PG&E Corp (PCG) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the PG&E Corporation third quarter earnings call.

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

Thank you, you have a great conference and go ahead Mr. Gabe Togneri.

Welcome and thank you for joining our call to report third quarter earnings.

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

And a replay of the webcast will be accessible from the PG&E Corporation home page after the call.

Bob Glynn, Chairman, CEO and President of PG&E Corporation and Peter Darbee, Senior VP and CFO will take us through third quarter results and other items.

In addition other members of the team are present and will participate in the Q&A session.

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

Thank you.

Here are the highlights from the third quarter.

PG&E Corporation and Pacific Gas & Electric Company delivered earnings from operations in line with our expectations, and consistent with our previously-stated guidance for 2003, which we are reaffirming today.

We continue to see solid progress towards resolution of the Utilities Chapter 11 case, both in a federal bankruptcy court and in the California public utilities commission forums.

We announced a proposed settlement to our 2003 general rate case that will provide us the opportunity to earn our authorized utility rate of return through 2006.

As a result of these thing, we continue to see a clear path to greater stability in our outlook, and we expect the value of our business will more fully reflect the solid underlying performance at Pacific Gas & Electric Company, and the prospect of timely implementation of a settlement plan.

Peter Darbee will now review the quarter's financials.

Thank you, Bob.

I will begin with a review of the third quarter financial results, including headroom.

Next, I will discuss items impacting comparability and then I will close with earnings guidance for 2003 and '04.

Turning to third quarter results, the company earned $510 million or $1.24 per diluted share on a GAAP basis.

This compares with $466 million, or $1.19 per share last year.

Non-GAAP earnings from operations for the Utility and Holding Company were 42 cents per share without headroom.

This compares with 61 cents per share last year.

Pacific Gas & Electric company contributed 42 cents per share to earnings from operations for the quarter, without headroom.

This compares to 59 cents for the same period last year.

The major reason for the difference is the continued absence of higher revenues while we await a final 2003 GRC decision to cover additional expenses for rate-based growth, inflation, benefits and other costs.

These expenses account for roughly two-thirds of the quarter over quarter difference.

If the CPUC approves the proposed GRC settlement we announced last quarter, it will provide revenues to cover these costs for 2003.

We expect that final 2003 GRC decision in early 2004.

If the decision is on schedule, we will reflect the full year of revenue adjustment for 2003 in fourth quarter results.

In addition to providing us the opportunity to earn our authorized rate of return, this agreement would provide timely and predictable attrition revenue adjustments for 2004, '05, and '06.

Finally, under the GRC and POR settlement agreements, balancing accounts will offset gas and electrics distribution sales fluctuations and generating -- generation operating revenues much as they have for the last 25 years.

Therefore, sales variations will not affect earnings from operations.

We view this settlement as another -- as another encouraging development in the mutual efforts between our company and the CPUC to improve the stability in California's regulatory environment.

The rest of the quarter over quarter difference reflects two factors of roughly equal size.

First, we had more shares outstanding, and second, gas transmission revenues were lower due to lower demand from gas-fired generators.

Rounding out the results, the holding company was break-even for the quarter versus earnings of two cents per share for the same period last year.

The difference is due to lower unitary tax credits resulting from discontinuing operations at the NEGT.

Now for headroom.

Headroom is generally highest in the third quarter reflecting higher summer usage in seasonal rates.

Headroom for the quarter was $1.19 per share.

This compares with 95 cents per share in the third quarter last year.

And several factors account for this increase.

First, hotter weather led to higher electric usage.

Sales fluctuations don't affect earnings from operations under the CPUC's current rate structure, but they do affect the amount of headroom.

Second, DWR remittances affect headroom.

Third quarter headroom this year was higher due to lower accruals per DWR pass-through revenues.

Lastly, headroom was reduced a year ago by a regulatory liability recorded for the half cent surcharge.

We did not reserve the surcharge this quarter as this piece of generation revenues was resolved at the end of last year.

Now, to headroom estimates for the year.

Headroom for the first nine months was $635 million after tax.

This amount does not reflect any offsets associated with the 2003 GRC, which will be reflected in the fourth quarter results, assuming a timely CPUC decision.

An increase in GRC base revenues will reduce annual headroom due to its residual nature.

That, combined with the anticipated lower seasonal rates for most of the fourth quarter, means that fourth quarter headroom is expected to be negative.

