Pacific Gas & Electric Co.

Ladies and gentlemen, thank you for standing by, and welcome to the PG&E Corporation second quarter 2020 earnings release conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. We ask that you please limit yourself to one question and a follow-up. You may press star 1 to rejoin the queue. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Chris Foster, Vice President, Treasury and Investor Relations, PG&E Corporation. Thank you. Please go ahead.

Thank you, Stephanie, and thanks to those of you on the phone for joining us. Before I turn it over to Bill Smith, I want to remind you that our discussion today will include forward-looking statements about our outlook for future financial results which are based on assumptions, forecasts, expectations, and information currently available to management. Also joining us this morning are John Simon, Executive Vice President, Law, Strategy, and Policy, and Jason Wells, Executive Vice President and CFO. Some of the important factors that could affect the company's actual financial results are described on the second page of today's second quarter earnings call presentation. The presentation also includes a reconciliation between non-GAAP and GAAP measures, and can be found online along with other information at investor.pgecorp.com. We also encourage you to review our quarterly report on Form 10-Q that was filed with the SEC earlier today, and the discussion of risk factors that appears there, and in the 2019 annual report on Form 10-Q. With that, I'll hand it over to Bill.

Thanks, Chris, and good morning, everyone. We're excited to return to our traditional format. Today's call marks a milestone for us, and we're excited to share our post-emergence vision for the coming years. We've emerged from bankruptcy as a stronger company. The complex legal matters are now resolved, and major regulatory cases establishing our revenues are either approved or settled. We also have a good line of sight on our regulatory framework for the next three years. Our financial plan displays strong growth and enables a path for the company to get back to investment grade. My remarks today will focus on changes we've made on governance, progress on our wildfire plan, and preparations ahead of the 2020 wildfire season. I will conclude with an update on key regulatory matters. Jason will then cover the financials, including updated guidance and a walkthrough of the quarterly financial results. Our focus now turns to building on the many changes we've put in place during bankruptcy, which set the foundation for an improved company. At the same time, we will never forget the impacts to the communities we serve and those who lost their lives as a result of catastrophic wildfires in recent years. Our mandate is to rebuild the trust of our customers while delivering operational excellence. We'll do that by focusing on responsive customer service and system investments that focus on risk reduction, safety, and reliability. Organizational changes to help deliver on this mandate are already well underway. First, at the board level, 11 new directors were seated at the start of this month. These directors were carefully chosen based on their individual skills and backgrounds and are well suited to guide our company for years to come. One of our initial priorities as a board is to hire the next permanent CEO, and that process is ongoing. We've had recent changes that we've announced among our leadership ranks, and I want to thank each of them for all their contributions to PG&E. With our emergence from Chapter 11, this is a natural inflection point for leaders to evaluate their future and their roles at the company. We'll continue to build our team through both internal development programs and external hires. A couple of recent additions to the team include Francisco Benavides as our Chief Safety Officer and Sumit Singh as our Chief Risk Officer, and I'm delighted to say we'll be announcing a CIO soon. We have a seasoned team in place that is well suited to execute on our operational improvement plans developed during the bankruptcy process. For example, the core electronic operations team members that manage our wildfire mitigation efforts and successfully achieved our goals during the last wildfire season remain in place. This group has consistently improved our tools and evolved our capabilities each year. I have confidence that this team, and others will add to deepen the bench, will lean on their extensive experience to manage the evolving wildfire threat. And we will take the necessary steps to keep our customers safe. If you go to slide three of our presentation, you can see we're progressing well on our four key wildfire mitigation plan targets. I'll cover a few areas on the wildfire preparedness front. First, I'll touch on our operational work plan status. I'll also showcase some of the technology we continue to deploy to better understand our assets and reduce risk. Then I'll touch on our Public Safety Power Shutoff, or PSPS program, evolution. Knowing a number of the program goals are longer term in nature, we continue to stand ready to shut off power when extreme weather conditions present themselves. So let's start with this year's mitigation work. Behind these numbers, the annual work plan is on track to meet all of our 2020 targets. We had some supply chain issues early on in the stages due to COVID-19, which slowed our progress on the installation of weather stations and HD cameras. We've since resolved those issues and fully expect to meet the program goals. Turning to slide four, you'll see a snapshot of how we're making foundational investments in technology that we're excited about. On our enhanced inspection work, we're evaluating new programmable flight options to ensure greater consistency and efficiency of the drone inspections we do. We've also started a partnership with one of the country's most advanced data analytics companies. We're working