PG&E Corp (PCG) 2004 Q3 法說會逐字稿

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

At this time I'd like to pass the conference over to your host.

Thank you and go ahead, Mr. Gabriel Togneri.

Good morning everyone.

Thank you for being patient.

As you know in these days of Reg FD we want to make sure we have not only the conference call but a live webcast going on simultaneously.

We were having a little technical difficulty with that this morning and it's now been resolved.

So thanks for your patience.

Thanks for joining our call for our third quarter earnings.

All participants are in listen-only mode and thankfully there is both a simultaneous webcast and a conference call happening.

A replay of the webcast will be accesible from the Corporation's home page after the call.

Our earnings release was made available earlier this morning and is posted on our website if you don't already have it.

It includes our consolidated income statement, earnings and EPS breakouts, the non-GAAP to GAAP reconciliations, and supplemental performance metrics for Pacific Gas and Electric company.

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 and Electric company, and other members of our team are also here, and with that I'll turn the call over to Bob Glynn.

Good morning and thanks for joining us as we review another strong quarter of earnings from operations.

Reaffirmation of our 2004 earnings guidance at upper end of the range and reaffirmation of our recent 2005 earnings guidance.

PG&E Corporation reports strong earnings from operations for third quarter resulting from solid operational performance at Pacific Gas and Electric company.

For the quarter, the corporation under 228 million on a GAAP basis, and earnings from operations of 242 million or 50 cents per diluted share.

These results provide confidence that we're on track to deliver 2004 earnings from operations at the upper end of our current guidance range for this year which is $2.00 to $2.10.

For 2005, we recently raised our guidance range to $2.15 to $2.25 per share.

This assumes the refinancing of the settlement regulatory asset, and a corresponding reduction of its rate base earnings, offset by share repurchases made possible by the refinancing proceeds and also by the 350 million of cash currently available at the corporation for repurchases.

We're reaffirming this 2005 earnings guidance today.

These earnings, the recently announced target dividend of $1.20 per share commencing early in 2005, and infrastructure needs in our service territory that will lead to a growing rate base, provide a basis for enthusiasm about the outlook and opportunities for the Company.

Between now and the end of 2006 we expect to generate approximately 2.7 billion in distributable cash.

We intend to distribute 1.75 billion of this by the end of 2005 through dividends and share repurchases.

The remaining 950 million will be available in 2006, and our options will include dividends, share repurchases, and also investments in our core utility business.

Such additional investments would be above the 1.9 billion annual capital expenditure level we've already included in the forecast for '05 and '06.

Higher capital spending will substitute for share repurchases so long as we remain convinced, as we are, that we can earn authorized return on the investment and that those investments will provide good value and needed service to our customers.

The distributable cash estimate assumes that we refinance the reg asset, and it is our base plan to do so.

So this refinancing is expected to save customers as much as $1 billion over the next eight years.

Peter Darbee will now discuss these results in more detail.

Thank you, Bob.

I'll begin with review of third quarter results and close with guidance for 2004 and 2005.

PG&E Corporation earned $228 million, or 53 cents per diluted share for the quarter on a GAAP basis.

This compares to $510 million, or $1.23 per share, for the quarter last year when we were still collecting headroom in a frozen rate environment.

On a non-GAAP basis consolidated earnings from operations were $242 million, or 57 cents per diluted share.

This compares to $174 million, or 42 cents per share for the third quarter last year.

Pacific Gas and Electric company contributed 59 cents per share to earnings from operations versus 42 cents per share in 2003.

The quarter-over-quarter increase in earnings from operations reflects about 15 cents per share in additional revenues from the 2003 GRC settlement and the 2004 attrition decisions.

Remember that the 2003 financial results do not reflect the '03 GRC or '04 attrition decisions.

There is also about 7 cents in equity earnings on the settlement regulatory asset, and about 3 cents in higher electric transmission revenues as a result of transmission rate decisions.

These items were partially offset by higher costs associated with rate-based growth and inflation, as well as amortization of the generation-related regulatory asset.

Rounding out the results was 2 cents per share in operating interest at the holding company.

Prior to April of this year, this interest expense was categorized as an item impacting comparability.

Now, let's turn to items impacting comparability.

