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Edited Transcript of PCG earnings conference call or presentation 2-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 PG&E Corp Earnings Call

SAN FRANCISCO May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of PG&E Corp earnings conference call or presentation Tuesday, May 2, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ann Kim

* Geisha J. Williams

PG&E Corporation - CEO and President

* Jason P. Wells

PG&E Corporation - CFO and SVP

* John R. Simon

PG&E Corporation - EVP and General Counsel

* Steven E. Malnight

PG&E Corporation - SVP of Strategy & Policy and SVP of Strategy & Policy - Pacific Gas & Electric Company

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Conference Call Participants

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* Anthony Christopher Crowdell

Jefferies LLC, Research Division - Equity Associate

* Christopher Turnure

JP Morgan Chase & Co, Research Division - Analyst

* Gregory Harmon Gordon

Evercore ISI, Research Division - Senior MD, Head of Power and Utilities Research and Fundamental Research Analyst

* Jonathan Philip Arnold

Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst

* Julien Patrick Dumoulin-Smith

UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst

* Michael Jay Lapides

Goldman Sachs Group Inc., Research Division - VP

* Paul Patterson

Glenrock Associates LLC - Analyst

* Praful Mehta

Citigroup Inc, Research Division - Director

* Shahriar Pourreza

Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst

* Stephen Calder Byrd

Morgan Stanley, Research Division - MD and Head of North American Research for the Power and Utilities and Clean Energy

* Steven I. Fleishman

Wolfe Research, LLC - MD and Senior Utilities Analyst

* Travis Miller

Morningstar Inc., Research Division - Director of Utilities Research and Strategist

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Presentation

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Operator [1]

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Good morning. Welcome to the PG&E Corporation 2017 First Quarter Conference Call. (Operator Instructions)

At this time, I would like to pass the call to Ann Kim. You may proceed, Ms. Kim.

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Ann Kim, [2]

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Thank you, Mallory, and thanks to those of you on the phone for joining us. Before I turn it over to Geisha Williams, 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. The slide deck also includes a reconciliation between GAAP and non-GAAP measures. We 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 our 2016 annual report.

With that, I'll hand it over to Geisha.

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Geisha J. Williams, PG&E Corporation - CEO and President [3]

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Thank you, Ann, and good morning, everyone. Let me start off by saying how thrilled I am to be leading this iconic company. This is a time of great change and opportunity in the energy industry, and I'm product that PG&E is helping to lead the way to a clean energy future. This morning, I'm going to spend a few minutes reviewing our progress this past quarter with a focus on the 3 key objectives that I've set for the company, namely: building on our safety and operational performance; delivering on customer expectations; and positioning PG&E for success in the changing energy industry. After my remarks, I'll turn it over to Jason to walk us through the financials.

But before I begin, I want to acknowledge the tragic death of Zackary Randalls, a customer service representative who was killed in a random active shooter incident in Fresno on April 18. Zack had only been with the company a few weeks, but had already established himself as a valued member of our team. Our hearts go out to Zack's wife, their 2 young children as well as Zack's family, friends and coworkers in the Fresno community. This was a senseless act of violence that has deeply impacted the PG&E team, and I thank you for allowing me a moment to recognize this terrible loss.

To start our business update this morning, I'd like to report on 2 major developments this past quarter and our continuing efforts to resolve the proceedings stemming from the San Bruno tragedy. First, on March 15, all parties in the shareholder derivative litigation reached a global settlement to resolve all claims. On April 21, the judge in the main derivative cases preliminarily approved the settlement and scheduled a hearing for final approval on July 18. Second, on March 28, PG&E and the other active parties to the CPUC's ex parte investigation jointly submitted a settlement agreement to resolve the case through a combination of financial and nonfinancial remedies. If approved, these 2 settlements will move us substantially closer to resolving the San Bruno-related legal matters.

With those updates, let me begin by talking about our first key objective, and that is building on the safety and operational performance that we've achieved. As you know, safety is our most important responsibility and highest value. We've previously reported on the improvements we're seeing in public safety performance, such as faster emergency response times and reductions in gas dig-ins. Well, I'm happy to report that we're also seeing positive trends in employee safety. Both our OSHA recordable injury rate and preventable motor vehicle incident rate are down 20% in the first quarter of 2017 as compared to the same quarter of 2016. Even better, the number of serious motor vehicle incidents is down 65% this quarter as compared to the same period last year. These improvements are especially notable given the tough weather conditions in which our employees had to work this past quarter. And they serve, frankly, as a testament to our employees' commitment to putting safety at the forefront of their work each and every day.

Speaking of the weather, as we shared last quarter, in 2016, we delivered the second-best reliability in the company's history despite a record-setting winter storm season. Well, Mother Nature wasn't quite finished with us, and strong winds, heavy snow and rain continued to pound our service area over the last few months. The good news is that we've been able to minimize outage time for our customers. In fact, nearly 96% of the almost 2.5 million customers who experienced sustained outages during our January and February storms were restored within 24 hours. Now our strong performance can be credited to the tireless efforts of our employees, improvements in our emergency preparedness and response capabilities, and the investments we've been making over the years to modernize and upgrade our electric system. In the first quarter alone, we avoided more than 50 million customer outage minutes as a result of our investments in advanced grid automation and self-healing technology. As we continue to install this technology throughout our electric system, our customers will enjoy even greater reliability benefits in the future.