to migrate to predictive maintenance utilizing the enormous dataset we've collected from advanced visualization inspection tools. This year we'll likely add another 2.5 million images of our assets. We're utilizing machine learning tools to deploy computer vision models to compile asset inspection photos. This improves the quality and consistency of the analysis. All of this part is knowing our assets better and consistently improving our records and data. Stepping back with these early stage examples, we're evaluating a range of different technologies, much as we did with the methane leakage technology adopted by our gas business years ago. We're fortunate to be working with California-based companies on these emerging technologies that will reduce wildfire risk in our state. We've taken this partnership approach for years on the clean energy front. Our announcement yesterday that we're breaking ground on one of the world's largest battery energy storage systems with Tesla is just another example of that. There's one other aspect of the wildfire mitigation program that I'll give an update on, and that's our PSPS program. It's covered here on slide five. As we have in prior years, we'll continually evaluate conditions that include wind speed, humidity levels, fuel moisture, and other factors. When conditions warrant, we'll implement power shutoffs for public safety purposes. We have taken steps to minimize the impact of these events on our customers, and we're working hard to make the PSPS programs smaller, shorter, and smarter. To make our PSPS program smarter, our team will be using new weather modeling that has doubled the granularity of the data feeding our models. Our team will now use the improved insights to inform which circuits are considered for shutoff. The improved accuracy of the forecast should ultimately result in fewer customers being impacted. Our next priority to improve the PSPS program is to make the customer footprint smaller. To address this, we are pre-positioning about 460 megawatts of temporary generation in order to meet critical community needs in areas that have a high probability of an outage. These will be strategically placed at over 60 substations, mid-feeder locations, and secondary health facilities. We've also installed nearly 400 sectionalizing devices and plan to achieve our 2020 goal of 600 devices by the end of August. Both solutions allow us to keep power on in more places where it's safe to do so. In combination, these elements are expected to allow us to reduce the number of customers impacted by a third. In order to make the outages experienced by our customers shorter, we've increased our aerial patrol abilities through additional helicopters and fixed-wing aircraft. By using infrared cameras, we'll be able to conduct controls into the evening, unlike last year where our post-event inspections were limited daylight hours. This greatly advances our ability to meet our goal as a 50% faster restoration time this season. As I mentioned earlier, part of the improved financial foundation for the company is improved clarity on our key regulatory cases. I'll touch on a few of those. First, I'll cover some updates at the CPUC. Looking back to our previous gas transmission and storage rate case, we overspent on capital and sought recovery. Roughly $600 million of that spend was subject to audit, which was completed in May with no disallowances recommended. We are now authorized to seek recovery of the and we anticipate a decision on that filing in Q2 of 2021. As a reminder, we've reached an all-party settlement in our 2020 general rate case. The Commission recently updated the procedural schedule, and we expect a final decision by the middle of December. In our securitization filing, this week a scoping memo was released by the Commission, pointing to hearings at the end of November. Given this update, we would anticipate resolution around the start of 2Q next year. We are required to have our safety certificate renewed each year in order to access the AB 1054 wildfire fund. Our 2020 safety certification request is currently with the Commission for review, and our certificate from last year is valid while the review is underway. Moving to FERC, in our Transmission Owner 20 case, we are currently in settlement discussions, though we do not know the timing of potential resolution. I'll close by touching on COVID-19 and workforce impacts, and I'd be remiss not to mention other challenges that our employees and customers face given the broader backdrop of the issues that are part of our larger national discussion. We continue to make headway in the second quarter, even with the challenges created by COVID-19. The recent uptick in COVID cases in California has resulted in the state reinstituting measures to protect against further spread, compared to what we reported in May. During a period from mid-May to July, we've seen a 3% reduction in electric load, and a 4% reduction in core gas load on a weather-adjusted basis versus 2019. We also experienced higher cost in 2Q. These impacts have been offset by a regulatory asset that was recorded to a memorandum account created to track COVID-related costs. Given the challenge of our current operating environment, I want to take a second to express my appreciation for all PG&E frontline employees who continue to execute on our risk reduction, safety, and reliability programs across gas and electric systems. Our workforce is also engaged in the broader discussion around diversity and inclusion. We are fortunate to serve a customer base with extreme diversity. As a company that has weathered bankruptcy and still maintains a very low overall attrition rate, We're focused on this conversation with our employees and our suppliers over 50% of our hires in 2020, and we'll maintain a history of investing in diversity, including eight consecutive years of exceeding supplier spend. With that, I'll turn it over to Jason to cover financials.

