PG&E Corp (PCG) 2002 Q3 法說會逐字稿

Ladies and gentlemen I would like to welcom you to the PG&E Corporation Third Quarter earnings call.

At this time I would like to turn the conference over to your host, Gabe Togneri of PG&E.

Go ahead Mr. Togneri.

Good morning, everyone, and I'd like to welcome you to our third quarter earnings call.

All participants are in listen-only mode through a simultaneous webcast or via conference call.

And after the call, a replay of the webcast will be available on the PG&E Corporation homepage.

With me today are Bob Glynn, Chairman, CEO and President of PG&E Corporation and Peter Darbee, Senior Vice President and CFO.

Other members of our team are also available, and they will be here during the Q & A session.

I hope you all had an opportunity to review the earnings press release that we distributed this morning.

It includes a statement of consolidated income and supplemental performance metrics for both the utility and the NEG, and these materials can also be accessed via our Web page at www.pgecorp.com.

We are also filing with the SEC today our Form 10-Q reports for the corporation and for the NEG.

As you know, we have been filing these 10Qs concurrent with our earnings release for the last several quarters in order to provide investors with the current financial disclosure to use in understanding the earnings release.

Finally, let me remind you that the call and the subsequent discussion will contain a number of forward-looking statements based on expectations and assumptions reflecting information currently available to management.

Actual results may differ materially from those forward-looking statements.

And as always, we encourage you to review the SEC filings to obtain additional information and to better understand the many factors that can influence future results.

And with that I'll turn the call over to Bob Glynn.

Good morning, and thanks for being with us for this call.

PG&E Corporation had a number of important successes in the third quarter and some significant challenges.

Our employee team continues to deliver solid operational performance, and that allows us to focus attention on advancing the utility's plan of reorganization and on the challenge of finding a long-term resolution to the issues at the National Energy Group.

Pacific Gas & Electric Company is making steady progress towards resolution of its Chapter 11 proceeding with a number of favorable legal and regulatory decisions providing added momentum behind our plan as we are about to commence the confirmation hearing.

And PG&E National Energy Group is fully engaged with its lenders and bondholders on the development of its restructuring.

The corporation secured an additional 300 million in new borrowings, replacing a portion of the previous $600 million loan from GE Capital.

That was paid off in August.

We also successfully removed from the parent company loan rating triggers and cross defaults tied to the NEG.

Our objectives there were to provide the corporation with ample flexibility to meet any foreseeable financial needs through at least 2006 and also to contain the parent company's exposure to the liquidity issues that the National Energy Group is managing; and we achieved these objectives in this financing.

Peter and I will each continue with comments on these events and provide guidance for the remainder of 2002 and for 2003.

Starting with the results for the third quarter, our total reported net income was 466 million, or $1.19 per share, on a diluted basis.

That's the basis for the remainder of the earnings per share numbers we'll use.

Earnings from operations were 69 cents per share without headroom, with the utility contributing 59 cents, the NEG contributing 8 cents, and the corporation 2 cents.

With headroom, earnings from operations were $1.64 per share.

These results we're reporting today are in line with our expectations, and so we're maintaining the guidance we provided last quarter.

That guidance was $2.25 to $2.35 per share on an operating basis without headroom.

Including headroom, we expect to earn at least $4.75 per share.

We're now within a week from the November 18 start of the utilities plan of reorganization confirmation hearing, and in the third quarter, we had several important positive bankruptcy-related developments.

The first of those was in September when our plan received an overwhelmingly positive response to the creditors' vote, with 9 out of 10 voting classes approving the PG&E plan; and only one class approving the CPUC OCC alternate plan.

The Bankruptcy Court rejected the CPUC's request to resolicit the creditor vote.

Now recently, the CPUC and the OCC filed another request for resolicitation of a preference vote by creditors.

We believe that that proposal is counter to the court's existing rejection of vote resolicitation.

The US District Court also handed down a strong favorable ruling affirming our view on the express preemption of state law under the bankruptcy code.

The US District Court said that federal bankruptcy court does have the power to expressly preempt state law in order to implement a plan of reorganization.

At the Federal Energy Regulatory Commission, we recently received a positive preliminary decision from the FERC administrative law judge on our proposed bi-lateteral contract between the reorganized utility and the new generating company.

The ALJ's preliminary decision confirmed that we met our obligation to show that the contract meets FERC's just and reasonable standard.

In the filed rate document case, the US District Court recently dismissed the CPUC's request to stay the procedural schedule, finding the CPUC's arguments without merit.

Fact finding and discovery are going on now, and the trial is scheduled to begin in June 2003.