These items are excluded from earnings from operations and total 4 cents per share for the quarter.

They include costs related to the California energy crisis, NEG's Chapter 11 filing and the dividend participations rights connected with the convertible subordinated notes.

Details are provided in our press release.

Now for earnings guidance.

For 2004 we're reaffirming our guidance for earnings from operations of $2.00 to $2.10 per share on a diluted basis.

This is based on an average of $425 million -- 425 million outstanding shares for 2004.

Given the solid third quarter results we forecast year end EPS will be at the high end of the range, even taking into consideration the Diablo Canyon outage expenses in the fourth quarter and the potential for winter storms.

For 2005 we're reaffirming our earnings from operations guidance range of $2.15 to $2.25 per share.

As we mentioned previously, share repurchases are a major assumption of our 2005 earnings guidance, and at this time we'd like to provide a little bit more clarity around this assumption.

We intend to pursue three share repurchase programs between now and the end of 2005.

We expect that the bulk of the share repurchases will be executed on an accelerated basis.

The first share repurchase program will be roughly $350 million and will be initiated between now and the end of the year.

The second would utilize the proceeds of the securitization and take into consideration the need to balance the utility's capital structure and pay an April dividend.

The third repurchase program would utilize the utility's cash generated from operations in excess of capital expenditures and would occur towards the end of 2005.

These amounts are included in our projected 1.75 billion of cash available for dividends and share repurchases by the end of 2005.

When combined with the top line earnings, the amount and timing of share repurchases are expected to result in EPS that is within our guidance range for 2005.

Let me also be clear on the other major assumptions for this guidance.

First, the utility will earn its authorized 11.22% return on the equity portion of rate base, excluding the regulatory asset.

Second, the first series of energy recovery bonds of approximately $1.8 billion required to refinance the regulatory asset, will be issued in January of 2005 and the subsequent series is assumed to occur in 2006.

Each series will reflect generator settlements and refunds that are received prior to sizing the refinancing.

Recently we received the administrative law judge's proposed decision that would authorize this financing.

The California Public Utilities Commission is scheduled to issue a final decision by November 19th.

Third, we are targeting an initial annual dividend of $1.20 with three payments in 2005 under our base plan to refinance the regulatory asset in early 2005.

And fourth, with a redemption of the senior notes, the $280 million convertible notes account for all of the holding company's interest expense.

The resulting earnings from operations of $2.15 to $2.25 demonstrates our potential for solid year-over-year earnings per share growth.

If the refinancing of the regulatory asset is delayed or for some reason doesn't occur, the utility would continue to earn 11.22% on the equity portion of the regulatory asset.

And also remember in this instance that shares outstanding would be higher, because there would be less cash available for repurchases.

We reconcile guidance for earnings per share from operations to projected GAAP EPS in our earnings release.

To sum up, a good third quarter has us on track for very solid full-year performance.

Investors can expect this positive momentum to carry into and through 2005 with great opportunities for us to deliver substantial value.

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

So as we said last week, this team is pleased to be communicating with increased clarity and with improving performance, our business prospects, as we told you we would.

We've delivered another solid quarter and expect the full year to be solid as well.

We expect 2004 financial results to be at the upper end of our guidance range, and we're reaffirming our 2005 earnings guidance.

We have an annual target dividend level of $1.20 per share and a target payment date of April 2005.

And you can see very substantial cash available for common dividends and for some combination of share repurchases and additional utility investments through 2006 assuming securitization.

We're increasing our forecast investment in the utility for projects that will benefit consumers and will drive increasing earnings.

And we are committed to delivering these results.

And in the spirit of today, I'm Bob Glynn, and I approve this message.

Back to Gabe.

In addition to our earnings release, we are filing with the SEC today our Form 10-Q reports for the Corporation and for Pacific Gas and Electric company.

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

And actual results may differ materially from those forward-looking statements.

We encourage you to review the SEC filings and obtain additional information and to better understand the factors that can influence future results.

For the Q&A session, we'll follow our usual practice of moving to a different caller after each question.

This provides everyone an opportunity to be heard, and you are certainly welcome to rejoin the queue if you have an additional question.

So with that, Rachel, if you could provide the instructions.

