Morning, and welcome to the PG and E Corporation Second Quarter Earnings Conference Call. 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 with me today in the room are Geisha Williams, Nick Stavropoulos, Jason Wells, John Simon and Steve Mount Light. Before I turn it over to Geisha, I want to remind you that our discussion today will include forward looking statements, which are 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 Q2 earnings call presentation. The presentation also includes a reconciliation between non GAAP earnings from operations and GAAP measures.
We also encourage you to review our quarterly report on Form 10 Q that will be filed with the SEC later today and the discussion of risk factors that appears there and in the 2017 Annual Report. With that, I'll hand it over to Geisha.
Thank you, Chris, and good morning, everyone. While we provided the market with an update related to the October 2017 Northern California Wild Fires Accrual just over a month ago, there have been a number of developments since then that I plan to cover today. But before we get going, I wanted to open by expressing my appreciation to Nick Ziveropoulos for all his contributions as President of the Utility and for his time leading our gas business prior to that. As you know, Nick has announced his intention to retire at the end of Q3. His leadership in driving strong safety performance in our gas organization cannot be overstated.
It's thanks to his efforts and those of our employees that we've seen significant improvements in our gas operations. His collaborative approach internally and with external industry partners has consistently inspired our employees to embrace continuous improvement and seek out external best practices to model. Not only that, but the progress he led on our safety culture work and the incredible talent he helped recruit and develop are going to have an impact for years to come. So thank you, Nick. I know we will miss you very much and we all wish you well.
Moving now to what we'll be covering on today's call. First, I'll detail some of the detrimental financial impacts that are occurring due to the California's flawed policies and the extreme wildfire conditions that have become a new normal. I'll then provide a view of the legislative and legal landscape, including the solutions that our coalition continues to push for in Sacramento. And finally, I'll cover the operational progress we've made with our community wildfire safety program. It's been nearly 10 months since last October's devastating wildfires and our thoughts remain with the impact of communities as they recover.
These communities include our customers, our workforce, our family and friends. We are there on the ground with operational and customer service team members helping them with the rebuild process. Now we've talked on past calls about the increased risk of extreme weather and wildfires that we're facing as a state, But we're experiencing that new normal now. Another fire season is upon us, and we've already seen several sizable fires across the Western United States and of course here in California. In the same way that we need to take action to make our states, communities and infrastructure more resilient, it's critical that we address our public policies.
Yesterday's laws won't help our state deal with the impacts of tomorrow's wildfires. Now let me be clear here. The reforms we seek would not absolve investor owned utilities from responsibility. Negligence claims against PG and E can still be pursued, and the California Public Utilities Commission should retain the authority to investigate our conduct and reject any costs that are not just and reasonable. But where we acted reasonably, we cannot be put in the position of being held strictly liable for damages without the ability to recover those costs.
The strict liability construct that is applied to investor owned utilities in California today is unsustainable and is already having very real consequences. As we shared at the end of June, we took a $2,500,000,000 non cash charge this quarter for 14 of the 16 Northern California wildfires for which Cal Fire has concluded its investigations. We're also seeing negative impacts in the insurance markets as providers are adjusting to the increased frequency and severity of wildfires across the state, coupled with the unsustainable strict liability standard. Jason will cover this in greater detail, but we are seeing significant increases in insurance premium costs as compared to just a few years ago. Additionally, we have experienced downgrades from the 3 major rating agencies, and S and P placed our sister utilities to the South on negative watch, pending the outcome of this legislative session.
All of these outcomes have negative consequences for our customers and our state. As you know, the credit downgrades have a direct correlation on financing costs and higher financing costs translate into higher customer bills. For every 100 basis point increase in our total cost of capital, it's the equivalent of a roughly $400,000,000 increase to the costs that are borne by our customers. At the end of the day, our state's infrastructure investments require access to affordable capital. And as I've said before, while we will never sacrifice safety driven work, as long as these flawed policies remain in place, we must carefully evaluate whether we can support our current level of capital expenditures.
For example, we may need to pull back on some of the clean energy projects that are so critical to our state's ability to meet its bold clean energy goals. We were pleased to see that the California Public Utilities Commission approved our request to delay our 2020 general rate case application by up to 4 months to January 1, 2019. This will allow us time to thoughtfully consider and reassess our investment plan once we have greater clarity from any reforms that may come from that may come about during this legislative session. We also recognize that our shareholders will require a return commensurate with the risk they are taking. As a result, if we don't see meaningful reforms from this legislative session, I expect that we will request an elevated cost financing in our upcoming cost of capital proceeding to fully reflect the increased risk our company faces.
Action is required now. So let me be really specific about the solutions our coalition is seeking in Sacramento. First, permanent reform to the strict liability standard under inverse condemnation is critical. 2nd, the legislature needs to directly address the effects of the climate driven 2017 wildfires on California industrial and utilities. And finally, we need clarity around how our regulators view compliance with the operational standards to which we hold ourselves accountable.
