PG&E Corp (PCG) 2005 Q1 法說會逐字稿

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

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

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

Thank you for joining our call to discuss first quarter earnings.

As usual, 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 website after the call.

Our earnings releases are also posted on our website and we've expanded the supplemental earnings materials to provide more detail and transparency.

This expanded package contains the quarter-over-quarter EPS reconciliation, utility operating statistics, cash flow sources and uses, debt tables and the full financial statements.

Note that a subset of the complete package is contained within the earnings release issued over the wires and the complete version can be found on the investor relations page of our website and has also been furnished through a 8-K filing with the SEC.

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

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

And now I'll turn the call over to Peter Darbee.

Thanks, Gabe.

Good morning and thanks for joining us.

PG&E Corporation is off to a solid start this year.

First I'd like to reiterate how pleased we are that the shareholders began receiving a regular common stock dividend again last month at a quarterly level of $0.30 per share.

This is an important milestone because it signals the completion of our financial restoration after hitting our 52% equity target in January.

As we previously said, we're on track to distribute nearly $2 billion in dividends and share repurchases in 2005.

Now during this course of this call, we will review the following: First quarter results, which continue to reflect strong operations and the stable regulatory framework under which we operate.

Earnings guidance for 2005 and 2006 which we are reaffirming today.

And lastly, an update on the investments we're making in the business as well as our overall transformation effort.

First quarter performance was in line with our expectations.

The corporation earned $218 million on a GAAP basis.

Non-GAAP earnings from operations were $226 million or $0.56 per diluted common share.

Earnings reflect solid operations, as well as the effects of issuing the energy recovery bonds in February to refinance the settlement regulatory asset.

We're planning to issue the second series of the RVs in connection -- in November.

In connection with the first series, we executed a $1.05 billion accelerated share repurchase program, which cancelled 29.5 billion -- million shares in early March.

In connection with the second series, we plan to buy back approximately $500 million in shares to meet our total repurchase target of $1.6 billion this year.

The combination of both series provides customers with savings of up to $1 billion over the next 8 years.

Looking ahead, we continue to see a stable path.

This puts us in a strong position to increase shareholder value.

We see significant opportunities to transform our operation and invest in needed infrastructure to better serve our customers.

As we discussed with you, we're undertaking an in-depth analysis of our key processes with a goal of providing better, faster, and more cost effective service.

We're using that analysis to identify opportunities and define specific initiatives.

Then we're going to take a highly structured and highly focused approach to implementation.

As you'll recall, we said that this is a three to five-year process and we're now at the front end.

We look forward to providing you with periodic updates at a regular basis.

Now Chris Johns will review the quarter and our outlook for the next several years.

Thank you, Peter.

This morning I'll review our first quarter results, discuss EPS guidance for 2005 and 2006, and close with a general outlook for the next several years.

PG&E Corporation earned $218 million or $0.54 per diluted common share for the quarter on a GAAP basis.

This compares to a $3.03 billion or $7.15 per diluted share for the first quarter last year, which primarily reflected the recognition of two regulatory assets associated with the Chapter 11 settlement.

On a non-GAAP basis, consolidated earnings from operations were $226 million or $0.56 per diluted common share.

This compares to $175 million or $0.41 per diluted share for the first quarter last year.

Pacific Gas and Electric Company contributed $0.56 per common share to earnings from operations versus $0.42 per share in 2004.

The quarter-over-quarter increase in consolidated earnings from operations is primarily due to the timing of the 2003 general rate case and attrition decision.

Recall that we received a final decision last May that was retroactive to 2003.

As a result, first quarter earnings last year did not include the GRC and attrition revenues that equate to approximately $0.15 per share.

Also contributing to the increase was about $0.03 of higher equity earnings on rate base.

The utilities equity ratio reached its authorized level of 52% in January of this year and compares to about 48% in the first quarter last year.

Lastly, we had fewer shares outstanding, as well as some small miscellaneous items, each of which accounted for $0.02 of earnings per share.

Partially offsetting these items was an adjustment to our liability for environmental remediation which reduced earnings by about $0.03 per share.

We also had approximately $0.04 of lower earnings on the regulatory asset.

During the quarter, we continued to earn an equity return on the regulatory asset until the first series of the energy recovery bonds were issued in February.

This resulted in one and a quarter month of earnings this year versus a full quarter in 2004.

Turning to items impacting comparability, these items are excluded from earnings from operations and totaled $0.02 per common share for the quarter.

The amounts reflect the net interest expense associated with the Chapter 11 claims that are still pending.

Details are provided in our press release.

Now for earnings guidance.

For 2005, we're reaffirming our guidance for earnings from operations of $2.15 to $2.25 per share on a diluted basis.