Ladies and gentlemen, if you would like to ask a question please press star followed by 1, and to remove that question, press star followed by 2.

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

Go ahead, please.

Good morning.

I was wondering if could you give us a little clearer picture on what you're seeing in the O&M line?

The way you've presented it, it includes depreciation.

Just curious if you could talk about the quarter and year-to-date excluding depreciation.

Sure, we can give that.

This is Chris Johns, Controller.

O&M for the quarter is 677 million on a consolidated basis versus 678 million last year for the same quarter.

So it's basically flat on a year-over-year basis for this quarter.

Okay.

Next question.

Our next question is from Ashar Khan, SAC Capital.

Peter, can you tell us, what should we use as an average share count for 2005 implied in the guidance?

At this time, we aren't releasing that information.

What we have said is that we expect to do 350 million in share repurchase between now and the end of the year.

Then we'll have the 1.8 billion in securitization, and we've talked about that in the past, in terms of how much debt will be retired.

And then there will be excess proceeds available for share repurchase, and then what we mentioned today earlier in the call, is that the remaining amount would come from cash from operations in the -- probably the latter part of the fall of the year.

So what we want to do is retain some flexibility in terms of the share repurchase program and the amount that we do exactly when, and we're continuing to work on refining our strategies in that regard.

So that's as far as we're prepared to go at this time.

Our next question is from Ali Agha with Wells Fargo Securities.

Go ahead, please.

Thank you.

Bob or Peter or Gordon, could you remind us, the CPUC's decision to accelerate the utility reserve requirements to June '06, would that have any impact as far as PG&E is concerned?

Yeah, Ali this is Gordon Smith of the utility.

We can meet the accelerated schedule to 2006 that the commission has announced they'd like us to meet.

As you probably know, northern and central California is a little better off in terms of preserved margin than southern California is right now, so it would probably be easier for us but we plan on meeting it by 2006 without any difficulty.

It will add some cost to us, but not substantial.

Our next question is from Kit Konolige with Morgan Stanley.

Go ahead, please.

Thanks.

Good morning.

Peter, I think you may have implicitly answered this question already, but I was wondering if could you give us a sense of what form the buyback might take in '05?

For example, are you thinking of perhaps some kind of forward purchase which would lower the share count early in the year but provide the actual purchase to occur during the course of the year?

Sure, Kit.

Let me tell you our thoughts in that respect.

With respect to the 350 million, the first one, it occurs to us that that's taking place late in the year, and, therefore, there isn't a lot of advantage from a share count standpoint, to do an accelerated share repurchase in that instance.

With respect to the largest one, which will come in the early part of the year, there is a fair amount of incentive to get the shares removed from the overall share count, as quickly as possible.

So I think it's likely that that will be an accelerated share repurchase program where, we will work with an investment bank and we will eliminate those shares from the count early on in the year, and they will, in effect, effectuate the repurchases over some period of time, but it won't be an actual forward repurchase, but it will accomplish the accounting objective that you have in mind we do.

And then we haven't made the decision with respect to the third one that would occur, and that would depend on exactly when in the year it would take place, and how many shares -- precisely how many shares were in that third repurchase program.

So that's our current thinking at this time.

Great.

Thank you.

Our next question is from Steve Fleishman with Merrill Lynch.

Go ahead, please.

Hi, guys.

On 2004, could you clarify the comments you made that you're incorporating the Diablo outage and storm costs?

Are these kind of normal costs, or you have some extra cushion?

And just overall what is your allowed -- your earned return expected to be for 2004?

Steve this is Kent Harvey, what Peter was referring to before about Diablo Canyon this is a double refueling year, so both units have scheduled refuelings, and the second refueling has just gotten underway, and that does result in increased expense during the period during which the refueling is taking place.

As you recall in years past, when we were on incentive rate making for Diablo it also affected our revenues.

At this point we're back to cost of service, but it does have an effect on the timing of our expenses.

That's close to a nickel impact in the fourth quarter, and so when you're doing a quarter-over-quarter comparison from Q4 last year to Q4 this year, you'll want to take that into account, as well as the fact that we have our normal rate base growth and inflation impact which together is another nickel.

