PG&E Corp (PCG) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the PG&E Corporation fourth quarter 2003 earnings call.

At this time I would like to introduce your host, Mr. Gabe Togneri.

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

Thank you, Stephanie.

And welcome.

Thank you for joining our call today to report our consolidated earnings for the fourth quarter and for 2003.

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.

Our Chairman and CEO, Bob Glynn; and Peter Darbee, Senior Vice President and CFO will take us through the consolidated results and other items.

Other members of the team are also present and will participate in the Q&A session afterwards.

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

Good morning.

We closed out 2003 with two critical accomplishments.

The CPUC approval of the Chapter 11 settlement, and the bankruptcy court confirmation of the modified plan of reorganization, both for Pacific Gas & Electric Company.

These successes generated momentum for 2004, and the company continues to move down a clearer and clearer path to greater stability and improving financial performance.

For sure, real work remains to complete Pacific Gas & Electric Company's exit from Chapter 11, and we'll spanned on that in this call.

As we announced last week, 2003 earnings from operations do not include the effect of a final 2003 general rate case decision, because the CPUC has yet to complete that proceeding.

Had their decision been made, our earnings from operations would have been on target with guidance, and you'll note that bulk of the 2003 GRC revenues are already reported in our 2003 GAAP financials.

They're simply reported as headroom instead of earnings from operations.

We're confident that the GRC settlement we have reached remains the basis for the final CPUC decision.

Peter will now view the financial results of the year.

Thank you, Bob.

I'll begin by discussing the financial impacts of not yet having a GRC decision.

That will be followed by a review of fourth quarter and year-end results, including headroom, and then I'll close with earnings guidance for 2004.

First let's turn to the GRC.

Recall that the major parties in the case agreed to a proposed settlement last September, which provided for $326 million revenue requirement increase for electric and gas distribution and electric generation.

As you know, we had assumed the affect of a final GRC decision in our guidance for 2003 earnings from operations.

If we had received a decision consistent with the GRC settlement before closing the '03 books, we would have recognized the annual impact of roughly $.45 in earnings from operations in the fourth quarter.

As a result, we would have met our guidance.

As Bob indicated, it's important to recognize that the delay in the GRC decision did not significantly affect the bottom line GAAP net income.

The reason is that the utility was still operating under the frozen electric rates in '03, and the electric portion of the GRC increase, approximately $160 million after tax which was already being collected as headroom.

As you know, headroom is reflected in total GAAP net income.

So the impact of not having a final GRC decision in '03 was that it prevented us from being able to reflect about $160 million as earnings from operation; and instead, this $160 million was reflected as headroom.

Before reviewing the financials, note that we have put 2002 EPS results on a comparable basis with the '03 numbers to reflect NEGT as discontinued operations.

The actual earnings amounts have not changed.

The difference in the per share amounts stems from the use of basic versus diluted shares to calculate EPS.

Because we reported a loss from continuing operations in '02, accounting rules required us to use the number of basic shares to calculate EPS.

Given that, NEG is now reported as discontinued operations, '02 and '03 earnings from continuing operations are positive; therefore these per share amounts are calculated using the number of diluted shares, as opposed to basic shares.

Now let's turn to fourth quarter results.

For the fourth quarter, the Corporation earned $37 million, or $.09 per diluted share on a GAAP basis.

This compares with a loss of $2.2 billion, or negative $5.41 per share in '02.

On a non-GAAP basis earnings from operations for the utility and holding company were $.34 per share, without headroom.

This compares to $.55 per share for the quarter in '02.

Pacific Gas & Electric Company contributed $.35 per share to earnings from operations for the quarter, without headroom, versus $.51 for the same period in '02.

The major reason for the difference is the delay of the GRC decision.

The impact for the fourth quarter is about $.12 per share.

The remainder of the quarter-over-quarter difference consists of a number of small items that total a negative $.04 per share.

Now turning to full year 2003 results, total corporate earnings for the year were $420 million, or $1.06 per diluted share on a GAAP basis.

This compares to a loss of $874 million, or negative $2.26 in '02.

On a non-GAAP basis, earnings per share from operations for the utility and holding company without headroom were $1.48 per share versus $2.22 per share in '02.

The utility's contribution to earnings from operations for the year was $1.49 per share, without headroom, and this compares to $2.08 per share in '02.

Again, the year-over-year difference was primarily due to the delay of the GRC decision, which accounted for approximately $.45 of the difference.

We also hit more shares outstanding in '03, which accounted for roughly $.15 of the difference.

Lastly, lower gas transmission revenue for the year was fully offset by higher electric transmission rates that went into affect last August, as well as some other items.

To round out the year's operating results, the holding company came in at a negative penny per share, versus earnings of $.14 in '02.