Many stakeholders are pleased to see the governor along with key legislative leaders recently form a wildfire preparedness and response conference committee to consider potential solutions to these issues. And just yesterday, the conference committee held its first hearing, which is an important first step. The issues raised yesterday related to safety and the prudent management concepts are critical. We would expect that the committee will also consider the Governor's outreach proposal as part of their process. The governor's proposal as a standalone measure represents some progress on reforming strict liability, but it's insufficient.
And it's important to keep in mind that this is just one element of a more comprehensive set of solutions that are needed. That's why we think it's appropriate that the committee is tasked with considering a wide ranging set of preparedness, response, resiliency and other policy reforms, all of which will be important as they complete their work over the next few weeks. In parallel, our efforts on the legal front continue where we are challenging inverse condemnation in the courts. Just last week, we filed a writ in the 1st District Court of Appeals to challenge the application of inverse condemnation to the October 2017 wildfires. Finally, I will now highlight some of the important operational work we've done as part of our community wildfire safety program.
While we press for solutions on the legal and legislative front, we are not waiting. We are moving quickly to implement additional measures intended to further mitigate wildfire risk. Our Wildfire Safety Operations Center is up and running 20 fourseven during the height of the wildfire season. This center provides us with greater situational awareness across our system, including our high fire risk wildfire areas. It improves our ability to collaborate with 3rd party agencies such as Cal OES and Cal Fire and it enables more timely responses to both existing wildfires and any potential threats.
We've also procured 2 helicopters to assist operations and are making them available to support first responders with addressing wildfires. During late June early July, these helicopters are utilized by CAL FIRE to support efforts for a number of fires, including the Pawnee and County fires. We've been performing daily aerial fire detection patrols across 1,000 of miles of our service territory to assist both state and federal agencies with early fire detection and response. 7 planes are flying daily routes over the next several months, providing near real time information to our wildfire safety operations center. Our program to disable reclosions and circuit breakers has been expanded during the height of the wildfire season as yet another measure to further mitigate wildfire risk.
And in situations with the most extreme fire conditions, we are prepared to proactively de energize targeted circuits. While we view this as a last resort, it's a serious effort we'll execute on under specific circumstances. This of course would be done in consultation with Cal OES and other third party agencies. In fact, all of the efforts I've described are done in close partnership with our communities and agencies. We've held over 250 in person meetings with city and county officials, community organizations, customers and others over the last several months.
The safety of our communities and our workforce is our greatest responsibility, and we will continue to identify and implement programs to mitigate the increased wildfire risk that we face. Before I turn it over to Jason, I'll just close by saying how important the next month will be for energy providers, our customers, suppliers and the state of California. PG and E is committed to helping deliver on California's clean energy goals and we recognize that investor owned utilities are critical to meeting these aspirations. Time is of the essence though. With the recent formation of the conference committee, we believe the right process is in place to thoughtfully and comprehensively develop solutions to the complex problems faced by our state.
We look forward to seeing solutions continue to come forth in the coming weeks. Of course, we will continue to keep you apprised as meaningful updates occur. And with that, I'm going to turn it over to Jason to provide you with an update on the financials.
Thank you, Geisha. Good morning, everyone. Before we dive into the financial results, I'll first cover our insurance renewal for the policy period that runs from August 1st this year through the end of July 2019. As Dasha mentioned, we have seen dramatic changes in the insurance market for California investor owned utilities with increased pressure on both price and capacity. Some carriers have significantly reduced their exposure by reducing limits or excluding events that were previously covered and all have significantly increased their premiums.
In response to this changing environment, we've taken an innovative approach to financial risk transfer with several different products. You can think about this as a stacked approach to addressing our needs. First, we plan to obtain traditional insurance to cover all perils, including events such as wildfires from the most financially stable carriers. 2nd, we intend to increase coverage for 3rd party property damage due to wildfires due to the reinsurance market. And 3rd, we're actively exploring a capital market solution via catastrophe or cat bond, which would be additive to the wildfire specific property damage coverage I just mentioned.
In total, we are seeking to transfer approximately $1,000,000,000 to $1,500,000,000 of financial risk to the insurance and capital markets. We expect to have agreements for this coverage executed in the coming days. The cost of this coverage is expected to be roughly $350,000,000 annually, which exceeds the amounts that we're currently recovering in rates by around $300,000,000 Last month, the California Public Utilities Commission authorized our wildfire expense memorandum account or WEMA. In addition to claims and legal costs, this account enables us to track insurance premium that are incremental to what we're recovering in rates on a retroactive basis to the end of July 2017. As a result, we've recorded a regulatory asset for $69,000,000 this quarter related to incremental premium costs that we have been paying since last August, dollars 32,000,000 of which relates to premium costs from 2017 and has been recorded as an item impacting comparability.
The regulatory asset also includes $37,000,000 dollars for incremental premium costs incurred in the 1st and second quarters of 2018. On an annualized basis, we expect to record roughly $80,000,000 in incremental insurance costs as a regulatory asset in 2018 2019. Cost for premiums in excess of the approximately $50,000,000 we are currently recovering in rates as well as the $80,000,000 we plan on recording as a regulatory asset will be included in earnings from operations until we set in the 2020 GRC. We do, however, intend to seek recovery for the full amount of premium costs paid in excess of the amount we're currently recovering from customers through the end of this GRC period. Moving now to our financial results for the quarter as shown on Slide 5.