These developments reinforce our view that our plan of reorganization is on solid ground moving into the confirmation process, and we're looking forward to the opportunity to present the facts supporting our plan during the coming weeks in court.

The confirmation process will begin with the CPUC plan on November 18.

We anticipate that our plan will be before the court sometime in mid-December, and we're hopeful that the entire process will be completed during January.

Based on this current outlook for the confirmation schedule, we have now adjusted our target implementation date appropriately, and we filed with the Bankruptcy Court that our target for the effective date of our plan is now on or before May 30 of next year.

Our internal team is well prepared to move forward expeditiously as soon as our plan is confirmed.

And as has been the case for each quarter, the foundation for the plan of reorganization's credibility continues to be the solid operational performance for the entire team at Pacific Gas & Electric Company.

Turning to NEG, as everyone on the call knows, market conditions and the lack of investment-grade credit ratings have put NEG in a situation where it is no longer able to meet its immediate incremental debt, equity support and loan guarantee obligations as they come due.

Our NEG team has been fully engaged for some time with the bank groups and bondholders to develop a consensual restructuring plan, and these entities have expressed interest in working constructively to explore an appropriate restructuring plan.

Of course, all of the entities involved recognize that a comprehensive restructuring plan is both complicated and has multifaceted challenges.

We are continuing to stay very actively engaged with these entities because we believe that the ingredients for a successful consensual solution are present.

Since the NEG and the bank groups and bondholders are focusing their efforts on developing a consensual restructuring plan, there is not, at present, an effort to continue to develop extensions to the various due dates for NEG's payment obligations under its lending agreements.

Thus, investors and lenders should anticipate that the faults will occur under these various agreements as they come due.

We do not believe that the existence of such defaults will materially affect the current constructive efforts to accomplish a consensual restructuring plan.

As you know, Tom Boren has played a critical role in developing and growing our national merchant energy and trading business; and as we announced yesterday, Tom has decided to retire.

We are grateful to Tom for the many contributions he made in PG&E National Energy Group and we wish him well in the future.

Tom King has been appointed President of PG&E National Energy Group effective November 15.

Tom's qualifications are strong, and I am confident that he will lead the PG&E National Energy Group through its current set of issues.

Every one of us knows that shareholders expect us to deliver even under conditions as difficult as those currently facing our industry and our company.

And I will reiterate for myself and the entire management team that we are committed to that goal and that our activities at both the PG&E National Energy Group and Pacific Gas & Electric Company are designed to achieve it.

And now here is Peter Darbee.

Thanks, Bob.

First I'll discuss the corporate loan.

Next will be a discussion of the NEG's restructuring efforts.

Then we'll turn to the third quarter financial results.

Finally, I'll wrap up with earnings guidance.

Given market conditions and the impact on the NEG, we hit three key objectives in addressing the corporate loan.

First, remove all NEG ratings triggers and cross-defaults.

Second, provide independence for the corporation from any liquidity issues at our subsidiaries.

And third, create additional financial flexibility to meet the uncertainties resulting from the current highly tumultuous and unpredictable market.

We're happy to report we have achieved each of these objectives.

A key part of our strategy was accessing $300 million of additional funding.

The $300 million replenishes approximately half of the cash we paid to GE to retire the Tranche loan.

The additional liquidity provides the flexibility that we believe is prudent in the current turbulent and unpredictable market.

It positions the corporation to deal with contingencies surrounding the utility's POR and the NEG's restructuring.

The proceeds for working capital and general corporate purposes should meet the parent's cash needs through 2006.

The terms of the loan strictly limit the use of these funds.

We are specifically limited to investing no more than $15 million over the course of the loan to our subsidiaries.

The corporation may, however, provide up to 75 percent of any net consolidated cash tax savings to the NEG that result from qualifying NEG restructuring transactions.

With regard to the NEG, we have a number of teams working on various restructuring alternatives.

At this point, it would be premature to go into a detailed discussion of these alternatives; however, here's what I can say: The NEG's efforts to raise cash or reduce debt have not produced sufficient results to meet the NEG's upcoming obligations.

The NEG's focus is now on a global restructuring of its debt facilities and obligations.

We're following several guiding principles as we develop this plan.

One, we're seeking a consensual solution with the NEG's lenders and bondholders.

Two, as always, we're viewing the NEG on an independent basis.

Three, we're viewing tax benefits as an important element of the restructuring transactions.

And, four, we, of course, recognize the different perspectives and unique requirements of each of the parties we are in discussions with.

A restructuring along these lines would require the NEG to abandon, sell, or transfer certain merchant assets and continue to reduce energy trading operations.