Thank you, Bill, and good morning, everyone. I plan on covering three items, some of which are highlighted here on the financial summary on slide six. First, given the clarity resulting from the emergence from Chapter 11 and the resolution of key regulatory proceedings, we are initiating earnings guidance now benefit from as a full for wildfire fund, as well as from Lastly, I'll briefly cover our results for the quarter. Stepping back into the more traditional earnings format post Chapter 11 emergence, we plan to provide a slightly longer view of our earnings potential and at a greater level of detail than in the past. We've provided some of the basic assumptions impacting GAAP and non-GAAP core earnings for you on Slide 7. We've also provided a traditional look at CapEx and rate-based growth, the latter of which is growing at roughly 8%. Our assumption for rate-based growth is in order. Due to our anticipated the timeline for cost recovery of the GTS rate case audit results, $100 million. We now have that amount included in rate-based and earning a return on equity in 2021. There was no impact to our capital forecast for the year. One item to note is that CapEx is reflective of the $3.2 billion in wildfire mitigation spend that does not earn an equity return under AB 1054. However, this amount is not included in these rate-based projections. Moving to our earnings guidance elements. First, we are updating earnings for core earnings per share guidance for 2020. Second, non-GAAP core earnings per share guidance and updating our potential equity needs for 2021. If we now go to slide 10, starting with 2020 earnings guidance, We have updated our earnings factors to reflect the anticipated non-GAAP core earnings of roughly $2 billion for the full year. That translates into approximately $1.60 to $1.63 per share based on anticipated average share count of 1.25 billion shares outstanding for the full year. This non-GAAP core earnings target is 325 to 325 to 325 to 325 to 325 to 325 to 325 to 325 to 325 to $350 million that we provided last quarter. We're also narrowing the range on both components of under-earnings. On our net below the line and spend above authorized, we are adjusting the expense range to $200 to $225 million, and that primarily reflects additional wildfire spend above authorized. Second, unrecoverable interest expense will be consistent with the midpoint of our prior forecast range and results in a $125 million impact to earnings for the remaining six months of the year. Keep in mind that for 2020, some of the factors such as increased shares outstanding and interest expense from our exit financing are impacting only the last six months of the year. Additionally, the guidance assumes a final decision in the 2020 GRC this year consistent with our all-party settlement. Moving to non-core earnings guidance, there are a number of elements that I'd like to update here. First, we have an updated range to a range of $2.63 to $2.67 billion, which reflects the total equity backstop fees of $1.5 billion, a charge of $620 million for the reduction of the deferred share value for the equity contributed to the fire victims' trust, and total legal and professional service costs for the Chapter 11 proceedings. Second, the $300 million of investigation remedies and cost recovery has been updated to reflect the uncertainty in the tax deductibility for a small portion of the amount related to the wildfire and locate and mark OIIs. Third, amortization of the wildfire fund contribution has decreased to roughly $300 million for 2020, reflecting an increase in the assumed life of the trust that I'll discuss further in my prepared remarks. Fourth, due to the media notice provided by CAL FIRE recently identifying PG&E's transmission line as the cause for the Kincaid fire, we've also recorded an accounting charge that reflects the low end of the range we provided last quarter, a write-off of associated restoration costs, and a receivable for the associated insurance recovery. And finally, we've updated the pickup associated with the successful audit of the GT&S capital. The $80 million reflects a recognition of the regulatory asset for recovery of the historical depreciation expense and cost of debt. The final decision approving cost recovery is now anticipated in 2021, and accounting rules limit the ability for recognizing a regulatory asset for the historical equity return until that final decision is received. Moving to 2021 earnings factors on slide 11. We have made progress addressing the factors contributing to under-earning our allowed return on equity, resulting in an increase in our forecasted non-GAAP core earnings relative to the forecast included in our March disclosure statement. We are initiating non-GAAP core earnings for 2021 in a range of $2.1 to $2.3 billion. This is roughly $50 million to $250 million more than our previous estimate in the March disclosure statement. In comparing this range to our authorized earnings, this guidance results in between $275 million and $425 million below authorized levels, reflecting an update to net below-the-line spend above authorized levels and a range of $275 million to $325 million in unrecoverable interest expense. We have line of sight to initial improvements relative to our disclosure statement in a few areas, including lower unrecoverable interest costs, and renegotiated third-party contracts that will result in more efficient execution of some of our inspection repairs on our electric system next year. 2021 is the first year we'll experience the full dilution from the exit financing, and as a result, this translates