Of course, we can't talk about reliability without mentioning the significant outage we experienced in San Francisco on April 21. This outage was not weather-related but was caused by a fire at one of our substations. We know this outage inconvenienced many of our customers, but thankfully, no public or employee injuries are reported as a result of the incident. I'd like to highlight that we were already underway with a major $100 million upgrade to the substation, and we're also working closely with the city of San Francisco to address their questions in the wake of the outage.

I'd like to turn now to our second key objective, which is delivering on our customers' expectations. Our goal is to be our customers' provider of choice. We know that energy customers today want more options and more control, and that's driving us to focus on enhancing our customers' experience through continuous innovation and improvement throughout our business, and we're pleased to see these efforts actually paying off. For example, we've recently received the results of our annual customer satisfaction survey for our gas transmission business, which showed the second highest rating in the 20-plus years we've conducted the survey. We also recently received EEI's 2017 award for outstanding national key accounts customer service. Votes for this award were cast in a nationwide open ballot by a pool of national commercial customers that include some of the country's largest, most sophisticated and most demanding energy consumers. We're proud of the progress we're making with customers, and we remain focused on continuing to improve the quality of our service.

As we continue to invest in our systems to provide customers with the level of service they need and expect, we're also committed to affordability. Now earlier this year, we announced $300 million in cost efficiency measures for 2017. I'm happy to report that we're on track to achieve the savings this year, and as we've mentioned before, this effort should be viewed as a first step in an ongoing focus on maintaining affordable service for our customers.

I'd like to turn now to our third key objective: positioning PG&E for success in the changing energy industry. To us, success goes hand in hand with enabling California's clean energy economy, a topic I'm particularly passionate about. With the state of the clean power plant in question, I've been getting inquiries about how we see the national political environment affecting our business strategies on clean energy here in California. We believe that regardless of what happens at the federal level, California will continue to lead the way in transitioning to a clean energy economy, and we are absolutely committed to remaining a key partner in the state's efforts. As we think about California's clean energy future, we know that some changes will be needed in regulations that mirror market changes that have taken place. So for example, last week, PG&E, Southern California Edison and San Diego Gas & Electric collectively filed an application at the CPUC proposing to update the mechanisms used to ensure a fair allocation of energy supply costs to those customers that choose to depart for either CCAs or direct access providers. We are proposing to replace the current mechanism, which is known as the PCIA, the power charge indifference adjustment, and which, by the way, all parties agree is in need of reform, with an updated approach that more fairly allocates costs and benefits. As California continues to engage in discussions on the utility of the future, we view this as a foundational step for the continued growth of CCAs or other choices that our customers may have in the future.

Beyond Energy Supply, one of the most promising clean energy opportunities in California is electrification of the transportation sector. Transportation accounts for about 40% of California's GHG emissions. Governor Brown and the California Air Resource Board have both signaled their desire to see a dramatic increase in the number of 0-emission vehicles in California, so it's clear that electric vehicles will play a critical role in helping the state achieve its carbon reduction goals.

The CPUC's approval last December, we're actively kickstarting our $130 million pilot, which, by the way, is the nation's largest utility infrastructure deployment to support charging of light-duty EVs. At the same time, we're also continuing to work with innovative partners to pilot new programs, technologies and approaches in the EV space. So for example, last December, we wrapped up Phase 1 of our smart charging pilot with BMW. Over the 18 months of the pilot, we were able to shift nearly 20-megawatt hours of charging in response to changing grid conditions. We're excited to support the next phase of this pilot, which will test the feasibility and the value of more active charge management.

So to close, I want to reiterate my confidence in our future. We remain focused on continuing to deliver safety and operational excellence in meeting the needs of our customers, and at the same time, we are as committed as ever to working with the state to achieve its clean energy goals. We feel good about the opportunities this represents for PG&E and for our customers.

Thank you for your time today, and with that, let me turn it over to Jason to walk us through the financials.

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Jason P. Wells, PG&E Corporation - CFO and SVP [4]

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Thank you, Geisha, and hello, everyone. I'll begin by reviewing the first quarter results and then quickly cover the 2017 outlook.

Slide 4 shows our results for the first quarter. Earnings from operations came in at $1.06 per share. GAAP earnings, including the items impacting comparability, are also shown here. The pretax numbers for the items impacting comparability are in the table at the bottom of the page. Pipeline-related expenses were $28 million pretax for the quarter. We incurred legal and regulatory-related expenses of $4 million pretax. Fines and penalties were $60 million pretax for the quarter. This includes the planned $47 million related to the San Bruno penalty decision and disallowances imposed for ex parte communications in Phase 2 of the gas transmission and storage rate case decision. We have now fully recognized the penalties imposed from these 2 decisions. This item also reflects a $13 million charge as a result of the settlement that we reached at the end of the first quarter in the ex parte order instituting investigation. Butte fire-related costs net of insurance were $3 million pretax and reflect legal costs associated with the fire. Finally, we booked revenue of $150 million pretax for the quarter, which reflects a recognition of the gas transmission revenues in excess of our 2017 cost of service. We have now recognized all of the undercollected revenues associated with our 2015 gas transmission and storage rate case.

