PG&E Corp (PCG) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

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

Welcome everyone, and thank you for joining our call to discuss second quarter earnings.

As you all know, participants are in listen-only mode through a simultaneous webcast and via conference call, and a replay of the webcast will be available from the PG&E home page after the call.

Our earnings release is posted on our web site along with supplemental earnings related tables.

These materials have also been furnished to the SEC in our 8-K filing.

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

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

And now I will turn the call over to Peter Darbee.

Thanks, Gabe.

Good afternoon and thanks for joining us.

The second quarter earnings we're reporting today put PG&E in a solid position at the mid-year mark.

Our overall performance continues to underscore the major themes that define the PCG story, namely, solid financial performance, a stable business and regulatory environment, and opportunities to deliver better, faster and more cost-effective service to our customers.

Earnings for the quarter on a GAAP basis were $267 million.

On a non-GAAP basis earnings from operations were $262 million or $0.69 per share.

We're also raising our earnings from operations guidance for both 2005 and 2006, which we'll cover in more detail when Chris Johns reviews the quarterly results.

During today's call I'd also like to update you on the steps we taken to advance our objective to deliver value for customers through needed investments in infrastructure, investments in our people, and transformation of our business.

As you know, we have previously articulated a capital expenditure outlook that is designed to support this objective, and we've taken steps recently to begin obtaining the key approvals we will need to move this effort forward.

First, we have filed our application to deploy advanced metering across our system over approximately a five-year period.

The total cost of deployment is estimated to be about a $1.5 billion, of which $1.25 billion is capital related.

Advanced metering technology will significantly improve customer service in billing, meter reading and outage management.

It also dovetails with the state's policy of introducing greater customer awareness and improved demand response during peak power periods.

We're optimistic that the Commission will see the same benefits that we do and they'll give us the green light to move ahead with this program.

In addition to AMI, we have also asked the Commission for approval to take ownership of the partially built Contra Costa Unit # 8 so that we can complete it and get it online for the benefit of our customers.

If approved, we expect to invest $310 million to complete the plant and have it operational by 2008.

Contra Costa Unit #8 would provide 530 mega watts of low cost, low emission, power, and help address local reliability issues.

Last, two days ago, we submitted our Notice of Intent filing for our 2007 general rate case.

The GRC covers the revenue needed to operate our electric and gas distribution business and all nonfuel generation costs over the 2007 to 2009 period.

This case is about committing the resources necessary so that PG&E can deliver great service and provide for a reliable energy future.

Our request is designed to ensure we have the right infrastructure, tools and technologies, in combination with highly skilled motivated people focused on the customer.

As the name of the filing indicates, this is a draft application that gives the Commission staff an opportunity to check the filing for completeness.

We expect to file our official application towards the end of the year.

The total base revenue increase in the request relative to projected 2006 levels, is $393 million for electric distribution, $61 million for gas distribution, and $48 million for nonfuel generation costs.

Like many other utilities, there are significant parts of our electric distribution system that are nearing the end of their useful life.

Additional investment for necessary upgrades for infrastructure replacement will help ensure service and enhance reliability.

We're looking forward to working with the CPUC and other parties to move all of these applications forward.

And now Chris Johns will review the quarterly financial results.

Thank you Peter.

I will begin buy reviewing our second quarter results.

I'll then discuss our outlook and EPS guidance for 2005 and 2006, and, finally, I'll discuss a portion of our estimated capital expenditures for 2007 through 2009, and our 2007 general rate case.

PG&E Corporation earned $267 million, or $0.70 per diluted common share for the quarter on a GAAP basis.

This compares to $372 million or $0.88 per diluted share for the same quarter last year, which reflected several quarters of revenue associated with the 2003 general rate case and 2004 attrition decision received in May of last year.

On a non-GAAP basis, consolidated earnings from operations were $262 million, or $0.69 per diluted common share.

This compares to $298 million, or $0.70 per share for the second quarter last year.

The quarter-over-quarter change in consolidated earnings from operations was due to the following factors: First, operating earnings were lower by approximately $0.16 per share compared to last year due to the timing of the 2003 general rate case decision.

As you may recall, we recorded two quarters worth of the revenue increase in the second quarter last year because of the delayed decision.

Earnings were also lower by approximately $0.07 compared to last year, because we stopped earning an equity return on the settlement regulatory asset when we issued the first series of energy recovery bonds this past February.

