PCG
#Thanks, <UNK>.
Good morning, everyone.
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Thank you, <UNK>, and good morning, everyone.
I'll start by covering our second quarter results and then provide a couple of updates to our guidance for 2017.
Slide 4 shows our results for the second quarter.
Earnings from operations came in at $0.86.
GAAP earnings, including items impacting comparability, are also shown here.
Pipeline-related expenses were $29 million pretax for the quarter.
Our legal and regulatory related expenses came in at $3 million pretax.
For the Butte fire, we recorded insurance recoveries of $46 million pretax this quarter, including the receipt of $32 million from one of our contractor's insurers.
This was partially offset by legal costs of $17 million, for a net favorable impact of $29 million pretax for the quarter.
Finally, we have a new item this quarter related to charges associated with the planned closure of Diablo Canyon.
During the quarter, we reached a settlement with parties in our joint proposal to retire Diablo Canyon, along with several other intervenors, which provides clarity on the recovery of previously incurred license renewal costs and costs incurred for projects that will be canceled as a result of the retirement.
As part of that settlement agreement, we have recorded a $47 million pretax charge for the unrecoverable portion of these costs in the second quarter.
This settlement agreement was filed with the CPUC in May, and we expect a final decision later this year.
Moving on.
Slide 5 shows the quarter-over-quarter comparison for earnings from operations of $0.66 in Q2 last year and $0.86 in Q2 of this year.
Consistent with last quarter, we were $0.15 favorable due to the timing of 2015 GT&S rate case decision, which was received in August of last year.
This year-to-date favorable variance of roughly $0.30 will fully reverse in the fourth quarter.
Rate base earnings were $0.07 for the quarter.
Since we did not receive the 2017 GRC decision until May of this year, our second quarter results reflect 2 quarters of incremental GRC rate base earnings.
You can expect to see about $0.05 in rate based earnings for each of the next few quarters for a total of $0.20 for the full year.
A number of small miscellaneous items totaled $0.04 positive for the quarter, most of which is timing related and is expected to reverse by year end.
There were 2 additional items from the 2017 GRC decision that contributed to a negative $0.04.
As we mentioned last year, our GRC revenues were adjusted in 2017, resulting in a loss of incremental tax repair benefits of roughly $0.25 annually, including $0.07 this quarter.
This was partially offset by $0.03 favorable for incremental revenues to recover depreciation and interest costs that we incurred in the first quarter.
Lastly, we had $0.02 negative related to the issuance of shares.
Transitioning now to Slide 6.
Today, we are reaffirming our guidance for earnings from operations of $3.55 to $3.75 per share.
On Slide 7, we've outlined the underlying assumptions for that guidance.
I'll reiterate that it remains our objective to earn the CPUC-authorized return on equity across the enterprise in 2017.
One adjustment to our plan that I'll note here is we are reducing our 2017 CapEx range from approximately $6 billion to roughly $5.9 billion, which primarily reflects the shift in some of our gas transmission and distribution work into 2018.
At the same time, we have increased the CapEx forecast for 2018 to $6.1 billion, on Slide 10, to reflect this adjustment.
Turning now to Slide 8.
There are a few changes in our items impacting comparability in 2017.
Butte fire-related insurance recoveries net of legal costs reflect recorded proceeds and costs through the second quarter.
The shareholder derivative settlement was approved by the court on July 18, and we expect to record a net benefit of $65 million pretax in the third quarter.
Lastly, we've included the $47 million for the Diablo Canyon-related charges that I mentioned earlier.
Moving now to Slide 9.
I'm pleased to share that the high end of our equity range has decreased from $600 million to $500 million.
With 2 quarters under our belt, we have better line of sight into our financing plans for the year, coupled with the shift in some capital to 2018.
On Slides 10 and 11, we've updated our CapEx and rate base to reflect the changes I shared earlier.
Additionally, as <UNK> mentioned, we filed our TO19 case with FERC yesterday, which includes a roughly $200 million increase to CapEx over our TO17 settlement.
This is reflected in the high end of our CapEx and rate base ranges.
Finally, let's move on to Slide 12.
At the end of May, we announced that we were raising our quarterly dividend $0.04, to $0.53 per share.
On an annual basis, this increases our dividend by 8%, from $1.96 per share to $2.12 per share.
This is another step in our commitment to target a 60% dividend payout ratio by 2019.
I'll close by echoing <UNK>'s comments about how pleased we are with the results this quarter.
With favorable regulatory decisions in 2 of our most important cases, the General Rate Case and cost of capital, great reliability despite a record heat wave and we're continuing to provide shareholder value with another increase to our dividend.
We continue to be confident in our ability to deliver on our plans as we evolve with a changing energy landscape.
And while we aren't providing guidance beyond 2017, our objective is to earn the recently authorized return on equity across the enterprise for 2018 and 2019.
With that, let's open up the line for questions.
<UNK>, this is <UNK>.
It really is ---+ we started to bundle some of our work on our gas transmission and distribution business so that we could better execute that work.
As a result, this is really just sort of a timing shift where the final execution of that work will fall into 2018.
That's why we're really just highlighting its timing and nature.
That's right.
I mean, we have better visibility to our financing plan with 2 quarters under our belt.
So we have a final decision in the GRC.
We've resolved a number of our pending items impacting comparability which we started the year with.
So we have a better line of sight to the equity needs for the full year here in 2017.
<UNK>, this is Steve <UNK>.
