PG&E Corp (PCG) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the PG&E Corporation fourth quarter earnings call.

At this time, I would like to pass the conference to your host host, Mr. Gabe Togneri.

Thank you for joining us this morning.

A simultaneous listen-only public web cast is supplementing this call, as usual, for the financial community and a replay of the web cast will be available on the PG&E Corporation home page after the call.

This morning, we issued a press release describing our 2002 results and we plan to file our 10-K later today.

Speaking today will be Bob Glynn, chairman and CEO and Peter Darbee, Senior Vice President and CFO.

Gordon Smith, president and CEO of Pacific Gas and Electric Company, Tom king, president of PG&E National Energy Group and other members of our team are also participating in the call.

And to begin, I'll turn it over to Bob Glynn.

This morning, we're going to re review last year's financial results.

We're also going to share our thoughts about our businesses' over all performance in 2002 and what we're doing to improve on that performance for 2003 and beyond.

The discussion will include a brief review of the respective paths that we're on for Pacific Gas and Electric Company and the PG&E National Energy Group and the objectives and challenges ahead for them.

Our three summary points are, even in Chapter 11, Pacific Gas and Electric Company continued to deliver solid operational and financial performance.

We're presenting very strong legal and financial bases for our plan of reorganization, as we proceed toward the latter part of the confirmation hearing and the PG&E National Energy Group continues to take definitive restructuring steps and is actively engaged with its lenders, with the objective of reaching agreement on a consensual global restructuring.

Among the challenges are the large number of parties involved, as well as a number of complex issues.

And the achievement of this objective is still very much a work in progress.

The NEG is reporting a $3.4 billion after-tax loss driven principally by the impact of the downturn in wholesale electric power margins and including the impairment charges related to the planned sale transfer or abandonment of AG investments associated with the merchant power generation operation.

The NEG loss combined with Pacific Gas and Electric's strong earnings and eliminations results in PG&E courtroom PG&E Corporation Corporation's reported loss of $874 million or $2.36 per share.

What we'll do now is Peter Darbee will discuss the financial performance from 2002 and following that, we'll talk about our structure and strategy as the POR and the NEG re restructuring efforts move down their separate paths.

Peter.

Thank you, Bob.

I'll begin of a quick review of this year's results, including fourth quarter numbers numbers, headroom and earnings from operations for each segment segment.

That will be followed by discussion of the extraordinary charges, primarily at the NEG, taken during the fourth quarter.

And lastly, I'll close off with earnings guidance for 2003.

For the full year of 2002, PG&E Corporation reported a total net loss of $874 million or $2.36 a share.

This compares with 2001 reported earnings of $3.02 per share.

The driver for these losses was the substantial charges taken at PG&E National Energy Group, primarily due to impairments associated with various planned asset sales, transfers and abandonments.

Our 10-K filing with the SEC will provide a substantial amount of detail on these items.

These charges reflect the lower value associated with these as assets and obligations in the current business environment.

I'm going to comment briefly on these charges in a few minutes.

The corporation's 2002 earnings from operations were $864 million or $2.33 per share without headroom.

And $1.9 billion or $5.16 per share with headroom.

These amounts exclude the various items impacting comparability

.

Headroom in 2002 totaled $1.1 billion after tax or $2.83 per share.

As expected, headroom results during the fourth quarter were less than the third quarter, primarily due to lower seasonal rates.

In addition, DWR procured more power during the quarter.

This was the result of a prolonged maintenance outage at one of Diablo canyon's nuclear power plants.

In looking at the individual business units, this year's operating results without head headroom consisted of $2.15 per share from Pacific Gas and Electric Company from the PG&E National Energy Group.

And 15 cents at the holding company.

At Pacific Gas and Electric Company, the $2.15 earnings per share is 36 cents less than the $2.51 for the prior year.

The key factors driving the decrease are threefold First, the results did not include any CPUC authorized attrition relieve for 2002 to cover costs associated with the growth in rate base and inflation.

Second, as we expected and previously indicated, financial and operating performance returned to more normal levels after having been unusually high in 2001.

For example, in 2001, California gas transmission enjoyed unsustainably-high throughput because dry hydroconditions resulted in higher gas-fire generation that year.

Third, there were a higher number of shares outstanding during 2002.

The NEG reported earnings of 3 cents per share compared with 57 cents last year.

