PG&E Corporation (NYSE:PCG) Q1 2024 Earnings Call Transcript

PG&E Corporation (NYSE:PCG) Q1 2024 Earnings Call Transcript April 25, 2024

PG&E Corporation beats earnings expectations. Reported EPS is $0.37, expectations were $0.35. PG&E Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the PG&E Corporation First Quarter 2024 Earnings Release. All lines have been placed on mute to prevent any background noise. [Operator Instructions] As a reminder, today's call is being recorded. I will now hand today's call over to Jonathan Arnold, Vice President, Investor Relations. Please go ahead, sir.

Jonathan Arnold: Good morning everyone and thank you for joining us for PG&E's first quarter 2024 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 earnings presentation. Presentation also includes a reconciliation between non-GAAP and GAAP financial measures.

The slide with other relevant information can be found online at investor.pgecorp.com. We'd also encourage you to review our quarterly report on Form 10-Q for the quarter ended March 31, 2024. With that, it's my pleasure to hand the call over to our CEO, Patti Poppe.

Patricia Poppe: Thank you, Jonathan. Good morning, everyone. I'm pleased to report another quarter of solid progress with our core earnings per share for the first quarter coming in at $0.37. We're also reaffirming our 2024 guidance range of $1.33 to $1.37, up at least 10% from 2023. And we're reaffirming our longer-term earnings per share growth of at least 9% each year starting in 2025 and continuing through 2028. In addition, we remain firm in our commitment to no new equity in 2024. We're also pleased to share with you our five-year financing plan, which Carolyn will discuss in more detail. What I want to emphasize is that our financing plan does not include the proposed sale of a minority interest in Pacific Generation.

As you may have seen, we continue to advocate for the Pac Gen sale with the CPUC. We see the minority sale as an efficient financing alternative while offering significant benefits to our customers, and it would further strengthen our plan. However, as you can come to expect, we plan conservatively, so the sale is not currently in the plan. The key takeaway is that we are comfortable reaffirming our earnings guidance and our $62 billion capital plan with or without Pac Gen. Our plan also enables us to grow our dividend payout to a level closer to our regulated utility peers with $2.5 billion included in the plan through 2028. Consistent with our conservative approach, the plan assumes up to $3 billion of equity starting in 2025, likely through a routine utility ATM program.

Moving to Slide 4. What I want to impress upon you is this. California and PG&E specifically have a favorable risk profile given significant changes made following catastrophic wildfire events we experienced in our state back in 2017 and 2018. California did the hard work to address challenges to the investor-owned utility model, policymakers passed key legislation. Assembly Bill 1054 provides access to liquidity through a wildfire insurance fund with $21 billion of claims paying capacity. Cost recovery under the presumption that the utility's conduct is reasonable with a valid safety certificate, and a cap on shareholder exposure if a portion of our requested cost recovery were to be disallowed by the CPUC. These protections afforded to PG&E under AB 1054 are further complemented by our self-insurance model, which limits shareholder exposure to a deductible of only $50 million, paired with our proven progress mitigating wildfire risk, and significant actions the state has taken to strengthen fire prevention and response in our communities.

California stands out as a model for all states that have wildfire risk, and PG&E's operating system delivers the physical risk reduction, which further differentiates our story. In fact, we've reduced our wildfire risk by 94% and are working every day to reduce that further. As one additional proof point of our wildfire risk mitigation efforts, I'll remind you here on Slide 5 that in 2023, we reduced ignitions by 68% compared to 2017. And through the end of the first quarter of 2024 on a rolling 12-month basis, our weather-normalized ignition rate remains at 0.93, more than a 70% reduction from 2017. As well as our differentiated wildfire risk reduction framework, we also have a differentiated approach for how we intend to grow our customer capital investments while keeping bills affordable.

Here on Slide 6 is our simple affordable model. Since its introduction, we have exceeded our annual nonfuel O&M reduction target every year, reducing O&M by 3% in 2022 and 5.5% in 2023. This is new for PG&E, and it will take repeated performance for our customers and policymakers to believe in the benefit of our new capability and what it delivers for customers. As I like to say, performance is power. When we perform, when we keep our commitments, we have the power to influence the perception of PG&E with our customers and investors. We are differentiated in our potential and our system to deliver on these annual nonfuel O&M savings. Time will prove this out. One exciting element of our simple affordable model is the opportunity for load growth in our service area.

Our electric load growth opportunities are not just electric vehicles and data centers but an eventual and necessary decarbonization of our entire economy with clean electricity as the primary energy of the future. PG&E is vital to our state's ambition and the need to heal our planet. 1% to 3% load growth per year in the near-term with upwards of 70% load growth over the next 20 years will be required as California moves to carbon neutrality by 2045. California is not afraid to set ambitious targets and has proven repeatedly that we will innovate our way to achieving them. Cost savings and loan growth, coupled with continued efficient financing options are how we can execute on our commitment here on Slide 7 to control average annual bill increases to 2% to 4%.