Earnings from operations came in at $1.16 per share. Our GAAP loss, including the items impacting comparability are also shown here. Costs associated with the Northern California wildfires totaled roughly $2,200,000,000 pretax. There are several components included here that I'll walk through. First, this includes the $2,500,000,000 charge that we've taken for 14 of 16 fires for which Cal Fire has concluded its investigation.
2nd, it includes legal and other support costs of $46,000,000 pretax. 3rd, we have determined that a portion of the catastrophic event memorandum account regulatory asset associated with cleanup and repair cost is no longer probable of recovery, resulting in a $40,000,000 pre tax write off. Finally, we recorded $375,000,000 pre tax for expected insurance recoveries. Moving on, pipeline related expenses were $12,000,000 pretax for the quarter. We recorded $10,000,000 pretax for legal costs associated with the Butte Fire.
Finally, as I mentioned previously, we recorded $32,000,000 pretax for the 2017 component of expected recovery of insurance premiums above the amounts we're currently collecting in rates. Moving on, Slide 6 shows a quarter over quarter comparison of earnings from operations of $0.86 in the Q2 of last year to $1.16 for the Q2 of 2018. In the Q2 of 2017, there was a nuclear refueling outage with no similar outage in the Q2 of this year, resulting in $0.08 favorable. We were $0.06 favorable due to the resolution of several regulatory items. As previously mentioned, we recorded $37,000,000 pretax or $0.05 for the expected recovery of insurance premium costs for the 1st 6 months of 2018.
Timing of taxes was $0.05 favorable. Consistent with previous quarters, our taxes fluctuate with the variability in earnings throughout the year, but ultimately will net to 0 for the full year. We were $0.04 favorable due to growth in rate base earnings, which includes $0.02 unfavorable related to the timing of the 2017 GRC decision. As we shared last quarter, we expect earnings from our rate base growth to be roughly $0.25 for the full year. Miscellaneous items accounted for $0.07 favorable.
This was primarily driven by several timing related items that are expected to reverse by year end. We were $0.03 unfavorable due to the timing of the GRC cost recovery. In the Q2 of last year, as a result of the 2017 GRC decision, we recognized incremental revenues associated with capital costs such as depreciation and interest with no similar revenues in the Q2 of 2018. We were 0 point 0 $1 unfavorable to last year's settlement in our cost of capital proceeding, which resulted in a decrease in our authorized return on equity. We expect this to equal roughly $0.05 on an annualized basis.
Share dilution resulted in a $0.01 unfavorable. Moving on to Slide 7, to other factors affecting earnings from operations in the lower right quadrant. As I highlighted in the quarter over quarter comparison on the previous slide, we recorded $0.05 in the 2nd quarter to reflect recovery of excess insurance premium cost for the 1st 6 months of the year. We expect to record a similar amount in the second half of twenty eighteen. While there is regulatory risk associated with recovery of these costs and the amounts will not represent the full cost of the premiums going forward, we do expect this to favorably impact our earnings from operations results for the year.
Slide 8 shows our forecasted items impacting comparability. The forecast for pipeline related expenses is consistent with what was shared on the Q1 call. The guidance range for Butte fire related costs, net of insurance, now reflects the high end of range of potential outcomes at $1,300,000,000 The low end of the range is unchanged from last quarter at $1,100,000,000 Estimated Northern California wildfire related costs net of insurance reflects both a $2,500,000,000 charge for claims and expected insurance recoveries that we recorded this quarter. In addition, this reflects the $40,000,000 write off of cleanup and repair costs that were determined to be no longer probable of recovery. Slides 9 and 10 show our expected CapEx and rate base for both 2018 2019.
While we're not changing guidance today, as Geisha highlighted, our capital plans could be impacted if we do not see constructive legislative reform this session. So I'd expect this to have more significant impacts in 2020 beyond. Slide 11 outlines expected uses and sources of equity for the year. We have incorporated the charge we took for the Northern California wildfires net of insurance. The other items are consistent with what we shared last quarter.
Through the Q2, our internal programs have generated equity of roughly $80,000,000 Investment activity can vary throughout the year, but given our year to date results, internal programs may not generate the same levels of equity in 2018 that we've seen in recent years. The cash that we're conserving from the dividend suspension continues to provide an equity cushion that could be used to provide needed equity, including for liabilities resulting from the Northern California wildfires. As of June 30, 2018, our equity ratio was 51.7%, resulting in a pre tax cushion of roughly $700,000,000 relative to the 51% minimum that would require a capital structure waiver. Stepping back, as I shared on our call in June, the non cash charge we recorded for the Northern California wildfires does not require the use of cash in the near term. As we look at future financing options, I will reiterate that the health of our balance sheet and the interest of our customers and shareholders will continue to be our top priorities.