The NEG's 2002 earnings contribution can be broken down into 21 cents from interstate pipeline operations.

And 4 cents from discontinued operations.

These were offset by a loss of 14 cents from integrated energy and marketing activities and 8 cents of eliminations and other items.

The NEG's interstate pipeline prayings remain solid.

They performed as anticipated, and we continue to expect this stable performance going forward forward.

At the end of 2002, approximately 93% of the available long-term capacity of the GTN pipeline was held under long-term transportation agreement.

The NEG's integrated and market marketing business was impacted by the widespread market declines in commodity prices and continued compressed spark spreads in 2002 as compared to the same period last year.

Lastly, at the holding company, the gain of 15 cents in 2002 is primarily associated with consolidated tax benefits.

Now, let's focus on fourth quarter results.

The utilities business earned 54 cents per share from operations, compared with 94 cents for the fourth quarter a year ago.

We had recorded the full year's worth of 2001 attrition revenues in all of the fourth quarter last year because of the timing of the CPUC's 2001 attrition decision.

For 2002, as we mentioned, we have not yet received any attrition revenues to compensate the utility for higher costs associated with inflation and rate based growth.

This represents about half of the decline in earnings from operations in Q4 2002 over Q1, 2001.

The other half is primarily due to three factors.

First, actuarial true-ups related to long-term disability and worker's compensation plans.

Second, additional shares out outstanding at the corporation and third, items that occurred in the fourth quarter of 2001 but did not repeat in the fourth quarter of 2002, such as the positive settlement related to a gas transmission dispute.

All of these items combined resulted in a difference of 40 cents in Q4, 2002, compared to Q Q4, 2001.

Now, turning to the NEG.

This unit reported a loss of 10 cents per share from operations.

This compared with income of 2 cents for the year-ago quarter.

The gas transmission business contributed 6 cents in the fourth quarter of 2002, compared with 5 cents in the same period in 2001.

Late fourth quarter, we put the north Baja pipeline in full service.

In addition, we reported increased revenues due to contract termination settlements.

These results were offset by lower prices and volumes in merchant plan operations.

Excluded from the amounts I just described were a number of extraordinary charges.

The most significant fourth quarter charges occurred in the NEG.

I'll address the major components of these next.

The items impacting come comparability for the NEG totaled approximately $2.4 billion after tax or $6.20 per share.

We incurred charges for impairments and write-office related to the construction activities of approximately 1.3 billion or $3.45 per share.

Included are charges associated with the impairment of power plant projects that are anticipated to be transferred to lenders.

The GEN holdings, lake road and La Paloma projects.

These include long term turbine pre-payments, disbursed generation equipment and related capitalized development costs.

An additional write-off of 767 million or $2.01 a share, reflect an after-tax loss on the planned disposal of U.S.

GEN New England and ET Canada, as well as the reclassification of earnings from these units to discontinued operations.

We expect to sell these assets some time during 2003.

Rounding out the charges at the NEG during the quarter were other various items generally associated with the restructuring.

Included in this category is the termination of certain hedges and some hedges that no longer meet the accounting criteria for hedge treatment.

These account for approximately $281 million or 74 cents a share.

The charges I just highlighted at the NEG are further described in our 10-K filing.

That report also includes the entire list of items taken throughout the year.

In their totality, we expect these charges to represent the preponderance of the charges we will take in connection with restructuring of the NEG.

We also had items impacting comparability for the utility and the holding company during the fourth quarter.

These include net interest expense on incremental debt of $89 million or 23 cents per share, and bankruptcy related legal and advisory costs of 56 million or 15 cents per share.

Now, let's look at 2003 guidance.

It's still not practical to provide our estimate of 2003 earnings for the NEG until we conclude which assets may be retained and which may be divested as part of the restructuring.

As such, we're leaving our full year EPS guidance unchanged at $1.90 per share to $2 per share.

Remember this guidance is for the holding company only and the utility operations only, without headroom.

With that, let me turn it back to Bob.

Beginning with our view of the financial results Peter just outlined, we met the corporations guidance range of $2.25 to $2.35 per share on an earnings from operations basis.

Pacific Gas and Electric Company Company's operational performance remains solid and we've highlighted some of those accomplishments in our press release, ranging from safety to customer service and its financial performance remains strong as well.

We're taking the actions necessary to resolve matters in each of our businesses.

