All lines are connected. You may proceed.
Good morning, everyone. This is Janette Fong, thank you for joining us for the Pacific Gas and Electric Corporation third quarter earnings call. Before I turn it over to Tony Earley, I want to remind you that our discussion today will include forward-looking statements about our outlook for future financial results, which is based on assumptions, forecasts, expectations, and information currently available to management. Some of the important factors that could affect the company's actual financial results are described on the second page of today's slide deck. We also encourage you to review the Form 10-Q that will be filed with the SEC later today, the discussion of risk factors that appears there and in the 2014 annual report. With that, I'll hand it over to Tony.
Thank you, Janette, and good morning, everyone. Thanks for joining us. Our key focus areas remain unchanged. California continues to lead the U.S. in driving clean energy policies, and PG&E will play a critical role in helping to achieve the state's goals. We also know that safety must be at the core of all of our decisions, and our commitment to that is unwavering. We continue to make progress towards resolving outstanding regulatory and legal issues while strengthening our safety and compliance programs. We believe that executing our strategies in these focus areas will provide the foundation for both operational and financial success. I'm going to touch on some of the key developments this quarter before I turn it over to Kent to discuss our financial results. Geisha Williams and Nick Stavropoulos are also with us today, and they'll be available to take any questions that you have.
In terms of our focus on clean energy, PG&E has a long history of action on climate change, and we've been a vocal advocate for policies that will move us forward. In fact, I recently participated in a meeting with President Obama to talk about the actions PG&E is taking to help drive clean energy policy and greenhouse gas reductions. We supported Governor Brown's recent move to increase the renewable energy target to 50% by 2030, and we're confident that we can get there. We've been investing in the electric grid to enable both utility-scale renewables and the growing distributed resources such as rooftop solar, electric vehicles, and energy storage. During the quarter, we filed our proposal to update the current net metering rates. Our proposal supports the continued growth of rooftop solar while beginning the transition to a sustainable rate structure that also supports the necessary grid investments.
Our 2017 general rate case includes detailed proposals for continued grid modernization to ensure that we have the visibility and flexibility we'll need to enable all of the new distributed resources. Our general rate case also supports our goal on delivering customer expectations by providing customers with safe, reliable, and affordable service. Using a risk-based approach, we propose safety-related investments across the system, including replacing aging infrastructure, taking targeted actions to reduce risk, and improving our emergency response. We've balanced the necessary investments with affordability. Average residential bills will increase less than 3% and will remain below the national average. In terms of reliability, the most significant event this quarter were the fires in Northern California. As you know, California is in its fourth year of a severe drought, and we've been partnering throughout the year with CAL FIRE and other stakeholders to address a challenging fire season.
Our efforts have included things like increased patrols and vegetation management, as well as enhanced emergency response coordination. At one point, the state was simultaneously fighting three major wildfires across 300,000 acres of our service territory. In addition to restoring power to impacted customers, our crews came up with creative ways to meet our community's needs in a very challenging time. For example, we leveraged the new exportable power technology from our electric trucks to provide an evacuation shelter with backup electricity when its generator failed. The response from our customers and other stakeholders has been positive, and we're really proud of how safely and quickly our crews were able to perform the work. As we've publicly reported, CAL FIRE is investigating whether one of our electric lines could potentially have been the source of the Butte Fire.
That investigation is still underway and could take quite a while to complete, so we don't have any updates on that at this time. On the heels of the state's historic drought, we're now hearing forecasts about an El Niño winter, which could bring significant rainfall and cause mudslides and floods. Our team has been preparing for this possibility through a wide array of actions, including updating our meteorological models and performing drills that simulate potential flood scenarios. Finally, in terms of resolving outstanding regulatory issues, we recently received a report from the Safety and Enforcement Division on the gas distribution record-keeping investigation. While the report identified a number of potential past violations, which we'll be responding to in the next month, we were pleased to see that it also acknowledged the progress we've made to improve our records.
Over the last few years, we've implemented a number of new procedures that have been informed by extensive benchmarking and industry best practices. As we've said from the beginning, we know we have more work to do to enhance our distribution records and practices, and we're absolutely committed to getting that right. Geisha and Nick recently had a chance to share some of the actions we've taken to improve our safety culture at the California Public Utilities Commission's first-ever Safety En Banc. This was an opportunity for all five commissioners, the presidents of California's investor-owned utilities, and a number of interveners to talk about what each of the utilities is currently doing around safety and what changes the commission might make to better incorporate safety into its proceedings.