And I guess a couple of the other items, obviously the GRC and the attrition revenues are in place, and that was not the case in the fourth quarter last year, so that helps by about 15 cents.

You have the regulatory asset as part of a settlement that was put in place, and the equity earnings on that are roughly 7 cents, and then you'll want to remember that there is a negative impact from the fact that there's now amortization of our generation regulatory asset, which is roughly negative 3 cents or so per quarter.

And then I think those are kind of the major items that affect the quarter-over-quarter comparison, in addition to just you'll want to double-check the number of shares, which I think will be slightly higher this year.

Our next question is from Michael Goldenberg with Luminance Management.

You mentioned the first buyback will be accelerated.

I'm not sure if you've stated it, any time frames around it that you can provide?

For the first buyback?

Yeah what I wanted to correct is I did not mention that the first program would be an accelerated program what I said was that the first one would occur between now and year end, and given how late it is in the year, an accelerated share repurchase program would really not yield a benefit with respect to share count for the year 2004.

What I did mention was the share repurchase that took place -- or will take place in the first part of the year, utilizing the proceeds of the securitization, that one would most likely be an accelerated share repurchase program.

So starting earlier in Q1 and --.

Right.

What we've mentioned is that we're targeting the securitization to take place in the first quarter and probably the first half of the first quarter, assuming that we have the private letter ruling and the financing order from the CPUC.

And so once we have that completed we'd be prepared to turn, then, to the share repurchase program.

Gotcha.

Thank you.

Our next question is from Jeff Coviello with Duquesne Capital.

Good morning.

I just wanted to see if you could remind us of how the accounting for the convert will function in '05 versus '04, if there's any change, and then if would you consider using any of the cash for the buy back to repurchase the convert?

This is Chris Johns, the Controller.

On the accounting for the convertible, there's two pieces.

There's the piece that impacts the earnings per share calculation, and that is going to be consistent between '04 and '05.

And there's the piece that requires us to mark to market the embedded derivative that's disclosed in our Form 10-Q and other than -- not being able to predict what the market value will be, generally most of that is probably occurred in 2004, and that's been an item impacting comparability.

With respect to the second part of the question, as we've looked at on the one hand repurchasing shares from the market, and on the other hand retiring the convertible, we've concluded that the best result comes from repurchasing shares from the market.

So it's not our current intent to retire that convertible with the proceeds of the securitization.

Next question.

Our next question is from Ashar Kahn, SAC Capital.

Peter, if I heard you right you said the '05 is based on earning exactly the allowed rate of return.

Can you just give us a sensitivity that if you overearned allowed rate of return, say by 50 basis points, what it adds to earnings?

I don't have my calculator with me, but during this year our rate base is at 17 billion, approximately, and so you'd want to take 17 billion times 52% times 50 basis points, and our guys have their calculators out at the moment.

Gabe what do you have?

It looks like about every 50 basis points is worth approximately 40 million in earnings.

Okay.

Thank you.

Our next question is from Steve Fleishman with Merrill Lynch.

Go ahead, please.

Yes, hi.

Asking the same question as before, which I didn't exactly get answered.

For 2004, based on the upper end of the range, what roughly earned return do you think you'll have at the utility, versus the allowed?

Steve, this is Kent again.

I'm sorry.

I thought I generally hit the question, but what we said was that our overall guidance for the year of $2.00 to $2.10, that's generally based on earning the authorized return, so I think you can do a sensitivity from something around of the middle of that range to the upper end of the range.

So the '04 guidance is also based on earning the allowed return?

That's correct.

Our next question is from Vic Kighton, Deutsche Asset Management.

Could I clarify two things?

One this 1.75 billion in '05, does that include the 350 million you will do in '04?

Yes, does it.

To just be clear on that point, we mentioned that between now and the end of '05, the amount of cash that would be available for both share repurchase and dividends would be 1.75 billion.

Okay.

Then the remaining billion or so left for '06 that could be used for dividend share buyback, as well as utility investments?

That's correct.

And when would you know how much would you need for utility investment in '06?

We will be undertaking an evaluation of that during the remainder of this year and in '05.

We don't have a precise date that we've targeted to have all of those decisions made, but it will be during the course of the year.

Okay.

Thank you.

Our next question is from Zach Shriver with Duquesne capital.