This type a restructuring would result in substantial charges to earnings in either the fourth quarter of 2002 or in 2003.

The NEG will work to -- continue to work with lenders and others to move this plan forward.

Let me reemphasize a point Bob made: This is a complex and challenging undertaking.

But we very much believe there is a path to resolution that can work for all parties involved.

And we'll continue to keep you informed as developments arise.

Now on to third quarter earnings.

As Bob mentioned, total reported net income was 466 million, or $1.19 per share on a diluted basis.

Last year, our third quarter total was $771 million, or roughly 93 cents per share higher.

Earnings from operations, on a diluted basis, were 69 cents per share without headroom and $1.64 per share with headroom.

Headroom reflects the recovery of uncollected costs that were written off for financial reporting purposes but still exist on our regulatory books.

These results compare to 70 cents without headroom and $2.45 per share with headroom for the third quarter of 2001.

I'm going to cover earnings from operations for each segment, then discuss items impacting comparability and finally finish with guidance for 2002 and 2003.

Pacific Gas & Electric Company earned 59 cents per share from operations without headroom for the quarter.

This compares to 53 cents for the same period last year.

This is primarily due to the timing of 2001 attrition revenue decision.

Since the decision was not received until late in 2001, these incremental revenues are reflected in the utility's current results but were not in the third quarter results last year.

Other factors during the quarter include the positive effects of lower operating interest expense and a lower effective tax rate.

These impacts were offset by a lack of 2002 attrition relief and the shift from the Isis (ph) mechanism to levelized revenues at Diablo Canyon.

The PG&E National Energy Group reported earnings from operations of 8 cents per share for the quarter compared with earnings of 21 cents last year.

Specifically, integrated energy and marketing reported 4 cents per share this quarter compared with earnings of 18 cents for the quarter a year ago.

Approximately 6 cents of the decrease was due to reduced earnings at US GEN New England, a big factor in this decrease was the reduced the contribution from the fuel adjustment provision in the standard offer load contract. 4 cents of the decrease is related to the lack of any major portfolio management transactions.

You'll recall that in the third quarter of 2001, the NEG recorded the sale of the Ote Mesa project to Calpon.

And another 4 cents results from a mark-to-market loss on those long-term contract plans subject to FAS 133, C-15, C-16 accounting rules.

Finally, interstate pipeline operations reported 5 cents a share, the same as in the third quarter last year.

Headroom for the quarter was $376 million, or 95 cents per share.

This compares to approximately 636 million, or $1.75 cents per share of headroom in the third quarter of 2001.

There are two primary reasons for the lower headroom compared to the year-ago quarter.

First, an additional accrual of about $180 million after tax in pass-through revenues to the DWR over and above last year's levels and, second, we recorded a regulatory liability in this quarter of about $110 million pre-tax for the half-cent surcharge pending resolution of the use of these surcharge revenues by the CPUC.

This surcharge was to have ended in June but has not yet ended.

Rounding out the results with PG&E Corporation, we recorded earnings of 2 cents per share at the holding company.

As was the case in the first half of the year, this was primarily due to consolidated tax benefits.

Now for items impacting comparability.

We recorded 8 cents per share of external legal, consulting and advisory fees and other costs related to the utility's Chapter 11 filing. 18 cents is related to the incremental interest expense and other costs associated with the California energy crisis and the utility's Chapter 11 filing. 17 cents is cost associated with the payoff of the GECC loan.

It represents costs that were originally being amortized over the life of the loan, and with the payoff, these costs are being fully recognized this quarter.

A positive 11 cents represents the change in market value of the NEG warrants related to the corporation's loan.

A positive 2 cents reflects change in the NEG's mark-to-market methodology which represents a refinement to more accurately reflect the value of existing contracts.

A negative 3 cents is related to the implementation of the NEG cost reduction program. 18 cents reflects the write-off of goodwill and 5 cents accounts for an impairment charge for disbursed generation equipment.

Both decreases result from a decline in current and expected market value for these assets.

Finally, there was an 11 cent positive impact from tax benefits related to the NEG's synthetic fuel investment tax credits.

Now, turning to 2002 guidance, during our second quarter call, we revised our guidance to $2.25 to $2.35 excluding headroom.

This incorporates the effects of the prolonged downturn in the merchant sector as well as dilution from the recent financings at the holding company and excludes any charges relating to potential NEG restructuring or other plans.

Through the third quarter, our consolidated earnings from operations are $1.80 without headroom.

Looking ahead to the fourth quarter, we expect to achieve a result that will put the 2002 operating EPS within the range of our guidance for the year.