Nick and Geisha talked about the changes made by our board of directors to focus on safety, the strong link between our executive compensation programs and safety performance, our use of third-party experts in benchmarking, and the way we engage our frontline crews around safety. The commission also had the opportunity to hear from other utilities and to start thinking about how to create common metrics to track and measure progress. I can tell you that we thought it was a really positive step forward in the conversation, and we look forward to continuing the dialogue with all the parties. Before I turn this over to Kent, I just want to take a moment to thank him for all that he's done for PG&E. As you know, after 33 years with the company, Kent has decided to retire next year.
Kent has done a tremendous job managing PG&E's financial activities during challenges that were some of the most complex in our industry. He's also been a great source of leadership and inspiration across the company. We're working through the succession process right now, and I'm thankful that Kent has agreed to stay on to ensure a smooth transition. Thank you, Kent, and with that, I'll turn it over to you.
Thank you, Tony. Good morning, everyone. I plan to first cover our results for the quarter, and then I'll go through our updated guidance. Let me say upfront that the complexity of our rate case timing issues has made it especially difficult for you to forecast quarterly results. However, we do expect solid results for the full year, and you'll see that when I get to guidance. I'll start with our quarterly results, which is on slide five. Earnings from operations were $0.84 in the third quarter, and GAAP earnings, including our items impacting comparability, were $0.63. Our pipeline-related expenses in the quarter were $32 million pre-tax or $19 million after tax shown in the table. This includes our cost to remediate encroachments on our pipeline rights of way and to complete the remaining expense work for our Pipeline Safety Enhancement Plan.
Our legal and regulatory-related expenses in the quarter were $14 million pre-tax or eight million after tax in the table. Here we have our cost for litigation and enforcement activities related to natural gas matters and regulatory communications. Fines and penalties in the quarter were $142 million pre-tax, as shown in the table below. This amount represents the disallowed capital work coming out of the final San Bruno penalty Decision, which we're accruing as we do the work. Finally, we received insurance recoveries in the quarter of $10 million pre-tax or six million after tax, as shown in the table above. I'm pleased that we've now resolved all San Bruno claims with our insurance carriers. In total, we recovered $515 million through insurance.
Moving to slide six, you'll see our quarter-over-quarter comparison of earnings from operations of $1.73 in Q3 last year and $0.84 in Q3 this year. This is where it gets a little complicated due to all the timing issues. In Q3 last year, we recorded three quarters worth of revenue increase associated with our 2014 general rate case. That's the biggest difference from Q3 of last year, worth $0.47. $0.16 is associated with lower cost recovery this year due to the timing of the gas transmission rate case. As you know, a lot of our transmission work is seasonal, and the Q3 amount reflects a higher level of activity in the summer months. When we receive a final decision in the case next year, the revenue increase will be retroactive to January 1, 2015.
$0.09 relates to the timing of taxes, which will reverse to zero by year-end. $0.05 relates to regulatory and legal matters. This includes the impact of some favorable regulatory decisions in Q3 of last year, as well as some legal costs incurred in Q3 of this year. Another $0.05 is associated with an increase in shares outstanding, and the impact here of share count is magnified by the fact that earnings in Q3 last year were so much higher as a result of booking three quarters worth of revenue increase to the GRC. $0.03 relates to the disposition of SolarCity stock in Q3 last year, and $0.09 relates to a variety of smaller miscellaneous items, many of which are timing. We've had positive miscellaneous items in previous quarters. These factors are partially offset by a $0.05 increase due to growth in rate-based earnings.
That's it for our Q3 results. On slide seven, you'll see our 2015 guidance. Previously, we've had a guidance range for earnings from operations of $2.90 to $3.10. Year-to-date, we've been trending towards the upper end of this range. Therefore, today, we're narrowing our range to between $3 and $3.10. There are a few other changes to this slide. We've reduced our range for pipeline-related expenses, and I'll say more about that in a moment. We've also updated our insurance recoveries just to reflect the amount we recovered in the quarter. Our resulting GAAP guidance is shown at the bottom of the table. On slide eight, we've updated our 2015 CapEx assumptions from $5.5 billion previously to $5.3 billion. There are really two main reasons for this update. First, our response to the recent wildfires displaced some of our planned work and electric operations.