into a range of non-GAAP core earnings per share of $0.95 to $1.05. Our 2021 guidance incorporates the same assumptions as 2020 with the addition of approved securitization application in the first quarter. Non-core earnings guidance for 2021 includes a one-time upfront charge for securitization of $1.36 billion, amortization of the wildfire fund contribution of $330 million, bankruptcy and legal costs of around $40 to $80 million, $80 million of investigation remedies and cost recovery, and a pickup of about $140 million related to the deferred equity return on the successful audit of the GTNS capital given the final decision we expect next year. We're also providing an update to our potential equity needs in 2021, which are contingent on approval next year of our securitization application at the CPUC that Bill mentioned earlier. While we remain committed to achieving investment-grade ratings across the enterprise and paying down roughly $1.7 billion in holding company debt in 2021, consistent with our March disclosure statement, we are lowering our projected equity need in 2021 to between $450 million and $750 million. This range includes the net impact from the Kincaid Fire and Cruel this quarter. I would also like to reaffirm that we also do not have any anticipated equity needs beyond 2021 for our five-year plan. There are a few factors that contribute to this overall reduction, including the improved earnings range I referenced earlier and a slight reduction in CapEx we are projecting. Additionally, we continue to pursue divesting of certain non-core assets that could generate additional proceeds more cost-effectively than issuing equity It would enable us to trend to the lower end of this revised equity range. Turning to slide 12, we have confidence that 2022 and subsequent years will continue to reflect the roughly 8% rate-based growth I mentioned earlier, and that rate-based growth will be outpaced by earnings growth as we continue to pay down unrecoverable interest costs. Bill covered the operational efforts we are making to mitigate fires. Along with a good execution thus far on our operational work plans, our financial risk has also been reduced as we head into the traditional start of fire season. We are now fully participating in the AB 1054 Wildfire Fund, having made our roughly $5 billion contribution. As a reminder, as participants in the fund, the disallowance liability cap is in place and the new prudent manager regulatory framework applies. In terms of how this contribution has been reflected in our second quarter financial statements, we've recorded a regulatory liability of $6.7 billion, reflecting the discounted value of the total payments to be made to the wildfire fund. In addition, we recorded a wildfire contribution asset of $6.5 billion, with a difference reflecting amortization expense for the period of time we had had partial coverage under the fund prior to our emergence from Chapter 11. The total expense is amortized based on an expected life of 15 years, which is longer than the previous estimated life of 10 years. This change resulted from an adjustment to the model to better reflect relevant historical data in the effectiveness of the state's collective wildfire mitigation programs. We also established our new liability insurance coverage, which runs from August 2020 through July 2021, totaling slightly more than $1.4 billion. The wildfire liability insurance component provides up to $757 million in coverage for the period. The non-wildfire liability insurance provides up to $700 million for non-wildfire events. The total cost of this overall coverage is roughly $750 million. We will continue to pursue additional insurance coverage for the same policy period in weeks to come. Recovery for all premiums associated with this coverage, either through the proposed two-way balancing account included in our pending 2020 general rate case settlement or through the existing wildfire expense memorandum account tracking mechanism. Now I would like to transition to our second quarter financial results. Slide 13 shows our results for the second quarter. Non-GAAP core earnings came in at $1.03 per share and is largely consistent with the disclosure statement forecast. GAAP earnings, including non-core items, are also shown here. The non-core items are consistent with the discussion of the full-year 2020 guidance I mentioned. Moving on, slide 14 shows the quarter-over-quarter comparison of non-GAAP core earnings per share of $1.10 in the second quarter of last year and $1.03 this year. The primary drivers related to the delay in the 2020 GRC decision, as well as an increase in interest on pre-petition payables and short-term debt with no corresponding costs last year, and wildfire mitigation costs that exceeded our authorized levels. These costs were partially offset by growth in rate-based earnings and timing of taxes. To close us out, I just want to echo Bill's comments at the start of our call today. The clarity we have on a number of fronts positions us very well from a governance, operations, and financial standpoint. We are focused on earning our authorized rate of return on equity, less the unrecoverable interest expense in 2022. And you can see that our five-year financial plan grows at roughly 10% earnings growth, which exceeds the 8% rate-based growth we've provided. When combined, We see a competitive total return even with our temporary suspension of the dividend. Having a Chapter 11 case behind us allows us to now fully focus on executing on our operational plans. With that, operator, could you please open up the line for questions?