The difference is primarily due to lower unitary tax benefits resulting from discontinued NEGT operations.

Now for headroom.

For the fourth quarter, headroom was $43 million after tax, compared to $133 million in '02.

For the year headroom was $677 million after tax, versus roughly $1 billion in '02.

In accordance with CPUC decisions, we are refunding headroom in access of the pre-tax $875 million threshold, after accounting for the 2003 GRC decision.

This is consistent with the Chapter 11 decision.

Fourth quarter and full year 2003 headroom are net of $125 million pre-tax reserve for access headroom.

The excess headroom is one component of the utility's 2004 rate production filing, and this amount ultimately will be trued up when various CPUC decisions, including GRC are final.

Turning to items impacting comparability, these are excluded from operations, and total negative $.36 per share for the quarter, and negative $1.17 for the year.

As in prior periods, they are comprised of higher interest costs, resulting from the California energy crisis and Chapter 11 costs.

Our earnings release provide the details for this.

Now for 2004 guidance.

We're reaffirming our previous earnings from operations guidance for the utility and holding company at $2-$2.10 per share.

Modifications to the Chapter 11 settlement agreement approved by the CPUC and bankruptcy court weren't significant to operations in '04 and haven't changed our overall view.

The major assumptions for 2004 guidance include the following.

First, a transition from frozen electric rates to cost of service rate making.

Note that this means there will be no headroom earnings going forward.

Second, earnings will include the 11.22% equity return from the regulatory asset established by the Chapter 11 settlement agreement.

Third, there will be no significant changes to the size of the regulatory asset and the earnings it generates in 2004, as a result of generator settlements, FRT [ph]refunds, or securitization.

And lastly, a 2003 GRC increase and 2004 attrition adjustment consistent with the settlement reached by the major parties in the case.

As a reminder, our guidance reflects the projections filed by the utility in the Chapter 11 process, and is included in the 8-K we furnished to the SEC last October.

Our earnings release reconciles our non-GAAP guidance with the comparable GAAP measures, and with major item being the reporting of the regulatory asset in 2004.

Of course, any time we provide guidance estimates, it's appropriate to acknowledge that regulatory uncertainty is always a consideration.

That applies to various CPUC decisions, including the GRC.

In closing as we look ahead to this year, we remain focused on completing the remaining steps to exit Chapter 11, maintaining solid operational performance, and delivering strong earnings and cash flow.

On all of these fronts, we continue to make steady progress.

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

As you know, CPUC approval and the judge's subsequent confirmation of the plan of reorganization were received at the end of 2003.

The deadlines to file appeals to the bankruptcy courts confirmation order and for requesting rehearing of the CPUC decision have both passed.

In the Chapter 11 proceeding, some parties have filed notices of appeal to the U.S.

District Court, and at the CPUC, several parties filed for a rehearing of that decision.

We filed a response with the CPUC.

If the CPUC denies the request for rehearing or doesn't respond within 60 days of the applications, the appealing parties can take their case to the state's courts.

We believe these appeals in each forum are without merit, and that the previous decisions will withstand these challenges.

Now for us, the next steps to exit Chapter 11 are obtaining investment-grade credit ratings from both Standard and Poors and Moody's, and completing the exit financing.

We're targeting to complete the financing in April.

After all of the conditions have been met, there is a required period of 11 business days before the plan becomes effective.

Now we're not only aiming at that day one with utility out of bankruptcy, but also we're aimed at days 2, 3, 4 and beyond.

Pacific Gas & Electric Company will exit Chapter 11 on a solid platform for us to begin undertaking a number of critical initiatives, starting with our commitment to make additional customer savings possible through securitization of regulatory asset, and by continuing to credit settlements, such as those with El Paso, against the regulatory assets.

It includes continuing strengthening of the utility's balance sheet so that we can meet our aspiration to resume a dividend in the latter half of 2005.

It includes having the financial strength to invest in meeting long-term electric supply needs for California, and it includes resuming a more active role in our communities, reconnecting with past partners, and with new ones.

This is all part of our post-Chapter 11 view of the future, and we look forward to making it happen.

Thank you.

All right.

I hope you've all had an opportunity to review our earnings press release, which was distributed this morning, in addition to the statement of consolidated income.

It includes earnings and EPS breakouts, the non-GAAP to GAAP reconciliation, and supplemental performance metrics for the utility; and these materials can all be accessed on our web page.

We'll also be filing with the SEC today our Form 10-K reports for the corporation, and for Pacific Gas & Electric Company.

And let me remind you that our prepared remarks and the question-and-answer session following contains 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 we encourage to you review the SEC filings to obtain additional information and better understand the various factors that can influence future results.

For our Q&A session, I'd like to ask everyone to follow our normal protocol.