And these are continuing progress towards implementation of our plan of reorganization underway at Pacific Gas and Electric Company and negotiations to reach a definitive resolution to the issues facing PG&E National Energy Group on their way there -- underway there.

At PG&E National Energy Group, as you know, the combination of compressed sparks spreads and loss of investment grade credit ratings put the merchant energy part of that business in an unsustainable position.

The discussions with creditors that we commenced last year are responding to that situation.

Our emphasis remains on reaching a consensual global restructuring agreement with the creditors and we believe this is an achievable though challenging goal.

Having observed the challenge, we should underscore that NEG's discussions with its creditors have been constructive to date, as indicated by various agreements we've reached, including agreements for continued funding of various projects in construction.

However, we do recognize that one potential outcome is that the PG&E NEG unit won't reach a workable restructuring and then will not continue in any form as part of PG&E Corporation.

As stated in our SEC filings, NEG expects more sales, transfer transfers or abandonments of as assets in 2003.

Those transactions are expected to result in some additional charges as they occur.

National Energy Group is continuing to reduce significantly its energy trading operations.

Our objective is to limit the trading and risk management activities to only what is necessary for the energy management services to facilitate the transition of our merchant generation facilities through their sale, transfer or abandonment process.

We will then further reduce trading to retain only the capabilities to ensure fuel procurement and power logistics for our independent power plants operations.

Turning to the Chapter 11 process for Pacific Gas and Electric Company, confirmation hearings are continuing and we're presenting a very strong case on why our plan is achievable and how it will enable Pacific Gas and Electric Company to exit Chapter 11 as a financially sound business within with investment grade credit ratings, and why comprehensive regulation of each of these businesses will remain in place largely unchanged.

Another noteworthy item related to this Chapter 11 process is the 9th Circuit's indication that it will provide an expedited review of the U.S.

District Court ruling affirming express preemption of state law in order to implement a plan of reorganization.

The district court had ruled in our favor and the CPUC had appealed.

As the end of the confirmation process comes into view, it's worthwhile to review the path we've taken.

You'll recall that we filed our plan in September of 2001.

Since that time, nothing has changed the simple fact that certain critical fundamentals will be achieved by our plan and no other plan has been identified that will achieve these same fundamentals.

And they are, our plan will pay all valid claims in full with interest.

It will be financially feasible and providing each of the re reorganized business was investment grade credit ratings as we exit Chapter 11, and it will do so without needing a rate increase from customers or a bailout from the state.

We're demonstrating in court how our plan will deliver these fundamentals and why the CPUC's plan will not.

This week, we filed some additional amendments to the plan in court that are designed to en ensure that our plan meets the investment grade test that we believe is critical.

The most significant new component is the commitment to issue up to $700 million in new equity, to reduce debt levels by a corresponding amount.

This concept emerged out of our discussion was S&P during the refreshing we had requested of their analysis of the credit ratings in our POR.

We are prepared to issue this equity unless other additional monies, such as from lower-than- lower-than-anticipated creditor claims, FERC ordered generator refunds or other sources are available to reduce or eliminate altogether the need to issue the new equity.

With the adjustments in plan, we've provided the court and S&P with an assurance that the ingredients to ensure investment grade credit ratings will be there for our plan.

In short, the confirmation process is coming into the home stretch.

The investment grade credit ratings are reconfirmed and our team is ready to implement the PG&E plan as soon as we have a confirmation order.

So to wrap up, each of our businesses is pursuing a clear, independent course of action that demonstrates our commitment to resolve the uncertainty in those businesses and to move forward.

We're confident that our objectives in each of these processes are achievable and we believe that accomplishing these objectives lays the foundation for our operations to deliver the kind of bottom line financial results that investors rightly expect.

Thank you.

Before we begin our Q & A, let me remind everyone that the call contains a number of forward looking statements based on expectations and assumptions reflecting information currently available to management.

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

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

As is our usual practice to keep the questions moving crisply, I would like to ask that everyone limit themselves to one question during the Q & A and, of course, if you have additional questions questions, you are welcome to get back in the queue.

Stephanie, with that, why don't we start the questions.

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

If you would like to remove that same question, touch star followed by 2.

At this time, we have a question from Scott Pearl of credit Suisse First Boston.

Go ahead, please.

Hi, can you hear me?

Yes, we can.

Okay, great.