On Slide 5, you'll see our quarter-over-quarter comparison of earnings from operations of $0.82 in Q1 of last year and $1.06 in Q1 of this year. We were $0.15 favorable as a result of the timing of the 2015 gas transmission and storage rate case decision, which didn't allow us to recognize incremental revenues until the third quarter of 2016. This item is purely timing in nature and will reverse by year-end. We were $0.06 favorable as a result of tax benefits associated with share-based compensation. There was an accounting standard change last year, and we are now booking the tax impact of our annual equity compensation true-up through earnings rather than equity. Rate base earnings were $0.03 for the quarter. Miscellaneous items amounted to $0.05 favorable for the quarter, which includes tax timing differences that will reverse by year-end. In previous years, we had shown tax timing as a separate driver, but we don't expect the quarter-over-quarter changes to be as significant in 2017. A delay in the timing of our 2017 GRC decision resulted in an unfavorable $0.03 for the quarter. This is primarily driven by incremental capital costs, such as depreciation and interest, without offsetting revenues. The driver for this particular $0.03 is timing, but as a reminder, we do expect the net impact of our 2017 GRC revenues and related costs to be roughly $0.25 negative for the year due to the loss of the incremental tax repair benefits. Additionally, if the proposed GRC decision is approved without modification, we'd expect to see an increase to rate base earnings of approximately $0.08 on an annualized basis. Finally, we are $0.02 negative for the increase in outstanding shares.

Transitioning now to Slide 6. We are reaffirming our 2017 earnings from operations guidance of $3.55 to $3.75 per share. Our underlying assumptions are on Page 7 and are consistent with what we shared last quarter. It remains our objective to earn the CPUC authorized return on equity across the enterprise as a whole.

Moving to Slide 8. We have several updates to our 2017 items impacting comparability. First, with the respect to our rights-of-way program, we had previously shared that the overall cost would not exceed $500 million. While the current year range for pipeline-related expenses is unchanged from last quarter, we're pleased that the overall cost of our rights-of-way program is now expected to range from $425 million to $475 million. We do, however, expect a small portion of the work will now fall into 2018 due to permitting challenges.

Second, as a result of the settlements we've reached in the ex parte investigation and the shareholder derivative lawsuits in the first quarter, we expect our legal and regulatory costs to come in around $10 million for the year. We had previously expected these costs to range from $10 million to $40 million.

Third, fines and penalties now reflect the $13 million in remedies settled as part of the ex parte investigation. The CPUC has not yet ruled on a settlement, and the ultimate decision may modify this amount. We had previously expected fines and penalties to be roughly $45 million.

Finally, we've added a new item that reflects a settlement we reached in the shareholder derivative lawsuits. If the settlement is approved without modification, the impact would result in a gain of approximately $65 million net of certain legal expenses we agreed to pay on the plaintiff's behalf.

We are reaffirming our 2017 equity needs on Slide 9 with a range of $400 million to $600 million. In 2018 and 2019, we still expect our equity needs to be met largely through our internal programs, which historically have been approximately $350 million annually.

On Slides 10 and 11, we're reaffirming our CapEx and rate base guidance through 2019. I wanted to highlight one new item with potential upside to our capital plan. As new gas storage regulations are adopted, we'll need to invest capital in our system to comply with the new regulations. We should know more about the new regulations later this year.

Finally, we recently had a development in our cost of capital case. Last week, the proposed decision approving the all-party settlement was withdrawn from the CPUC's April 27 agenda. This was disappointing, particularly given the constructive efforts that went into the settlement in the proposed decision. We'll remain confident that the all-party settlement, which was developed with investor-owned utilities and consumer advocates, is in the best interest of our customers, and we look forward to working with the CPUC and settling parties to reach a timely resolution of this case. While we're not providing longer-term EPS guidance, it remains our objective to earn our CPUC authorized return on equity across the enterprise in 2018 and 2019.

I'll close by saying we're off to a strong start in 2017. We continue to have solid organic growth with expected capital spend totaling approximately $18 billion over the next 3 years. We're continuing to target above-average dividend per share growth with a 60% dividend payout ratio by 2019. Combined, these factors make for an attractive total return.

So with that, let's open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Steve Fleishman with Wolfe Research.

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Steven I. Fleishman, Wolfe Research, LLC - MD and Senior Utilities Analyst [2]

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Just on the cost of capital case and delay, do you have any more color on why the CPUC delayed a ruling?

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Geisha J. Williams, PG&E Corporation - CEO and President [3]

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Steve, this is Geisha. No, we really don't, not at this time. We still think it was a great settlement that took a long time to sort of hammer through. We think it's in the best interest of our customers, as Jason said. And the CPUC has a really long history of supporting settlements, especially all-party ones. So we remain optimistic that once we get better insights of what's the concern, if there is a concern, that we'll be able to get it approved.