Second, we're realizing some efficiencies in gas operations, primarily related to our distribution pipe replacement program. The other assumptions for 2015 on this slide remain consistent with what we've previously provided. Slide nine reflects the updated range for pipeline-related expenses that I mentioned earlier. You can see we've decreased the upper end of that range from $150 million to $125 million. The lower end remains at $100 million. You'll recall that this item is primarily associated with our rights-of-way work, and we continue to expect that the cost of the overall program will not exceed $500 million. Moving on to slide 10. Our total equity needs for 2015 remain the same at $700 million to $800 million. Through the end of Q3, we've issued roughly $700 million of equity.
This includes about $350 million through a block trade done in August, about $75 million through our continuous equity offering program earlier in the year, about $275 million through our internal programs. Those are our 401(k) and dividend reinvestment programs. We do not expect to issue any additional equity this year other than through our internal programs. Slide 11 shows our estimated CapEx through 2019. Other than the change to 2015 that I previously covered, the ranges for 2016 through 2019 remain the same. Slide 12 shows our estimates of authorized rate base through 2019. These are consistent with the CapEx ranges on the previous slide. As a result, we estimate that 6%-8% annual growth in our authorized rate base over this period.
As Tony discussed, California's clean energy policies and our focus on system safety and reliability are driving significant investment in the coming years and support this strong growth profile. I'll stop here so that we can now open the lines for your questions.
Ladies and gentlemen on the phone lines, if you would like to ask a question, press star followed by one on your touch-tone keypad. To remove that question, press star two. If you're using a speakerphone, please pick up the handset before using the keypad. Once again, if you'd like to ask a question, press star followed by one. Our first question comes from the line of Jonathan Arnold with Deutsche Bank.
Oh, good morning, guys.
Good morning, Jonathan.
Quick question. Just on the CapEx and, I guess, therefore, the rate base ranges, could you just talk to what is in the base, the bottom end of the range? Is that just authorized spending, and then the other things that you mentioned are what defines the shaded section? Or is there some other way of being a little more clear about what exactly is in and out of the two pieces, the two different levels?
Jonathan, this is Kent. Let me kind of go through it by parts of the business, which really relate to the regulatory proceedings. For the electric and gas distribution and generation, which is our general rate case, the high end reflects the amounts that we've requested in the 2017 general rate case. For gas transmission, the high end in 2017 reflects the amount that we requested in the gas transmission rate case. Then in 2018 and 2019, we've just kept that amount flat with the 2017 request. Then for electric transmission, which is our TO case, we've really only requested an amount through 2016, our TO17 case. Our 2017 through 2019 levels are flat at the 2016 request. For the low end, basically, it's consistent with the low end that we've had out there already for 2016 for across the board.
Okay. How about the distribution resource plan, for example? Where does that fit into this range? Is that in the high end or not?
We did not have a specific ask in that proceeding, a lot of those types of investments for automating the system and so forth are included in our general rate case. Those components are included in the overall ask and therefore in the overall range, the upper end of the range.
Okay. Put simply, if you've got everything you've asked for in both of the big outstanding cases, you would come in at the high end?
That's correct. Then, of course, we'll have updates because at some point, we'll file another gas transmission case for beyond 2017, and we'll also file additional transmission owner cases for beyond 2016.
Great. Thank you, Kent. That was my question. Thanks.
Thank you. Our next question comes from the line of Dan Eggers, or excuse me, Dan Eggers with Credit Suisse.
Hey, good morning, guys. Can I just ask about with the El Niño concerns about the storms and the preparations there? How do you guys address cost recovery if you end up with some disproportionately high storm costs this year, I guess, next year? How would that affect the numbers as we think about ongoing earnings estimates?
This is Kent. We do have balancing account treatment in our current general rate case for major storms.
In addition, for things like the wildfires we just had, where in cases where the governor declares a disaster area, we also have the ability to seek recovery through a Catastrophic Event Memorandum Account. There's a few different mechanisms that are in place in California.
