PG&E Corp (PCG) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the PG&E Corporation first-quarter earnings call.

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

Welcome and thanks for joining our call this morning to report our earnings for the first quarter.

All participants are in listen-only mode through a simultaneous webcast via conference call, and a replay of the webcast will be accessible from our homepage after the call.

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

Gordon Smith, President and CEO of Pacific Gas & Electric Company, and other members of the team are also here.

And now I will turn the call over to Bob Glynn.

Good morning and since our last call, our core, business Pacific Gas & Electric Company, has regained investment-grade credit ratings, repaid creditors in full with interest, and reduced our customers' rates by about $800 million annually.

Now we are focused on delivering value to our shareholders and to our customers through a combination of paying common stock dividends again, buying back shares, and with the possibilities of owning and operating new generation and refinancing part of the balance sheet to make further customer savings possible.

For 2004 we are on track to meet the earnings guidance that we issued with our year-end 2003 earnings report.

We have received a proposed decision in the 2003 General Rate Case that reflects in large part the all party settlement, and we are looking forward to a final decision on that at some point in the second quarter.

We are continuing to strengthen our working relationships with regulators, including working with the CPUC on future electricity supply for California.

Now Peter Darbee will review financial results.

Thank you, Bob.

I will begin with the refinancing of Pacific Gas & Electric Company's balance sheet and the implications of lower-than-expected financing costs for the emergence.

Then to provide a context for the earnings in the first quarter and beyond, I will cover the following -- first, the onetime non-cash accounting effects of booking the regulatory assets; second, our starting point equity ratio, and third the financial impacts of not yet having a GRC decision.

That will be followed by a review of first-quarter results.

Then I will close with earnings guidance for 2004.

In the first quarter, we executed a successful financing to relaunch Pacific Gas & Electric Company.

We secured $2.9 billion in credit facilities to support working capital and to refinance certain pollution control bond obligations.

We also closed $6.7 billion in first mortgage bonds.

In total we refinanced the utilities balance sheet at very low interest rates.

A 4.8 percent blended interest rate for the new taxable financings is significantly more favorable than our previous blended rate of 6.8 percent.

This is more favorable than the rate assumed in the long-term financial projections in our October 14, 2003 8-K.

It is also lower than that of many, if not all, industry peers.

We expect the benefits of these lower financing costs to flow to Pacific Gas & Electric Company's customers.

This will be reflected in our cost of capital filing to the CPUC next week.

We expect a final decision by the end of the year.

We expect our filing to include a forecasted regulatory common equity ratio of approximately 49 percent for 2004.

This common equity ratio differs slightly from the more traditional GAAP-based equity ratio because it excludes certain debt treated as short-term financing.

The regulatory assets related to our plan of reorganization and the utility retained generation are key elements of our new financial profile.

The regulatory asset related to the plan of reorganization is $2.2 billion after-tax.

This was booked as of March 31st of this year.

The unamortized balance of the regulatory asset will earn a rate of return on its equity component for the entire year of not less than 11.22 percent.

In order to make the additional savings possible for customers, we anticipate securitizing a substantial portion of this asset once appropriate legislation and other requirements are in place.

We expect that we made begin implementation at the very end of 2004 at the earliest.

We have also booked a utility retained generation asset of $740 million after-tax.

The weighted average life of this regulatory asset is approximately 16 years.

The asset will also have an authorized return on equity of not less than 11.22 percent until the utility achieves certain credit ratings.

In accordance with GAAP, our first-quarter results recognize a onetime non-cash entry of approximately $2.95 billion after-tax to account for these two assets.

Another significant part of our new financial profile will be determined by the final 2003 GRC decision.

As we announced last week, earnings from operations for this quarter do not include the effects of a final GRC decision and the related 2004 attrition adjustment.

The impact in the first quarter is approximately $64 million after-tax, or 15 cents per share, assuming adoption of the proposed GRC decision.

On April 6th, the Administrative Law Judge issued a proposed decision that would approve the terms of the all party GRC settlement agreement for 2003 with a $326 million revenue requirement increase.

Unfortunately the ALJ recommended removing the minimum attrition adjustment amounts that can be above the CPI growth in 2004, 2005 and 2006.

This would be about $21 million lower than the minimum increase under the proposed GRC decision.

You will remember this settlement carefully balanced the interest of all parties in the case.

It reflects a consensus among a diverse group of different parties.

We believe that balance and consensus are exactly the goals of good public policy.

Hopefully the CPUC will foster and encourage this kind of consensus building by approving all party settlements when they have the opportunity.

The entire amount of GRC revenues will be retroactive to January 1, 2003, and attrition revenues will be retroactive to January 1, 2004.