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Steven I. Fleishman, Wolfe Research, LLC - MD and Senior Utilities Analyst [4]

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Okay. And do you have any sense on when you might get more insight into that?

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Geisha J. Williams, PG&E Corporation - CEO and President [5]

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Well, the ex parte ban was -- for cost capital was just listed on Thursday, so we are trying to meet with the commissioners. We have filed for having an ex parte conversation. And as soon as we have those conversations, we'll have a better view. But we have not had those conversations yet.

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Steven I. Fleishman, Wolfe Research, LLC - MD and Senior Utilities Analyst [6]

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Okay. Great. And then one other question, just, Jason, when you were going through the slide related to the -- I guess, it was on the earnings, but you're talking to the GRC and kind of an $0.08 impact to rate base. I lost track of what you were saying there. This is back on Slide 5 when you're talking to the timing of the GRC and what the potential proposed order would do.

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Jason P. Wells, PG&E Corporation - CFO and SVP [7]

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Sure. Thanks, Steve. Generally, we would see growth in rate base earnings of about $0.05 a quarter on an annualized basis. This quarter, it's only $0.03 because we don't have a final decision in our GRC. And what I was pointing out is once we've received that final decision, assuming it's voted out without modification, we'd expect to see an incremental $0.08 for the year in additional rate base earnings. So this quarter, our growth in rate base earnings were slightly lower because we didn't have the final GRC decision.

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Operator [8]

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Our next question comes from the line of Jonathan Arnold with Deutsche Bank.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [9]

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Just on that last point, is the issue that as long as you don't have a decision, you'll continue to be about $0.02 shy of where you should be? And for the cap job, when you do get a decision, it's $0.08?

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Jason P. Wells, PG&E Corporation - CFO and SVP [10]

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Jonathan, yes, that's the way to look at it is, for the full year, we expect this to be roughly $0.05 a quarter. The longer that we don't have a GRC decision, we will be short that $0.02 on a quarterly basis.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [11]

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Okay. I got it. And then could you give us a sense, Jason, I'm not sure how relevant this is, given the balancing account, but there's a lot of volatility in the tax line this quarter. What is a sensible effective tax rate to be thinking about for the year?

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Jason P. Wells, PG&E Corporation - CFO and SVP [12]

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I think our effective tax rate for the year is kind of roughly about 18%. It's hard to necessarily project a long-term effective tax rate. I'll say the driver for the low effective tax rate is mostly the flow-through accounting treatment for tax repairs. And while our $6 billion of CapEx remains similar for each of the next 3 years, the composition of that spend does change year-over-year. And so there will be changes for the portion of that capital spend that is eligible for tax repairs treatment, so I wouldn't necessarily project that 18% effective tax rate for 2017, beyond 2017.

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Jonathan Philip Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [13]

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Okay. But at least for this year, that's a reasonable number?

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Jason P. Wells, PG&E Corporation - CFO and SVP [14]

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It's slightly lower in the first quarter given the discrete item that we had related to the stock-based compensation accounting change, but that's a reasonable expectation for the full year.

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Operator [15]

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Our next question comes from the line of Stephen Byrd with Morgan Stanley.

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Stephen Calder Byrd, Morgan Stanley, Research Division - MD and Head of North American Research for the Power and Utilities and Clean Energy [16]

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I wanted to go back to Slide 11, where you lay out some potential future updates. And I guess, excluding the rate cases, there are a number of other items on that list. Could you expand a little bit on potential timing for us to be thinking about -- it's just an unusually large number of potential areas of future growth. Any color you can provide in terms of just how we could think about timing there?

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Jason P. Wells, PG&E Corporation - CFO and SVP [17]

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Sure. I think most of the opportunities outside of the rate cases are longer term in terms of rate base increases. But to give some context, the new item that we highlighted, gas storage regulations, those final regulations should be issued this fall in 2017. We'll have to see those final regulations to see sort of the compliance period, but we'd expect that CapEx to begin shortly thereafter, so it would start to impact 2018 and 2019. In terms of the future of transportation electrification, we just filed for medium- and heavy-duty vehicles back in late January. We're going to have to work through the CPUC process on that. So again, I think to the extent that we start to have spending in this sort of 3-year time horizon, the rate base impact will probably be on -- will be 2019 and beyond. And then the state infrastructure modernization projects, those are really much longer term in nature. Those are probably projects over the next 5, 7 years. So hopefully, that gives a little bit of color in terms of the timing of that spend and potential rate base increases.

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Stephen Calder Byrd, Morgan Stanley, Research Division - MD and Head of North American Research for the Power and Utilities and Clean Energy [18]

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No, that's very helpful. And then just thinking about your overall cost structure, I know you all do a lot of work, thinking about benchmarking your cost position and potential opportunities there. I just wanted to check in terms of progress of your work and the outlook, broadly speaking, in terms of what you might be able to do with your cost structure over time.

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Geisha J. Williams, PG&E Corporation - CEO and President [19]

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Stephen, this is Geisha. We're really focused on affordability, and part and parcel of that is taking a hard look at our cost structure. And as we mentioned, we had that announcement earlier this year with the $300 million efficiencies. That should be viewed very much as a first step, right? We are on a journey to continue to drive cost out of our business for our customers' affordability sake, so you can expect to see more of that coming from us in the years to come.