So, we are maintaining our expectation of headroom in 2003, to be in the $200 to $500 million range after tax for the year, but expect actual results to be at the upper end of the range.

Note that this reflects the stipulation on the headroom in the proposed Chapter 11 settlement agreement.

This would cap headroom for 2003 at $875 million, or approximately $520 million after tax, and sets a floor of $775 million, or about $450 million after tax.

If headroom falls outside this range, the CPUC would make the necessary adjustment in 2004, assuming the settlement agreement is approved.

Now, for items impacting comparability.

These items are excluded from the results I just described.

They total about 36 cents per share for the quarter.

As in prior periods, these are generally higher interest costs resulting from the California energy crisis and Chapter 11 costs.

These are detailed in our earnings release.

Now, I will turn to the National Energy and Gas Transmission unit, formerly the National Energy Group.

As we've done previously, we're reporting the NEGT on a GAAP only basis.

Results this quarter include only seven days of operation that preceded the NEGT's Chapter 11 filing on July 8.

From that date forward, PG&E Corporation's investment in NEGT is being recorded at cost on the balance sheet as we previously announced.

PG&E Corporation's consolidated results no longer reflect perspective revenues, expenses or losses at the NEGT.

As of July 8, PG&E Corporation's net investment in NEGT was a negative $1.2 billion.

Once the NEGT implements its plan of reorganization, PG&E Corporation's equity in the NEGT will be eliminated.

At that point, we will make the appropriate balance sheet adjustment, bringing NEGT's value from a negative number to zero, by recording a one-time noncash gain to earnings.

We will also offset any deferred tax amounts related to the NEGT's losses.

Now for guidance for 2003 and '04.

We are reaffirming our previous 2003 and '04 earnings from operations estimates for the Utility and Holding Company.

The range is $1.90 to $2.00 per share for 2003, and $2.00 to $2.10 per share for 2004.

And it is important to note that these exclude headroom.

As of the end of the third quarter, we're at $1.15 per share without headroom and without the GRC.

Based on our fourth quarter outlook, we expect 2003 operating EPS to be within the range of our guidance.

Keep in mind that the full effect of the GRC settlement revenues of approximately 45 cents per share will represent a large portion of the fourth quarter earnings.

To recap 2004 guidance, the estimates of the $2.00 to $2.10 per share are derived from projections filed by the Utility in the Chapter 11 process.

These include the effect of the proposed GRC settlement and are included in the 8-K we furnished to the SEC on October 14 this year.

The usual caveats about regulatory decisions and power procurement apply to the guidance estimates since they could significantly impact earnings.

For example, our '04 earnings estimate does not assume any reduction in generator claims against the utility.

If a decision in 2004 reduces these claims, the effect is an increase in available cash and a reduction to the size of the regulatory asset in the POR settlement agreement.

This would allow the Utility to achieve the target 52% equity ratio earlier than assumed, but would also reduce future revenues and earnings a bit.

Our earnings release reconciles our non-GAAP projections with the comparable GAAP measures.

Heading toward year end, we remain committed to securing approval for the POR, maintaining solid operational performance, and delivering earnings in line with guidance.

On all of these fronts, we continue to make steady progress and remain on schedule.

And with that, I would like to turn it back over to Bob.

Thanks, Peter.

The backdrop for these financial results is PG&E Corporation's continued progress towards increasing stability and financial performance.

We've established a clear path on these objectives with the proposed settlement agreement and other actions, including steps in the third quarter.

The proposed plan of reorganization settlement agreement is moving as planned and predicted through the approval processes in the court and at the CPUC.

A creditor vote on the new plan took place last quarter and the results were an overwhelming 97% of voting creditors and all of the voting classes, in favor of the new plan.

The CPUC completed hearings on the agreement on schedule in September.

Confirmation hearings at the bankruptcy court began Monday of this week and are expected to conclude in the next few weeks.

And we continue to expect final CPUC and bankruptcy court decisions on the proposed settlement agreement in December.

These plans for the Utility to exit Chapter 11 by the end of the first quarter of 2004 remain on track and on schedule.

Ultimately, Pacific Gas & Electric Company will return to investment-grade credit ratings, solid and stable earnings from operations and cash flows, a stronger balance sheet, with the target being 52% equity, and with the corporate aspiration to pay a dividend again in the latter part of 2005.