The Company expects to book the full effects of the decision in the quarter it is received.

A more detailed discussion of these revenues is included in the first quarter 10-Q we will be filing today.

Now let us turn to first-quarter results.

Corporation earned $3.03 billion or $7.21 per diluted share on a GAAP basis.

This compares with a loss of $354 million or 93 cents per share in '03.

The vast majority of this $7.21 per share was the onetime non-cash entry arising from the recognition of the after-tax regulatory assets.

On a non-GAAP basis, earnings from operations for the utility and holding company were 41 cents per share.

This compares to 45 cents per share for the first quarter of '03.

Pacific Gas & Electric Company contributed 42 cents per share to earnings from operations for the quarter versus 45 cents per share for the same period in '03.

The primary difference between the results in the two quarters is share dilution.

Results for the first quarter of 2004 were negatively impacted by cost escalation and rate-based growth without a final GRC decision.

However, this impact was offset by two items.

First, the equity earnings associated with the settlement regulatory asset, and second, higher electric transmission revenues due to transmission owner rates which went into effect at the beginning of year.

Holding company earnings from operations represented a charge of $5 million or 1 cent per share for the quarter compared to roughly no impact last year.

Turning to items impacting comparability.

These items are excluded from earnings from operations and total $6.80 per share for the quarter.

The primary items for the quarter are the onetime non-cash gains of approximately $7.00 per share for the regulatory assets.

This gain was partially offset by higher interest costs resulting from the California energy prices and Chapter 11 costs prior to April 12th.

Shareholder funding, the nonprofit corporation established by the plan of reorganization settlement agreement, to research and support clean energy technologies.

And finally, NEGT Chapter 11 related expenses.

Our earnings release details each of these items in the first quarter.

You can see the potential annual impact to these items for diluted earnings per share by looking at the table that reconciles our EPS from operations guidance with projected reported earnings.

Although we expect the majority of the utility's Chapter 11 related items impacting comparability to go away, we will continue to see some remaining wind down costs.

In addition, we will have the GRC and the items related to NEGT's bankruptcy.

The NEGT related items will include non-cash reversal of our investment upon their emergence from Chapter 11.

This event could occur as early as the second quarter of this year.

Now for 2004 guidance.

Pacific Gas & Electric Company returned to cost of service ratemaking as of January 1, 2004.

As we indicated last week, we are reaffirming our previous earnings from operations guidance for PG&E Corporation at $2.00 to $2.10 per share.

The major assumptions for the 2004 guidance include the following.

First, the size of the regulatory asset and the earnings it generates in 2004 did not change as a result of generator settlements, FERC generator claims reductions or securitization.

And second, a 2003 GRC decision and the 2004 attrition adjustment consistent with the settlement will be authorized.

Of course, anytime we provide guidance estimates, it is appropriate to acknowledge that regulatory uncertainty is always a consideration.

That applies to various CPUC decisions, including GRC.

Looking beyond 2004, the securitization legislation and long-term procurement proceedings are moving forward.

As these and other developments unfold, the 2005 to 2008 financial projections that we provided to the court last fall will become more and more out of date.

Our plan is not to update them.

They are already out of sync with current expectations and will become even more so with the passage of time.

For example, they do not reflect the amount and timing of any FERC refunds, the securitization of the regulatory assets, potential long-term procurement decisions, or any share repurchases.

In closing, as we look ahead for this year, we remain focused on maintaining solid operational performance and delivering strong earnings and cash flow.

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

Thanks, Peter.

The outlook for our Company includes significant opportunities to deliver value to shareholders and to customers.

It is our intent to use free cash flow first to restore the utility's balance sheet to the 52 percent equity target.

After that, we will use that cash flow for dividends and share repurchases.

As you know, we have clearly stated our aspiration to declare a common stock dividend by the second half of 2005.

And regarding new investment opportunities, as we have described before, California is in the process of answering who is going to be responsible for owning and operating the next generation of powerplants in this state, and we are participating in that process.

Some of the issues that need to be resolved as part of this process are identifying who the customers will be and what the obligation to serve will be, establishing a transparent, fair and timely process for assessing generation needs and getting those new facilities built.

We are also actively supporting legislation in Sacramento that will allow us to refinance the regulatory asset and provide substantial additional savings that would flow to our customers.

This legislation, in addition to our support, has the support of the major consumer group and the CPUC.

For the first time in a long while, we have a relatively stable environment in which to pursue our objectives.

The nine-year agreement with the CPUC, the five-year collective bargaining agreements we reached last year with our unions, and the all party settlement of the 2003 General Rate Case provide this more stable environment.