In closing, I will reinforce that we are aggressively pushing for the policy changes that Geisha covered. We understand the urgency of the issues before us and recognize the importance of favorable resolutions for both our customers and shareholders. So with that, let's open up the lines for questions.
Lisa, if you could open up the line for questions.
Certainly. Our first question comes from the line of Stephen Byrd of Morgan Stanley. Please proceed.
Hi, good morning.
Good morning.
Good morning.
I wanted
to touch on the cost of capital point that you raised. I think it's pretty clear that the cost of capital has increased in the state. But at a high level, is it possible to talk through sort of the methodology or the key elements of the change in cost of capital that we've seen for California utilities overall since we've seen numerous very large wildfires. What kind of key sort of points or key elements of that cost of capital methodology should we sort of keep in mind as we're trying to assess where that cost of capital might go?
Steven, this is Jason. Thanks for the question. It's clear that our cost of capital has significantly increased this year. I mean, I think the probably easiest place to look is the cost of our debt, which is up roughly 100 basis points. And we know that equity costs are a multiple of that.
I think as we look forward, we continue to push and believe that constructive reform of inverse condemnation is important to keep our cost of capital cost effective for our customers. But in absence of legislative reform, I think we would have to consider the potential for future fire events on what would be a sort of traditional foundation for the calculation of the cost of equity. And so in essence, I think it's premature to quantify exactly how much. But in absence of legislative reform, we could see significant increases in cost of capital that we would request next spring as part of the cost of capital proceeding.
Understood. And then I guess I'm thinking about the large Tubbs fire and possible outcomes. I guess one outcome is that there's a determination that your equipment was somehow involved, but that there is no finding of a potential violation of vegetation management. So sort of this is the scenario in which you might have strict liability and yet not be negligent. In that kind of a situation, how do you think about financing such a large amount of capital that will be required, absent legislation?
Or then I guess we could talk about possible legislative fixes, but it's obviously a large amount of money. How would you think about that kind of scenario?
Steven, this is Jason again. I think it's premature to speculate as to exactly sort of the financing plans. And under a hypothetical, Cal Fire still hasn't released its conclusion on tubs. But I will emphasize from a matter of principle standpoint is, as I indicated in my opening comments, if we were to take a non cash charge that dropped us below our required minimum equity ratio of 51%, we'd first file a capital structure waiver with the commission. That capital structure waiver would be considered to be approved until acted upon.
We think that capital structure waiver is in the best interest of our customers. It provides the legislature and the courts time to deal with inverse condemnation. And so there are a number of factors that would need to be resolved before we could quantify and articulate the exact financing approach for the situation that you outlined.
Yes, very much understood. Thank you very much.
Thank you. Next question comes from the line of Jonathan Arnold of Deutsche Bank. Please proceed.
Good morning, guys. Good morning, Jonathan. A lot going on today. And I think I heard most of what you said, Geisha, at the beginning. But if you I think you said you felt that you were encouraged by the governor's proposal on IC, but it wasn't sufficient.
I'm not sure if you meant you need to see other things as well or were you commenting on the specifics of that proposal?
Yes. So I think that the governor's proposal is constructive. But as I said earlier, we do believe it's insufficient. We think it's just one of many things that need to be considered in a more comprehensive set of reforms relating to inverse condemnation, relating to the wildfire reforms that are needed in the state of California. So it's an important input, I think, to the conference committee, but it's, I think a lot more work is necessary.
So what kind of things that it doesn't do would you like to see? And my reading of it was it looks like you would still have a lot of uncertainty if the courts don't decide until sort of some long time after an event, what your liability for it might be. So I'm just curious what your what are the elements of what you'd like to see that are not there
today? We've always been really clear about our expectations, our what we want to see accomplished in the legislature this year, and it's threefold. It's strict liability reform under inverse condemnation permanently. It's addressing the 2017 wildfire cost in the most cost effective manner possible. And it's also having clarity around, reasonableness standards and really the whole cost recovery perspective from a CPUC proceeding basis.
So when I say that it's insufficient, it doesn't go far enough and looking at inverse condemnation and the impact that it has on utilities like PG and E in the state of California.
Okay, fair enough. And then can I also ask on the do you have any insights into the CPUC's investigative sort of time line? And when we might see those reports start to emerge? And I guess sort of within that, do you know if they have seen the reports into the fires with the violations? And what would I think they've said publicly that they expect to come out reasonably promptly after Cal Fire, but we've not seen anything yet.
Right. Jonathan, to answer the question directly, no, really don't have any insights as to the timing of the SCD or more broadly the CPUC investigations on any of these fires. We're hoping that it's prompt, but it's again, we have no insight as to what their thinking will be in terms of timing.
Okay. And then could I just Jason, I apologize for this, but I felt that it was moving quick. And then you said that your insurance cost is now $300,000,000 higher than what's in rates. And the overall package you're expecting to cost you $3.50 annually. Did I hear that right?
That's correct, Jonathan. And then there was some of that you're deferring assuming recovery under the WEMA, but some you're not. Could you just rephrase that part?