On the positive side, we had a pickup of $0.04 because second quarter last year included the Diablo Canyon refueling outage compared to no outage during the quarter this year.

In addition there was $0.02 of higher equity earnings on rate base, because the utility's equity ratio is at the authorized level of 52%.

This compares to an equity ratio of about 49% in the second quarter last year.

We also had fewer shares outstanding, which accounted for an additional $0.08 of earnings per share.

At the holding company lower interest and other expenses accounted for another $0.02 per share, and finally, we had approximately $0.03 from earnings resulting from settlements of outstanding disputes relating to certain electric transmission contracts, and $0.03 of small miscellaneous items.

Turning to items impacting comparability.

These items are excluded from our interim operations and total a positive $0.01 of earnings per share for the quarter.

The amounts reflect net interest charges on disputed claims.

We previously recorded these amounts against earnings but during the second quarter we received regulatory recoveries going back to mid February of this year.

Turning to earnings guidance for 2005.

We are increasing our guidance for earnings from operations from $2.15 to $2.25 per share, to a range of $2.20 to $2.30 per share on a diluted basis.

This increase is based on the strong year-to-date operating results, as well as the earnings pickup for the settlements of certain electric transmission contracts that I mentioned earlier.

Our guidance still assumes that we will issue the second securitization bonds in November.

We're forecasting an issuance up to $800 million which incorporates roughly $385 million of generator settlements occurring prior to that issuance.

With regard to share repurchases, we are now targeting approximately $1.8 billion of repurchases this year compared to the $1.6 billion we have previously discussed.

The incremental $200 million of repurchases reflects higher available cash from the utility.

The utility recently increased its revolving credit facility to $1 billion which allows us to manage our capital structure and cash more efficiency.

Since the remaining repurchases will occur later in the year they will not materially impact the 2005 average share count but will have a positive effect on the 2006 results.

As we look at 2006, share repurchase activity we may see a modest level of repurchases next year, perhaps 200 million or so transacted throughout the year.

As a result, we are also increasing guidance for 2006 by a nickel to 2.35 to $2.45 from our previous guidance of $2.30 to $2.40 per diluted share.

This assumes that we earn our authorized return on equity on a rate base of approximately $16 billion.

Also, because we are now factoring in some generator settlements in a correspondingly lower energy recovering bond issuance in November the carrying cost credit in 2006 is forecast to be slightly lower.

Instead of the combined energy recovery bond and rate reduction cost credit of $70 million we assumed earlier, we are now estimating a carrying cost credit impact of approximately $65 million in 2006.

While earnings will still be challenged due to the carrying cost credit in 2006, the incremental share repurchases result in a higher earnings per share, looking forward into 2006.

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

As Peter mentioned, we have made several filings recently at the CPUC which include proposals involving capital investments.

These proposed investments impact our spending in 2006 and 2007, and beyond, and include the general rate case, the Diablo Canyon steam generator replacement project, Contra Costa Unit #8, and AMI deployment.

The capital expenditures requested in these filings are not significantly different from the forecast of combined base and incremental investment opportunities we discussed at our February analyst meeting.

AMI is slightly higher at approximately $1.25 billion through 2010, and although the NOI is preliminary, our general rate case request reflects average annual base distribution and generation capital expenditures over the 2007 to 2009 period at $1.5 billion, compared to a $1.3 billion annual base average in our February forecast.

In addition to the proposed capital investments, another important component of our general rate case that I would like to mention is our transformation program.

While we are still in the early stages of this effort, we built into our request the estimated net savings from this program.

The estimated savings will have the effect of reducing the attrition component of the request in 2008 and 2009.

Should there be additional savings that are achieved during this period, we proposed a 50/50 sharing mechanism with customers for any earnings in excess of our authorized return on equity plus 50 basis points.

Our goal in transformation is to serve customers better, faster and more cost-effectively, and the savings proposals in our general rate case filing are general examples of how to we intend to achieve the cost-effectiveness part of that goal.

To wrap up we had another good quarter.

We raised our financial expectations for 2005 and 2006, and we remain on track with excellent opportunities to deliver added value to our shareholders going forward.

With that, I would like to turn it back to Peter.

Thank you, Chris.

At mid year we made good progress with respect to the five priorities that we set out earlier this year.

You will recall that they are: Completing our financial restoration, advancing the transformation of our business, addressing procurement, enhancing communications, and investing in utility infrastructure.