The priorities are to continue operating the Pacific Gas & Electric Company business well, to deliver earnings from operations in line with our guidance, and to keep the proposed settlement agreement on schedule.

And on those, we are on track to achieve those objectives.

Thank you.

All right.

I hope you have all had the opportunity to review our earnings press release which was distributed this morning.

It includes the usual statement of consolidated income, and supplemental performance metrics for Pacific Gas & Electric Company, and these materials can also be accessed via our webpage.

We are also filing with the SEC today our Form 10-Q reports for the corporation and for Pacific Gas & Electric Company.

Let me also remind you that our prepared remarks and the Q&A session contain forward-looking statements based on expectations and assumptions reflecting information currently available to management.

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

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

Now, for the Q&A session, we'll follow our normal protocol of having people limit themselves to one question each time through the queue and this provides everyone an opportunity to be heard.

So, thank you again and Stephanie, we're ready to begin the Q&A.

Okay.

Wonderful.

Ladies and gentlemen if you would like to ask a question, please press star followed by one.

To remove that same question, press star followed by two.

Our first question comes from Michael Goldenberg with Luminous Management.

Go ahead, please.

Good afternoon, guys.

Congratulations on a good quarter.

Thank you.

Just wanted to ask you, what do Schwarzenegger's proposed policies mean to you in the both short and long term?

Well, ensuring adequate energy supply for California is really the key issue.

And the fact that governor-elect Schwarzenegger is focused on future generations, and is focused on not repeating energy crisis challenges of the past, we view as very positive.

We don't currently see anything in the policies that have been revealed so far that represents a problem for our business in the future.

And one follow-up quickly?

Make it really quick, Michael.

It is probably going to be in the queue but can you just quickly state what the cash balances were at parent and PG&E?

Yes, the cash balances at the parent were $835 million at the end of the quarter.

And at the Utility, I believe about $4.4 billion.

Thank you.

And congrats again.

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

Go ahead, please.

Good afternoon.

I just had a couple of questions.

At the CPUC, all related.

Just curious about the status of the long-term procurement proceeding and second, status of the gas accord, I think you're still waiting for a proposed decision, and then whether there is any time frame for a proposed decision on the GRC settlement?

Tom, this is Kent Harvey at the Utility.

In terms of the long-term procurement plan, that is a policy proceeding that has been under way at the PUC for most of the year and it addresses the timing of new addition, the reserve margins that the utilities need to plan for in the future and then the conditions for utility ownership of generation, including issues like compensating equity if we continue to contract for generation in the future.

We're actually proposing that the long-term procurement decision also include adoption of our short-term procurement plan, which is our annual plan for 2004.

We have had such a plan in '03, and we've been implementing it.

We have a plan for '04 as well which is provided for by the legislation in the state and that ensures that we get upfront standards and benchmarks.

In terms of the status, we finished all the briefing stage on it, so the hearings have also finished and we're hoping to get a proposed decision in mid-November with a final decision hopefully at the December 18 conference.

In terms of the GAAP accord, I think your characterization is pretty accurate.

That is our rate-making proceeding for the California gas transmission part of our business.

And we are essentially awaiting a proposed decision and hope to have that any time, with a final decision hopefully before the end of the year as well.

The -- your third part was the general rate case and when we're expecting a proposed decision.

This is Chris Warner, Chief Regulatory Counsel.

We are expecting a decision by the commission on the GRC settlement early in the next year.

We could have a proposed decision coming out any time now, in the next few weeks.

But then we expect a decision, a final decision sometime in January or early February.

Great.

Thank you.

Our next question comes from Scott Pearl with Seneca Capital Management.

Go ahead, please.

Hi, good afternoon.

Good afternoon, Scott.

Good afternoon.

Can you give us a sense for your decision-making process on dividend, what the boundaries are, as far as when you -- you might assign that, given FERC refunds and how you might go about the process of deciding what payout ratio or level may be given the free cash flow in your plan?

Sure, Scott.

This is Peter Darbee.

First of all, we look forward to having to make the decision about what the dividends will be and most appropriately I think that should be -- that decision should be made after we're out of bankruptcy, as you can well understand.

What I would say is we've previously indicated that we would be in a position, and our aspiration, we believe, would be to pay dividends in the second half of '05.