Once again, 2002 guidance is subject to regulatory decisions, most notably attrition, that could significantly impact our earnings.

We also provided guidance on earnings from operations plus headroom of at least $4.75 for the year.

Through the third quarter, we are at $4.23 and we expect to achieve our target for the year.

Now let's turn our attention to expectations for 2003.

As Bob said, we're planning for the utility coming out of bankruptcy on or before May 30, 2003.

We have also begun working on the NEG restructuring plan; however, at the NEG there is a lot of work to do and many options that still require evaluation.

The impact of these circumstances is that, at this time, we will be providing 2003 guidance only for the utility and holding company operations.

It's not practical to give guidance on the NEG for 2003 until we conclude which assets may be retained and which may be divested as part of the restructuring.

Taking all of this into consideration, 2003 earnings from operations for the utility and corporate will be between $1.90 and $2.00 per share without headroom.

This assumes a GRC decision in line with our expectations, implementation of the POR on or before May 30, and approximately 410 million shares outstanding for the diluted share calculation.

As a rule of thumb, you can anticipate that a one quarter delay of the implementation of the utility's plan of reorganization results in a negative $20 million impact on consolidated earnings from operations.

This impact is the result of changes in interest and bankruptcy expenses as well as headroom.

Headroom in 2003 will be even more difficult to predict than normal.

As a result of the DWR bond charges, contract costs allocation, the uncertainty of the GRC decision, and the implementation of the POR, we expect headroom will be significantly less than in 2002.

Our guidance for 2003 is, of course, subject to the usual caveats about regulatory decisions such as the GRC and power procurement matters.

To close, we remain focused on the confirmation of our plan of reorganization, safe and reliable operations, and on solid financial results.

Despite all of the challenges facing the NEG and the merchant energy sector as a whole, we continue to make steady progress.

And now I'd like to turn it back over to Gabe.

Okay.

Lee, we're ready to take questions; and I would just like to remind everyone on the call, consistent with our usual practice, to please limit yourself to one question.

That's worked very well and has given everybody a chance to ask questions; and, of course, if you have additional questions, you are welcome to get back into the queue.

So, Lee, the instructions, please?

Yes, sir of.

Ladies and gentlemen on the phone, if you would like to ask a question, press star followed by 1.

To remove that question, press star followed by 2.

We now have a question from Tom O'Neil of Lehman.

Go ahead, please.

Good morning.

I had a question on National Energy Group.

Just wondering if you could provide some details on the upcoming payment obligations at the sub, the bank revolvers, the long commitments on the projects and what will be paid and not paid?

There's been a fair amount of news, not all of it entirely clear to the reader.

Why don't we have John Cooper from National Energy Group answer that question.

Okay.

Thank you.

As Bob said, we continue to have our discussions with our lenders.

And under the current situation, we're using every effort to basically treat all of our creditors consistently as well as to maintain as much cash as possible.

Specifically, we do not expect to pay currently various obligations that are coming due for the NRG.

This would include our revolving credit facility for $431 million which matures tomorrow and is unlikely to be extended.

Our interest payments on our senior notes of $52 million that comes due on Friday, November 15.

We have a $25 million principal payment that comes due on our equipment revolver on January 1.

And then over the following months, we have various equity infusion requirements of $355 million on GEN holdings which we are not paying, $230 million on Lake Road that is due on March 31 of 2003, and $374.5 million that's due on La Paloma.

All of these facilities are proposed to be part of our overall global restructuring plan.

We are current and expect to make interest and other debt payments at GTN.

In addition, not withstanding our inability to fund our various equity infusion requirements at GEN holdings and La Paloma, specifically, thus far the lenders have continued to fund construction on those projects.

As of October, the lenders funded the October 25 construction requirements for Athens, Harkla Holla (ph), and Covert; and they have recently signed a waiver to basically fund the construction payments on La Paloma which is a project that's almost complete.

Great.

Thank you.

We now have a question from David Frank of Zimmer Lucas Partners.

Go ahead, please.

Yeah, hi.

Good morning.

I had a question regarding the headroom in 2003.

If the POR is not implemented, what happens to that headroom; and maybe if you could, just sort of give us a tally as to how much headroom you've booked since the beginning of this process and what the balance of some of that underrecovered power cost was at the end of the third quarter.

David, this is Kent Harvey.

First of all, the headroom, I think, as Peter indicated, it's very tough to forecast, primarily because it's calculated residually, so it reflects everything else that's going on in the business.

And it can be, as a result, fairly volatile and very difficult to predict, certainly on a monthly or quarterly basis.

And as we indicated, the factors that effect it include sales, seasonal rates, the net open position size and cost, as well as changes in other rate components such as our base revenues.