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. Your first question comes from Steve Fleischman with Wolf Research. Please go ahead.

Yeah, thanks. Hi, good morning, and nice to have you all back doing our calls. So just could you maybe a couple operational questions just on the wildfire preparation? You know, when you look at the different percentages, it's not, clear just based on looking for the year that you're kind of how much you're on track or not. Could you just give a little more color on how you're progressing with each of those categories and being ready for the fire season?

Sure. This is Bill. I'd be glad to do that. You know, we are really on target with all of the ones. As I mentioned, the couple that we had a little bit of a delay starting on, were related to the weather stations and the HD cameras. Those were impacted by some assembly issues at factories that were closed down temporarily and some things of that nature. But we are progressing very well and plan to be on target and getting everything completed. In some of these cases, we're ahead of target. So, for example, on the veg management, we're actually running ahead of schedule there. If you look at where we are on temporary generation, we're going to overshoot that target by about 50%. So we're doing very well overall. The two items that were a little bit delayed early on, we've got a recovery plan in place. So we feel very solid about getting all of this program executed as scheduled.

Okay. And then just any comment on the departure of the utility CEO? No.

You know, I think during an emergence like this, a lot of times people reevaluate what's going on, and so this is not an unexpected situation. We're very well situated with the leadership team we have in place, and we're actively bringing in the next generation of leaders for the new PG&E. So we're all set.

Okay, great. And then just on the thinking about 2021 and the securitization assumptions you're mentioning, just do things change dramatically if for some reason the securitization doesn't happen? Or would it be kind of, I think you have other alternatives in the worst case, but just assuming, could you give maybe a little bit of color there?

Sure, happy to do so. Steve, this is Jason. While we have confidence in the securitization application being approved, I mean, I think it was a strong statement of support by Governor Newsom when he said it was in the best interest of the public to see that securitization application approved. We did, as a fallback measure, as part of our plan of reorganization, we asked the CPUC to approve an extension of that temporary debt the $6 billion in temporary debt that we emerged with, we ask for a permanent waiver to the capital structure in the event that that securitization application is not approved. So from a financial standpoint, there is limited financing risk associated with the securitization application. I would say that the one impact, if not approved, would be there would be incremental unrecoverable debt on that $6 billion of temporary debt that would remain outstanding

uh in 2021 and beyond okay and i apologize i have one last question the the the guarantor trust discussion that you mentioned in the release that's um kind of uh in terms of the fire victim trust uh how you treat it could you maybe just give a little bit of a punch line on how to interpret that and what what that discussion means

Sure. As I mentioned in my prepared remarks, we took about a $620 million charge this quarter to reduce the deferred tax asset associated with the stock that we issued to the Fire Victims Trust. We had originally recorded the accrual and the associated deferred tax asset based on the settlement value of $6.75 billion. As a result of stock value coming in lower than that original assumed value, we wrote down the deferred tax asset to about sort of roughly $4.5 billion of value contributed to that trust. What we are highlighting is that that reduction in the deferred tax asset assumes that we maintain the tax deduction based on a qualified settlement fund, which essentially the tax deduction is recognized at the time that the stock is issued to the Fire Victims Trust. However, we are pursuing a different election for the deduction, and that would be the grantor trust election. The grantor trust election actually allows us to deduct the value of the stock when it is sold And so as the stock value increases over time, it would allow us to recognize a larger tax deduction. There are a couple of technical IRS elements to being able to convert to that grant or trust that we are currently working through with the IRS. We'd expect clarity on that likely around the end of the calendar year.

Okay, thank you very much. I appreciate all the questions.

Your next question comes from Steven Bird with Morgan Stanley. Please go ahead.

Hi, good morning.

Morning, Steven.

Thanks for the really thorough update on a lot of topics. Just a couple of items here, I guess, on my end. Just in terms of the cost of wildfire insurance, you laid out the amount of coverage I was just curious generally in terms of commentary, in terms of just availability and cost of that insurance beyond 2020, just what's your general sense of sort of the magnitude and cost that you're seeing these days?