Okay, thank you. I guess just the next question, Tony, with the electric vehicle charging station decision, it was kind of a deviation from what you guys seem to have been messaged from the Governor as far as his priorities are concerned. A, how do you think this is going to work out from meeting the Governor's goals on vehicles? Second, when you look at the DRP, is there a disconnect between the goals of the Governor and what the commission's proving to be supportive of you guys investing in?
Well, obviously, we thought that our initial proposal was totally consistent with the Governor's goals on electric vehicles. I think the commission felt it was overly aggressive and wants to phase it in. In terms of our spending estimates, since it takes a while to gear up, it really doesn't affect any of the numbers that Kent is talking about. We just want to get the program up and running, and we think that once we get it running, we'll show that it's very well received and is consistent with the electric vehicle strategy in California. It was disappointing we didn't get the full green light, we're going to continue to work to get still a fairly aggressive program out there.
I guess, what it means as far as the pacing of DRP capital. Is there going to be more of a test for each one of these new initiatives along the way rather than maybe a more wholesale buy-in of what you need to do to accomplish the bigger state goals?
Yeah, I think as Kent just said a minute ago, that the DRP capital is spread among the various regulatory cases. If our general rate case has some of it, and that's where it'll be addressed, and it's being addressed now. We've submitted that case, and it'll go through the hearing process. I don't expect a separate rate-making proceeding for DRP. DRP expenditures will just be rolled into various other proceedings.
Okay. I guess one last question, just with the Edison case where the manufacturing tax deductions are, they're trying to slot them as a reduction in rate base in the next rate case to claw back those earnings. How is that affecting you guys from maybe the way you're thinking about recognizing those earnings, those benefits during this GRC process? If there was a precedent that the commission was pulling those back, would you guys need to change how you're recognizing them in your numbers?
Hi, Dan, this is Dinyar Mistry, the controller. We've taken a look at the Edison PD, and we think that our situation is different from Edison's. We just filed our 2017 GRC, prospectively, the commission will consider our request over there. At this point in time, we don't anticipate changing our treatment.
Okay, very good. Thank you.
Thank you. Our next question comes from the line of Steve Fleishman with Wolfe Research.
Yeah, hi, good morning. First of all, Kent, I guess an early goodbye. We'll miss you. Secondly, on the similar question regarding the Edison PD on their GRC, is there any policy issues there that concern you at all relative to your case?
The major issue we've seen has been the repairs issue, which Dinyar just addressed, and we do think we're in a little bit different situation. That's the biggest one that we've been watching.
Great. Maybe just on the criminal case, I know there's been a lot of activity. Can you maybe just give us an update on whether any of the allegations have been thrown out at this point? Do we still have some kind of, I guess, trial in March of next year?
Yeah, this is Tony. Let me start off, and then I'll let Hyun jump in. Those of you who've been involved in major litigation, this is just the pretrial motion stage. There's a lot of activity going on. There'll continue to be more activity leading up to the trial. The trial is still scheduled for next spring. We'll see what happens as we get closer to it. Hyun, why don't you comment on where we are?
Steve, we did file a number of motions, all the motions have been submitted to the judge. We're just waiting for the judge to issue his ruling on our motions.
Okay, great. On the GT&S case, I know there's oral arguments, I guess, today. Just in terms of, is there any relevant updates there in terms of potential outcomes that we should be aware of?
Hi, this is Steve Malnight from Regulatory Affairs. Really, we don't have any additional updates. Timing still looks like next year for the case, we'll look forward to the oral argument later today.
Okay. Thank you.
Thank you. Our next question comes from the line of Michael Weinstein with UBS.
Hi, guys. Congratulations, Kent, by the way. Hey, when do you guys think you'll be in a position to discuss 2016 guidance and a dividend policy?
Well, that's something that we look at every time I'm with my board of directors. We discuss that dividend policy. We've not tied it to any specific outcome at the commission. What we're focusing on is what is the right time to address that? I'm well aware that our investors have been very patient on this. We're committed to getting our dividend in line with our peers, but it's got to be at the right time, and we continue to assess that.
In terms of timing of guidance, I'd just say we're looking towards hopefully getting back in a regular rhythm with guidance, and I'd like to think we'll be in a position to do that in the first quarter.