So there's a lot that go into it.

As we indicated, we're expecting headroom to be considerably smaller next year.

One thing you want to keep in mind is that this year's headroom was effected by roughly $600 million of reversing ISO charges from 2001.

So when you are looking at next year, you want to keep that in mind.

Because our overall rates aren't expected to change, the increases that we're looking at for our general rate case as well as potentially for the DWR revenue requirement, which has not been resolved yet, would reduce headroom next year.

Once you actually get to our POR next year, you'll know that our financial projections in the POR don't assume headroom contributions going forward.

And so that's just a different profile starting with the POR.

And as we've indicated, for guidance purposes, we're assuming that that happens in May of 2003.

Okay.

Great.

And is there any number that you can provide that -- of how much headroom you've collected to date perhaps?

And versus what that asset, that underrecovered purchased power asset, was at the start of this process?

David, sorry.

I forgot that part of the question.

I think what we've shown in our Q is that the remaining uncollected purchased power costs and transition costs that we're reflecting in our balancing accounts on an after-tax basis is approximately 2.4 billion at the end of the third quarter.

Okay, thank you.

We now have a question from Cyrus Haddidi JMB Capital.

Go ahead, please.

Good morning.

As you guys I'm sure are aware the CPUC filed a amended plan of reorganization with the Bankruptcy Court last week.

What's the company's position on the revised plan?

Our view continues to be that the CPUC plan has fatal flaws, and that extends to this most recent version of it.

We believe that this proposed reorganization agreement in their plan is unlawful because it simply -- state law simply prohibits the PUC from entering into an agreement like that in the first place and because the CPUC doesn't have authority to bind itself to comply with the agreement into the future.

These are among the very key reasons why we think this amended CPUC plan remains infeasible and that the company and the securities under it would not be investment grade.

Okay.

We now have a question from Zach Schreiber of Duquesne Capital Management.

Go ahead, please.

It's Zach Schreiber.

Can you hear me?

Yes, good morning.

Good morning.

I was just wondering given the CPUC's recent order, and it was last week a couple of weeks ago, on the whole sort of resumption of the procurement responsibility, if you guys were planning on resuming the power procurement responsibility for the residual net short position come Jan 1, 2003?

Hello, Zach.

This is Gordon Smith, President of the utility.

Hi, Gordon.

Yesterday, we filed with the California PUC a filing that included the conditions under which we would be willing to resume procurement for 2003.

These conditions are generally consistent with the protections in our plan of reorganization and we believe would not undermine our ability to achieve investment grade ratings in the future.

The PUC is working under a new state legislations, I think specifically Assembly Bill 57 and Senate Bill 1976, which requires, among other things, up-front standards for procurement rather than the sort of traditional after the fact reasonableness reviews as well as trigger mechanisms that would provide timely cost recovery of price increases, or decreases for that matter, in the future.

We'll be watching closely to ensure that the CPUC implements the procurement rules, and again, we're in a business where the devil's in the details, consistent with this new legislation.

In addition, we will be filing a motion in Bankruptcy Court requesting approval to resume procurement assuming the regulatory conditions that I have already mentioned and that we filed in our pleading yesterday are, in fact, met.

And I believe the CPUC is scheduled to act on our filing as well as, I think, Edison's in San Diego's filing before year end.

Great.

Thank you so much.

We now have a question from Thomas Mogler of GE.

Go ahead, please.

Good morning.

I wonder if you could elaborate a bit on your intentions with respect to Pacific Gas Transmission in all of this where you might stand with respect to potentially marketing the unit and whether you expect to remain current on all your fixed income obligations there for the foreseeable future.

John Cooper, could you answer that question for us?

Yes.

We basically are current on our obligations and expect to remain so at GTN.

It has positive cash flow and that entity is doing fine.

Are you planning to sell it and have you made any progress in that regard?

This is Tom King.

At this point in time, we are not planning on selling the PGT system or the GTN system.

Thank you.

We now have a question from Greg Gordon of Goldman Sachs.

Go ahead, please.

Thanks.

Could you just tell us at the end of the third quarter what the book value was at the NEG and also, refresh our memories on what your estimates are of the levels of cross-defaults between the NEG and the parent?

Yes.

We'll do that.

We're just checking the precise number right now.

The book value of the NEG at the end of September 2002 was a little over $2 billion. 2 billion 054 to be precise.

And I was wondering if John Cooper might address the second part that question.

Yeah.

I think you specifically asked about cross-defaults between the NEG and PG&E Corp.

There aren't any.

I just want to confirm, I thought the question was, with respect to the NEG.