Question for you is basically -- you've got a long-standing relationship with Mike Peavey [ph], president of the CPUC, why have you not approached him yet to at least have some discussions regarding the possibility for a settlement framework?

Scott, it's our impression that the CPUC would not be willing to accept either our plan's economics or our plan's structure, and that doesn't leave any room between those two margins.

We've got a duty to both creditors, equity owners, customers and employees to come up with plain that's financially solid.

We've outlined conditions necessary to do that, and we don't see any change in the CPUC's position in this proceeding to suggest a basis for a legal or feasible settlement.

But you don't see any value in actually just having a discussion to confirm that or --

I think I've answered the question fully, thanks.

Okay, thank you.

Our next question is from Cyrus Adeede [ph] of JNB Capital.

Hi, congratulations on a good quarter.

Thanks.

My question is, originally the CPUC plan contemplated issuing equity, which was something that the company was very loathe to do and now the company's plan contemplates equity as well.

How would you characterize the difference between your equity assurance and the CPUC plan?

A very key distinguishing feature of our plan, since its origination and submission in 2001 has been the securities issue to pay creditors would be investment grade quality and that all of the reorganized entities would be investment grade as well.

And it's critical to do that because these businesses are large consumers of capital as they go forward and they need to be strong, reliable and have in investment grade ratings in order to provide assurance for the health of the California energy infrastructures infrastructure.

We put the plan forward for the potential additional equity issuance in order to provide crystal clear assurance that that investment grade target for both the companies as well as the securities would be achieved achieved.

The issue in the CPUC plan is that it wouldn't achieve investment grade for the entities and it wouldn't achieve investment grade rating even for many of the securities.

So we're talking about very different plans with very different objectives, and the reason for the equity is to make sure that our plan continues to deliver that very key objective.

Next question?

Our next question is from Shelby Tucker of Banc of America Securities.

Go ahead, please.

Good morning, could you explain why you believe a National Energy Group deal should get done -- what might prevent it and what milestones we should be looking for?

Sure.

I'll take a shot at that.

I think the reason that it should get done is that it's in the best interests of both the NEG creditors and also PG&E Corporation to try and have an orderly sort of amicable restructuring and arrangement around the NEG.

I think by doing so, we can achieve a result that provides a higher return per dollar back to the lenders than they would otherwise get in an uncooperative liquidation or restructuring of the NEG.

And I think also for PG&E Corporation there is the opportunity to wind up with a result that it has a higher net present value and a higher value overall for shareholders.

Those are the reasons why I think both creditors and we have been working very hard to come to a cooperative arrangement on that.

Terms of the reasons militating against a resolution, I'd outline maybe two or three.

And the first is this is a very complex deal.

There are five bank syndicates in total.

I believe there are about 40 banks and there are about a billion dollars of bond holders.

So just the very size of it and the fact that each of these groups has slightly different interests would bear on it.

The second factor is that if we were to propose a solution, let's say, that doesn't provide lenders with 100 cents back on the dollar but some number less than that, although it might be better than what they might get in a liquidation or some other form of an NEG bankruptcy, the question is, is it enough better better.

You know, if you give somebody $5, they might say, well, I want $7 and I don't think it's fair that I'm only getting $5.

So that whole question of people's perception of how one splits the pie and whether it's fair and whether they get enough out of it is certainly a consideration.

Then the third factor that we need to be aware of is I'm sure all of you have been watching what's been happening to gas prices lately, and they have been moving up very substantially, and one of the key factors with the NEG is that they have to manage their positions, their commitments to provide power and procure gas to supply their power plants and so so, because they aren't perfectly hedged in this situation, due to a shortage of working capital, as gas prices go up, that impinges on their cash balances and could result in a situation where the NEG doesn't have the cash to continue to operate day to day.

So those would be, I think, the three factors working against us us, and we're just trying to struggle through this.

Shelby Tucker;

And any possible milestones to look for?

That's difficult to say, because there are a lot of negotiations taking place and I think it's best in these situations always to keep the negotiations confidential, and so we really won't have a lot of milestones until we come out and we say either we have a deal or we don't.

Thank you.

Our next question is from Vladimir Yolosolchek [ph] of Long Acre Management.

I wanted to see if you can give us an EBITDA estimate of the fourth quarter '02 and fourth quarter '01 as well.