Our financial restoration is essentially complete and we are on track to complete the final securitization and execute another share repurchase program towards the end of the year.

We have already touched on transformation and discussed the status of needed utility investments with the applications that we have recently filed with the CPUC.

In our communications efforts we have been out in front of our constituents on a regular basis so that our story is accessible and well understood.

With the summer season well underway I would like to give you an update on our priority for addressing procurement.

We recently hit peak levels of nearly 21,000 mega watts for the PG&E area, and I'm happy to report that we had adequate supplies to meet our customer needs.

We expect that this will be the case for the remainder of the summer.

We want to ensure that our customers will continue to have sufficient stable power supplies and we are addressing this through our bid process for 2200 mega watts of new long-term power supply among other steps.

We have recently short listed the bidders and will enter into a second round of bidding with these participants.

We then plan to execute contracts and file for CPUC approval by the end of the year.

To close, we are pleased with the Company's performance through mid year.

As we look forward to the second half of 2005 and beyond, we continue to focus on operational excellence for our customers and delivering solid results for our shareholders.

And now, I would like to turn it back over to Gabe.

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

Now, let me remind you that our prepared remarks and the Q&A session following contain forward-looking statements base the on expectations and assumptions reflecting information currently available to management and actual results may differ materially from those forward-looking statements.

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

And now let's take questions.

Rachel, would you please provide the instructions?

[Operator instructions] Our first question is from Michael Goldenberg of Luminous Management.

Go ahead, please.

Good afternoon, guys.

Good afternoon.

Just wanted to ask you once again on dividend policy.

You have stated several times before about the 50 to 70 payout ratio and overall views on staying lower in the meantime.

I was wondering if anything's changed or if anything can change that line of thinking?

If you can talk about the correlation of capital expenditures and the dividend policy as well?

Sure, Michael.

This is Chris.

As we have stated and we are not changing that, that we still have not put out a target dividend growth rate, and that we do have the target range of 50% to 70%.

We do anticipate that the dividend will rise as our earnings rise, maybe not in lock step, but as you can see we do have a lot of opportunities out there to make capital investments and we are continuing to try to balance those opportunities with what our dividend growth rate will look like.

Thank you.

And my only other question is regarding transmission.

There has been the recent IPO, and, I guess in general, there has been talk throughout the utility world about companies potentially looking to splitting off the transmission or distribution.

I was wondering if you guys have given any thought to separating any of those businesses or you would prefer to run them as integrated utility?

We constantly examine every part of our business and ask ourselves, "How do we optimize the value from it?"

What I would observe, having been involved in my career with IPOs of cellular companies out of the regional holding companies and others, is that industries go through cycles and there are cycles where people like pure plays and then there are cycles where people like integrated entities, and based on that experience we would be inclined to keep electric transmission as part of our integrated utility effort unless there became apparent significant strategic and operational reasons that would create substantial advantage and long-term advantage for the electric transmission to be separate.

So, what I would say is, we will always be looking at how to configure our business and be open minded about that, but that at this time we certainly haven't developed a view that we should spin off the electric transmission business and we see merit for it continuing to be part of our business but we will constantly look at that business, as well as any other part of our business, and ask our self, "Does it make sense to be part of PCG or separate?

Can you give us a rough idea of what percentage of overall rate base, let's say 2009 or 2010, will be transmission?

This Ken.

Roughly 10% of the total rate base and it is growing a bit faster than the rest of the business, but you won't see a dramatic change in that overall ratio.

Gotcha.

Thank you very much.

Our next question is from Steve Fleishman with Merrill Lynch.

Hi, guys.

Hi Steve.

Just on the dividend question.

You said your payout target remains 50% to 70% but you don't have a dividend growth target?

That's correct.

We have not announced any target growth rate--

Okay.

---but what we have acknowledged is we have a 50% to 70% payout ratio and that we are at the low end of that and so from that people can conclude a rough relationship between growth in earnings and growth in dividends.

Right, that in theory, if you want to get toward the middle, your growth in dividends should be quicker than the growth in earnings?

Well, I think what you just described was tautologically the case.

Okay.

Okay.

And because -- okay.

And then just to clarify the changes in the guidance.

For the '05 guidance it appears that it is related to these transmission settlements and those are kind of a one-year thing would you say?

Steve, this is Chris.