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Stephen Calder Byrd, Morgan Stanley, Research Division - MD and Head of North American Research for the Power and Utilities and Clean Energy [20]

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Understood. Is there a natural sort of cadence in terms of that, Geisha? Or is it, we'll just stay tuned, and it's sort of constant, and so there's no natural point at which we would have a better sense for where you're headed?

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Geisha J. Williams, PG&E Corporation - CEO and President [21]

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Oh no, absolutely. We have an integrated planning process that is very disciplined, very regimented. That's repeatable and very, very focused on really looking out 5 years at every given point in time. And so you shouldn't expect a particular announcement, a particular sort of a discrete discussion around that, but just very much built into the way we're running the business, very much looking ahead, what do we need to do, how do we get there, what are the specific objective and plans that we need to put in place, and part of that is a focus on affordability. So it's just a natural part of the way we're running the business.

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Operator [22]

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Our next question comes from the line of Julien Dumoulin-Smith with UBS.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst [23]

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So just to follow up a little bit on the last question, if you can expand a little bit on SB887 and just the potential expansion on the safety-related spend, I suppose it is. Can you talk about what you're looking to get out of DOGGR as these rules are finalized? Like as we see these rules announced and affirmed, what elements in particular are you looking to get clarity on that would drive the higher CapEx contemplated?

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Jason P. Wells, PG&E Corporation - CFO and SVP [24]

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There are sort of 2 principal parts to that regulation. One is sort of the incremental leak surveying and leak detection activities that will need to occur. That is primarily expense in nature. The other one will be sort of the well retrofits to make sure that we prevent unintended releases of methane, and that's really where sort of the capital costs will be driven. And ultimately, gas storage kind of as an industry has -- had its challenges economically, and I think what we're working through with the regulations is just how significant those retrofits are in light of the need for storage in California and the need to prevent future unintended releases of methane. So I think we'll have to continue to follow that development. Like I said, I think we should see final regulations issued this fall here in 2017.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst [25]

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Got it. Excellent. And then subsequently, on the TO case, is there any chance that you settled the 18 cases at this point? And how should we think about outcomes in light of the latest court dynamics?

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Jason P. Wells, PG&E Corporation - CFO and SVP [26]

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We have a long history of settling the TO rate cases. I think we've settled essentially the first 17. This is a change. I would say that it's probably less likely than it has been in the past, but we're still open to settlement discussions considering the appropriate terms.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst [27]

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Perhaps, if you can clarify on that. Was the decision to move, or at least the period for settlement past, was that prior, if I understand right, to the judicial outcome of late? And does that actually change the potential for a settlement at this point given the less than clear policies at FERC?

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Jason P. Wells, PG&E Corporation - CFO and SVP [28]

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I mean, I -- no, I don't directly -- I wouldn't link the 2. Ultimately, when -- if we were to fully litigate this case, we would need a full set of commissioners at FERC, but I wouldn't necessarily link the changes at FERC with settlement discussions on this case. But there are a number of California interveners that are challenging essentially the planning for the transmission owner-related spend. Essentially, about 40% of our transmission-owner spend is approved by CAL ISO (sic) [CAISO]. The remaining 60% really relates to things like substation modifications and isn't necessarily in the purview of the CAL ISO. I really think the focus on litigating this case is making sure that there's a full review of the entirety of the capital spend associated with our transmission on the rate case.

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Julien Patrick Dumoulin-Smith, UBS Investment Bank, Research Division - Executive Director of Equity Research for Electric Utilities, Alternate Energy, and IPPs Group and Analyst [29]

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Sorry to belabor it, but to be very clear about this. In fact, what you're saying is it's principally an issue on exactly where capital is allocated, rather than necessarily a stumbling block around return on equity. I mean, obviously, there's gradients in each. But would that be accurately capturing why you have been unable, thus far, to get that settlement then?

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Jason P. Wells, PG&E Corporation - CFO and SVP [30]

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I mean, I think it's one of the components, the planning. But certainly, return on equity is a factor, as is depreciation rates, the typical challenges of any rate case process.

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Operator [31]

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Our next question comes from the line of Michael Lapides with Goldman Sachs.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [32]

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Just a couple of questions. First of all, cash flow-wise, do you anticipate seeing a pretty sizable improvement in your cash flow metrics after 2017, given the fact that CapEx at the $6 billion is kind of flattish from 2017 levels?

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Jason P. Wells, PG&E Corporation - CFO and SVP [33]

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Michael, this is Jason. I wouldn't necessarily guide to that in 2018. We've got a number of factors that kind of work both ways, in addition to just sort of the annual volatility associated with commodity costs and recovery of our -- or procurement costs. One of the factors we see impacting our cash position here in the state is the incremental vegetation management work that we are pursuing as a result of the drought and bark beetles. The mechanism for recovery of those costs is generally about 3 years in nature. And so while we see improvement in some areas of our cash flow, we see extending terms in other areas. So I would really guide towards sort of longer-term financing needs to be driven by rate base as opposed to sort of underlying cash flows.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [34]

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Okay. I would just think that if rate base growth starts to slow down because CapEx flattens out, what normally happens is D&A gets recovered, so that would drive kind of an improvement in long-term CapEx unless rate base doesn't flatten.