And limit yourselves to one questions each time through the queue, in order that everyone can have the opportunity to be heard.

And with, Stephanie, why don't you go ahead and provide the instructions for the Q & A.

Ladies and gentlemen, at this time we will be taking your questions.

If you would like to ask a question, press star followed by 1 on your phone.

To remove that same question, press star followed by 2.

Our first question comes from Carl Brown, with Cramer Rosenthal McGlynn.

Go ahead, please.

Hi, I had a question for you on the appeals at the District Court level and then the request for the rehearing of the CPUC decision.

Do either of these preclude the company going forward with the financing, or would it only potentially affect the cost of that financing, and similarly, how would either of these affect your ability to get an investment-grade rating from the agencies?.

This is Chris Warner, our Chief Regulatory Counsel at the utility.

I'll take the first part of that question.

We intend to consummate the plan notwithstanding any appeals.

The confirmation order for the bankruptcy plan is effective ,and has not been stayed, and therefore we intend to go effective and emerge from bankruptcy as soon as practicable.

After assessing the various appeals, we are confident we that can move forward to obtain the investment-grade ratings and execute the financing notwithstanding the appeals.

Okay.

And the same applies for the CPUC rehearing request?

That is correct.

Okay.

Thanks, very much.

There is Peter Darbee.

I might add that I don't expect that would significantly impact the cost of the financing at all, because we really think that the likelihood of those appeals succeeding is very, very small if not minimus.

Okay, great.

Thanks.

Our next question is from Brian Tinn [ph] of Smith Barney.

Go ahead, please.

Hi.

I was wondering if you could give a little bit more color on the rating agencies and where they stand right now?

This is Kent Harvey at the utility.

We have had extensive discussions with the agencies to date, and as has been indicated, we are quite confident that we remain on track to receive investment-grade ratings, albeit at the low end of it, that's the grade as we have expected.

We anticipate that the agencies'll issue credit ratings as we get closer to the marketing period for exit financing, so we'll have more color at that point.

Great.

Thank you.

Our next question comes from Zack Schreiber, with Decain Capital (ph).

Go ahead, please.

Hi.

It's Zack Schreiber at Decain.

Good morning,zac.

I was just wondering if you can update us at to where we stand with the National Energy Group bankruptcy filing and some of the tax disputes, and I think the cash was escrowed with the parent, if I recall.

Third quarter we had $800 million in cash at the holding company, 400 million of it was restricted.

Where does that stand now?

This is Bruce Worthington, the General Counsel at PG&E Corporation.

Hi, Bruce.

The NEG has filed a couple amended plans of reorganization since they filed last July.

The plans still envision a wide range of potential restructurings, or asset sales, from the NEGT companies.

The tax litigation is still pending.

We filed a motion back in December with the U.S.

District Court of Maryland to move the litigation from the bankruptcy, court where it currently resides, to the Federal District Court, and the district court has scheduled a hearing on our motion toward the end of April.

We've also filed, in the bankruptcy court, a motion to dismiss that tax litigation while we await a decision from the district court.

The litigation -- the motion to dismiss is being briefed, and we have a oral argument on that March 25.

In the meantime, the bankruptcy court has reset the trial start date for that litigation to January of '05, unless it gets moved earlier to the district court.

With respect to the stipulation we filed with the court affecting the cash that we received from the '02 tax return, there's been no change in the status of that.

To remind you, what we agreed there was to give ten days notice before we went below the $361 million in cash that we received from the IRS.

Let me just supplement Bruce's response by saying at year end the holding company cash was $1 billion 40 million, and that's the total amount so you would subtract out the restricted amount of $361 from that.

While I'm on the topic of cash, and because people always ask that question, the total cash at the utility was at year end was $3.4 billion, of which slightly over 400 million was restricted.

Okay.

Our next question comes from Michael Goldenberg, with Limitless Management [ph].

Go ahead, please.

Good morning, guys.

Good morning.

I just wanted to ask you, first of all, how come there were fewer shares outstanding in Q4 '03, versus your full twelve months, and if you can just repeat on the cash portion -- 361 is included in 104?

That's correct.

On the cash.

Okay.

What about the shares?

On the shares, the answer to the question is, as we were doing the calculation of the earnings per share, it turned out that the inclusion of the subordinated debt would have been anti-dilutive, and so what we did for the quarter was we included the cost of the debt as debt, but then did not include the shares associated with the conversion factor, so that was the reason for that quarter, why it was done that way.

As we go forward, how should we think about whether you are planning -- you will end up including or not?

Is it based on stock price or are there other factors that we should be looking for as we try the model to see if you're going to have more or fewer shares outstanding?

We expect we will have -- that we will be doing the calculation as if it were equity, which would entail the estimate for the coming year about 420 million shares outstanding, maybe 423, somewhere in that range.