What we've also indicated is if we were to receive FERC refunds, the effect of that would be to accelerate our movement towards the 52% equity ratio and it was at that point that we have intended to pay dividends.

So FERC refunds would accelerate that process.

We are aware that the investment community very much is interested in dividends.

And so we will be consciously focused on trying to pay them at the earliest date.

And when we make decisions along this line, we will be very cognizant of industry payout ratios and other norms, as well as our cash position as we go forward, and cash requirements.

So those will be the basic parameters that we will look at.

Thank you very much.

Our next question is from Greg Gordon with Smith Barney.

Go ahead, please.

Thanks and I only have one question but it is in 27 parts.

[ Laughter ]

Can you just go through with us what the key dates are between now and the end of the year, relative to all of the different regulatory hurdles that we will be looking for, up to hopefully the approval and confirmation of the plan?

Yes, this is Chris Warner, Chief Regulatory Counsel for the Utility.

The first date that we're looking toward is obviously November 18, when a proposed decision is scheduled to be issued by the administrative law judge of the Public Utilities Commission.

Then, there will be comments and reply comments by parties on that decision, and any alternates to that decision, and then the first meeting at which the commission can consider that decision would be December 18, and we're hopeful that the commission will decide the case at that meeting.

On the bankruptcy side, as Bob Glynn pointed out, we began the confirmation hearings this week.

We expect to complete them in the next few weeks.

Then there would be a period where the judge works on a decision, and then issues a confirmation decision and order, hopefully by the end of the year.

What would happen -- what is the specific language in the settlement with regard to walk-aways, if the commission were to not hear the settlement on the 18th, when would be the next time that they could potentially hear it and what are your options if they stall?

Well, the commission has an option to have what it calls a continuation meeting at any time after one of its meetings, subject, of course, to open meetings notices, and so the commission would have time after December 18 to hold another meeting, probably before the end of the year, which is the deadline for approval of the settlement agreement, by its terms.

If they do not consider the plan by the end of the year, does the plan automatically terminate?

Or do you have the ability to sort of unilaterally say you're still willing to abide by the plan if --

The plan just is on its own terms.

It is subject to approval by the commission by the end of the year.

Okay.

Thank you.

Our next question is from Ali Agga with Barnum Securities, go ahead, please.

Thank you.

I wanted to come back to the GRC and clarify two points there.

First, if I heard you correctly, the annual impact that you expect from the GRC settlement is about 45 cents per share, and second, related to that, the settlement amount will certainly lower that what your original proposal was, could you sort of give us a sense of how you plan to make up the difference from the cost side?

This is Kent Harvey again at the Utility, and your question about the general rate case, just the rough number, the 45 cents are based on about $310 million of earnings-related increases.

So there -- that's where the 45 cents per share comes from.

The total original request within the $700 million range, and of that request, about $250 million were non-earnings impacting.

So really, in other words, it was things like contributions to the pension plan and it had to do with depreciation rate.

So the remainder was really in the $450 million range and as I said, the settlement is at approximately $310 from an earnings perspective.

And the way we're going to make up the difference is what we always do.

We manage the company to earn our authorized return, and we are going through our budgeting process right now in order to accomplish that.

Thank you.

Our next question is from Paul Fremont with Jefferies.

Go ahead, please.

Yeah, I was hoping to have you walk through the difference in diluted shares.

It looks like a $7 million increase in diluted shares between the second and the third quarter.

Yeah, in terms of the factor that has driven the increase in the number of shares has about the the share issuance in connection with our 401(k) program for, ever since really the onset of the California energy crisis and our bankruptcy, we've been issuing shares through that program in the holding company.

So is there any further activity that we can expect to create a significant change between now and the end of the year?

And I know that the number now is much closer than to your diluted share guidance for 2004.

Right, we expect to continue this program.

The guidance we indicated has 420 million shares in it for '04.

And we will re-evaluate the question as to whether we would continue the program at the point that we were emerging from bankruptcy.

The reason that we have instituted this, is this is really the sole additional source of cash for the holding company, other than payments we get from the -- from the Utility which are essentially none now except for allocations that we get from -- for reimbursement of costs, incurred at the holding company for services rendered to the Utility.

Thank you.

At this time, we have another question from Scott Pearl with Seneca Capital.

Go ahead, please.

As a follow-up to my earlier question on dividends, relative to use of cash going forward, given what you're seeing with southern California Edison and Mountain View, other opportunities to invest money in infrastructure, with some of that additional cash, once you clear the bankruptcy process?