Just a question following up on Jeff Coviello's question.

Could you explain to us the rationale for not buying back the converts?

It would seem that that would be your highest cost of capital given that you're getting penalized on the interest expense and on share dilution.

Is the coupon on that greater than the current common dividend, and then related, a lot of companies that we invest in, you know, have been able to sort of make these unilateral amendments to certain covenants that have allowed them to get out from underneath the COCO-imposed dilution.

Do you have that similar availability to you?

Zach what I would say at this point, we're not prepared to run through a complete evaluation on this phone call, of the pros and cons of refunding the convertible.

What we've said in the past is we constantly evaluate things like this.

And that you know, when and if it occurs to us, that it's in the shareholders best interest we'll go ahead and do that.

So rest assured, as we've done all the way along with, you know, the different financial alternatives that we have available to us, that we will look at that.

One of the issues is, there is no call feature on that, so we'll have to buy that out of the market, and it could be at a very substantial premium, and it's held by a substantial number of holders, and so, you know, these are some of the factors that have already gone into our consideration of not repurchasing the convert versus the equity.

Now, what about changing the covenants, though?

A lot of folks have actually been able to make -- if I recall, PPL has done some modifications to its covenants, Center point has done some modification to its covenants, and, wah la, they don't have to take the COCO dilution.

Could you guys do that, and if you did, what's the impact on your '05 guidance?

It seems like the benefit from the NEG cash associated buyback is being offset by this accounting change from the FASB, and sort of getting real value being taken away by fake change in accounting, you know, anyway.

Okay.

Well what I would say is we will take a look at those other things and what they did in that respect and if we feel we can accomplish the same, I have to say that when one talks about unilaterally changing covenants, that's an interesting concept.

Now, Chris, maybe could you talk about the impact, which I recall maybe like 4 cents --.

Yeah, the impact was about 4 cents.

Of EITF 03-06, that it was about a 4-cent incremental charge, resulting from that convertible.

So it basically, dollar for dollar, offsets the benefit from the NEG cash?

Comparable.

Thank you.

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

Go ahead, please.

Just two questions.

Curious, what storm expense provision did you take in Q4, or do you anticipate taking in Q4 versus the historical provision, then there -- is there any cleanup, tax adjustment regarding NEGT now that they've completed Chapter 11?

This is Kent, Tom, for the first part of your question.

We generally forecast more storm costs in the fourth quarter and the first quarter because that's our storm season.

So we would typically forecast a typical storm period, and we have no additional information at this point of anything unusual except we did have some storms early in October already.

We've had a couple of fairly strong storms for that early in the season.

This is Chris.

As far as the NEGT is concerned and the tax issues surrounding that, we had previously disclosed that they have informed us that they have taxable income for 2004 and we've made a provision at the end of September for that tax expense that we would have, it didn't have a net income impact because they're not consolidated with us for book purposes, and we will then at the end of October, because they're coming out of Chapter 11, went effective last week, finalized all the entrys, and those are fully disclosed in our Form 10-Q.

There would then be no other tax ramifications going forward.

So no incremental tax benefits accruing for the quarter?

That is correct.

Our next queen is from Neal Stein with John Levine & Company.

I guess last week you took up your distributable cash forecast by $200 million, and my question is how come this week you're not adjusting your guidance at all?

I would think if you do a bigger buy back next year your EPS would logically be higher.

Right.

When you look at the impact on earnings resulting from that amount of share repurchase, you're looking at about two cents, and our range is about 10 cents wide.

So I think that, you know, that explains the reason for it.

Are you prepared to talk any more about maybe the reasons for why distributable cash was higher, and might there have been any operating items, net income items that drove up distributable cash that might also have, you know, an impact on your forecast?

This is Kent Harvey at the utility.

We had this question on a previous call when we announced our dividend intentions a couple weeks ago, and generally the answer is there isn't a single item, just generally our cash flows have been somewhat stronger at the utility than we had previously forecast when we were putting together our forecast for coming out of Chapter 11, but it's a number of smaller items.

Okay.

There are no further questions waiting at this time.

All right.

Again, thank you for your patience as we had and resolved the technical difficulties.

Thanks for joining our call, and we'll talk to you again soon.