Utility Earnings Unharmed by Scandals

Two of the three investor-owned utilities have been wracked with communication scandals at the California Public Utilities Commission, but their first quarter earnings remain solid.

Pacific Gas & Electric Corp.’s profits were up the first quarter of this year in spite of the $1.6 billion penalty imposed by state regulators for safety violations in April that stemmed from the San Bruno pipeline blast in September 2010, as well as subsequent revelations of ex parte communication violations.

The San Bruno accident “changed the way we look at everything,” and company executives saw no benefit in appealing the record penalty levied by the California Public Utilities Commission, said Tony Earley, PG&E Corp. chief executive officer, during an April 29 call with financial analysts.

“Moving forward, we will continue to implement our plans to invest in the utility's infrastructure and deploy new technology on behalf of our customers,” Earley added.

Capital infrastructure expenditures this year are projected at $5.5 billion.

The company noted a $553 million hit in the first three months of this year from fines and a bill credit. Of that total amount, shareholders paid $100 million for the San Bruno penalty and another $53 million was due to disallowances related to pipeline safety improvements. An additional $400 million was subtracted out to account for a bill credit due to natural gas customers, according to Kent Harvey, PG&E chief financial officer.

PG&E Corp.’s earnings from operations were $418 million, or $.87 cents per share, the first three months of 2015. That’s up from $251 million, or $.54/share in the first quarter of 2014.

The largest factor contributing to this year’s first quarter increase was the timing of the expense recovery authorized in the utility's 2014 General Rate Case, according to the company’s earnings report.

Projected earnings for PG&E Corp. this year are estimated at between $3.50 to $3.70 per share.

Harvey said PG&E was disappointed by the proposed rate revision proposal before the state commission because it does not include monthly fixed charges in utility bills to cover costs related to home solar systems.

Environmental and consumer advocates told the commission that the rate revision plan would raise the power bills for most residential customers served by the state’s investor-owned utilities, perhaps as many as 90 percent. Regulators were directed by state law to reform rates to even out prices differences between hot inland areas and cooler coastal regions, as well as cross subsidies for those with solar rooftops.

Harvey, however, noted also that the Public Utilities Commission is expected to decide this September the utility subsidiary’s 2015-17 natural gas storage and transmission rate case, where it seeks a $572 million increase for 2015. A commission vote was delayed by the San Bruno penalty proceeding. Rate recovery will be retroactive to January of this year.

Earley warned financial analysts that the commission has opened an investigation into the utility’s safety culture and another on improper closed-door meetings with regulators.

“We welcome a conversation about safety at PG&E and know we have a lot of work to do to re-earn trust of customers and the commission,” he said.

He also noted that the start date for the federal criminal case on the utility possibly withholding information during the San Bruno investigation is set for March 8, 2016.

Legal fees arising from the San Bruno case pre-tax were estimated between $25 and $75 million. They are to be trued up in the 2015-17 gas storage and transmission case, according to PG&E.

The company will file its three year general rate case proposal this September with the Public Utilities Commission.

Edison International: First quarter earnings for the parent of Southern California Edison were reported at $294 million, on par with the reported first quarter earnings in 2014. That translates to $.90 a share in both first quarters. The net income was generated by the utility.

But, the earnings report is incomplete because the utility awaits a decision by state regulators on its pending general rate case. “Because SCE has yet to receive a 2015 general rate case decision, the utility is recording revenues largely based upon 2014 authorized levels,” Jim Scilacci, chief financial officer told financial analysts April 28.

Much of Edison International’s earnings report call with financial analysts focused on the secret negotiations in a hotel room in Warsaw between former CPUC President Mike Peevey and an Edison official on the pending closure of the San Onofre Nuclear Generating Station. The commission directed Edison to produce documents between March 1, 2013, and Nov. 1, 2014, related to the improper meeting.

“This is a mammoth undertaking involving an initial, broad pool of slightly more than 2 million emails and documents, and then winnowing that group down in successive levels of review to isolate documents,” said Ted Craver, Edison International CEO. He refuted claims that the deal hashed out in the hotel room influenced the final closure settlement approved last November, which includes a more than $3 billion tab for ratepayers and $1.3 billion for shareholders.