It is a combination of those are there and we believe we will be able to keep those, obviously.

They won't repeat themselves, necessarily, in the second half of the year but it is also the strong earnings that we had through the first six months of the year, too.

Then if I take that then on to the change in the '06 guidance, that wouldn't be related to the transmission items, that is more related to just the strong performance and a little more buyback?

And the share buyback, that's exactly right.

Okay.

And then you mentioned about 200 million of buyback in '06 relative to the 800 million of potential additional securitization proceeds.

What are you going to do with the other $600 million?

I think to be clear what we said is that -- and there's probably two sets of $200 million numbers out here.

We raised the amount of cash that we are going to have for buybacks in '05 from 1.8 -- or from 1.6 to 1.8.

Right.

That includes the 800 million of energy recovery bonds securitization going to be done at the end of this year.

And then we said just looking forward into '06 and looking at our cash flows and operations, there could be some minimal buybacks maybe in the $200 million range throughout that year.

Okay.

And where were you on --

And Steve --

Yes.

This is Gabe.

Remember, that with the securitization proceeds we have to keep the capital structure at the utility at the authorized level so you take the proceeds and you pay down debt and equity as you need to to maintain that capital structure and it is only the excess of that which becomes available for dividends or share repurchases.

Right, okay.

And then on the -- okay.

Okay.

So, where were you on the buyback at the end of the quarter?

The accelerated share repurchase plan, we have 11 million shares basically left to buy back through that plan.

And then that plan represented how much of the 1.8 billion?

1.05.

And are you --

Just so you're clear, the original -- when we entered into that first accelerated share repurchase program that was 29 million shares of stock that was repurchased, and that was for the 1.05 billion, so that is out of the 1.8 billion that we now project for the year.

Okay, and then the other 750 million, that is not in the accelerated?

That's right.

That will be another accelerated plan towards the end of this year.

Okay.

But that hasn't been started yet?

No.

That hasn't been started yet.

That will go in line with the proceeds from the energy recovery bonds.

Okay.

That's very helpful, thanks.

Our next question is from Leslie Rich with Columbia Management Group.

Go ahead, please.

Hi.

I wonder if you could walk through the timing of the general rate case decision?

Yes.

This is Kent Harvey.

The NOI which we just filed that was earlier this week, the notice of intent, and then we would anticipate filing our formal application at the beginning of December of this year.

Hearings would likely be in the spring and summer, so that we would have a final decision by the end of '06 and then, of course, the rates would be effective the end of 2007.

And then on the RFP -- or the RFO is that what you call it? -- for the incremental generation needed I think 2008 and beyond you said you have received some preliminary bids.

Are you one of the bidders?

What we have asked for -- we asked for bids that would be from third parties and they could be in different forms.

So they could either be long-term contracts for us to purchase under long-term contracts, or they could be projects that would be developed by third parties, and then sold to us on a turn key basis once construction was complete.

So that is the universe of bids we have requested.

We have gotten in bids and we have been going through a fairly extensive process to narrow down the list and then begin to engage in negotiations with some of those parties so that we can actually finalize our recommendation coming out of that process towards the end of this year which we would file at the CPUC for approval at that point.

Okay.

And the rate recovery mechanism is determined or not yet determined?

That would be the process that the Commission would go through.

They would then approve our proposal coming out of this RFP at that point.

Okay, and just to clarify, I thought you were going to issue 1.1 billion of securitization bonds and I think you made the comment you were only going to issue 800 because 300 million were being paid directly to the generators.

Is that the case?

This is Chris.

As you recall, we had outstanding generator claims and we entered into various settlement agreements with the generators to settle those claims, and as part of that we received -- we had proceeds of about $385 million related to those settlements, and those go to off set what we originally were planning to issue in the second series of the energy recovery bonds.

Okay.

Thank you.

Our next question is from Ashar Khan with SAC Capital.

Go ahead, please.

Good afternoon.

Chris, I was just trying to understand.

You said credit 5 million lower so improves earnings by about $0.01 or so, correct?

The carrying cost credit, oh yes.

Carrying cross credit --

Correct.

- it would be lower

And then if I use the 200 plus the 200 this year and the next year, that is nearly 400 million that is if I use, you know, 40 that is nearly 10 million shares; that's nearly 3%, you know, reduction in the share count from the extra proceeds.

And that, to me, gives $0.06 or $0.07 of earnings pickup.