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Jason P. Wells, PG&E Corporation - CFO and SVP [35]

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We are seeing a little bit of that improvement, but as I mentioned, the incremental costs related to the droughts and bark beetle are roughly $250 million annually. And as I said, that takes about 3 years to recover, so we do see offsetting factors.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [36]

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Got it. Okay. One other thing. When you think about the upcoming electric TO cases, not the one that's underway but for kind of the 2018, 2019 year, as well as the upcoming GT&S case, what do you see as the moving parts that could influence CapEx levels in either of those businesses?

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Jason P. Wells, PG&E Corporation - CFO and SVP [37]

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I really think it's going to come down to -- we've ramped up over the last several years, particularly in light of pipeline replacement, substation modernization. I think those levels of sort of safety-related investments and grid monitorization are going to probably continue at sort of the current pace. I think really the upside that we see is continued movement, particularly on the state infrastructure modernization work. And I think it's going to be important to follow what happens with high-speed rail in particular.

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Operator [38]

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Our next question comes from the line of Anthony Crowdell with Jefferies.

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Anthony Christopher Crowdell, Jefferies LLC, Research Division - Equity Associate [39]

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I wanted to jump to Steve's earlier question, I guess, with cost of capital. And you had the white paper published in the commission, then the -- was withdrawn from the agenda. Is your expectation that the final order that's approved the cost of capital is consistent with the settlement? Or are you expecting changes from the settlement?

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Jason P. Wells, PG&E Corporation - CFO and SVP [40]

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Anthony, this is Jason. I think it's too early to speculate. As Geisha mentioned and as I mentioned, we think that this was a very constructive settlement that we worked with consumer advocates to establish. We do think it was in the best interest of our customers, and so we're looking forward to understanding why the commission withdrew the proposed decision and, ultimately, working collaboratively to resolve this timely.

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Anthony Christopher Crowdell, Jefferies LLC, Research Division - Equity Associate [41]

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Okay. If this scenario occurred where the commission tinkered with it or haircut it, the settlement was for 2 years. Is the utility able to pull out of it if an order comes out that lowers it but it's over a 2-year period, like we don't want to be at risk of a longer term cost of capital if it's lower? Is that an ability to pull out of it then?

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Jason P. Wells, PG&E Corporation - CFO and SVP [42]

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We would have the ability to comment on any proposed modifications to the settlement. Our focus is -- we worked hard with all the interveners in the case with our -- just our utilities here in the state. We still think this is a very constructive settlement, and so our intention is to understand the questions the commission may have with respect to the settlement terms and work through the resolution of those questions with them.

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Operator [43]

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Our next question comes from the line of Chris Turnure with JPMorgan.

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Christopher Turnure, JP Morgan Chase & Co, Research Division - Analyst [44]

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I wanted to get an update on the Butte fire situation. If I remember correctly, there was a decision from the CPUC on that relatively recently. Kind of where are you now? What are the next steps on that?

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John R. Simon, PG&E Corporation - EVP and General Counsel [45]

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Chris, this is John Simon. I'm the General Counsel here. You're right. Recently, the safety enforcement division of the CPUC issued 2 citations against PG&E, 3 violations, the total for $8.3 million. The bulk of the citations is SED's view that PG&E, or its contractor failed to remove a tree that came into contact with our line. We're currently evaluating the citations. We have 30 days to do that. Our view is we need to evaluate it in the context -- the overall context of the wildfire situation here in California, considering that we also have a comprehensive veg management program and we're in an extreme drought, and as Jason referred to, bark beetle situation. So that's where that is right now.

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Christopher Turnure, JP Morgan Chase & Co, Research Division - Analyst [46]

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Okay. Are there any other things that we should be aware of there, kind of private litigation or anything that would kind of flow from that over the next couple of years?

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John R. Simon, PG&E Corporation - EVP and General Counsel [47]

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At this point, no. It's too soon to say whether those citations would have any impact on liability or the litigation, but we're evaluating it now.

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Operator [48]

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Our next question comes from the line of Greg Gordon with Evercore.

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Gregory Harmon Gordon, Evercore ISI, Research Division - Senior MD, Head of Power and Utilities Research and Fundamental Research Analyst [49]

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A follow-up question on the Butte fire. I recall you had given us an estimate of what you thought the total claims were going to be relative to your insurance coverage in the past. Can you update us on that? And also, can you explain -- I think we've had a discussion about this, why we shouldn't think about sort of your maximum available insurance coverage as being sort of a number over which there would then be shareholder liability because your vendors also have insurance, which will be tapped to deal with those claims.