But on the topic of cross-defaults between the parent and the NEG, --

Right.

That was the question.

I apologize.

Yeah.

There are no cross-defaults.

In the corporate restructuring -- the renewal and amendment to the corporate loan that we undertook, what we did was we addressed any potential problems that might arise in that respect from either cross-defaults or defaults relating to downgrades in the ratings of the NEG.

And so each entity, in effect, operates on its own financial basis going forward.

Great.

So in the event that the NEG were to become legally insolvent, you don't think there is any financial recourse back to the parent at this point.

That's correct.

Yes.

Thank you.

We now have a question from Nancy Doyle of Times Square Capital Management.

Go ahead, please.

Thank you.

Could you discuss the exposure that Pacific Gas Transmission might have to an NEG bankruptcy that would be how much Pacific Gas Transmission has guaranteed at this point and also if there are any cross-defaults between the two?

I'm going to ask Tom King to answer that question.

Yes, good morning.

This is Tom King.

And as you will see when we file the Q today, we stepped through this and basically, the current face value of the guarantees between GTN and energy trading is roughly around $400 million with an exposure of about 65 million.

And then there are two toning agreements: one for a guarantee of 24 million and one for 150 million.

And I would encourage to you read those two paragraphs to see how those two are structured.

But at -- the net answer to the question is, there is close to 900 to $1 billion of equity value in GTN, and the aggregate of the exposures are far below that.

And the intent would be to meet those obligations with cash on hand both at energy trading and then there is sufficient liquidity at GTN.

And are there cross defaults between -- any debt that GTN that has a cross-default to NEG?

This is John Cooper.

No, there isn't.

Thank you.

We now have a question from Scott Pearl of CSFB.

Go ahead, please.

Good morning.

One question, and I think you touched on it a little bit in David's question, but was wondering if you could specifically address the Ninth Circuit decision in the turn case related to Southern California Edison and if you thought that any of the interpretations that the federal courts articulated have any impact on the arguments that either you are making in the Bankruptcy Court or the -- what the commission is making in their plan.

Yes.

This is Chris Warner with the utility law department.

As you know, the Ninth Circuit decision is not effective.

It's basically pending any decision by the California Supreme Court on the certified questions.

And we do not believe that the Ninth Circuit decision would affect our plan of reorganization in a legal sense because our plan does not rely on a settlement as the Edison plan does.

And in addition, we believe that under state law, we are entitled to recovery of our undercollected costs due to the rate freeze ending retroactively per the terms of the state law.

In addition, of course, we are -- we still have our filed rate doctrine litigation so we also believe we have a right under federal law to full recoverry of our costs.

As far as that filed rate doctrine litigation, what do you see as the ultimate timing of that?

I think as Bob Glynn mentioned, we're heading toward a trial I think beginning in June.

And we have had, as you know, recently some very good decisions, both on the merits of our case as well as on the procedural schedule.

And so we're expecting to move forward to begin the trial by no later than June.

Okay.

Thank you.

We now have a question from Purinia Pury of Redwood Capital.

Go ahead, please.

Quick question for you which is can you give us a magnitude of what the tax sharing might be between PCG and NEG?

I think at this time, it would be premature to give you a view on that.

What I would say is that the amount will be determined by specific transactions that the NEG would enter into.

But it could be material if those transactions were material as we go forward.

But it's really premature to try and estimate the total magnitude of it.

The point I would make is that they will only be passed down to the extent that the parent company realizes in their -- realizes a tax savings in their consolidated tax filing; and then 75 percent of any of those cash benefits would be passed down to the NEG, assuming that the transactions qualify under the terms of the parent company term loan.

What type of transactions would these be?

For example, if one were to sell at a loss -- a significant tax loss -- certain of the assets, or if one were to abandon and write off certain of the assets of the NEG, that would trigger tax losses if structured correctly.

Okay.

And can you tell us how much cash is on NEG books right now?

Yes.

As of the end of the third quarter, the number was approximately $500 million, and then, you know, the important thing to point out is that there are a number of different corporations and subsidiaries, LLCs, that make up the NEG, and so one has to actually look at cash at every different level to really get a view of their specific liquidity situation.

And that is a table that is in the 10-Q released later today, as well.

So I would encourage everybody to look at that.

Thanks.

We now have a question from Jeff Gildersleeve of Argus Research.

Go ahead, please.

Thank you.

I wanted to confirm, you said a quarter delay in the implementation, that POR would result in a negative 20 million.

Did you say that included headroom?

No.

That does not.

That's a $20 million after-tax impact on operating earnings in the utility.

Okay.

