Earnings Call Transcript - PCG Q3 2023

Operator, Operator

Hello. My name is Chris, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the PG&E Corporation Third Quarter 2023 Earnings Release. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you, Jonathan Arnold, Vice President, Investor Relations. You may begin.

Jonathan Arnold, Vice President, Investor Relations

Good morning, everyone, and thank you for joining us for PG&E’s Third Quarter 2023 Earnings Call. With us today are Patti Poppe, Chief Executive Officer; and Carolyn Burke, Executive Vice President and Chief Financial Officer. We also have other members of the leadership team here with us in our Oakland headquarters. First, I should remind you that today’s discussion will include forward-looking statements about our outlook for future financial results. These statements are based on information currently available to management. Some of the important factors, which could affect our actual financial results are described on the second page of today’s third quarter presentation. The presentation also includes a reconciliation between non-GAAP and GAAP financial measures. The slides along with other relevant information can be found online at investor.pgecorp.com. We would also encourage you to review our quarterly report on Form 10-Q for the quarter ended September 30, 2023. With that, it’s my pleasure to hand the call over to our CEO, Patti Poppe.

Patti Poppe, Chief Executive Officer

Thank you, Jonathan, and good morning, everyone. I am happy to share that we have made solid progress this quarter. Our core earnings per share for the third quarter is $0.24, bringing our total to $0.76 for the first nine months of 2023. We are still reviewing our general rate case with the California Public Utilities Commission and have not yet included its benefits in our earnings. Once we receive the final order, we will recognize the new GRC revenues retroactive to January 1, 2023. Our general rate case will be discussed at the CPUC's voting meeting on November 2, and we are hopeful that the commission will see the need for a timely and constructive resolution that ensures cash flow to support essential work ahead. If the GRC is not approved next week, there are additional voting meetings on November 16 and 30. Finalizing the GRC is crucial as it sets our CPUC base revenue through 2026. While we await the decision, we can still maintain our 2023 guidance range of $1.19 to $1.23. We are also committed to a minimum of 10% earnings per share growth in 2024 and at least 9% in both 2025 and 2026, and we plan not to issue new equity through 2024. Once we have the final GRC decision, we will hold a follow-up investor call to provide a detailed update on our financial plan. In February, during our year-end call, we will share more about our investment plans. Regarding our common dividend, we understand its significance to utility and income investors and are looking forward to recommending this step to our Board soon. On the GRC, we have expressed our concerns in comments to the CPUC, stating that we believe the proposed decisions do not adequately fund essential safety work for our customers. We are disappointed that the decisions appear to prioritize short-term cost savings over safety and reliability. This is vital work necessary for fulfilling our safety commitments in our annual wildfire mitigation plan and other regulatory orders. A specific example is the current proposal’s failure to fund over $260 million needed for maintaining our gas meters, which is required for compliance with CPUC General Order 58-A. If meaningful changes are not made to the financial components of the proposals, we will have to delay safety improvements and compliance with legislative and regulatory requirements. My management team and I are dedicated to ensuring safety, reliability, and affordability. We believe our plan, based on a straightforward and affordable model, will keep growth below the current inflation rate of 2% to 4% annually during the rate case period. The CPUC’s GRC process aims for the best outcomes, and the state has clearly articulated the infrastructure it wants us to develop. We continue to assert that our undergrounding plan is the fastest and most cost-effective way to ensure customer safety. We have received considerable support from local leaders and stakeholders. Apart from the GRC, we are working on reducing physical and financial risks. We are pleased to report ongoing success in mitigating wildfire risks through our layered protection strategy, which remains central to our mission. This year’s legislative session included bills aimed at addressing utilities’ challenges in keeping up with customer growth. Following our last update, the SB 410 Energization Bill was passed and signed into law, providing a constructive solution for more timely cost recovery. One key aspect is the establishment of a mechanism by the CPUC to recover energization investment beyond what is approved in our GRC. Given the rapid changes in customer electrification demands, we believe this is necessary. In the new Phase 2 of our GRC, we proposed a balancing account to implement SB 410's provisions, with a customer bill impact cap of 2.5% of electric distribution rates. This could generate over $200 million annually, supporting nearly $1.5 billion in incremental capital investment. The ratemaking mechanism, alongside GRC authorized funding, will enable 300-plus distribution capacity