We intend to use this period of stability to deliver value to our customers and to our shareholders.

Thank you.

All right.

I hope you have all had the opportunity to review our earnings 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 the supplemental performance metrics for the utility.

These materials can also be accessed via our homepage.

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

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

Actual results may differ materially from those forward-looking statements, and we encourage you to review the SEC filings to obtain additional information and better understand the many factors that can influence future results.

Now for the Q&A session, I would like to follow our normal protocol of having people limit themselves to one question at a time through the queue so that everyone has the opportunity to be heard.

Of course, you are welcome to come back in the queue to ask an additional question.

So, Chris, can you please provide the instructions for Q&A?

(OPERATOR INSTRUCTIONS).

Kit Connelly, Morgan Stanley.

Good morning.

Could you just give us a little more detail on where the securitization legislation stands, where in the Legislature, and if there has been any comment in the newspapers or other public support or opposition to it?

This is Chris Warner, Chief Regulatory Counsel for the Utility.

Securities legislation has moved through two committees of the California assembly, and we expect it to get to the floor of both sides of the Legislature in the next couple of weeks.

There is favorable support, as you know, from the major consumer group that joined us and the CPUC in advocating legislation, the utility reform network.

So we expect the legislation to move through and possibly be on the Governor's desk sometime toward the end of May.

Okay.

Thank you.

Leslie Rich (ph), Bank of America.

Good morning.

I see that the Bankruptcy Court has confirmed the plan of reorganization for NEGT, and you have mentioned in your prepared remarks that you expect them to emerge in the second quarter or as early as the second quarter.

I just wondered where you stand on the tax dispute litigation with NEGT, if there has been any sort of resolution or movement on that front?

This is Bruce Worthington, General Counsel.

The tax litigation has had some action a week or so ago.

The District Court agreed to remove the case from the NEGT Bankruptcy Court.

The court has then scheduled the trial for March 2005.

Ali Agha, Wells Fargo Securities.

I just wanted to clarify, assuming that the 2003 General Rate Case and the '04 attrition revenue requirements are all approved as you file them, what is the ongoing annual impact to you from that?

This is Gordon Smith of the Utility.

On an annual basis for electricity distribution operations, we are expecting an annual revenue increase as recommended by the Administrative Law Judge in the GRC, General Rate Case, a $236 million increase over currently authorized rates.

On the gas distribution side, it is a $52 million increase over previously authorized revenues.

And then because of the ratebase true-up as we return to cost of service ratemaking for generation, it is a $38 million increase.

So the three of those would add up to $326 million on an annual basis going forward.

And just if I could clarify, does that all flow down to the bottom line, or does some of that get taken away from higher costs?

That all flows down to the bottom line, except for the portion that is our expenses, and that is basically what a General Rate Case does.

I might add that there is an $82 million attrition that we are arguing for for the year 2004.

So these reimbursed our expenses.

To the extent we can come in our expenses lower than these revenues, they will flow to the bottom line.

Again, our goal is to budget to earn the authorized return on equity.

This is Gabe Togneri.

The way you framed your question, I think you mentioned in terms of an increase, and I would just like to remind everybody on the call that the rates we are currently charging build the GRC increases in.

They are not really an increase to current rates.

Customers have already seen rates that reflect consistent with the GRC all party settlement.

Taryn Miller, UBS.

I was wondering if you could talk to us about when you might consider building additional generation and how that factors into Governor Schwarzenegger's prognostication this week of having 15 percent contracted?

The biggest gaining factor in deciding when anyone will build through generation is deciding which party is going to be responsible for that.

As you know, over quite a long time period, California moved towards having basically 100 percent of new generation built owned and operated by folks other than utilities.

And in the Edison Mountainview decision, there was the very beginnings of movement back to allow utilities to participate.

Mountainview was an ad hoc item, and there is continued long-term electric supply proceedings going on in the California PUC right now to determine who is going to be responsible.

That is really the gating factor.

Greg Gordon, Smith Barney.

Thanks.

Just wanted to clarify if you guys do receive the ability to securitize the regulatory asset, that it would also allow you to accelerate the initiation of a common dividend to earlier than the middle of next year?

We have not made any decisions about the timing of the dividend.

What I would say is, from a theoretical basis, the answer to your question is correct, that we would have the ability to pay dividends sooner.

We, of course, need to make a decision about when we would pay dividends.

As you will recall, our strategy is to move the dividend -- move the equity ratio up to 52 percent to do that first.

And then once we have accomplished that, we have additional cash flow that can be used to pay dividends, repurchase shares of stock and also look at investment opportunities and such things as generation.