Yes. About $80,000,000 of the amount that is in excess of what we're currently collecting in rates would be deferred as a regulatory asset in WEMA. The rest would fall to the bottom line. Although I do
difference between $380,000,000 falls to the bottom line on a sort of annual basis. But you're also saying you expect it to be a positive earnings driver year over year. So is the difference cost saving or something else? Or how do we reconcile that?
Yes. So while we didn't provide you per share guidance for 2018, when we set our financial plan for the year, we did anticipate higher insurance costs.
Okay.
And when we set that plan, we set it with the objective of earning our authorized return on equity. The WEMA regulatory asset that we recognized for insurance costs this quarter is incremental to that.
Okay. So said another way, you had assumed that your insurance these are sort of the amount by which insurance costs would impact your numbers this year would be more than 220,000,000 effectively?
I think that's fair.
Okay. Thank you.
Thank you. Our next question comes from the line of Steve Fleishman of Wolfe Research.
I had a lot of the same questions. So I apologize these will be clarifications. So, the on the insurance, the $350,000,000 annually, is that a 2018 annualized number?
That will be the cost from August 1, 2018 through July 31, 2019.
Okay. So you weren't absorbing in your plan all $350,000,000 in 2018. It would have been, I guess, by 2019?
That's correct.
In theory? Okay. Okay. So in theory, that would be a 2019 pressure that you'll be absorbing or recovering by then. Got it.
Okay. And then on the Gesh, I apologize going back to the Governor's plan being insufficient comment. Obviously, one way it's insufficient versus what you stated is it does specifically doesn't address the 2017 fires. But could you just clarify outside of that issue how that plan is insufficient with maybe a little more detail?
Yes. So it's, it really doesn't address the 3rd item that we typically have called for, which is having, in essence, pre prudency review, having an opportunity, to look at clarifications around what constitutes being in compliance, what constitutes being a prudent manager. I think that's important. As we've seen from the San Diego Gas and Electric WEMA refusal, I guess, or not accepting the rehearing. It's a big issue for us.
And when you consider the fact that we're in this new normal, the fact that we have more and more wildfires, it seems every year, very severe wildfires, we've got to look at this whole issue of wildfire reform, inverse condemnation reform, liability reform more broadly, more comprehensively. So that's why I believe that it's insufficient.
Okay, great. And then one last question. I'm sure you heard the Cal Fire comments on tubs yesterday. I don't know if you have any color from your standpoint on those comments. And just how if the Tubbs fire report is not out by the end of the legislative session, what does that mean for getting legislation done?
Let me first talk about that. I mean, clearly, the Tubbs fire is so significant, so devastating. But I believe that and what we've been talking about at the legislature is that the reform that we're seeking is so much more than just hubs. It's so much more than just 2017. It's so much more than just PG and E.
We find ourselves in this climate driven extreme weather facing wildfire after wildfire. The numbers that we're seeing already in California and in the Western United States is staggering. So this is going to be a perennial issue. And our focus in addressing legislation is about we've got to come up with new solutions, new legislation that deals with this new normal. So while I don't know what the impact would be of tubs being delayed one way or the other, but I think the time for action is now as we're dealing with wildfire after wildfire today and having clarity about what utility liability is going to be in the future is going to be so important to our ability to raise capital, our ability to be a financial utility, to our ability to execute on our plan to achieve California's clean energy goal.
Great. Thank you. Go ahead.
It's John Simon. Just on another part of your question, we really don't have insight into the timing beyond what Cal Fire has said publicly. I do want to emphasize though that ultimately the question of the cause of the fires and PG and E's role if any in them is going to end up being an issue in the litigation. So whenever Cal Fire says what its determination is, it's going to be their finding, but it's not going to be dispositive of PG and E's liability. And we do expect the plaintiff's lawyers who have filed suits in San Francisco to pursue theories, whatever Cal Fire says.
They've asserted 2 theories, the inverse theory that we've talked about before and negligence as well.
Thank you.
Thank you. Our next question comes from the line of Greg Gordon of Evercore ISI. Please proceed.
Hi, how are you? Sorry to beat a dead horse on this question on the Governor's proposed language in the legislation. But my first question is, as it pertains to his willingness to support guidance to the courts that would establish a proportionality standard, Does that in and of itself eliminate strict liability if it were passed as written on a going forward basis?
Hi. Yes, Greg, this is Steve Mollnight. I think as Geshi said, the Governor's proposal clearly weighs in on some elements. You mentioned the elements he weighed in on inverse reform. I think we're still fully vetting the specifics of that proposal.
But I would just again highlight, as Geshu said, it is an input to the process that the conference committee is undergoing. They had their first hearing yesterday. I expect them to look at the Governor's proposal along with proposals from many other parties. And I think we have to see what emerges from that process to really assess its impact on the issues that Geisha mentioned that California is facing.
Okay. I get that
you don't want to answer the question specifically, but from a direction and perspective and a philosophical direction, even if it's not worded exactly the way you would like, does it show that there's a way to move away from a strict liability standard that doesn't fundamentally have to go through a constitutional elimination of inverse?