I'm trying to understand and then you are showing better performance in the first half that why isn't the next year's forecast up by, you know, $0.10 versus $0.05?

I'm just trying to.

I don't know what I'm missing in the puzzle.

What's negative to offset some of these gains?

Sure.

A lot of it will have to do with the number of shares that you are assuming and the prices on those.

One thing to be clear is that the additional 200 million this year will incur, will have an impact on the share buybacks that will occur at the end of this year, and as I said before that will is a positive earnings impact in '06.

Yes.

The amount of share buy backs that I mentioned for '06 could occur, you know, a lot of that depends on timing of when that occurs and we really don't have a set timing for that.

It is probably throughout the year, or maybe even at the end of the year, and so the impact on '06, and on what your projections would be would have a lot to do with the timing of what you would expect there.

And as I said, '06 from an earnings aspect with the carrying cost credits is a challenge for us on earnings. and even the nickel or even the $5 million of decrease in the carrying cost credit that you mentioned, you know, that also impacts the number of shares that are involved in the buyback.

So, we think that that is why we were -- we're encouraged because it is great we are being able to raise the guidance for '06 and we think that is very positive and we think that we are falling within that range now.

Okay.

And then if I can -- but just to repeat there is nothing negative that has come up at all, am I correct, between what you provided earlier and all that, there are no negative moments in any portion of the operating plan, as you see it right now --

We --

to offset some of the positives that you have highlighted today?

Not anything large other than what we have disclosed today in the meeting.

Okay.

Thank you very much.

Our next question is from Andrew Levy from Bear Wagner.

Go ahead, please.

Actually, I'm all set, thank you.

The next question is from Vic Khaitan with Deutsche Asset Management.

Go ahead, please.

Yes, thank you.

Given our more clear clarity on the Cap Ex program and including AMI, what kind of rate base quote are you looking at now through 2009 or so?

You know, Vic, this is Kent Harvey.

I think in February we talked about the long-term rate base growth and based on those forecast at that time we said that rate base could grow between 4.5% and 6.5% per year and a lot of that depended on the Cap Ex profile.

And I think what Chris articulated earlier in the call is that in the case of our distribution business we appear to be on the upper end of that range now in terms of our plans for our future capital expenditures and then, of course, there were other factors that affected that range such as the upper end of the range reflected AMI and again we are continuing to pursue that and we feel optimistic about that piece as well.

So the AMI included -- that would reach about the upper end of that 4.5 to 6.5 or is that for the room to grow beyond the rate base of 6.5?

That is really how the pieces that we have updated have changed since February but we haven't really reaffirmed the overall guidance since last February.

I see.

And the cash flow coming from operations should be sufficient to meet this increasing potential capital spending or do you see any potential for need for new equity or so down the road?

Vic, as we have been consistent about we believe that for '05 and '06 that the cash flow from operations will be sufficient to fund and meet our capital investment needs, and then for '07 and beyond, we haven't put out any guidance or comments on whether or not what the cash flow will look like.

And most of that is because that we do have a general rate case coming up during that time frame and we have these filings out there and a lot of what our debt or equity needs would be would be determined based on the outcomes of those hearings and those procedures.

But in theory, I guess, your current plan is to be able to fund it internally?

That is how we should look at it?

Well, Vic, we are really not commenting on any cash flow from '07 and beyond.

All right, thank you.

Our next question from Lashawn Johong [ph] of RBC capital market.

Go ahead.

Good afternoon.

Now, that PUC has gone the way of the dodo bird any change in strategy in terms of how you look at the rest of the universe outside of California?

I don't think so in that what we said in the past is that we are focused first and foremost on the transformation of the business and delivering better, faster, and more cost-effective service to our customers.

So, that is very important.

What we also said is, longer term we want to be a leader in the industry and that would suggest that we will be a consolidator rather than somebody that is acquired.

And beyond that I think all we said is we are just monitoring what is happening in the industry so that at such a time that we are ready with transformation we established sufficient momentum we will have done our homework and have prepared.

Any time frame for when you will make that transition?

No, we haven't provided a time frame.

Recently the volatility of natural gas prices and pump prices have been pretty high.

How has that affected your cash flow?

This is Kent Harvey.

You know, in terms of on the electric side, a good portion of our portfolio that is, you know, some what insulated from gas like our nuclear and hydro, which is what we own.