Our next question is from Ali Agha with Burnham Securities.

Go ahead, please.

Thank you.

Bob, could you just remind us to the extent when you reinstate the dividend, as you said, latter part of '05, what parameters should we be thinking about.

Specifically I'm thinking about a payout ratio.

What should we be thinking about when the dividend does come back?

We've been asked that question several different times, and at this time we're going to answer it the same way as we have in the past, and that is what we're expecting is that we would pay it once our equity ratio gets up to 52%; and as we've indicated, the projections show that would be in the second half of '05.

To the extent we get refunds or have a securitization, that will mean we get to the 52% ratio more rapidly, and that would accelerate potentially the commencement of dividends.

We have not come out and said what our payout ratio would be and really talked about where we would set it.

What I can assure you of is that we will take the approach there that people typically take when they set their dividend, and that is we will be aware of what comparable payouts are and comparable yields are and we will think about what amount of cash is required for reinvestment in the business, and the standard cooperate finance approach that one would take to setting the dividend.

Thank you.

Our next question comes from Matthew Mark, with Jet Capital .

Go ahead, please.

A couple of questions.

Implicit in the earnings guidance for 2004, I think, is that share number of around 420 million shares.

I'd be curious to try to understand what the use of free cash flow is going to be, for whatever period of time, between the emergence of the utility from bankruptcy and the achievement of the target equity to capital ratio as a first question.

Then, I guess, my second question would be if you could speak to -- more generally once we've achieved the target capital ratio to the extent that you're comfortable, what's a fair expectation for, sort of, use of cash and whether or not you're able to elaborate on that any more at this point given the confirmation.

And just, third, if you could briefly talk about the status of the securitization legislation and how that process is going along.

Right.

Why don't I take a crack at that.

First our expectation in the near term would be that the excess cash that we generate during the remainder of '04 and into '05 would be used entirely for increasing the equity base so moving us towards that 52%.

So earnings would be retained during that period, and not used for share repurchase or dividends.

Then what would happen, is we would get to the point of the 52% ratio, and we would turn on the dividends is the intent, because we think paying dividends for a utility is very, very important.

Now a baseline type of analysis we're doing going forward is we'll set the dividend and then excess cash is available for share repurchase.

On the other hand, as Bob mentioned during the course of his remarks, we feel it is critical both for the state of California, as well as the company, to ensure there's a resolution to the California energy problem and ensuring that there's sufficient power.

So as we look out beyond the point of paying dividends, what we would do is weigh investments and power generation in the state of California versus a share repurchase program, and we would use as the benchmark the return to investors of that share repurchase program.

But I think we will certainly have an eye looking at the question of investment in generation, meeting the company's net open position, and what will be critical about investments in generation is ensuring that we get an appropriate return on and return of investment.

And this will be utility generation is what we are talking about.

Chris, you want to do the DRC?

Sure, this is Chris Warner.

The securitization legislation is moving forward fairly positively in the California legislature, and we would expect a final vote on the legislation sometime during the second quarter.

Of course, there are other implementing steps that would have to take place after that legislation is enacting, including tax ruling, CPC implementation, and, of course, a precondition is that PG&E has emerged from bankruptcy.

Okay.

At this time we have another question from Michael Goldenberg with Limitless Management.

Go ahead, please.

Yes, guys, I just wanted to follow up on the NEG trial, as long as the trial has not begun, you will always keep the restricted cash aside and will not be using it, and so that means at least until the January '05 time frame?

Not necessarily.

We'll keep it there as long as the court order is in affect.

As I mentioned we have a motion to dismiss pending, and if that''s granted, that will certainly dispose of it.

But if that's not successful, at least until January '05, I would imagine you would, assuming there's no success in motion to dismiss?

Or it otherwise gets resolved.

Okay.

That makes sense.

Thank you.

At this time we another question from Tom O'Neill with Lehman Brothers.

Good morning.

I was just curious if there is a schedule at all on the Federal District Court appeal?

This is Bruce Worthington again.

The -- couple parties who have filed have just recently received an appointment of the judge.

On Tuesday we filed a motion to have the matter referred to the federal district judge who's handles all of the other issues on appeal.

We also filed a motion to dismiss for the two commissioners who filed for appeal, and we asked for the Court to stay the briefing schedule on the rest of the issues until such time as those two matters are resolved.

So, there is no schedule yet established.

And the judge that was appointed was who?

Judge Pattel [ph].

Thank you.

Once again, ladies and gentlemen, if you would like to ask a question press star followed by 1.

To remove that question press star followed by 2.

At this time there are no further questions waiting.

All right.

I'd like to thank everybody for your interest in PCG, and have a great day.