We appreciate that near-term build pressure due to consolidated years of GRC recovery and catch-up recovery of wildfire mitigation expense is difficult for some of our customers, and I look forward to the day when we can announce that customers' prices are coming down. At the same time, we stand by the need for the near-term increase as this GRC is funding critical work, which is making our customers and communities safer than ever before. Here on Slide 8 are just a few examples of important safety and reliability work funded by our GRC. Installation of more than 10,000 devices for situational awareness, system hardening, automation and reliability, repair or replacement of over 175,000 units on our distribution lines. Inspection of $2 million and replacement of over 60,000 poles, replacement of more than 160 miles of gas distribution pipeline and under-grounding of 1,230 miles of distribution lines in high fire risk areas.

As we perform this work, it is our responsibility to ensure every customer dollar is put to maximum use, which brings us to my story of the month here on Slide 9. You may recall that last year, I shared a story on work bundling. Specifically, I highlighted an example of cross-functional bundling where we planned and executed 12 jobs under one planned outage. I also left you with a little teaser saying, this is just the tip of the iceberg. Well, my coworkers are now rolling out our next generation of work bundling with something we refer to as mega bundles. Using breakthrough thinking and our lean operating system, we've identified over 9,000 individual scopes of work and converted them into 20 bundled projects. With mega bundling, we're looking at an entire circuit as one project.

In the past, we plan and execute work at a granular level. For example, we roll a truck to replace a single pole or just 1 switch. When we look at an entire circuit, we may find 100 poles that need to be replaced. In Stockton, for example, we have 1 circuit with nearly 1,000 poles that will be completed this year. Bundling these pulls into a single project improve safety, the customer experience, quality, cost, delivery and coworker morale. Imagine assembly line style production, the potential for one permit for hundreds of poles rather than hundreds of separate permits as it is today, seeking multiple pole holes per day in a specific region, resulting in significant fuel savings and less hazardous drive time for our coworkers. Framing hundreds of poles at a time using manufacturing style production off-site rather than one by one on-site.

And customer outreach to entire neighborhoods, reduced outages and lane closures versus one job at a time. This approach also allows us to negotiate better contract pricing and reduced overhead costs. Overall, with mega bundling, we expect to see cost savings of at least 20% compared to historical all-in cost, which will result in at least $20 million of our customers' dollars saved just this year, freeing up resources to do even more safety and reliability work for our customers. When I joined PG&E, you may have heard one of my early observations. We're very good at engineering equipment, but we're not very good at engineering our work. Well, that's changing, thanks to our performance playbook. We are delivering improved performance every day, which serves both customers and investors.

Brightly-lit nighttime view of an electricity power grid with distribution lines and transmission substations.

With that, let me turn it over to Carolyn to walk you through the financial details.

Carolyn Burke: Thank you, Patti, and good morning, everyone. Today, I'm looking forward to covering four topics with you; first, our quarterly results; second, our five-year financing plan; third, our continued execution against our simple, affordable model; and fourth, an update on our regulatory process. Starting here with our first quarter walk on Slide 10. Our first quarter core earnings of $0.37 are up $0.08 over the first quarter last year. Remember, that our general rate case was approved in the fourth quarter when we booked the catch-up revenues for all of 2023. Adjusting first quarter 2023 for the GRC timing, our first quarter results are up $0.05 year-over-year. This improvement is primarily driven by an increase in customer capital investment.

And our CPUC rate base now provides an equity return of 10.7% as approved through the adjusted cost of capital mechanism advice letter. As a reminder, we said that we were not counting on this increase to meet our earnings guidance but it does give us more flexibility to redeploy resources for the benefit of our customers. Other drivers include nonfuel O&M savings of $0.01 offset by $0.02 reinvested back into the business to fund more work, such as increased transmission system inspections and electric acid mapping. Also this quarter, we revised our estimate for the duration of the wildfire fund established under AB 1054. Based on all the data available to us, including the progress we've achieved in reducing physical wildfire risk on our system, the fund will provide coverage for 20 years, that's up from our previous estimate of 15 years.

Another example of how AB 1054 is working as intended. Turning to Slide 11. There are no changes to our CapEx or rate base guidance. Our plan includes $62 billion of customer investment over the next five years and we still have at least another $5 billion to pull into the plan once we make it affordable for both our customers and our balance sheet. And please keep in mind that in 2024, 93% of our rate base has already been authorized with 90% authorized out in 2026. This is higher than most utilities given our four-year GRC cycle, and we continue to pursue cost recovery to increase that percentage. As an example, we filed an application for our gas metering replacement program last month, seeking revenue requirement to support nearly $500 million in capital additions from 2023 through 2026.

That's in addition to the request filed late last year for revenue requirement to support the capital costs associated with moving our headquarters from San Francisco to Oakland. Here on Slide 12. Again, no changes from what we shared with you on our year-end call. Our operating cash flow grew substantially from $5 billion last year to $8 billion this year. This reflects collection of both our 2023 GRC revenue increase and 2024 GRC revenues as well as the catch-up recoveries of our prior work, including interim rate relief. Our operating cash flow continues to rise through the plan period, reflecting our growing capital investment on behalf of customers. In total, we're forecasting $50 billion in operating cash flow from 2024 through 2028. Turning to Slide 13.