Then there is a portion that also is the qualifying facilities and those have been under fixed price contracts so which go through until sometime next year.

And then the last piece, really, of our major portfolio is the Department of Water Resources contracts that the state entered into during the energy crisis and there is a portion of that that is gas sensitive but when you look at the overall it hasn't had -- the higher gas prices and the volatility haven't had the same kind of impact as you would expect.

From a cash flow perspective we are also some what insulated because each year we can true up those costs through the revenue requirement for our procurement including the DWR and, of course, if we start running under, we can actually go in for an immediate rate change.

When you look at our electric procurement to date, we are actually somewhat over collected and we made a proposal for the Commission not to adjust rates yet because it will sort of work its way off naturally over the coming months.

On the gas side, where we buy gas directly for usage by our core customers we have a monthly adjustment in rates to reflect changes in gas prices.

So, I think when you look at both sides you see that we do have some good protections in terms of cash flows for the volatility that has been experienced on gas prices.

Have you guys started hedging out your DWR position for 2011?

When you say hedging it out, you're talking about when the contracts go away in 2011?

Yes.

That's because a lot of them drop off in 2010 and we have been planning to -- that that event occurring.

It is definitely in our sights.

And, of course, the plants won't really go away, so there is an opportunity, well before those dates come, for us to recontract with those parties, or with other facilities that are in the service territory.

But parallel to that, of course, we are identifying some needs prior to that primarily for peaking and load capabilities and that is what our long-term RFP is all about.

But, you guys are progressing well, not too concerned about the increased price in power?

Well, we are always concerned about the price of power for our customers, but a large portion of our portfolio is either owned or is under long-term contracts, and so we are not very exposed to spot prices day-to-day in the electricity market.

But there is that component of our portfolio that will be subject to gas prices and so we are -- we actively manage those pieces.

I was talking about in terms of hedging out your future DWR obligation.

That is where we would be looking to contract in advance of the terminations of the contracts.

Great.

Thank you very much.

Our next question is from Greg Gordon with Citigroup.

Go ahead, please, sir.

Thank you.

Do you anticipate any further potential for generator settlements between now and when you do go to market with the securitization?

This is Chris Warner.

I don't think we can speculate on that because I think the schedule for various FERC refund orders and any settlements is pretty variable.

Are there any more that are outstanding, that are in contention?

Certainly there is a good deal of refund claims that we still have outstanding with the other California parties and we are pursuing those very aggressively.

Thanks.

Second, when we go back through your statements when we adjust up our share repurchase assumptions for 200 more this year, the potential for 200 more next year, you have also indicated, and please correct me if I'm wrong, $200 million increase in our annual sort of base capital expenditure.

When we get to sort of December 31, 2006, will the Company still be sitting on a significant cash balance or do you look at your cash sources and uses as being roughly matched at this point given the increase in the -- on the usage side that you have articulated today?

Greg, the one thing I wanted -- this is Chris and then I will let Kent address the cash side.

On the capital expense side, on the increases, I wanted to make sure people are aware we were talking about the increases being from the '07 to '09 period of time.

Not the '05 and '06.

Okay, sorry.

Right.

Okay.

Kent, do you want to address cash?

Just in terms of the cash position we do have a seasonal phenomenon with our cash and so if you look at the end of the Q we still had a fair amount of unrestricted cash as a utility but we would expect that that would typically decline during the remainder of the year and we typically manage our cash during our peak borrowing period which would tend to be toward the end of the year.

At the end of the fiscal year what type of cash balances would be typical at the end of '05 or at the end of '06?

We wouldn't expect to have much cash invested at that point other than any remaining restricted cash that we had related to the generator claim.

And so since you are at your 52% capital structure, should we basically assume that any cash that would be building up in retained earnings that would cause you to exceed that would be dividend to the parent?

If -- to the extent we had additional cash that allows to us repurchase debt and equity but we have to maintain that balanced capital structure.

Okay thank you.

Our next question is from Neil Stein from John A. Levin and Company.

Please, go ahead, sir.

Thanks.

How much will the carrying cost credit be for 2007?

Neil, just give us a minute, if you have a follow-up question, while we find that answer for you.

I'm interested in that and then is there any change in the entire in then schedule going out for the entire decade or is the change just for '06?

On the carrying cost credit -- this is Chris -- it will be slightly less each year than we had originally talked to people about in February because there is less energy recovery bonds being issued in the second amount.