No, we're not prepared to give you that estimate at this time.

Can I ask just one more question?

Go ahead, Vladimir.

Regarding the Cal PX.

It's a large claim in the case and given the fact that Cal PX is intertwined with the FERC, you know, rulings, has there been any progress made in re resolving that claim against PG&E?

Against the utility?

This is Kent Harvey at the utility.

We're really looking towards the FERC process there to resolve the claim.

Understood.

Thank you.

Our next question is from Teri Schuh [ph]from J.P. Morgan.

If I could go back to the settlement question.

There's also the issue that even if -- and that's a big "if" that your plan gets confirmed, it will certainly be challenged in the court.

So there is also that issue and the time delays that would be -- that would happen if you don't accept some -- at least talk to the Commission with regard to a settlement.

And also conditions are vastly different from the time when you first proposed your settlement.

Now when you look at the generation part, I mean NEG is no longer a part of the picture.

So what you have, the utility retained generation and it's just -- and the way you original originally thought of splitting it up is if is that the conditions are vastly changed as well.

Going back to Scott Pearl's question is there not some kind of common ground, especially given the situation where there are issues regarding -- issues regarding California law and it will certainly be challenged.

Well, Teri, if the premise is that post the confirmation order we would simply have a new fact to consider in deciding what to do in any next steps, I agree, and I look forward with a greet great deal of enthusiasm to the point where we have a confirmation order and can then evaluate the best way to move forward from that platform.

But until you hear from the bankruptcy court, are you saying that there is no middle ground, there is no discussion, you will not make that call to Mr. Peavey to discuss what they are thinking about?

Well, in responding to Scott Pearl's question at the beginning of this, I made clear, our impression and understanding about the willingness on the other side to either consider our structure or our plan economics --

Would you not agree that as far as your structure goes, the conditions are vastly changed as well?

In terms of the marketplace and NEG's current condition.

Teri, I don't think that the NEG conditions bear on the economics of operating any of the resulting companies that would result from the implementation of our plan.

In fact, we continue to renew our belief that they will operate as planned and the basis for that for each one of those businesses.

So, the -- if you will, the economics that support the plan of reorganization that we have on the table are in essence unchanged, not with standing the turmoil that's taken place for businesses that are largely exposed in a merchant environment rather than those that are supported by a very long-term and FERC approve contract.

I was just talking about the original structure that would put all of the generation together.

The conditions are vastly different.

Well, we're focused on getting a POR.

The thing that's going through federal court here is the POR itself, and not any second or third steps that --

I understand that.

Yeah, I understand that.

Thanks.

Okay.

Our next question is from Tom O'Neill of Lehman Brothers.

Tom O’Neill: A question and point of clarity to understand the S&P rating outlook which I realize is not a firm outlook from them.

I guess my understanding is the longer the utility would stay in bankruptcy for whatever reason, if it were a legal challenge to the company's POR, and in an environment where headroom is still building, the need for equity, the $700 million discussed by S&P and promised by the company, the need for that equity would diminish with the passage of time and the cash building.

Am I understanding that correctly?

Tom, there are a couple of factors that you should understand in that respect, and that is generally what we've seen in the past has been that head room has built up, and so we've had an increase in cash and that's made it easier for the utility to come out of bankruptcy.

In the coming year, while we're not going to provide a specific estimate on head room, it will be less than we saw in 2002 because of the allocation of the DWR contract.

So we're anticipating that there will be less headroom and after that, I think headroom will pick up.

To the extent that there is more cash, there will be less of a need for equity.

Also, what I would say is there are other opportunities to avail ourselves of cash without raising debt and we have an understanding with S&P that to the extent that we are able to get that cash, for example, settlements, to the extent that we're able to get that cash, then we can use it to reduce the amount of equity that we would otherwise issue.

So, it is quite possible that we would not issue $700 million of equity but rather some number less than that.

Tom O’Neill: Okay.

And then is it not premature to consider this idea of a settlement with the CPUC or the state, you know, without knowing the legal outcome of the California Supreme Court case?

Well, there is an extremely wide difference between the observable outcomes of either of those two cases, of either of those two plans, the company's plan or the proposed alternative.

In our view, they are fairing very differently in the court proceeding itself, with the clear indications that our plan is confirmable as demonstrated by us making each of the points we asserted in the plan.