We've certainly seen tightening in the liability insurance market. While AB 1054 provides significant financial stability to the utilities, The fact that inverse still applies means sort of the first dollar of loss falls on liability insurers. And as a result, we've seen sort of tightening capacity in that market and a significant increase in costs. You know, as I mentioned, we've secured a total of $1.4 billion in liability insurance, about 757 of which relates to wildfire claims. The total cost of that program is $750 million. It's obviously a significant increase over what we were seeing several years ago, and I think it's sort of reflective of what will be an ongoing trend of higher liability insurance costs going forward.

Understood. That's helpful. And then I guess stepping back, when you look at the overall business, I guess I'm thinking a lot about optimization and not related to to wildfire risk, but just sort of cost optimization across the entire PG&E footprint, whether that be how you go about procurement, looking at real estate that is owned. Is there a potential in your mind for kind of a more thorough review now that sort of you've reemerged and just looking across at the whole business in terms of areas where either operating costs, not related to safety again, but just other areas could be reduced or real estate could be monetized, just thinking more broadly, are there such opportunities?

Yes, Stephen, thanks for the question. I think there are pretty extensive opportunities available for the company. We are cognizant of maintaining the affordability of our servers, particularly as we continue to invest so significantly in our gas and electric systems. I think you've touched on a couple of the programs that are at the forefront of the start of our work on cost optimization, and that is selling underutilized assets, things like, as you mentioned, real estate could also include or has included selling excess renewable energy credits. I also think you've touched on another opportunity that we see an opportunity for significant improvement around, and that's Our third-party spend, the company spends about $10 billion annually with third-party suppliers. There was a number of contracts that we had to enter into over the last couple of years to incentivize crews to come out west to accelerate the work on our wildfire system. Those contracts included premiums to attract that significant level of work that was needed on our system. However, what we are doing now with third-party suppliers is we are bundling that work and committing to longer-term plans in order to bring the cost structure down over time. We've seen a couple of really good examples in our vegetation management and inspection programs and look forward to continuing to work with our third-party suppliers on the rest of that remaining spend. I think as we get past sort of those elements, there is an opportunity for the company to redesign some of our work management related capabilities. But our focus is on the upcoming fire season, and so we will grow into that sort of process redesign over the coming couple of years.

Your next question comes from Jonathan Arnold with Vertical Research. Please go ahead.

Good morning, everyone.

Good morning, Jonathan.

And could I just ask on the timing of the CEO search process, I think you mentioned you were going to announce a new CIO soon, but any sense of just what the sort of likelihood timeframe for leadership announcement would be. And then also on that topic, do you anticipate still having a separate utility and corp CEO? I just could use a reminder on the way you stand on that governance question.

Sure. Thanks for the question. This is Bill. The search is being launched for the CEO as we speak, so that process is underway. The target deadline is to have someone in that role permanently by the end of the year. As I've said before, Fortunately, there's no artificial deadline, and I have the flexibility to be in the role as long as I need to be, but we're really looking for getting the next generation of the leadership team fully in place and get that closed so that team can start executing their plan going forward. So we think that it's reasonable to have that individual in place by the end of the year, and that's still our target. But what's most important is finding the right person, so there's nothing artificially imposing a deadline on that particular item. With regard to the utility head, There is a requirement to have some separation between the corporation and the utility. I don't think it will be a CEO per se. I think we'll likely go back to the way it had been for a number of years with the president of the utility more often. If you think about it more of a president and chief operating officer, that seems to make more sense. I think it's been a little bit confusing to a lot of constituents with the dual CEO title, but there are some requirements that keep separation between the utility and the corporation, and we'll obviously continue to honor those.

Great. Thank you, Bill. And then may I just, one other question on the equity for 2021. I believe in the disclosure statement you sort of talked about that being one possibility, but you might also pay down debt a little slower, presumably if you didn't like the price on your potential equity issuance. Should we take what you're doing today more as a definitive statement that you plan to do this piece with equity, or is it still possible you might choose not to?

Jonathan, thanks for the question. I mean, I do think we retain that flexibility as we look at, you know, those equity needs. But, you know, let me clarify a couple of things first. You know, the equity that I mentioned, that revised range of $450 to $750 million, that's contingent on the securitization application. We also, you know, have had an opportunity given sort of the earnings forecast improvements as well as some timing in cash flows, you know, been able to sort of generate a reduction in that contingent equity need. As I also mentioned, we are exploring certain divestiture of non-core assets. We have sort of a more natural owner approach. And so, you know, that would also have an opportunity to sort of bring us to the lower end of the range that I mentioned. And then to the point that you raised, we do have some flexibility around the timing of the holding company debt pay down. But I want to reiterate, we are also committed to improving our balance sheet health and achieving investment grade credit ratings. And so I would anticipate if the securitization application is issued, you know, equity in that general range next year.