With $50 billion as the starting point, we are pleased to share our five-year financing plan to support our $62 billion of capital investment. As Patti mentioned, our financing plan does not include the proposed Pac Gen minority interest sale, which would further strengthen what we're showing here. Now, for the highlights. First, we plan to grow our dividend over the next five years. Given our commitment to prioritize customer capital investment in the near-term, we anticipate growing the dividend more slowly at the front end of our plan, with the payout stepping up more quickly in the later years. In the meantime, we are benefiting from nearly $2.5 billion of annual retained earnings this year, and we consider this a valuable source of internally generated equity.

Second, we forecast incremental utility long-term debt needs of approximately $14 billion. Third, we continue with our plan to reduce our parent company debt by $2 billion by the end of 2026. Finally, we are contemplating raising new equity of $3 billion over the 2025 to 2028 planning horizon, likely through a routine ATM program. This supports our $62 billion of customer capital investment and our consistent earnings guidance of at least 10% this year and at least 9% each and every year through 2028. Importantly, our commitment to no new equity in 2024 remains firm. In developing this plan, we had several key objectives in mind for our customers and our investors. One, funding the significant safety and reliability investments our customers deserve; two, keeping customer bills affordable, and we gain 2% to 4% assumed inflation; three, delivering on our premium earnings per share growth; and four, achieving solid investment-grade ratings.

We want to reinforce that final objective here on Slide 14. We're targeting investment-grade ratings at the corporate level. And since 2020, our ratings have improved steadily with all three agencies. We're now just one notch below investment grade at both Moody's and Fitch and on positive outlook at both. The recent improvements in our ratings are a function of demonstrated financial and operational progress since 2020, especially mitigating wildfire risk. Our five-year financing plan is designed to build on the progress we've made in all of these areas and reflect our laser focus on improving the balance sheet. And as a reminder, our operating cash flow increased $3 billion from $5 billion in 2023 to $8 billion in 2024 with continued growth through the planned period.

This growing operating cash flow supports including credit metrics, including our mid-teens goal for FFO to debt. We also generate new investment dollars every year as we execute on our simple, affordable model, as shown here on Slide 15. I'll remind you that in 2023, we realized net cost gains of just over $500 million. mega bundling, which Patti discussed is just one more example of the wealth of opportunities we see here at PG&E to deliver more for our customers while keeping build growth in the 2% to 4% range. Moving to Slide 16. Our progress working with policymakers continues. Just during March, we saw a number of constructive regulatory decisions, which together, accelerate well over $1 billion of cash flow. On March 7th, the CPUC approved interim rate release in the amount of $516 million, while our wildfire and gas safety cost application moves through the typical process.

Next, on March 15th, the commission's Executive Director approved our request to delay until 2025, $650 million of contributions to the customer credit trust established as part of our great neutral securitization. And finally, on March 20th, the commission issued a proposed decision denying the petition for modification filed by joint rate payers to suspend the formulae cost of capital adjustment mechanism for 2024. The proposed decision finds that the mechanism operated as intended, it also offers strong regulatory support for our return on equity. In terms of Pac Gen, we continue to believe this transaction is highly beneficial for customers. It has clear potential to lower bill while accelerating our return to investment grade and bringing them a partner to invest in these assets, which are key to California's energy transition.

We'd appreciate the commission wanted to take some time from additional time before making a final decision. Looking ahead, as you know, the California legislature has passed a series of constructive measures, which have the potential to add upside to our plan and important benefits to our customers. This legislation, including Senate Bill 410 and 84 continue to move through the regulatory implementation stages. Regarding SB 410, our proposed decision in Phase 2 of our general rate case, which we're now calling the capacity phase is scheduled for later this quarter. This would authorize CapEx to support energization incremental to what was approved in our GRC. Regarding SB 884 on March 7th, the commission approved of resolution establishing CPUC guidelines for approving under-grounding plans.

We remain prepared to file our 10-year under-grounding plans later this year when our safety regulator is ready to accept our submission. I'll end here on Slide 17, with a reminder of our value proposition: 9.5% great base growth through 2028, at least $5 billion of incremental investment opportunities, at least 10% core earnings per share growth in 2024 and at least 9% in 2025 through 2028. Growing momentum around credit ratings with two agencies, Moody's and Fitch now just one notch below investment grade and with positive outlook and the continued consistent execution of our simple affordable model, delivering both for our customers and you, our investors. With that, I'll hand it back to Patti.

Patricia Poppe: Thanks, Carolyn. As I reflect on the progress we've made over the last three years, just imagine our performance in the next three. With the wildfire-related legal and regulatory protections in place and with our physical and financial risk mitigation progress, well understood and managed, we look to the energy transition in front of us and see nothing but opportunities. The future California energy system calls on PG&E to deliver the clean electricity of the future. Growth will fuel the simple affordable model and California's economy. We can't wait to share more with you at the New York Stock Exchange for our investor update on June 12th. With that, operator, please open the line for questions.

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