Just one follow-up question on the repairs deduction issue. Can you just refresh how are you guys treating it and is there any simple way to explain why your situation is different than Edison's?
Yeah, this is Dinyar again. The rate making for repairs is that customer rates are reduced for taxes that aren't currently paid to the IRS. That's the fundamental principle of the flow through rate making. To the extent that there is a forecast difference between what was in the rate case and what actually occurs during that rate case period, up or down, that forecast difference affects the bottom line. I would say the primary difference between us and the Edison case is that in the Edison PD, it indicated that its previous GRC request was based on a different methodology for calculating the tax repairs than was actually applied during that period. For us, we've applied the same methodology for our actuals that we used to develop the forecast. I think that's probably the key difference.
That's very helpful. Thank you very much.
Thank you. Our next question comes from the line of Michael Lapides with Goldman Sachs.
Yeah, guys, just curious, when you think about longer term, do you expect to be a company that winds up growing earnings kind of in pace with rate base growth? Is there anything kind of structural that could make it something different than that over time?
Michael, this is Kent. I think at the levels of rate base growth and CapEx, frankly, that we are having right now, it do require some equity issuance. Generally you'd see earnings grow with rate base, but you'd have to net out whatever equity issuance you need to support that level of CapEx. At lower levels, you could see that, We're at higher levels, I do think that requires some level of equity issuance.
Got it. Okay. Second, Tony, you made the comment about you talked to the Board about dividend and dividend policy. Can you dive a little bit into that? When you think about dividend policy, are we talking a payout ratio, a growth rate, a dividend yield kind of target relative to the peer group? I'm just trying to think about what are the metrics you and the Board are looking at when y'all have the discussions about dividend policy.
This is Kent. I'll just say, generally, probably the primary metric we look at is payout ratio. We look at the industry, It's pretty nicely clumped. It's pretty easy to see where the industry is, We're a bit below that. That's the primary issue we'll be addressing.
Got it. Okay, guys. Thank you. Much appreciated.
Thank you. Our next question comes from the line of Hugh Nguyen with AllianceBernstein.
Hi. Thank you. Two questions. One, I was just wondering if you might bring us up to date on any developments that could shed light on potential outcomes of the gas distribution records OII. Similarly, whether there have been any developments with respect to the CAL FIRE investigation into the origins of the Butte Fire.
Yeah, let me comment on CAL FIRE. Their investigation is ongoing. We're cooperating with it. We don't have any updates. Traditionally, those investigations take quite some time because it's hard because all the evidence is burned up. It takes a lot of work to figure out exactly what happened. With respect to the other proceedings, Steve, I don't think we have any updates there.
No, we don't really have any updates on the OII. We saw the SED filing, as was mentioned earlier. We'll file our rebuttal testimony in November. Then we would expect hearings on that in January, first part of the year.
Great. Thank you.
Thank you. Our next question comes from the line of Brian Chin with Bank of America Merrill Lynch.
Hi, good morning.
Morning, Brian.
Question on your dividend, just going back to that. Given some of the changes that'll take place in the C-suite over the next 12 months, does that to some degree make you think that you ought to maintain flexibility on the dividend until the next set of C-suite executives comes in? Or does that not factor into your thinking about how you think about the timing of a dividend policy going forward?
I don't think it has any connection at all with dividend policy. Dividend policy is based upon our financial situation and our assessment of what's going on in the regulatory front, and it doesn't have anything to do with the C-suite changes.
Okay, understood. Secondly, on the cost of capital mechanism and the proceedings that'll come up next year, it seems like mechanically the numbers are shaping out where an extension perhaps may not be too difficult of a suggestion to different stakeholders. I guess what I'm wondering is, are you aware of any issues out there that may prevent some of the stakeholders from wanting to consider an extension of the current mechanism? Any issues that may need to be worked through that could prevent that, and instead make a full-blown cost of capital proceeding take place?
Brian, this is Kent. As you alluded to, the normal process would have us file a cost of capital application next spring, and that would be for rates effective January 2017. I think what you're alluding to, I think everybody knows that last year, we and the other parties all agreed to extend the existing cost of capital as well as trigger mechanism by one year. The question is: will that happen again this year? I just say we're open to exploring that again, given that, as you said, forecast bond rates haven't changed all that much since the proceeding was originally litigated. Whether or not that occurs depends on the extent to which all the parties are able to reach agreement.