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Jason P. Wells, PG&E Corporation - CFO and SVP [50]

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Thanks, Greg. This is Jason, and you're correct. Over the course of 2016, we recorded an accrual for about $750 million related to claims associated with the Butte fire, and that represented both property damage as well as the risk associated with personal injury claims. That continues to be our best estimate of the total accruals. We have yet to be in a position to estimate the high end of the range. We are still working through the details of the claims in that process, which will ultimately be a lengthy process. That $750 million in total claims compares to about $900 million that we maintain in insurance. And as we've discussed in the past, subcontractors actually execute this work, and those subcontractors maintain standard insurance associated for these activities. So we would seek recovery, ultimately, from both our insurers as well as our subcontractors' insurers if -- for the claims associated with the Butte fire.

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Gregory Harmon Gordon, Evercore ISI, Research Division - Senior MD, Head of Power and Utilities Research and Fundamental Research Analyst [51]

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Okay. So to think about the math, once we come up with a total number in terms of claims, that would then have to be absorbed by some combination of what their insurance ultimately pays for and what your insurance ultimately pays for. So the totality of your insurance coverage is not necessarily the arbiting factor on when or if (inaudible). Correct?

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Jason P. Wells, PG&E Corporation - CFO and SVP [52]

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That's correct, yes.

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Operator [53]

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Our next question comes from the line of Praful Mehta with Citigroup.

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Praful Mehta, Citigroup Inc, Research Division - Director [54]

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First question I had is on CCAs, and you've talked about in your proposal. Just want to understand any key points on the new proposal and how that helps reduce the risk as more migration happens towards CCA going forward.

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Steven E. Malnight, PG&E Corporation - SVP of Strategy & Policy and SVP of Strategy & Policy - Pacific Gas & Electric Company [55]

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This is Steve Malnight from our strategy and policy team, so let me field that one. I think it's important to remember, first, when CCAs really formed, and as the legislature has continued to reinforce, the legislative intent here is that when a customer or a community chooses to go CCA, the customers who remain PG&E-bundled customers should be indifferent to that choice. In other words, any costs that were borne -- customers who eventually choose to go CCA, they should take those -- their share of those costs with them so that customers who remain behind are indifferent. The mechanism that the commission has put in place to accomplish that, as Geisha said, was the PCIA. And that mechanism, over time as CCAs have grown, has become more distorted. It's not as effective at fully passing through those costs. So what we see today is that about 65% of the costs actually are passed through to customers who go CCA, and the rest remain with our bundled customers. Now that was not a significant issue when CCAs were really small and served a small portion of the load. But we're currently forecasting that by the end of this year, they'll be at 13%, and growing to 38% by 2020. So in order to really build a sustainable future for those CCAs and for other choices, as Geisha mentioned, we've got to make sure we put in place the right foundational mechanism. So the PAM, the difference in the PAM, versus the PCIA, is that it uses -- rather than using administratively set benchmarks to try and value the portfolio that we have put together, it uses actual market prices with true-up mechanisms. And importantly, going forward, when -- under the PCIA, when a customer departs, they bear their portion of the cost, but they receive no benefits from the portfolio we've currently accrued. And under the PAM, the renewable attributes of the portfolio we've accrued and the resource adequacy would actually be transferred over to the CCA for them to use in their portfolio to continue to serve customers. So using the combination of transferring benefits and using market prices, we feel the PAM is a better way to really value the current portfolio and assure those costs are evenly shared. And in doing that, we build the foundation for continued growth.

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Praful Mehta, Citigroup Inc, Research Division - Director [56]

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Got you. That makes sense. And clearly, the allocation of cost, like you said, would be much more fair. The question then is, given the quick migration or the increased migration to CCAs, if this process takes time, what kind of risk do you foresee if it takes a few years for this entire change to go through?

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Steven E. Malnight, PG&E Corporation - SVP of Strategy & Policy and SVP of Strategy & Policy - Pacific Gas & Electric Company [57]

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Well, I think the plan in the proposal in the PAM application is that the PCIA would be fully replaced by PAM. So for customers, as CCA growth continues, any customers or any communities that have gone CCA would switch -- shift over to the PAM mechanism, which would enable us to fully allocate those costs. Having said that, I think you're right. There's a pretty rapid transition happening in the state, and I think we've made it pretty clear to folks that we think it's important that we act on this PAM application quickly, so that communities that are considering going CCA in the future will have the best information available to make that decision. So we're urging the commission to move quickly here, and we hope that they take us up on that.

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Praful Mehta, Citigroup Inc, Research Division - Director [58]

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Got you. And then just quickly, Jason, on the effective tax rate. The tax repair, clearly, is a key component that helps -- as you said, keep the tax -- effective tax rate load around 20%. How do we estimate that going forward, as in clearly, 2017, you talked about? But going forward, what proportion should we kind of think about is the tax repair fees so that we can kind of model a more long-term rate?

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Jason P. Wells, PG&E Corporation - CFO and SVP [59]

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We're not providing any component detail on guidance beyond 2017. The tax repair treatment will continue to exist in 2018. It's the driver for why we're so much lower than the statutory rate. You'll have to make your assumptions around how that changes over time. Let me just reinforce the point that while our CapEx is relatively constant at $6 billion, the composition of that CapEx changes annually, and therefore, the components that are eligible for tax repairs does change. So while we would expect our effective tax rate to go -- be below the statutory rate, we're not providing specific guidance beyond '17.