projects and over 35,000 new business connections in the next three years, should the proposed mechanism be adopted. It’s crucial that the Phase 2 proceeding ensures the cash flow and timely resolution necessary to carry out the work directed by our legislature. Additionally, we've made progress in addressing legacy legal risks by reaching a settlement with the CPUC's Safety and Enforcement Division related to the Dixie fire for $45 million, mostly for a new electronic record system over five years. We maintain that we operated prudently, and our settlement preserves our right to seek cost recovery from the CPUC and the state Wildfire Fund. Turning to our wildfire season performance, we are pleased to report that we are on track with our primary goal of zero catastrophic wildfire ignitions associated with PG&E equipment. As of October 22, CPUC reportable ignitions in high-risk zones have decreased by 27% from last year and by 67% since 2017. The heavy winter storms we faced in 2023 delayed the start of fire season, but they also led to significant growth in fuel once conditions dried. We acknowledge the limitations of year-to-year comparisons due to variable weather conditions. To address this, we evaluate a weather-normalized ignition rate, expressed as ignitions per 100,000 circuit mile days under R3 or higher conditions. We have seen a 70% decline in ignition rates since 2017, with significant decreases in 2021 and 2022, demonstrating the effectiveness of our protective measures. This year, through mid-October, our weather-normalized ignition rate has declined an additional 7% compared to 2022. It's important to note that at PG&E, we are prepared every day for potentially dangerous conditions. Our protective layers do not depend on favorable weather. We have implemented advanced situational readiness technologies, and we approach every day as a high-risk day to ensure the safety of our customers and communities. For instance, we initiated two public safety power shutoff events this year, localized in August and September. Through enhanced situational awareness and the use of data and advanced meteorology, we have refined our PSPS capabilities. Our updates show that these events affected only about 3,900 customers in August and 1,200 in September. Our analysis indicates that our shutoffs this year prevented two probable ignitions and saved close to 30,000 acres from the possibility of burning. We are committed to preventing catastrophic wildfires. While PSPS and our enhanced Powerline safety settings have effectively reduced ignitions, they pose challenges to customer reliability. Thus, we believe undergrounding is the right long-term infrastructure solution for the high-risk areas identified in our 10,000-mile plan, providing affordability at approximately $3.40 per month for the average residential customer. Our analysis suggests that our GRC proposal offers billions more in net present value over the infrastructure's lifecycle compared to the alternative proposals. Like our physical protection measures, our financial strategy includes multiple layers of protection. We are advocating for improvements in cash flow aspects of the proposed decisions, as solutions are needed for three items where allowances are not recommended, pushing cost recovery into future proceedings. These include future filings related to energization expenditures under SB 410 and our 10-year undergrounding initiative under SB 884. We see significant opportunities for incremental investments within our FERC jurisdiction rate base. It’s essential that capital invested for customers’ benefits can be balanced with operational cost reductions and efficient financing alongside controlled growth to ensure a safe and affordable infrastructure. This represents the core of our straightforward, affordable model that regulators and stakeholders are beginning to understand. We must implement this model reliably to establish the modern infrastructure necessary for safety and energy. I want to share a recent experience from a site visit in Vacaville, where my co-workers are working on burying lines in a high-fire threat area. The project team has made tremendous progress, reducing estimated costs from nearly $3.5 million per mile to about $2.9 million per mile, with expectations to finish by early December. By applying Lean principles and challenging existing practices, they identified cost-saving opportunities and reduced both material and labor expenses without compromising compliance with county standards. This proactive approach has reduced construction time and minimized community disruption. Each project presents unique hurdles, but at PG&E, we have standardized tools and a commitment to continuous improvement that foster predictable success, even under challenges. Regarding undergrounding, we currently have more than 2,000 trained personnel working safely in our service area every day. Earlier this month, we announced the completion of all heavy construction work for the targeted 350 miles this year. We anticipate energizing an average of an additional 20 miles per week until year-end, and I am extremely proud of the team's dedication to overcoming the challenges posed by this year's weather. We are closely managing our progress and utilizing visual management to operate effectively, affirming that we remain on track with our 2023 plans, with momentum extending into 2024. Now, I will hand the call over to Carolyn for our financial highlights.