Look, I'll say this, Greg. I think that the as we've asserted, reforming inverse does not require a constitutional amendment. It can be done by the legislature. I think we heard that in the hearing yesterday from multiple parties who testified in the hearing, and I think the governor's proposal puts forward a methodology to accomplish that as well. So I think the issue of reforming inverse, as we've said, is something the legislature can take on and needs to take on in order to really address the challenges that California faces.
Appreciate that. One other question. Jason, I know you also didn't want to opine as to some sort of specific financing path should you wind up having to have significant liabilities for the fires. But ultimately, if you're compelled to take charges associated with the payment of buyer claims that are unrecoverable, should we assume that in the end that they'd be that you'd need to replenish those write downs with equity that there may be multiple financing paths over time that allow you to bridge that, but that in the end write downs associated with those theoretical costs should they be incurred would have to be financed with equity?
Yes, Greg, thanks for the question. I do think as you summed it up there that in the end, ultimately, the equity needs will need to be financed with some form of equity, but there could be multiple paths on an interim basis before issuing that incremental equity to fill our equity ratio at the utility. Thank you, sir. Take care.
Thank you. Our next question comes from the line of Praful Mehta of Citigroup. Please proceed.
Thanks so much. Hi, guys. Just following up on that question, if there is, let's say, securitization with AB33 that goes through, you have a bridge at least for some time till you have a decision on what happens around prudency reviews at CPUC. But if you win some of these court battles around the Supreme Court, California Supreme Court, which kind of have a view around whether you're liable under inverse, would that result in no equity need or could that be the upside case where securitization almost bridges to a solution on the court side?
Praful, I think you're highlighting the complexity of the situation why it's hard to commit exactly to a path. There's we're pushing forward on reform at the legislative level. We're challenging a reverse in the court system. There are a lot of different paths that can take. And so what we can commit to in the near term is that if we fall below the minimum equity ratio at the utility because of a non cash charge, we are committed to filing a capital structure waiver at the commission to mitigate financing needs so that we can fully pursue resolution under those multiple paths.
Understood. But securitization at least in the near term is a bridge to some other legal solution. Is that a fair way to think of that?
It's possibly. I mean, AB33 as currently constructed, we're providing mechanism to pay claims essentially today, and we'll give the commission the opportunity to disallow costs down the road, which if disallowed would require a different form of financing at that point.
Yes. Got you. Fair enough. And then secondly on the Senate Bill 901 and all the language on what the governor is supporting as well. It seems like Senate Bill 901 actually has language in it right now as the draft is right now that kind of addresses IC at least to some extent.
Is that something that you would see as a potential path forward in terms of what you could see final shape around addressing IC? Or how are you kind of thinking about with all these bills floating around, how do you kind of see that progressing given we're coming down to crunch time at this time?
Hi, thanks. This is Steve Melamed again. So just to kind of clarify the process. So Senate Bill 901 was amended really just to set sort of the scope of work that the conference committee would take on. It really, as of now, is a bit of a shell and was moved into the conference committee for their actions.
So what we would expect to see is that as the conference committee debates solutions and puts them forward in legislative language, they would be amended into 901 and then the committee would consider 901 in total and pass it back to both chambers for a vote. So I think what you see in 901 today is really not what it will be in the end. It's really just a it's a shell with some clarification of the scope that the committee intends to take on.
Got you. But so I guess within the next few weeks, we by the end of August, we are expecting that to kind of take shape in terms of addressing IC in 901 or do you expect it another bill like 1088 or something else?
No, I think the current expectation is the conference committee will likely be the primary source of potential solutions. That's what it was formed to do. They'll be debating that and putting it in 901. As you mentioned, the session ends at the end of August. So, as Geshi said, the next month is really critical, but the committee was formed really to do this work, and we're looking forward to working with them through the month to hopefully see the solutions emerge in 901.
I mean, obviously, we're really pleased that there was a conference committee where there is laser like focus, I think, in terms of looking at inverse, looking at wildfire preparedness and response more broadly. I think it's the right approach to tackle such a complex issue as what we're dealing with here in California.
Got you. Thanks, Kisha. Thanks, Tisha. Thanks.
Thank you. Our next question comes from the line of Julien Dumoulin Smith of Bank of America Merrill Lynch. Please proceed. [SPEAKER JULIEN
DUMOULIN SMITH:] Hey, good morning, everyone. Good morning, Julien.
[SPEAKER JULIEN DUMOULIN SMITH:] Hey,
so perhaps just to clarify Praful's last set of questions there. Just with respect to the shell of 901 and obviously you've got the 33 bill out there. I mean, how do you think about this being sort of multiple parallel bills addressing various avenues and should we expect that to be the case? Or as the committee continues here, would you expect that different parts of the various proposals to kind of come together in a kind of a singular 901 bill to carry the day? Just to clarify the last question.