This is based on earning the authorized return on a forecast rate base of about $15.3 billion.

As Peter mentioned, it also reflects the impacts of the regulatory asset securitization which includes the elimination of the regulatory asset earnings going forward offset by fewer shares outstanding from targeted share repurchases of about $1.6 billion.

For 2006, we're also reaffirming our earnings from operations guidance of $2.30 to $2.40 per diluted share.

Again, this assumes that we earned our authorized ROE.

As we've discussed previously, 2006 poses some earnings challenges due to the carrying costs credits associated with second series of securitization and the remaining balance of the rate reduction bonds.

Estimated earnings reduction is approximately $70 million in 2006.

This impact will decline over time and eventually go to zero.

With regard to shares outstanding, we don't currently expect any repurchases in 2006.

For 2005 and 2006, we assumed annual base capital expenditures of approximately $1.9 billion.

The potential incremental expenditures that we previously identified are not really material until late 2006.

We also assumed that $280 million of convertible debt remain outstanding so annual interest at the holding company will reduce earnings by approximately $16 million.

A reconciliation of our guidance for 2005 and 2006 earnings per share from operations to projected GAAP EPS can be found in our earnings release.

Beyond 2006, we'll have a new general rate case, as well as other proceedings to address long-term procurement resources and advanced metering.

These proceedings will determine our level of capital spending in 2007 and beyond.

Looking forward, our outlook supports solid earnings and dividend growth.

With regard to dividend growth, our current payout ratio is at the lower end of the 50 to 70% target range.

Given the investment opportunities before us, we intend to balance dividend growth with incremental expenditure opportunities.

So while we expect the dividend to grow, the payout ratio is likely to stay at the lower end of our range.

In summary, the first quarter provides good momentum for the rest of the year, with excellent opportunities to deliver value to our shareholders.

With that, I'd like to turn it back to Peter.

Thank you, Chris.

I previously discussed our five priorities for 2005, which are completing our financial restoration, transformation, procurement, communication, and investments in utility infrastructure reaching our 52% targeted equity ratio and paying a common dividend, address financial restoration, and we've touched on transformation already today.

On the communication front, we've been significantly enhancing our communications efforts both inside and outside the Company.

I'd like to give you an update on the two remaining priorities.

First, investments in utility infrastructure.

In addition to base capital expenditures, we're continuing to pursue significant potential incremental investments, advanced metering and utility owned generation.

We believe that advanced metering technology will provide value to customers through improved demand response and better outage management.

We intend to file a full project application this summer, and we're targeting systemwide deployment beginning in 2006.

Another one of our priorities is addressing procurement to ensure our customers will have sufficient stable power supplies.

One way we're doing this is through our bid process for long-term power supply.

We requested offers for both utility owned generation and power purchase alternatives.

We believe a mix of both is the best outcome for our customers.

The bids came in last week, so we'll be reviewing them in accordance with the CPUC long-term procurement decision issued last December, and we expect to go to the CPUC in the third or fourth quarter of this year to file for approval of the contracts.

To sum up, we're off to a solid start in 2005.

We're reaffirming our positive outlook for the year.

We're energized by our transformation efforts and we're taking concrete steps to make investments that are going to provide value to customers and shareholders alike.

Now I'll turn it back over to Gabe.

Thanks, Peter.

In addition to our earnings release, we have filed with the SEC today our form 10-Q reports for both the corporation and Pacific Gas and Electric Company.

Let me also remind you that our prepared remarks, and the Q&A session, contain forward-looking statements that are 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 and obtain additional information and to better understand the many factors that can influence future results.

Now let's go to the Q&A session.

And Beth, if you could provide the instructions.

[OPERATOR INSTRUCTIONS]

Beth, are you still there?

Our first question comes from Ali Agha with Wells Fargo Securities.

Go ahead please.

Thank you.

Peter or Chris, when you look at your March quarter results for the utility business, is it possible to extrapolate or just look at those results and get a sense of whether currently you are either overearning or underearning or just about earning your authorized return?

This is Kent Harvey.

Our overall guidance for the year is based on earning or authorized return.

I think you can read into the fact that we're reaffirming guidance that we think we're on track to accomplish that during the year.

I would imagine so.

I was thinking can we take a sliver of that, just look at the March quarter and say whether you're right there or actually doing a little better than that.

It's pretty hard to break up an ROE for a calendar year into specific quarters.

Okay.

I would say that, you know, we're reaffirming guidance for the year, and that takes into consideration our performance for the first quarter.

And we think it's still appropriate that the guidance level that we have out there for the year.

Fair enough.