“To start with, the Warsaw contact was made a good two-and-a-half months before we made the decision to permanently shut down SONGS,” Craver asserted.

Consumer advocates last month urged the California Public Utilities Commission to levy a $648 million fine on Edison for “inappropriate conversations” between Peevey and Edison Executive Vice President Stephen Pickett concerning how to handle San Onofre closure costs.

Of the first quarter reported corporate income, Southern California Edison produced $325 million, with an $11 million loss from the corporation parent in the first three months of this year. That compares with $304 million generated from Edison in during January to the end of March in 2014, with a $10 million loss from the parent corporation.

In its pending general rate case at the commission, expected to be decided this year, the utility seeks a $5.7 billion revenue requirement for 2015, which is $80 million over the amount now authorized.

“Our goal the last few years has been to keep the increase in our system average rate to 3 to 5 percent per year,” according to Craver. “We seek to do this even in the face of cost pressures from expensive mandates that require substantial incremental investment.”

The company’s capital expenditures this year are expected to be $4.1 billion and up to a total $13.1 billion over the next three years.

Sempra Energy: San Diego-based Sempra Energy garnered $437 million in first quarter earnings this year, up from $247 million during the same period in 2014. First quarter earnings amounted to $1.74 per share. That was up from $.99 a share in the first quarter of 2014.

Sempra Chief Executive Officer Debbie Reed said that most of the increase—$113 million—was due to a change in California Public Utilities Commission policy that requires its SoCal Gas subsidiary to report most of its earnings during the first and fourth quarters. That’s when gas sales rise in response to demand for winter heating.

Reed told analysts May 5 the company expects to see compound earnings growth of 11 percent over the next five years, thanks in part to an expected $7 to $8 billion of development opportunities, including potentially building and operating up to five new natural gas pipelines in Mexico.

Sempra’s utilities, San Diego Gas & Electric and SoCal Gas, also face what Reed called a favorable outlook when it comes to future rates under commission policy.

Reed particularly noted that in its general rate cases, the Office of Ratepayer Advocates is recommending fewer reductions than in the past, plus is backing a 3.5 percent inflation adjustment for 2017 and 2018.

The chief executive explained that a residential rate reform proposal—to be taken up next month by the commission—is “favorable,” but that company hopes the agency will “go further faster” on additional rate reforms. The rate reform package flattens tiers and aims to allow utilities to recover fixed costs. It also paves the way for a transition to time-of-use rates. (See related story on page below.)

San Diego Gas & Electric enjoyed earnings of $147 million in the first quarter, up from $99 million during the first quarter of 2014. SoCal Gas earnings hit $214 million, up from $78 million during the same period in 2014.

Combined utility earnings not only were boosted by shifting when SoCal Gas reports income, according to Joe Householder, Sempra chief financial officer, but also by higher rate bases allowed by the state commission. He attributed $30 million of the rise in combined earnings at the two utilities to that, as well as to a higher power transmission tariff authorized by the Federal Energy Regulatory Commission.

Two other Sempra subsidiaries were gainers too.

Sempra Mexico earnings grew to $47 million, up from $42 million in quarter one of 2014. Sempra South American earnings went up to $41 million from $35 million during the same period last year.

The other two subsidiaries experienced falling earnings.

Sempra Renewables saw earnings drop in the first quarter to $13 million from $28 million in the first quarter of 2014. Earnings in the first quarter of 2014 were temporarily inflated, the company said, from the proceeds of selling 50 percent of its interest in the 250 MW Copper Mountain Solar 3 project in Nevada.

Sempra Natural Gas earnings were $2 million, down from $9 million in the first quarter of 2014 on lower gas prices and expenses in developing liquefied natural gas export facilities.

“Overall,” said Householder, “our financial and operating results for the quarter were very strong.” —Elizabeth McCarthy & William J. Kelly

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Utility Earnings Unharmed by Scandals

William J. Kelly

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