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Operator [60]

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Our next question comes from the line of Shar Pourreza with Guggenheim Partners.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [61]

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Most of my questions were answered. Just real quick. Is there any update on Senate Bill 618 and how that can sort of play into your CCA filing?

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Steven E. Malnight, PG&E Corporation - SVP of Strategy & Policy and SVP of Strategy & Policy - Pacific Gas & Electric Company [62]

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We don't have any update for you at this time. I think, as we know, there's a lot of activity happening both in Sacramento and at the PUC around CCA, retail choice, how we want to structure the markets for the future. And I think we're going to continue to advocate for -- as we said with the PAM application, that we build the right foundation and that we continue the discussion over time about where the state wants to go.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [63]

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Is there an opportunity for Senate Bill 618 to transition ahead of your CCA filing?

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Steven E. Malnight, PG&E Corporation - SVP of Strategy & Policy and SVP of Strategy & Policy - Pacific Gas & Electric Company [64]

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I don't think that, that would likely happen. I mean, I think at the end of the day, we've got the application in front of the commission. And under most circumstances, I think it's going to be up to the PUC to really set the right cost allocation mechanisms to ensure that we have a fair transition. And as I said, as I think the legislature said in multiple bills, the idea of customer indifference, so that a customer who remains behind with the utility is indifferent to the choice another customer may make, that's really a foundational concept for any kind of continued choice expansion, and I think that will continue to be the case.

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Operator [65]

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Our next question comes from the line of Travis Miller with MorningStar Capital Group.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [66]

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As it relates to the EV and, even more broadly, the whole retail discussion, what's the possibility that you would enter some kind of -- business in that space versus all the regulated investment you've talked about?

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Geisha J. Williams, PG&E Corporation - CEO and President [67]

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This is Geisha. I don't know. I mean, I think that's something that we'd have to really think about. We believe, as an infrastructure company, which is what we are, we're really in a great position to put in the makeready and the EV charging stations to really accelerate the adoption of EVs. Looking beyond a regulatory play, we'd have to really take a look at the economics and the financing and the whole nine yards to see whether that really makes sense for us today. We think it really is an integral and important part of the regulated business here in California.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [68]

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Okay. And then on a separate subject, gas transmission, midstream in general, if I'm looking at that CapEx number, what component of that would be any kind of growth in transmission? I know you've talked about the storage. Obviously, you have the safety stuff. What portion of that, 2017 to 2019, is growth? And then a follow-on to that would be as you look out 2020 and beyond, are there growth opportunities in the gas transmission area specifically?

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Jason P. Wells, PG&E Corporation - CFO and SVP [69]

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I would really look at very little of it to be growth in terms of gas throughput on the system. Generally speaking, we're seeing flat throughput on the system sort of currently to declining as the state continues to pursue higher and higher renewable portfolio standards. So I would see the driver behind that gas transmission growth is less around new capacity but more about replacement and improving the safety of our existing system.

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Travis Miller, Morningstar Inc., Research Division - Director of Utilities Research and Strategist [70]

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And could you foresee that changing at all in the next, call it, 5, even 10 years down the road?

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Jason P. Wells, PG&E Corporation - CFO and SVP [71]

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No, I see the pattern of CapEx being driven by safety enhancements being the primary driver. I don't see capacity in the next 5 years -- new capacity in the next 5 years being a driver of CapEx.

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Operator [72]

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Our last question comes from the line of Paul Patterson with Glenrock Associates.

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Paul Patterson, Glenrock Associates LLC - Analyst [73]

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Just really, most of my questions have been answered, but there has been some press on Diablo Canyon, and I was wondering if you could sort of respond to some of their -- some of the more pointed editorials about policies issue. Just give us an update in terms of how that looks and your thoughts about it.

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Steven E. Malnight, PG&E Corporation - SVP of Strategy & Policy and SVP of Strategy & Policy - Pacific Gas & Electric Company [74]

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So this is Steve Malnight again. I think that we hit an important milestone in the Diablo Canyon retirement proceeding at the commission. We completed our -- about 2 weeks of testimony. During that time, we talked about and gave details on all the different components of the proposal, including how we're going to replace Diablo with GHG-free resources, the energy efficiency, procurement that we're proposing to do, along with the community payments, the payments to our employees to make sure we retain the effective and safe workforce and the cost for -- that we've incurred for relicensing. So I think we covered those issues throughout the proceeding. We feel very good about the case we put forward. It's really a comprehensive proposal that looks at all of the various stakeholders that are needed in order to ensure we continue to operate the plant safely through the rest of its life, that we take advantage of the great greenhouse gas-free energy that it produces until it retires, and then we have an orderly and effective transition to new GHG-free resources. So we continue to be very supportive of that proposal, and we think it will -- as we advocate forward through the commission proceeding, we're optimistic that we can keep that moving forward.

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Ann Kim, [75]

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All right. Thanks to everyone for joining us this morning. We wish you a safe and happy day.

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Operator [76]

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Ladies and gentlemen, thank you for attending the PG&E Quarter 1 2017 Earnings Conference Call. This now concludes the conference. Enjoy the rest of your day.