Well, we are advocating strongly that some level of looking at 2017, the AV33 bill as it currently stands, we would love to see that moved into conference committee. So as they're looking at comprehensive reforms, they're looking not just at Prospector, but also looking at 2017 because it was just so, so substantial. If however, AB33 doesn't move in to the conference committee, there is still an approach for more of the traditional legislative process in California. But I would have to say, it's harder. It's more complicated.
So again, our focus is on making the work of the conference committee as comprehensive as possible to deal with this very complex set of issues, while at the same time working in parallel to continue to advance, the good work of AB33.
Got it. And while we're on the subject of 33, just to kind of understand, obviously, we want to look at retroactive and provide a framework. How do you think about the notion of prudency down the road and the refund scenario under that 33 legislation, if you can kind of comment around that?
Well, the current way that AB33 is sort of set up, it's explicit about 2 things. 1st, the commission must approve that the initial advice filing, it has to ensure lower cost for customers. And second, it provides for reasonable review for all the wildfire costs incurred. So that if the CPUC determines that we did not act justly or prudently, then those there will be dis allowances and those disallowances will be shareholder funded.
Got it. All right, excellent. And then maybe just turning back to the more financial side of the house. Can you talk a little bit more about financing avenues? I know you alluded to it a little bit earlier in the questions, but sort of cumulatively potential cash outflows to fund some of these, let's call them one time type efforts here.
How do you think about capital raising efforts and sort of preemptively putting in place financing vehicles to any extent? I mean, obviously, you're to a certain extent doing that with these cat bonds and in a certain context, but more broadly, if you will.
Yes. Thanks, Julien. This is Jason. Obviously, liquidity is a clear area of focus for us. The $2,500,000,000 of debt that we raised in the utility late in 2017 was intended to largely address our ongoing financing needs for 2018 2019 to give us the flexibility to work through the complexity that we've outlined.
As we've said, uncertainty with respect to legislative reform, the uncertainty with respect to the timing of the judicial challenges of inverse combination create a challenging environment for incremental financing. That's why I'll come back to our commitment at least early on if our non cash if we fall below the minimum equity ratio from a non cash charge, we will file a capital structure waiver. If that is denied, ultimately we will look at other tools and we'll seek to balance the balance sheet health of the company, but as well protect the interest of both our customers and shareholders. And I think just given all of the uncertainty, it's hard to be any more specific than that at this time.
Got it. So it seems like that you wouldn't necessarily be seeking to put much more preemptively in place beyond the specific liquidity and debt that you put in place last year?
We have a few short term debt maturity floating rate notes that we'll have to address. But as I mentioned, the debt offering at the utility late in Q4 largely met our financing needs our debt financing needs for 2018 2019.
Got it. All right. I'll leave
it there. Thank you all very much. Best of luck.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Michael Lapides of Goldman Sachs. Please proceed.
Hey, guys. And this may be a John Simon question, but I'm just curious, how do you balance the litigation paths that are outstanding and as you show in your slides may take some time a year or 2 or so versus the claims that are coming in and the process and timeline for either settling or paying out claims, especially claims that are more inverse condemnation claims and not necessarily negligence claims. And there are obviously 2 suits outstanding, challenging inverse condemnation. How do you outstanding challenging inverse condemnation. How do you balance that?
And how do you think about just the cadence of things?
Let me take a run at it, Michael, and others here will jump in if I've sort of missed the spirit of the question. You're right to note we've got many trains running down many paths. Just timing wise, our appeals on inverse condemnation are going to work their way through. The appeals we have right now are discretionary. If the courts accept them, so we have them pending in 2 different places, then you're looking at a timeline of 9 months to a year and a half to deal with those.
The litigation that's filed on the fires under the theories, negligence and inverse, they're very early stages. We don't even have a case management conference yet, but that's coming up in a month. There's no trial date set, discovery is early. So that's going to run its course over years. It's early.
And then you look at settling claims. If we were to do that, it's really early to talk about that now. And here's why we don't have the evidence that Cal Fire is relying on. We don't have most of their reports. It's really difficult to evaluate settlements and timing of settlements when we're in that position.
And so back to your question, we're pursuing aggressively our defenses in a number of fronts. We really want to understand Cal Fire's thinking. We don't understand it right now because we don't have anything substantive from them to talk about sort of their alleged their claims that PG and E may have alleged state law and its practices. So we don't have some nifty balance to thread needles on all that. What we are doing is making every argument we can defending vigorously and moving ahead.
So I don't have a great answer to that question, I'm afraid, but that's where we are.
Okay. And then a question totally unrelated to wildfires. How do you think about the cadence or trajectory of capital spend just on core kind of rate based items when you think about all of the dockets that are coming up, meaning the GRC, the TO cases, the GT and S case, you've got a lot going on in the regulatory arena that will have a significant impact on that $6,000,000,000 CapEx number for 2019 and beyond. How do you think about kind of the range that could be around that level?