In terms of where the proceedings sit, so yes, we ---+ the record in the proceeding is now closed, and we're awaiting a proposed decision from the judge.
It has evolved and changed pretty substantially since it was originally filed.
So as you noted, we filed a settlement with the joint parties to withdraw some of the procurement that we have proposed to do in this proceeding and instead defer that to the commission's integrated resource plan proceeding.
So we still have the energy efficiency replacement that is in this case, but we've deferred the remainder to the IR<UNK>
In the case, we still have the costs for the employee retention programs as well as the retraining programs.
We have the community mitigation payments that we proposed.
And as <UNK> mentioned in the call, we recently filed an additional settlement that resolved some of the uncertainty around ---+ that would resolve some of the uncertainty around both the license cost recovery as well as canceled projects.
So at this point, we're awaiting a proposed decision from the judge on all of those items.
Yes, so this is Steve <UNK> again.
Let me just give a quick update on that.
As we mentioned, in the original proceeding the power cost indifference adjustment, the PCIA, is really designed to ensure that the state law is fulfilled to maintain indifference as some customers choose to leave bundled service and go to either CCAs or direct access.
As we have pointed out, and as I think the joint utilities pointed out, the current mechanism as it stands today does not fully allocate those costs.
So for us, about 35% of those costs really remain with bundled customers, which needs to be corrected, as CCAs continue to become a bigger and bigger part of load.
With the PCIA OIR that the commission recently launched, we view that as a real positive.
The commission's clearly recognized the need for reform in that proceeding and has laid out some guiding principles that highlight the need to really maintain what we call bundled customer indifference which ensures that the state law is followed.
So the commission has not yet issued a schedule, but in many different proceedings and areas, they have mentioned the desire to handle this on an expedited basis and move through that quickly.
So we're very hopeful that, that comes to pass.
And we'll see and follow this proceeding as it goes.
I would expect it will hopefully be resolved sometime in 2018.
<UNK>, this is <UNK>.
I think it's way too early to tell.
I mean clearly when we litigate cost of capital they're going to look at the equity ratio; they'll look at our return on equity; they'll look at the adjustment mechanism.
But frankly, I think it's just way too early in the process to think about what's going to happen 2 years down the road.
Couple of CapEx questions.
Just in the TO cases, and if you don't mind address TO18 and TO19, the one that just got filed.
What is the CapEx for those TO cases relative, I think it's to the roughly $1.1 billion that you're assuming in 2017.
<UNK>, this is <UNK>.
In TO18, we filed for a CapEx of $1.3 billion.
As you know, that case is still pending.
Hearing is next ---+ the first quarter next year.
Currently, we're forecasting spend for this year on our electric transmission business of $1.1 billion.
That compares to what we filed in TO19 of a CapEx of $1.4 billion.
So you filed for TO18 of $1.3 billion, TO19 of $1.4 billion.
If you were to get actually get that CapEx spend, that adds another $500 million to $600 million to your CapEx and then after bonus, [P&A] and all that good stuff, it kind of creates an uplift potentially to rate base.
It does create potential upside.
But obviously, we're going to have to work through the hearings process, and we just filed the TO19 case.
So we'll have to work through what we anticipate to be settlement discussions early on, and I think a lot of this will be tied up to the resolution of TO18.
Got it.
Okay.
And finally, <UNK>, when you look at other opportunities for rate base growth, and you lay several out on the slides, which ones do you think have the potential to be the most material.
Meaning when I think about it on a dollar of capital invested, which ones do you see that are not in your current CapEx forecast where you could see, hey, that could wind up being a pretty big number over time.
Yes, the ones we've talked about historically which are outside this period is what ultimately happens with the high-speed rail, what ultimately happens with some of these really large state-sponsored projects.
I think that provides an opportunity.
More near term, I continue to think that there's great opportunity around electrification of transportation.
I think at this continued improvement or opportunity for us to continue making investments in our bread-and-butter work, modernizing the electric lines and modernizing our pipes.
So longer term, it's the things that are outside the range, like the high-speed rail, short term it's our bread-and-butter work.
Yes, we're still signaling to earn the CPUC-authorized return on equity in '18 and '19, which is 10.25%.
We did file a TO19 for 10.75%.
That's the 10.25% plus the 50 basis point adder for participant in the competitive transmission process.
But the electric transmission rate base still represents a little less than 20% of the overall rate base.
So that differential isn't very significant to earnings.
<UNK>, this is Steve <UNK> again.
So thanks for the question.
I should say another important part of the existing proposal that I failed to mention before actually is the mechanism to ensure that the rate base for Diablo Canyon is appropriately depreciated through the rest of its useful life.
So under our proposal, the ---+ we will put in place the mechanisms to ensure that the depreciation is fully recovered in that plant by the time it shuts down.
So that's part of the proposal we have now.
On the decommissioning, as you know, that's going to be a very long-term endeavor at Diablo Canyon as we go through that.
We have regular proceedings to look at the cost of decommissioning.
We recently had the decision in the current case that did not fully support our estimated cost.
But we will have the opportunity in 2018 to come back and refile that.
And as a part of our plans for decommissioning, we're now going to be conducting a site-specific study, which will look in detail at the estimated cost.
So we will be litigating that again in 2018.
Yes, this is <UNK> <UNK>.
We have already actually been depreciating Diablo to fully recover the asset balance by the end of its current license term.
So there's no increase necessarily in depreciation as a result of that path.
Correct.
So 2.2 roughly in Diablo rate base today, we hope to be ---+ or plan to be at 0 by the end of the current license term.