This is Bob Glynn, Scott.

We've said in a couple of forums that the cash that's available for distribution would be used first of all to fill dividend, as yet to be established, a payout ratio.

Second would be available to repurchase shares beyond that.

And third, that an additional use of some of that cash would be to invest in new utility generation if that was an opportunity that emerged from this public policy development process in California.

And the forecasts that are associated with the Exhibit C we have don't include any new generation-related costs, but the cash line certainly provides a basis for that if that represented an opportunity for the company.

Okay.

Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, please press star followed by one.

To remove that same question, star followed by two.

Our next question comes from Jason West of Deutsche Bank.

Go ahead, please.

Hi, I just had a question on the third quarter earnings.

I had noticed in the monthly filings for the Utility that the O&M was declining quite a bit versus last year in July and August, and just wondering why earnings were down at the Utility if O&M seemed to be going down versus last year.

Let us basically take that question under advisement.

We will see if we have the information to answer that question here.

And we may come back later in the call and address that one.

Okay.

Great.

Thanks.

Our next question comes from Hugh Anderson with Stadea Capital.

Go ahead, please .

Go ahead, Mr. Anderson.

Thank you.

Can you hear me?

Yes, we can.

Sorry about.

That I was just wondering could you go through the scheduled nuclear adages for the next 18-24 months.

Hugh, we may have to come back to that one as well.

Okay.

Thanks very much.

Okay.

There are no further questions at this time.

I'm sorry, we do now have another question from Michael Goldenburg from Luminous Management.

Go ahead, please.

Gentlemen, just to get one more figure.

Can you update us on how much cash have you received from the IRS due to tax benefits stemming from National Energy Group and maybe give us guidance as to what you expect to receive overall?

Yeah, the answer to that question, as I recall it, is $531 million.

You have received overall --

I'm sorry, 351.

It was total was -- refund that we got was, I believe $522.

And $361 related to the National Energy Group at that time.

$361 due to NEG for 2003?

That was due to deductions taken in the NEG.

Related to deductions in the NEG.

Is that expected to increase?

Are you expecting any more?

The question revolves around what is the profitability from a tax standpoint for the NEG going forward in this year, and they have not provided their taxable income to us and the information required to do those calculations, so at this point, we can't really answer that question.

And the worthless stock deduction is included in this $361?

No, the $361 1/2 is a more precise amount, relates to deductions on assets and activities in the NEG that we took earlier in this year.

It did not include the worthless stock deduction.

So there will be more on top of that, because of worthless stock, right?

We haven't made that statement, and we will just have to see when we get tax information from the NEGT what that is and we will make assessments about what their tax position is and ours accordingly.

Thank you very much.

Good luck.

Thank you.

This is Gordon Smith, President of the Utility.

There was a question a few minutes ago related to the refueling of the canyon, scheduled for 2004 and although I don't have the precise date for it, 2004 is a double refueling year, so both units one and two will be refueled during the calendar year 2004.

I believe the first one is beginning at the end of the winter period, late February, early March and the second refueling, I believe, is in the fall quarter.

And I believe that those dates are probably confirmed, if you go in the 10-K, I know that the 10-K has a schedule, so I would refer everybody there.

Also, this is Chris Johns, the Controller for the corporation and there was an earlier question on the operating and maintenance expense decline and the big reason for the decline in '03 versus '02 is that in '02, we were reserving against surcharge revenue -- the half cent surcharge revenues that the utility was collecting, pending resolution as to what those revenues would be used for, at the CPUC and there was resolution in the fourth quarter of '02 and so we do not have a like reserve occurring in '03.

Okay.

Any remaining questions?

We do have a question from Greg Schultz with SAB Capital.

Go ahead, please.

Actually, it is SAB.

You said cash at the utility was $4.4 billion?

Yes.

And you still feel -- are you still sort of sticking to, do you think $2.5 billion by year-end?

Yes.

One of the things that explained the difference between the two numbers is that we pay taxes, we invest in gas for the winter, and there are a number of other payments of that nature that absorb a fair amount of cash in the end of the year, so we have found that our cash is very seasonal.

Okay.

Thank you.

There are no further questions at this time.

All right.

I would like to thank everybody for joining us and we look forward to the next opportunity to report results.