And to us, it seems far more appropriate and frankly, more valuable to achieve the confirmation order from the court and then use that as a platform for future decision- decision-making.

Tom O’Neill: Great, thinks thanks.

And I would just point out that SCE is not investment grade grade, so the difficulty we've been having is coming up with a structure other than ours that provides for a result that creates investment grade companies.

So we haven't really found an alternative other than ours that works.

Our next question is from Jason West.

Deutsche Bank.

If your plan is confirmed and it's appealed by the state, would you be able to just move forward on the implementation or would it sort of be stayed and you would continue to build cash on the balance sheet as you await the outcome of the appeal?

This is Bruce Worthington, general counsel of PG&E Corporation.

The appeal risks and the ability to get a stay do depend on which action is being considered and then whether we can finance through it.

It's quite possible that we could nonetheless go forward.

So you could potentially move forward with your plan, even if it was being appealed?

Bruce Worthington Yes.

Is that something you think you guys would try to work through or, you know, how are you guys planning for a potential appeal at this time?

Bob Glynn Well, what we're planning to do is get to the point where we have a confirmation order.

I can't underscore that more.

It's very important that we maintain our focus on getting the confirmation order.

Then the next steps start to be the ones that we would deal with with.

Okay, thanks.

Our next question is from Phillip Broneman [ph] of Monarch capital.

My question has been answered answered..

It was a follow-up to Pearl's commentary.

It just seems that as a comment here, it just seems like there is a little bit of obstinance that's getting in the way of some sort of negotiation or settlement.

Well, I hope you wouldn't reach the conclusion that there is any obstinance involved.

These are two vastly different plans.

They would have very significantly different outcomes outcomes.

Those outcomes have differences, including the financial viability of the enterprises, which is a very big deal.

They would have to do with consumer ability -- ability for consumers to have confidence in the financial security behind the energy infrastructure in California, that's a very important issue, and there are nontrivial value differences to folks who have a claim on the estate of this debtor and those people who have claims include creditors, as well as equity holders.

Well --

So it's not simply like some negotiations where there is point A, point B and people run to the middle and say let's solve it.

It's vastly more different than that.

I understand but it's not clear that it's a binary outcome, which means there must be some middle ground that's reasonable to both parties.

Indeed, that's why it's a negotiation.

Well, thanks for your question.

Our next question is from Michael Lucas of Appalachia Management.

Go ahead, please.

How is it going, congratulations on a good quarter.

Thanks.

I have a point about the negotiation.

It seems in terms of the PUC, the only thing I'm worried about as an equity holder it seems we're getting closer and closer to where the settlements are coming closer together and I understand from your perspective they are very different in terms of splitting up the company and you having an investment grade rating, but here's my fear after speaking with Michael Peavey it's not hard to get an investment grade rating.

Their plan is under 3 times leverage.

That to me for all intents and purposes is an investment grade rating.

You are not going to see a utility with regulated rates, once they get the legislation written in terms for the rate clarity, it -- the thing is investment grade.

As an equity holder I don't want to be held out here and go on for another six months of negotiating and getting closer to a resolution at the end of the day -- if you understand my point.

Do you think it's difficult for them at this point to get that language in there which essentially, my opinion that gives them the best spread.

At this point in time, through each of the modifications and changes to the CPUC's plan, it hasn't even come close to receiving that kind of a rating.

I can't speak for them, as to how difficult it might be for them to achieve investment grade.

I'll just observed observe that as of this point in time, they haven't even come near getting investment grade for all of their securities, let alone for the companies.

We think that that's a very important point to achieve, and if -- and I think that the proof of the pudding is going to be in whether or not investment grade rating of -- appears even remotely forthcoming from their plan.

To date, it simply doesn't, regardless also of what people want to say off the record or in any other proceeding inside of the confirmation hearing, and with the communication that has been made publicly about their plan by the credit rating agencies, they are simply not there.

And let me just add to that, Michael, and that is that you may be correct with respect to the indicia for investment grade grade, but two things I'd point out.

One that I alluded to before, that SCE has ratios that would suggest investment grade and they are not.

The other thing is, in our own experience in dealing with the rating agencies, if you look at the ratios with the $700 million of debt, they almost look like Double-A type of ratios.

They are better ratios than the utility has had in the past, and those are only getting us to barely or into the investment grade triple B arena.

So what is happening is the rate rating agencies are using a different set of criteria than than -- and metrics than they've used in the past.