So we have not made a decision on the timing in that event, but that possibility does exist.

So structurally the securitization would get you there faster, but you have not made an explicit decision?

Exactly right.

Jonathan Arnold, Merrill Lynch.

I know you have said that you are not going to update the numbers for the October projections, but with regard to the ratebase numbers, excluding the regulatory asset on the URG asset, the core gas and electric rate based numbers, there was quite a lot of growth forecast in those original projections.

Is there any reason we should be thinking about differently from how they were originally laid out?

The last ratebased numbers we have disclosed were the end of year at about $14.5 billion, and I think the big change obviously in the first quarter is the addition of the regulatory asset of about 2.2 billion.

That would be the primary change.

Otherwise, our ratebased trends are always very gradual.

They largely reflect our capital expenditures and our depreciation, which are both very steady.

Mike Worms, Harris Nesbitt.

Thank you.

Either Bob or Gordon, can you give us a review of the supply situation in California generally, and maybe more specifically what the outlook is for the summer of 2004?

Specifically since we have heard so much about the lack of Hydro in the Pacific Northwest.

This is Gordon.

Number one, we view, notwithstanding some of the shortages you might have read about in the last several days in Southern California, December of 2004 as being a relatively stable period for us with no interruptions expected.

We believe that there is adequate supplies to meet demand in other words.

The Cal ISO has made some projections that under certain extreme conditions would indicate that there could possibly be shortages if there is not significant conservation.

We tend to disagree with a number of their forecasts, but we do not expect any problems for 2004.

As you may recall, a couple of weeks ago or I should say last week, the Governor announced his electricity priorities, calling on the California PUC to implement reforms to California's electric market.

And he also advocated a 15 percent resource adequacy requirement by 2006 rather than the previous period of around 2008.

So that could possibly increase the need for us to either contract or otherwise provide for 300 to 350 megawatts of reserve by 2006.

But all things considered, I think the shortages we are looking at in Southern California right now reflect very high temperatures and the fact this is spring and there is a significant amount of car plants that are down from maintenance or refueling.

For example, Diablo Canyon Unit I, which is an 1150 megawatt unit.

This is in for refueling right now.

Jeff Caviolli (ph), DK Capital.

Good morning.

I just wanted to see if you could give us the absolute dollar amount of equity at the end of this quarter?

And then I think you said it was expected to be 49 percent at the end of '04.

On an equity to cap basis, I guess that is the utility.

Are there any other adjustments maybe with this GRC being implemented that you would expect over the course of a year to make a onetime change in that level?

Just to clarify what I said earlier, that was what we were filing for was a 49 percent ratio, and that was probably the average -- right, that was the average for the current year.

So that is the point there.

And then with respect to the consolidated equity as of the end of the quarter, the answer is $7.3 billion.

And that is the corporate level, right? (multiple speakers) -- a little higher at the utility?

The utility, we are taking a look for that.

But let me just mention on the 49 percent, that excludes short-term debt.

For the utility, the equity at the end of the quarter was $8.2 billion.

Do you expect if the GRC, assuming it is approved as the settlement is written, do you expect an equity write-up relating to that being retroactive to 1/1/03?

No, we do not, and I just want to go back and mention that the consolidated equity number that I mentioned includes about $300 million of preferred stock.

Michael Goldenberg, Luminance Management.

I might have missed part of the call, but I just wanted to confirm once again where the securitization process currently stands and if you are still on target for end of December issue?

This is Chris Warner, Chief Regulatory Counsel for the Security again.

The securitization legislation is moving through the California legislature, and we are hopeful that it will be on the Governor's desk in the next month or so.

And then, of course, from there on out, we would be moving forward with the mechanics of securitization.

I think as we said at the outset, we would expect that the earliest that we would go forward with implementing securitization would be the latter part of this year.

Remember, Michael, that one of the requirements is we have to get a private letter ruling from the IRS, which is expected to take at least six months.

So that is why it is probably end of year '04, beginning of '05 at the earliest.

Six months from the point of the Governor's approval?

Six months from the -- yes, essentially the time of the Governor's approval because we want to make sure that what we provide to the IRS is the final and is not going to change in some way that they would need to be material, and we have already started the process.

We don't want to do that.

My only other question would be, when approximately would you be looking to provide 2005 guidance?

There is obviously a lot of things that are still in the works that could affect it.

So when would you be comfortable enough?

Normally people do it in the summer preceding the coming year, so I think we would revisit that question at that time.

Thank you very much.

There are no more questions at this time.

All right.

In that case, I would like to just thank everyone for their interest in PG&E Corporation and wish you a wonderful day.