Your next question comes from Ryan Levine with Citi. Please go ahead.

Good morning. Good morning, Ryan. In terms of the insurance, in terms of the $757 million insurance, I think in your prepared remarks you mentioned potential to expand that further. Can you elaborate around the potential or what your goal would be as we get closer to wildfire season?

We're currently, as conducting this call, still in the market with a number of different risk transfer policies. And so we think that there is still some opportunity, still some capacity in the market that we're continuing to pursue. Our goal would be to try to achieve the billion dollars of risk transfer that's prescribed under AB 1054. I will say I think that that's probably going to be tough to achieve that full level, but there is some additional capacity in the market that we're pursuing.

Thank you. And then in terms of the issuance assumption for 21, beyond asset sales, are there any other key drivers of where you may be within the range absent as a securitization?

No, the reduction in the equity range, really the improved earnings forecast, some of the cash flow benefits that I mentioned, really bring us to sort of the – I call it the top end of the range, and I think then it's the disposition of some non-core assets that would drive us to the lower end of that range that we've provided. Okay.

Your next question comes from Michael Lapid with Goldman Sachs. Please go ahead.

Hey, guys. Thank you for taking my question, and congratulations for the effort you've put in over the last two years, especially over the last 18 or 20 months, which have been hectic, obviously. Just curious, can you, Jason, talk about the holding company debt? So I think it was around $4.8 billion. And then the temporary short-term debt, the $6 billion debt. Can you walk us through a path over the next couple of years of what you want those balances to be two or three years from now and how you get there?

Thanks, Michael. Great to be back on a formal earnings call again. You know, with respect to the holding company debt, as part of our plan of reorganization program, we committed to the state of California that we would not reinstate our common stock dividend until we had achieved $6.2 billion of non-GAAP core earnings. That's roughly about three years post-emergence. And so those retained cash flows provide significant capacity to pay down that holding company debt We're anticipating paying down roughly a little more than $3 billion of that debt over the next five years, with the majority of that debt being paid down over the next three, given the retained cash flows from that suspended dividend. I think with respect to the $6 billion in temporary debt, again, There's really two paths to pay that debt down. The first path is the securitization application that is in front of the Commission to the extent that that application is approved. The $7.5 billion of proceeds from that securitization will be used to pay down that $6 billion in temporary debt. If we think it's unlikely the securitization application is not approved, We have asked the Commission for a permanent capital structure waiver on that $6 billion of temporary debt, and what we have committed to is using the shareholder-funded net operating losses. As we realize those shareholder-funded net operating losses, we will use those cash flows to pay down that $6 billion in temporary debt over time. And so those would be the two pathways to addressing that debt at the utility level.

Got it. And if I think about when you guide for 2021 guidance, the unrecoverable interest expense that you lay out in the guidance slide, is that all just tied to the hold code debt and to the temporary debt, or is there anything else that's contributing to that?

There are sort of three sort of factors that I would – there's the holding company debt that we've discussed. There is some incremental debt above authorized levels. First, we raised about $2.5 billion of incremental debt at the utility to fund half of the wildfire fund contribution upon emergence. That has no impact on our equity ratio because we have an equal amount of equity to offset it on a ratio standpoint, but it is $2.5 billion of debt above authorized levels that contributes to under-recovery. And then as a result of the securitization application and the impact on the equity ratio, we do have a modest amount of incremental utility debt in 2021 that is contributing to that unrecoverable interest expense that will effectively get paid down in 2022 and in 2023. Those are sort of the three sources beyond the, again, the holding company and the temporary debt that we discussed.

Your next question comes from Richard Sutherland with JP Morgan. Please go ahead.

Hi, good morning. Thanks for taking my questions here. Maybe turning back to the insurance premium question that we've touched on a couple times. Could you speak to the AB 1054 requirements and any changes there possible should you be under a situation where you're not getting full recovery of the premiums?

Thanks, Richard, for the question. No, I wouldn't anticipate any change to that fundamental structure in AB 1054. I mean, AB 1054, as passed, really sets sort of the foundation for eligibility for the state wildfire fund at damages that exceed a billion dollars. Utilities are encouraged to to secure risk transfer up to that level. You know, given kind of all of the issues that California is currently undertaking, I don't necessarily see an amendment to AB 1054 that would modify that expected level of risk transfer or liability insurance.