Carolyn Burke, Chief Financial Officer

Thank you, Patti, and good morning, everyone. This morning, I’ll cover three main topics with you. Our 2023 year-to-date results, why we feel confident reaffirming our year-end and longer-term outlook and our simple affordable model. Let’s start with our 2023 report card here on slide nine. As Patti discussed earlier, we are solidly on track with our operational metrics. We also have confidence that we are on track to deliver our 2023 financial commitments. Today, we are reaffirming our 2023 EPS guidance range of $1.19 to $1.23, along with our EPS growth target of at least 10% for 2024 and at least 9% for 2025 and 2026. We are also reaffirming our commitment to no new equity in 2023 or 2024. You may have noticed our Amber dial signaling a potential challenge to reaching our FFO to debt target in 2024. While we remain committed to achieving our mid-teens FFO to debt as quickly as possible, as discussed in our public comments throughout the past several weeks, the PD and APD in our general rate case fall short on cash flow in two notable areas. First, both the PD and APD extend the amortization period for collecting our incremental 2023 revenue increases to 36 months, packing an additional 2 years onto our requested 12-month collection period. This longer amortization period pushes out cash flow and unnecessarily burdens customers in the form of additional interest cost. Second, the APD allows only 25% of the customary inflation index adjustment, which risks lowering the pace of our balance sheet recovery as intervening parties acknowledge that last week’s oral argument, our request and the index supporting it are consistent with commission precedent. Taken together, these cuts will constrain future cash flows. As we’ve said to the commission, we will be forced to make some difficult choices on what priority work to dial back on and what to complete. We simply are not willing to compromise on safety. Nor can the state afford to see us take a step backwards in terms of the progress we’ve made improving our credit metrics. As Patti mentioned, we are advocating strongly for improvements in the PD. And we trust the CPU understands the importance of a financially healthy utility just as we understand the importance of keeping bills affordable for customers. The simple affordable model makes both financial health and affordability possible. Turning to Slide 10. As we’ve said, we are on track to meet our 2023 EPS guidance of $1.19 to $1.23. On a year-to-date basis, our result is $0.76 per share, including $0.24 in the third quarter. During the first nine months of 2023, we’ve realized $0.03 of favorability from operating and maintenance cost reductions, which we have fully redeployed right back into the business. And we’re on track for at least our annual 2% non-fuel O&M reduction target. The $0.04 of timing is expected to fully reverse by year-end. And includes the typical tax driver, which results in variances between quarterly and annual earnings. This driver is even more pronounced this year as we await the final decision in our GRC. The $0.04 of other has not changed from last quarter. Once we receive a final GRC decision, we will record the catch-up revenues supporting our customer capital investments for the full year 2023 as tracked in our approved memo accounts. This incremental catch-up revenue is the largest discrete driver of earnings that we project for the fourth quarter. As you may have seen, we have adjusted our accrual for the 2021 Dixie fire this quarter. Our focus continues to be on making it right for the victims, and we are making a non-cash increase to our accrual of $425 million to reflect our claims settlement experience to date. At the same time, we recorded an offsetting receivable from the state Wildfire Fund, reflecting our continued confidence in the protections provided by AB 1054. On Slide 11, our 10-year capital investment plan has not changed. As I mentioned earlier, we continue to advocate for improvements in the final outcome of our GRC. At the same time, we have several layers of financial protection to support our plan, including opportunities to seek cost recovery for the needed safety and reliability investments that our system requires. Our customers demand and which are supported by legislative and regulatory stakeholders. You can be sure that we’re not taking our foot off the pedal to find and realize opportunities to further improve quality and reduce cost. Reducing costs and delivering more for our customers are core to our simple affordable model shown here on Slide 12. Coupled with load growth and efficient financing, this is how we plan to keep customer bills affordable. In fact, while we expect a step-up in average customer bills in 2024 with the GRC implementation, our internal forecast for 2025 and 2026 show a declining bill trajectory. As we progress with our lean tools, lower O&M costs, and as legacy cost items recoveries roll off. This permits us to sustain average annual bill increases from 2023 through 2026 at or below assumed inflation in the 2% to 4% range, even with the first year GRC step-up. Part of our affordable model is efficient financing. Our sale of a minority stake in our non-nuclear generating assets, Pacific Generation has received robust inbound interest for this attractive and unique portfolio. The regulatory record closed earlier this month and a PD is due early next year. We are targeting a transaction closing date in mid-2024. I’ll end here on Slide 13, looking forward to 2024. On October 13, you saw this file an advice letter with the CPUC seeking to implement the cost of capital adjustment mechanism effective January 1, 2024, subject to commission disposition. Based on market interest rates, the mechanism has triggered, resulting in a formulaic 70 basis point upward adjustment to our return on equity and a 35 basis point upward adjustment to our cost of long-term debt. We believe the increase is well justified by market conditions. If approved, we anticipate reinvesting any upside beyond our targeted earnings growth right back into the system for the benefit of our customers. On the same day, we also filed our TO21 rate case application with FERC seeking a 12.87% ROE, inclusive of the 50 basis point CAISO participation adder. A FERC order accepting the filing is expected by mid-December for rates to be effective January 1, 2024. Our filing includes $1.9 billion in forecasted capital additions during 2023 and 2024. As a reminder, a nice feature of our formula rate structure is the annual true-up mechanism, which adjusts rates to reflect actual costs, including customer capital investment, which, as we’ve said, is an area where we see abundant growth opportunities. To summarize, we are mitigating both our physical and financial risk with layers of protection. Although we are concerned that the PDs in our GRC risk setting us back in our quest to restore our credit ratings, we believe we can make our system safer faster and more affordable for our customers. At the same time, we are offering attractive earnings growth to investors. We are looking forward to reinstating our common dividend soon and we look forward to catching up with many of you at EEI next month. With that, I’ll hand it back to Patti.