So, you need to be careful before you -- when you say well, I'm going to look at these ratios and therefore the commission plan would be investment grade.

We've analyzed that in great, great detail, and don't believe that would be the case, based on our own experience with ratios in our own company in dealing with S&P.

Fair enough.

I wanted to make a point.

I'm glad you brought up the SCE, reference the letter in what they saw from S&P, what they had spoke about, they spoke about that they have their eye on the Supreme Court decision.

So southern Cal, there is no question that it is investment grade if they get past the supreme court.

The rating agencies have been too many times with California, and they don't want to go out there and in front of a decision of the Supreme Court get an investment grade rating, have the settlement overturned and therefore they are not investment grade anymore.

That’s the only issue with that investment grade.

As a capital markets participant and a stockholder in this entity I would say that there is no way that -- I mean, if you guys have most of your power will be con contracted and the only real risk here is that one of your facilities go down.

Low 3 times or 2-1/2 times leveraged, that's investment grade.

As always, Michael, we appreciate your thoughts.

Again, I mean, I'm just trying to understand that if they do come out with that in terms -- if they get liquidity, put it through legislation, that they will have, you know, the rate increases, if anything happens and there's blips on the radar screen, does that mean we would have to -- would there be another six month or seven months before a settlement comes to fruition.

That's my only fear.

I think clearly what we will do is update our thinking based on, you know, all of the things things -- all of the developments.

Yeah.

Day-by-day.

Thank you.

We're ready for the next question.

Thanks, Mike.

The next question comes from Matthew Hart with Merrill Lynch.

Go ahead, please.

Can you confirm that Lehman Brothers hasn't issued a new highly confident letter since the one in 2001 for the plan?

What we would say in that regard, I don't believe they have issued a new highly confident letter, however, we believe there will be one forthcoming shortly.

You have requested one?

Yes.

Okay.

All right.

I guess that's about it.

Thanks.

Our next question comes from Brian Werner of Banc of America Securities.

Go ahead, please.

Yes, I was wondering if you could talk a little bit about the impact of the higher gas prices and the drought in the northwest on the power costs for the utility this year.

Yes, this is Kent Harvey at the utility.

They actually so far have had very little impact on our overall electricity costs.

That's because, as you'll recall recall, a big portion of our portfolio, Diablo Canyon and hydroelectric aren't at all sensitive to gas prices.

Obviously that benefit will continue for customers under our POR.

Also, the vast majority of our contracts at qualifying facilities are fixed out with respect to gas prices.

And then, in addition, there is a portion of the DWR contracts that are allocated to us that are under fixed gas prices as well.

When you look at the remaining net open position for us, for 2003, it's very small.

It's actually -- we estimated to be less than 2% of our load over overall.

So we really have not felt a significant impact on total costs for customers.

Does that net open position increase out in 2004 and '50 or does that stay the same?

We do expect it to increase somewhat in 2004, but it's still quite modest.

Next question?

Our next question comes from Zack Schreiber [ph] of Duquesne Capital.

High, Zack Schreiber , can you hear me?

Yes?

Can you talk about how much high the DRW requirement is going to be in 2003 versus 2002?

We're trying to follow-up on Tom O'Neil's question as it relates relates to headroom for ’03, you had the billion-one headroom operations in '02 and a DWR revenue requirement that's 3 hundred or 4 hundred million higher given the bond financing built in on a pre pretax basis.

But now that you've resumed the net open position on the 2 million megawatt hours in the $40 to $50 range, what is the net-net increase in the DWR revenue requirement that we ought to then apply to sort of reduce the headroom by, and what kind of assumptions should we make on a general rate increase in terms of just thinking about headroom, thinking about time delays sort of mitigating the equity issuance.

This, again, is Kent from the utility.

I won't even begin to forecast what the DWR is going to propose for their revenue requirement in future periods because it has not been an easy thing to forecast, let alone understand.

When you compare '03 to '02, there has been an increase.

The increase in the energy component, I think, went from about the total revenue requirement in '02 went from about $1.8 billion for us to about $2.0 and then when you add on the bond charges, it's a little bit more than $300 million as I recall for the bond charges.

So together you can see the magnitude of that impact going from '02 to '03.