And can you also remind us, what is your target for cash or liquidity that at a minimum should stay at the Company both at the utility and the parent at the end of the year?

Yes.

We're targeting about a $100 million at the holding company level and around $300 million at the utility on a cash basis and then we also have some lines of credit that we have available too.

And last question just related to that, given some of the CapEx programs you've talked about, is it fair to say that that would still be your number one priority in terms of use of the incremental cash is to invest in the utility?

Yes.

That's a fair statement.

We believe that our capital expenditures are the priority investment.

Okay.

Thank you.

You know, the only point that I was going to add is, during the course of the year, looking at different quarter ends and the like, you'll see that the cash frequently goes above the levels, the minimum levels that we have in mind.

And that is the result of either cash build up prior to dividends at the holding company or cash build up prior to taxes in the utility towards the latter part of the year.

So I just want to point that out.

Right.

Thank you

Our next question comes from Patrick Forkin with Tejas Securities.

Go ahead, please.

Good afternoon.

I was wondering if you could give us an update on the timing and the process for the predeployment application on your AMI initiative.

And if you could talk about, you know, the collection of technology that you're going to use for that project and how you went about that process?

This is Chris Warner.

I can speak to the procedural schedule on our AMI application.

We did file the application on March 15th.

We're expecting a prehearing conference in the near future and we've asked for an expedited decision.

We're expecting a decision sometime later this year.

And as to your question about technology issue - no, we're still in that process and that's a confidential process at this time.

Okay.

The decision on the predeployment would be later this year or on full deployment.

The decision on predeployment we expect later this year.

Okay.

Thank you.

Our next question comes from Mitchell Moss with Morgan Stanley.

Go ahead, please.

Hi.

Could you just give us an update on the steam generator replacement at Diablo canyon in terms of timing if you've sort of -- when that will happen?

Yes.

This is Kent Harvey.

You may recall that earlier this year, the PUC approved the cost effectiveness of the steam generator.

So now they're going through the process on the environmental approval which we expect later this year.

That's sort of procedurally when we'll complete the regulatory process.

And so when would the actual spending that you forecast be occurring?

Well, we have begun some of the spending in anticipation of the PUC approval given the lead times involved in getting the steam generators.

In terms of the significant expenditures, most of that takes place post this year.

But we've spent to date about 25 million so far.

The overall cost amount that the PUC approved was 706 million for the project.

Thank you very much

Our next question comes from Vic Katan (ph) with Dutch Asset Management.

Go ahead, please.

Yes.

Thank you.

Good quarter Peter and everybody.

Thank you.

Thank you, Vic.

The question is regarding the utility -- generation of procurement plus the AMI, the automated meter reading investment.

What's the size of that you are contemplating and can those funding be done through internal cash or do you need to raise some money externally to fund those procurement and AMR?

Victor, what we said on -- this is Chris Johns.

On the automated meter initiative, we're projecting that's about a billion dollar investment.

And as we've said in the past, that's spread out over a four to five-year period of time.

And then as far as generation is concerned, you know, we are going through the RFO process, and there's going to be some mixture of utility-owned generation and long-term procurement contracts.

And I mean it could be zero to any number that that mixture's out there.

And although we're not reconfirming any of the post '06 information that we said in the past, if you recall back to the analyst conference that we had in February, at that point, there was provided a projection of some anticipated generation investments.

And I think that there were incremental expenditures in that projection of about $300 million, somewhere around 2008.

But the funding for this thing could be anticipated to be met through internal cash, I assume?

What we've said is that we believe we have enough internal cash generation for '05 and '06 to fund any and all of our capital expenditures including any of the incremental capital expenditures and we're not commenting on any cash flow post '06 because we're going to go through the 2007 general rate case and we have to consider what comes out of that and what our current cash positions are then in the future.

So post 2006 we haven't really been projecting what our cash flows will be.

Could I just clarify, then, the statement you made about dividends that you anticipate dividend will grow but it will be at the lower end of the ratio.

And in light of somewhat unclear capital spending plan, would you say that the dividend growth could be -- what should we be interpreting that to be dividend growth prospects?

Well, what we're saying is that we're not putting out a growth rate.

We do anticipate that our dividends will grow and we want to keep it within the 50 to 70% range.

What we said is we want to have the flexibility to balance the dividend growth with our opportunities to make investments in our infrastructure of the utility.

However, realizing that, we understand we're already at the low end and as our earnings grow, we're going to continue to grow the dividends not necessarily in lot step but to stay in that range and we're anticipating at least over the next year or two, to be in, or in the lower end of that range.

Okay.

Thank you.

At this time, there are no further questions.

All right.

Well, let me just thank everybody for joining our call today and your interest in PG&E Corporation.

Have a great day.