Patti Poppe, Chief Executive Officer

Thank you, Carolyn. Before we take your questions, I just wanted to take a moment to review our regulatory and legislative timeline shown here on Slide 14 and reflect on some of our highlights in 2023, starting with our wildfire self-insurance settlement in January, which we see saving customers up to $1.8 billion through this 4-year GRC period. Other milestones include resolving our safety culture OII, settlements with the CPUC Safety and Enforcement Division for both the Zogg and the Dixie fires and over $1 billion of interim rate relief approved in our 2022 proceeding. We have plenty to look forward to as well. Key catalysts we can point to include resolving our GRC and achieving base revenue visibility through 2026, approval of our 2023 WMP and safety certificate, resolution of our GRC Phase 2 proposal to implement SB 410, our 10-year undergrounding plan filing under SB 884, disposition of our cost of capital adjustment advice letter, the proposed decision on Pacific Generation and advancing our DOE loan application. That’s a lot of value to come for customers as well as investors. In addition to regulatory catalysts, we look forward to further progress towards normalizing our financial profile. With the Fire Victim trust completing their sales, restoring our credit ratings to investment grade to unlock significant financing cost savings for customers and reinstating our common dividend. We believe these catalysts favorably differentiate the PG&E investment story anchored in our simple affordable model. Our strategy remains focused and is based on the foundational belief that a financially healthy and well-run PG&E can and will play a leading role in enabling the clean, affordable, and resilient energy future to which the state of California and our customers aspire. We trust that you feel the momentum that we do. And with that, operator, please open the lines for questions.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.