Right, Kent, doesn't that assume that the DWR revenue requirement that they, serve the net open position at around $112 per megawatt hour and you are serving the net open position which is around 2 million megawatt hours in the 40 to 50 megawatt range?

It did assume their continued purchasing of power for the net open, and it affects not only the energy requirement that you've referred to but it has a big impact on the bond reserve amounts.

We remain hopeful that the revenue requirement could actually come down because they no long are, we believe, need those bond requirements since they are no longer purchasing the net open.

There is a large component that is linked to that function.

Let me just quickly cover your other question, the general rate case is an amount that is known that we've requested, which is over $500 million, and that's another impact on -- in a potential head room for 2003, and then as you indicated, while in future years that should come out of the DWR contract or excuse me, DWR revenue requirement, the procurement costs, we do have the costs now for our own costs that need to be accounted for in the overall headroom calculation.

So there's a number of pieces moving around on headroom as there always is.

It's a residual calculation so it's always difficult to forecast.

When would the general rate case increase be retroactive to?

We have had a decision by the PUC that it'll be retroactive to January 1st of this year.

So while we don't expect a final decision until probably after the end of this year, it will be retroactive to January 1st.

Thank you so much, guys, congratulations.

All right, Zack.

Our next question is from Chris Warren of ING Capital.

Hi, I'm having trouble understanding what the possible implications are of the negative outcome of term litigation of the California Supreme Court for the company.

I was wondering if you could talk about that a little bit.

Yes, this is Chris Werner, chief regulatory counsel.

We do not believe that the facts before the California Supreme Court in the Edison settlement case apply to our plan of re reorganization or to PG&E.

So we don't believe that a negative outcome in that case would affect our plan or the utility.

Just briefly, what is the factual distinction?

The principal factual distinction is, as you know, the Edison case involves a settlement, whereas both under our plan of reorganization and under our current regulation regulation, we believe the rates are freeze has already ended under the state law and therefore, the issues regarding the impact of the rate freeze on the Edison settlement just don't apply to us.

Okay.

Our next question comes from David Graham of Metropolitan.

Go ahead, please.

Yes, what is the time line for the confirmation hearings at this point?

This, again, is Chris Werner.

We're expecting the hearings to go through march and into April and to the extent that the schedule beyond that gets -- there is any change, we'll up update our expectations but at this point, we're certainly expecting the confirmation hearings to hopefully be completed by the end of April.

And when might should we expect a decision?

Well, it's hard to project.

Again, we expect the judge to have followed -- as he does, follow the evidence very closely and so we expect him to move fairly expeditiously.

That's his manner to, come up with a confirmation order after the hearings close and after any post hearing briefs.

Okay.

Thank you.

At this time we have another question from Cyrus Adeede.

Actually my question has been answered.

Thank you, though.

Our next question is from Vladimir Yolosolchek from Long acre Management.

A question regarding power purchases.

A question was asked by Brian Warner regarding effect -- effect of high gas prices and you answered the high gas part but can you speak about how the reservoir levels might affect the utility?

This is Kent Harvey again.

So far year to date, precipitation has been slightly above normal.

We're still within the precipitation period however, so there'll be updates as we go forward through the next couple of months.

Okay, that sort of conflicts with reports we've heard about relatively low reservoir levels generally -- maybe not in your specific areas, but in the northwest generally which should have an effect on power prices.

It has been dry conditions in the northwest.

I was referring to the conditions effecting our hydroelectric units.

Okay, understood.

At this time we have another question from Zack Schreiber.

A follow-up question for Kent Kent.

As far as you mentioned the QF contracts being largely fixed out in terms of their exposure to gas prices.

You've got to refresh my memory here.

I recall there was a modified S-rack put in, but we have it in there at $79 per megawatt for hour of the QF costs.

Is that right and is that a fixed number or is there any portion that have number which is exposed to gas prices?

No, I believe that's right.

It's been a little while, but I thought that the energy component was somewhere around 5.5 cents and the remainder getting up to your total was the capacity component.

The energy component was fixed out for the majority of our QF contracts.

When that option was available to them.

Okay, great.

And those contracts go out how far?

Well, the arrangements for the fixed energy amount is over the next maybe 3 to 4 years, I believe, because I think they were fixed out for a five-year term at the time.

Right.

Great.

Thank you so much.

At this time, we have no other questions waiting.

Okay, I would like to thank everybody for joining us on the call today.

Have a good day.