And then just along those same lines, your confidence in the May 30 or prior implementation, what is that based on and what can we look for to see that that's progressing on schedule?

The basis for the May 30 target -- May 30 or earlier -- is based on the following: It's based on the confirmation hearing at the Bankruptcy Court being completed during the month of January 2003.

It's -- and then it's premised on completing the necessary procedural steps in the financing in order to be able to consummate the plan by the end of May.

It does not include provisions for appeals that might be filed at any one of various levels.

And as we previously disclosed in a fair amount of detail, there's potential for delay if parties elect to appeal what would be a successful confirmation order.

Very good.

Thank you.

We now have a question from Jason West of Deutsche Banc.

Go ahead, please.

Yeah.

Just a little clarification on the '03 guidance.

I think you said you're assuming that the, you know, the GRC goes in line with your assumptions, is that basically that you get the rate increase that you have requested, that's sort of what this suit did in the 1.90 to $2?

Yeah, this is Kent Harvey.

Essentially, we're assuming that we earn our full authorized return and the foundation for that is our general rate case filing.

Okay.

And then for the parent earnings next year, what is assumed there?

We historically have not broken out, you know, the different components of the parent company earnings.

And so they will be a nominal amount, and it would relate to unitary tax benefits and things of that nature but not a lot.

Okay.

Thanks a lot.

We now have a question from Paul Freemond of Jefferies.

Go ahead, please.

Just a quick follow-up to the question on the turn decision.

Is it -- will the company basically argue that the settlement is -- the CPUC settlement with the creditor group violates AB1890 which I guess was the point that the federal appeals court was trying to make in that decision?

And will that slow down the bankruptcy judge in terms of having to wait for a decision out of the state Supreme Court?

This is Chris Warner.

No, we will not argue that the CPUC creditors committee planned violates AB1890; however, we have argued that it violates the underlying state law provisions that generally forebit me to CPUC from entering into a rate agreement or binding itself to a rate agreement for any period into the future, and we will continue to argue that at the Bankruptcy Court.

We don't believe, therefore, that there will be any delay in the Bankruptcy Court consideration of our plan.

Thank you very much.

We now have a question from David Idleman of Idleman Finger.

Go ahead, please.

Yes.

Given that you estimated for next year earnings before headroom of $1.90 to $2, if I remember correctly, in the slide presentation you did for making the projection of the post-bankruptcy earning power, the whole company came in at around $2.75.

Does all this machinations that have gone on with NEG change that?

And if NEG had to be written off, how much would have to be written off of book value after the tax effect?

Well, there's a couple of parts that question and we'll try and parce them out as best we can.

First of all, what we're forecasting for 2003 guidance is just the utility business and the parent and the vast majority of that by far is the result of operations from the utility.

And second of all, we're forecasting in that estimate that the plan of reorganization becomes effective, in essence, in the middle of the year; so there's a half of the year under the pre and a half of the year under the post.

We're not forecasting for 2003's guidance any positive or negative impact from operations at the National Energy Group.

Okay.

But for looking ahead to let's say I think on -- for 2004, that 2.75 earning power, do you feel that is still there, or has anything changed since you made that slide presentation?

Yeah.

We're not -- we're really not going to provide earnings estimates for 2004.

The one factor that Bob didn't mention that I just want to reemphasize relating to differences between what was in disclosure documents and the like is our share count is higher as I mentioned in the strip than it had been in the past.

So that's another factor impacting on it.

But at this time, we're really not in a position to comment on 2004 earnings.

Okay.

Thank you.

We now have a question from Scott Ingstrom of Hamilton Investment Management.

Go ahead, please.

Hi.

Just another headroom question.

You mentioned two points affecting the headroom change this year quarter-over-quarter.

Could you -- I'm not sure if I really comprehended those.

Could you talk in a little more detail about those two factors?

Peter, I think in your scripted remarks there were two factors that regarded headroom.

Hang on just a second.

We'll get an answer to that question for you in just a second.

Yeah.

This is Kent Harvey.

The two factors that Peter referred to, one was that in the third quarter of this year, we have done an accrual of about 180 million after tax in pass-through revenues that we expect to go to the DWR that are higher than last year's levels.

And then secondly, we also have recorded a regulatory liability, essentially reserving against a half-cent surcharge which was to have ended in the middle of the year but has remained in place by the PUC so we have been reserving against that.

And that number is approximately $110 million pre-tax.

Does the DWR reserve relate to actual higher wholesale costs that they were paying or as an estimate of wholesale prices or does it have to do with the -- with regulatory decision regarding the DWR?