Got it. Thank you. And then just on Kincaid real quick, you spoke a little bit about this in the script, but curious to you know, in terms of reaching the expected impact or the cost in 2020 here, what, you know, what hurdles from, I guess, the CPUC or other party standpoint remain to kind of tying that up?

Hi, Richard. It's John. I will say on Kincaid, it's very early. in the process, and I won't speculate on tying it up. What makes it really difficult to give more certainty in the answer is a couple of things. First, we don't have the evidence CAL FIRE has that I think is leading them to conclude what they're concluding. Their practice is to lock down evidence after the fire, so they have things we don't. As you probably know, we don't have the report from CAL FIRE either, which lays out their determination. We'd certainly like to see it. What I can tell you is if, in fact, PG&E equipment is the cause of Kincaid, we would work for an expeditious resolution. It's just hard to give you a sense for the timing, and so, therefore, it's hard to answer the rest of your questions.

Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from Paul Fremont with Mizuho. Please go ahead.

Thank you very much, and congratulations for being back. I guess my first question, can you just confirm the dollar amounts that were raised under the public issuance, the pipe, and the convert, including all the over allotments that, you know, are expected to be finalized or haven't been finalized.

Yeah, thanks Paul for the question. The over allotment feature, the backstop of the green shoe, those structures were put in place to ensure that we raised a total of $9 billion across the pipe, the mandatory convertible equity, as well as the common equity. And so we have issued the total $9 billion as a result of the expiration of that over-allotment feature at this time.

Great. And can I just get the convert dollar amount then? because that's obviously going to affect the future share count.

Paul, it's Chris. I'll make sure we follow up with you separately on that.

Great. Then, would you expect the securitization to happen 90 days you receive regulatory approval, so does that put you mid-year next year on the securitization?

Generally speaking, there is a 90-day appeal window for securitization applications. I don't think that necessarily pushes us to mid-year, though. I think in terms of Bill's prepared remarks referencing the second quarter, we took into consideration the timing of the decision as well as the appeal window. So we think it's sometime sort of early in the second quarter.

Your next question comes from Travis Miller with Morningstar. Please go ahead.

Good morning, and I definitely appreciate you guys doing the call and taking the questions. A quick question, you answered most of them, but for the CEO search, how much input Either are you going to seek or do you have to seek from legislators, the governor's office, and other non-utility entities?

This is Bill. Thanks for the question. There's no formal requirement. Obviously, we will look for someone that would be a good fit in California and someone that the stakeholders here would be comfortable with. There's no formal requirement for approval, but that process basically is what we went through in seeding the new board, and the new board is an extremely talented group of people, and I think we'll do the same thing with the CEO search. So, you know, I'm really pleased at the prospects of having high-caliber people interested in this job. It's been a challenge for Obviously, the last couple of years, but there's nothing that will keep this corporation, in my opinion, from being able to perform in a top quartile, if not top decile level. We've just got some work to do, and I think it's a great opportunity for the right person coming in. So I have no concerns about any inability to find someone that's a nice fit for the environment here in California.

Okay, great, thanks. And then one other quick follow-up on Kincaid. What's either the timeline or the ability or the amount that you'd have access to the AB1054 fund and how that might impact the insurance recovery that you've booked so far?

Thanks, Travis. I'll answer the first part, and maybe, Jason, you can answer the second part. In terms of the wildfire fund under 1054, It's available for claims costs after insurance above $1 billion. For the reasons I was mentioning earlier, it's very early for us, no evidence, no report. We haven't paid any claims either, so in terms of tapping into that fund, we won't speculate on that, and maybe Jason on the second part.

Yeah, thanks, Sean. Right now, because the The accrual estimate is below that billion-dollar threshold. There's been no recognition of cost recovery from the state's wildfire fund. We would only begin to record a receivable for those expected receipts when the costs exceed that billion-dollar threshold. One thing, though, that I will point out is that we do have and are eligible to seek recovery for about 10% of those costs through our transmission owner rate cases at FERC. We have to wait and see what the underlying report by CAL FIRE alleges before we can seek that cost recovery. But in the event that there are no substantive violations identified, then we have the opportunity to, again, seek about 10% of the net costs through the transmission owner rate case process.

Thank you, Travis, for that question. Stephanie, thanks for helping us to organize the call today, everyone. Thanks for joining for our call today. Have a safe day and feel free to let us know if you have additional questions. Thank you very much.