pre-tax 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. Second, 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-related costs, including claims costs that exceed insurance. While approval of that account would be a positive indicator, given the precedent of the denial for cost recovery in the San Diego Gas & Electric WEMA case , it would likely not provide us enough clarity to record a regulatory asset this quarter. Additionally, the outcome of the CPUC Safety and Enforcement Division investigations for each of these fires will 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. As we look at more permanent financial solutions in the future, 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 when 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. 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.
Certainly. Ladies and gentlemen on the phone lines, if you would like to ask a question, press star followed by one. To remove your question, press star followed by two. First question comes from the line of Stephen Byrd of Morgan Stanley. Please proceed.
Good morning, and thanks for taking my questions.
Good morning, Stephen.
I wanted to, just at a high level, to understand what triggers recording a 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 to trigger some amount of a charge, assuming, again, that there was real damage and quantifiable, et cetera. Is causation sort of a key trigger behind your consideration of taking a charge?
Steve, this is Jason. There are a number of factors that we balance when we think about the accounting threshold of probability. 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. You may not be able to say too much about Atlas, but it's definitely gathered 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 FIRE mentioned there's multiple ignition points. Based on what we know today, we haven't reached a conclusion that a loss on Atlas is probable. As we learn more, that could change, but that's where we are now.
Okay, great. Last one for me is on Nuns. The report was a little bit ambiguous in terms of whether the equipment involved in Nuns was yours or not. Is there anything further you can say about that? I know it's part of the central LNU Complex, nonetheless, it's a pretty snoot[uncertain] in parts. Just curious if there's any color you could provide on that.
David, this is Jason. For the Nuns Fire, I do think the report referenced a secondary overhead conductor, which is generally sort of a low voltage line from the utility. In effect, the report was 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-K, you say related to Tubbs and Atlas, that 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-K?
Praful, good morning, this is Jason. What I would say is, CAL FIRE hasn't released its conclusion on the cause of the Tubbs Fire, nor has it released any underlying evidence. I think it's early to assess the potential cause for Tubbs. We have not yet reached the threshold from an accounting standpoint as to the probability that 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 assess the probable loss from an accounting standpoint.
Gotcha. Your statement that the loss arising is not probable is 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. As we've talked about in the past, Cal Fire retains evidence as part of its investigation. An important data point, while not absolutely dispositive, but an important data point 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.
Gotcha, thanks. 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? Any reference to 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 crisis and what came as a result of that. The topic does come up periodically in our conversations about specifically the threat that inverse condemnation presents to the financial health of the California IOUs. What we're doing is we're working every day with legislators, helping them understand the broader context for the implications that this very bad policy can have and the kind of implication it can have on a utility like ours' financial condition. That's the kind of discussions we've been having with our legislators.
Gotcha. Fair enough. That's helpful context. 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 $2.5 billion charge reflects, how should we read into it that the base case is X% above that? How did you 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. We did take into consideration, obviously, a variety of data points, including previous history at arriving at the low end of the range that we announced today.
Gotcha. Thanks so much, guys.
Thank you. Our next question comes from the line of Julien Dumoulin-Smith of Bank of America. Please proceed.
Hi. Good morning. Can you hear me?
Good morning, Julien. Yep.
Yeah.
Hey, excellent. Just following on a couple of specific questions here. Wanted to follow up on Tubbs. 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 in 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.
Julien, it's John. I think what you can go on is what we put in our EIR related to Tubbs, and that's really all we know at this point. In that EIR, generally what we said is CAL FIRE took possession of customer-owned equipment, and there was no apparent damage to PG&E equipment. We really don't know more than that. If CAL FIRE is looking at equipment that's not PG&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. Perhaps moving beyond that, 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?
Yeah, thanks, Julien. This is Jason. As you can imagine, we're very early in this process, it's hard to provide specificity as to financing plans. 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 to capital right now is very high. 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. We would file a capital structure waiver if we were to get 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. That's about all I can share, just given how early we are in this process.
Excellent. Just finally, if you could elaborate a little bit, how do you think about the scaling of the claims filed here? 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 inflation given what transpired with Butte and how much of that is sort of reflected in the files?
Julien, this is Jason again. 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. As I said, and as you pointed out, we're early in the claims process. There's a two-year statute of limitations and a three-year statute of limitations. As we saw from Butte, we saw a number of claims come in, particularly at the end of the two-year window for statute of limitations. 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. 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 Wolfe Research. Please proceed.
Yeah. 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 or leadership reaction and any impact it might have on ability to get legislation done this session?
Yeah, Steve. Hi, this is Geisha. Thanks for that question. 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 the headlines and so forth. 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. By extension, and I think this is really important, the state's clean energy agenda. 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. Legislators, I believe, remain open to understanding the impacts that this bad public policy has. We continue to engage with them. Our focus is very much on continuing to engage with the legislators and continue to advocate for the importance of reforming inverse condemnation this year.
Okay. Just in terms of the charge, just 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?
Steve, this is Jason. We don't know what the basis of the allegations of violations are currently based on because CAL FIRE hasn't yet released those reports. Instead, when we thought about calculating the reasonable estimate of loss or the potential accrual, we took into consideration what we believed would be a reasonable estimate to resolve the claims against the company. As I said, claims are filed against the company under both the theory of inverse condemnation as well as the theory of negligence.
Okay. Last question, just, I'm assuming you may not know this, but just any sense of timing of the CAL FIRE report on Tubbs?
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 proceed.
Hey, guys, maybe a little bit of a difficult question, or at least my first one is, 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? The charges would just be for kind of normal related damages, et cetera, 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 any of the details of the assumption. I will just emphasize that given the fact that inverse condemnation as it currently exists, applies a concept of strict liability for the company, that was a key determination in terms of crossing the accounting threshold of a probable loss this quarter.
Got it. Okay. One other thing. Just thinking about, you talked a little bit about how 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? Also, just given how some of your multiple public securities may be trading lately, what is the availability to external capital sources?
I would say, Michael, and I'll get us started here, that it's going to be years. I think this is going to be a long and complex litigation process. I think in terms of cash out the door, it will be years. I can't quantify how many years that will be. Relating to your second question, Jason, do you want to take that?
Michael, despite the recent downgrade by S&P, 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. We do anticipate having ready access to the capital markets should we look to finance any of the cash flows in the future.
Got it. 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. 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 put that on the back burner? Are the interveners and the customer groups or the commission, given all else that's on the table right now, willing to table that?
Michael, thanks for the question. We're gearing up to file the cost of capital application next spring in 2019. Our focus right now is really on reforming inverse condemnation 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. That's probably going to be one of the most critical areas of focus in the near term as opposed to an extension for that application.
Got it. Thank you, Jason. Thank you, Geisha. Much appreciated.
You bet.
Thank you. Our next question comes from the line of Christopher Turnure of JPMorgan. Please proceed.
Good morning. Jason, I just wanted to 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 only new thing that has occurred for many of them in the past three weeks is that we have basically one sentence from CAL FIRE on the cause or the source of ignition. That alone seems to be enough to trigger the 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. 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. We've talked in the past that the company has conducted extensive fact-finding efforts.
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. 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 effort 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 need to consider our own fact-finding efforts as well as CAL FIRE's perspectives. I wouldn't weight one versus the other. I think each one of these fires is complex, and we need to look at the totality of information available to the company to reach the conclusion, 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 Butte 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 Geisha 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 roughly two 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 California Courts of Appeal to hear that appeal," so they'll ask the California Courts of Appeal to hear it, and then we'll brief it there. The California Supreme Court could just outright deny our request.
Got it. That's very helpful. Thank you.
Chris, thanks for those questions. 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.