It primarily has to do with the formula for calculating the revenues that get sent to the DWR, and the DWR has made a filing at the commission with respect to that.

And does that impact next year's issues with respect to headroom?

Well, next year the commission is currently contemplating a proposal for the DWR revenue requirements for calendar year 2003 and to the extent that there are any adjustments in their revenue requirement to reflect '02 events, then there would be a relationship.

But otherwise, it's a separate proceeding.

Okay.

Thanks.

We now have a question from Michael Lucas of Appaloosa Management.

Go ahead, please.

Yeah.

I was just wondering if you are not putting the money to a tax refund, if you were to abandon or write off the value of NEG, how much would that amount be if you were to write off NEG; and have you considered just somehow distributing that value to shareholders rather than putting the money back into NEG?

Right, Michael.

Thanks very much for that question.

The answer is that there would be a a bit of problem that we would face, and that is if we were just to write off the NEG, that would result in a capital loss which would be a substantial maybe on the order of $1 billion or so from a tax standpoint.

The problem is that we do not currently in our consolidated tax group have $1 billion of capital gain to match that loss against.

And, therefore, what we would do is have to carry it forward for -- and maybe not be able to utilize it.

And, therefore, in order to really take advantage of these benefits, we will have to have a sort of a cooperative arrangement going forward with both the NEG and potentially its bondholders and bank lenders to enter into a number of transactions and structure things appropriately so that capital losses might be transformed into operating losses which could be offset against the consolidated operating income, and then in that event, we would realize the benefit at the parent and be able to pass that down to the subsidiary.

So we have contemplated exactly what you described as one of our options.

But it looked like it really wouldn't generate the tax benefits for the consolidated group the way you described it might.

And, therefore, that's been the reason for the path that we have identified that we are now going down.

Okay.

Thank you.

We now have a question from William Matthews of Canyon Capital.

Go ahead, please.

Yeah.

I guess it's kind of to clarify when the 10-Q is released later today, but I believe the press release says NEG's capitalization as of 9/30 has 371 million in cash and you had said 500?

Yeah.

The issue is the question of restricted cash versus total cash.

And you'll note on the -- in the 10-Q, you'll see $371 million cash and equivalents and then $210 million of restricted cash.

Okay.

Of the 371 that would be considered unrestricted, what ability does the parent company have to remove that cash from NEG?

Let me comment from the parent standpoint.

There was a ring fencing mechanism put in place approximately a year ago or more, and that greatly restricted the ability for the NEG to dividend up funds to the parent.

And so from our perspective, we view that the ability to get access to that -- those funds is severely limited or zero.

Got it.

Thank you.

We now have a question from Vladimir [INAUDIBLE] of Longacre Management.

Go ahead, please.

Good morning, gentlemen.

Two questions.

Number one, could you just give us an EBITDA number for the utility for the third quarter and also give us a full fiscal year '02 EBITDA projection for the utility?

That's question number one.

And question number 2, just relates to the DWR contracts.

Can you give us, you know, a sense of where things stand regarding the utility's potential obligations taking assignments from some of the above market DWR contracts.

Vladimir, we're going to take the second question first while we're searching for the EBITDA numbers.

Vladimir, this is Chris Warner, the utility law department.

The DWR contracts today remain the legal and financial responsibility of DWR and there has been no regulatory or contractual attempt to assign them.

There is a pending CPC decision that would require operating and administrative responsibility to be assigned to the utilities.

We and the other utilities are filing rehearing on that decision.

We don't -- do not believe that either the DWR or the CPC have the legal authority to compel us to accept assignment of those DWR contracts.

And we will continue to pursue that legal challenge.

In terms of the answer to your first question, the EBITDA for the period through September 30 was about 1.4 billion.

That was for the three-month period ending September 30.

For the -- getting back to your question, then, what is our forecast for EBITDA for the year, what I would say is we have not historically, and do not plan as a matter of policy, to forecast line items in the income statement or the cash flow statement in our subsidiaries.

So we won't do that.

What I will mention is that the EBITDA through the nine-month period in the utility was about $4.2 billion.

And Lee, we have --

Thank you very much.

Lee, we have time for one more question.

Okay.

We now have a question from Michael Goldenburg of Luminous.

Good morning.

How are you doing?

Fine, thank you.

What is your annual O&M expenses that are covered by the parent?

They are approximately $100 million, slightly -- between $90 and $100 million.

And does the utility cover any of it?

We have corporate overhead allocation agreements with both the utility and the National Energy Group.

And that is split approximately 75/25 Utility/NEG.

Okay.

I'd like to thank everybody for joining us on this call today and your interest in PG&E Corporation.

Please have a good day.