I guess at this point, you're not aware of any specific issues that may cause one or two of the stakeholders to say, "We really ought to revisit this despite the mathematics looking fairly similar versus last year?
Brian, if I were, I wouldn't be talking about it with investors.
Understood. Lastly, there's been a lot of consolidation happening in the industry. If, Tony, you could give just your quick thoughts on consolidation, how you think about it in the industry here. A lot of your peers have been using their balance sheets, and I think it's safe to say that the California utilities are in a much better balance sheet position than others, just kind of your latest thoughts there.
Yeah. Generally, we don't comment on specifics on M&A opportunities. I will say one interesting observation, though, is everyone's buying a gas company. We've already got four and a half million gas customers, so I think we're in pretty good shape.
Excellent. Thank you very much.
Thank you. Our next question comes from the line of Gregg Orrill with Barclays. You may proceed.
Yes, thank you. You mentioned that as you get out to 2017 and 2018, your forecast for rate base on your forecasts include flat assumptions for the gas and electric transmission. Since you are going to update it at some point, is there a better modeling assumption that we might use, or would those updates maybe get you to the higher end of rate base growth that you're thinking about?
This is Kent. We've just done that because it's a fairly mechanical way to do it, we don't want to call future cases that we've not yet filed. You can apply judgment to it. You can look at our historic track record, what we've done over the last few years, adjust that, whatever you think is appropriate. We just try to keep it simple and objective when we present it to you for your consideration.
Okay, thank you.
Thank you. We have a follow-up question from the line of Michael Lapides.
Hey, guys. Thanks for taking my follow-up. Real quick, on the rate base charter exhibit slide 12, that still excludes the incremental CWIP that actually generates some earnings. I think that's a number of around $1 billion, $1.7 billion, $1.8 billion, somewhere in that range. You've kind of commented historically that that earnings from CWIP, while not in rate base, would largely be offset by kind of corporate costs that aren't recoverable in rates. Do you still kind of see that trend, or is there the potential to manage some of those corporate costs down over time?
This is Kent again. I think nothing's really changed there. I think that's a reasonable assumption to make going forward. I think I've said several times, a lot of the stuff we do that is below the line is really important to the longer-term success of the company and our financials. It includes our advertising, a lot of our charitable contributions, just bread and butter for a utility, and we're going to continue to make those necessary investments.
Got it. Thank you, Kent. Once again, congratulations.
Thanks, Michael.
Thank you. Our next question comes to the line of Travis Miller with Morningstar.
Good morning. Thank you. Going back to the long-term outlook for CapEx and that discussion, what's the impact from SB 350? How long out, and is that included in any kind of near-term CapEx or GRC? Just your thoughts around that.
Well, SB 350, really, one of the primary components of it is the RPS requirements in the state. Generally, we have already been on track to meet the 33% RPS. This would now take us to 50% eventually. We do that primarily through long-term contracting, so it doesn't have a direct implication for our own CapEx, which are primarily our distribution and transmission businesses.
Although I will add one place we may see some opportunities is in additional transmission out there. We've been successful in the competitive transmission bidding process here in California in the last couple of years. We continue to intend to stay involved in that process. All of that is outside any of the years that we've been showing on the slides, because recall that the current 33% is a 2020 objective, the new SB 350 requirements will start showing up in the 2020s, and you'd see transmission in that timeframe. I think the only conclusion you can draw is given California's commitment to a clean energy environment, it's going to require the utilities to have continued investment to upgrade the system.
Okay, great. Thanks. Different subject. What's your appetite right now for ex-California, outside of California, or unregulated type of investments? Obviously, the SolarCity moves you've made here seem to be a pullback on that front. What's your thoughts and appetites for that unregulated type of investment?
We continue to look at those opportunities. I think I've said this before. The California affiliate rules make it very difficult to start from scratch because it's very hard to take your utility expertise, and without taking them away from the utility and moving them to a totally separate company, and they can't even talk to their colleagues back at the old business. It's hard to justify when we've got so many growth opportunities in the utility right now.
Okay, great. Appreciate the thoughts.
Thank you. There are currently no additional questions waiting from the phone lines.
All right. This is Janette again. I want to thank everyone for.