Michael, this is Jason. As we've talked about in the past, while we haven't necessarily quantified capital spend beyond 2019, the pipeline for projects is extensive. We have an aging system that requires significant investment at a time when we need to modernize our grid or new technologies that our customers are demanding of us. And so the pipeline for capital investment is very strong. But as Gesh and I mentioned in our opening remarks, to the extent that we don't see spend because it just of spend because it just wouldn't be in our customers' best interest to finance some of those projects at the current cost of capital that we're experiencing.
So right now, it's hard to quantify beyond what we provided here. But I think as we get into the Q3, we should be able to provide more details.
Got it. And can you remind me just what's the timing for the filing? I know you got the 4 month delay on the core GRC, What's the timeline for the other cases?
We will file the transmission owner rate case before the end of this year. We have the 4 month delay on the GRC. We have hearings for our GT and S rate case starting kind of mid September timeframe. I think those are probably the 3 critical sort of cases for the remainder here of 2018.
Got it. Thank you, Jason. Much appreciated.
Thanks, Michael.
Thank you. Our next question comes from the line of Christopher Turnure of JPMorgan. Please proceed.
Good morning. I just have a clarification on the last question on the court process. Is it fair that basically if you are granted your request at the Supreme Court in the Butte case that it really will not have an immediate impact on the Butte case or the NorCal case at the lower courts?
I think, Christopher, it's John. I think it will take some time. If the Supreme Court hears the appeal, then there'll be a process to brief the appeal, to argue the appeal, and then for the court ultimately to decide the appeal one way or the other. So that will take some time. Can't predict the exact amount of time.
The impact won't be immediate. It will be once the appeal is thoroughly reviewed, heard and argued and all the rest. So it could be 6 months to 18 months, some sort of timeframe like that. It's really hard to predict.
Okay. And as you said, during that time, the lower court proceedings continue basically unaffected?
That's right. That's my understanding. Okay.
And then one other question on the Cal Fire testimony from yesterday. I'm wondering if in all your experience with Cal Fire investigations, Butte, other fires, etcetera, how frequently you've been aware of equipment being sent to third parties for review?
Yes, really can't comment that because don't know one way or the other what Cal Fire may choose to do when it's doing its work to investigate a fire.
We don't have a lot of visibility to the inner workings of Cal Fire's investigative process. So we don't know if this is highly unusual or something that they do more regularly. It really there's no transparency on that.
Okay, got it. But you haven't typically seen that in the past?
Not that I'm aware of.
Okay, that's helpful. Thank you, guys.
Thank you. Our next question comes from the line of Paul Patterson of Glenrock Associates. Please proceed.
Good morning. How are you doing? Good morning. Good morning. So, I appreciate your comments, all of which make a lot of logical sense.
And I guess what my question sort of is, is from listening to the meeting, it was sort of highlighted during the public comments, which were basically a lot of lobbyists, it seemed to me, was this substantial opposition from the insurance industry and municipalities regarding inverse condemnation. It seems like there's been a sort of ecosystem that's kind of developed there. And I'm just wondering whether or not when you look at the legislative calendar and everything else, whether or not it's possible to focus on recovery of costs, the prudency stuff that you're asking about, the wildfire mitigation being recovered and then perhaps leaving inverse condemnation to the side in an effort to get something through that addresses sort of the immediate financial issues that you guys are going to be confronting as opposed to what appears to be what might be some significant opposition that starts to develop from powerful insurance and other industries basically trying to perhaps derail the process. Do you follow what I'm saying? In other words, if there's some way of sort of addressing sort of some issues immediately as opposed to just it being just maybe too big a lift to address what I agree with you really should be addressed, but maybe sort of just difficult in the current calendar environment that you got?
Yes. Hi, Paul.
This is Steve Meline. Just a couple of comments on that. I think, first of all, it is very apparent that these issues are significant and meaningful to many groups and constituencies across California. That's completely consistent with what we've been saying that these the reforms that are needed, the comprehensive reforms are really critical. I think you can look to the statements that have come out previously from the governor and the legislative leaders on the need for action and the need for urgent action.
You can look to the calling of the conference committee, which is an unusual step, legislatively and see within those, the critical importance of this work and the importance for the legislature to weigh in. I think it's also important to remember that this work didn't just start with the conference committee or the hearing yesterday. That was an important milestone. But obviously there have been a lot of discussions. There have been bills that have been put in front of the legislature and have been debated and worked on.
So at this point, we still are continuing to advocate reforms because all of these issues are interrelated. The ability for us to both compensate victims and make sure our victims and the communities that suffered from these fires in 2017 can be made whole and rebuild. The ability to keep our customer bills as And we continue to believe the conference committee has got the right scope. They've got the right membership and the right process, and we can deal with this year. So we're going to continue to advocate for that as we move forward and I think that that is possible for us to take on.
Now I can't speculate on the outcomes, and we'll continue to work our way through this process. But at this point, I think that's how I sort of view the next month.
Okay. Okay. Thank you.
Thanks, Paul. And Lisa, thank you for hosting the call today. Everyone, I know we're at time, so just want to thank everyone for joining us this morning and have a safe day. Thank you.
Thank you. This now concludes the conference. Enjoy the rest of your day.