So to the extent there is a $5 million decrease in '06 , there will be a decrease in the rest of those out years, slightly less than that $5 million because it amortizes off.

Okay.

Neil, we thought we had that information here.

We don't.

But the appendix from the -- from the presentation that we gave in February and also a conference we were at in March has that information.

It is also available on our web site and as Chris said if you just start with what we had assumed there, back off 2006 by 5 million, then sort of slowly amortize that difference down to zero over the remaining 7 years or 8 years, you will be close.

And the numbers you give, are they pretax or after-tax?

For the carrying cost impact credit on the EPS?

Yes.

The 65 million was an after-tax impact on earnings.

Okay.

And basically that will go down to zero within 7 years to 8 years?

Yes.

My last question -- could you review again where this incremental 200 million of share repurchases -- where the funds come from to do that?

Are you essentially just, you know, maybe requiring less working capital?

Is that what it is or if you could just go through what that is?

Yes.

This is Kent Harvey.

Earlier in the year we did increase the size of our working capital facility and so that does allow us the ability to repurchase more shares because we can now more effectively manage our peak borrowed position at the end of the year than we could before.

I see.

Okay.

Are there any other action steps like that that you might be able to take that would free up other incremental cash, or maybe is there any restricted cash that might become unrestricted, that could go into the pool for potential share repurchases?

Neil, again, this is Chris.

We are always looking to maximize our liquidity position and are always looking for those opportunities.

There is nothing else out there right now that we are identifying but we always are looking at that and trying to do the most efficient use that we can.

Okay.

And from the credit side, don't forget, that as we settle these claims we do have the cash but those go into reducing the amount of the second series of energy recovery bonds, or if it is after that time frame then it has to be funneled back to the customers.

Understood.

But you do have other unrestricted cash that is not related to the undisputed claims?

We do have unrestricted cash that is in escrow for the purposes of collateral, or procurement, for example.

And will that balance change over time?

There are any things that might happen that could kind of lower those collateral?

As our procurement needs change that will change.

One positive trend we have experienced is we are being given more credit as our credit quality as improved, you know, in recent months so we certainly are taking advantage of that as we well should.

Okay.

Thanks very much.

Our next question is from Daniele Seits with Maxcor Financial Group.

Go ahead, please.

Hello.

I was just wondering in principle if the California Commission has already agreed for your company to be a much larger provider of your supply requirement in terms of fixed assets, meaning that out of the 2200 mega watt you applied for, would they accept that you own all of that supply or is there a restriction?

No, there is no restriction on ownership versus contracted.

This is Kent.

There is no restriction on that but the Commission is very focused on making sure that we get the right outcome from the RFP and one of the things that they have required and we have certainly put in place, is to make sure that the two alternative -- structural alternatives are compared on an apples-to-apples basis and they actually have an independent evaluator of the process to make sure it is an objective process that will result in the best value for customers over time.

And assuming over time there is no restriction, it is a pure economic decision?

That's correct.

I don't think the Commission has stated you know a specific percentage one way or the other.

Great, thanks.

Our next question is from Steve Fleishman with Merrill Lynch.

Go ahead, please.

Yes, sorry to ask so many dividend questions.

But --

That is fine, Mr. Fleishman.

--when does your Board plan to address the dividend from an increase standpoint again?

Would is it be kind of on an -- an annual April time line?

Our Board has not established a schedule--

Okay.

--for when they would look at the dividend question.

I think they would be prepared to address the question when management presents it.

Okay.

And then just with the -- since you -- you -- you have targeted this pretty wide dividend payout range, 50 to 70, despite having, say, a relatively nonvolatile earnings component.

So have you given thought to maybe bringing that range a little tighter and maybe also why did you start at the kind of low end of that range, or low -- toward the low end of that range?

Right.

Several thoughts in that respect.

One, yes, the range is pretty fulsome, but we identified that range after reviewing the ranges that other companies had established and we felt that it makes sense at that time.

Secondly, we chose the low end of that range because we were emerging from a condition of financial distress as you and everyone else is very familiar, and there is really a process of seasoning and stabilizing that has taken place, and we have been on that transition, and I think we are extremely pleased with how that has been going.

So, we will revisit the question around dividends from time to time, and then ask ourselves, Given the environment that we are faced with, is it appropriate to raise the dividend level so we will evaluate that, rest assure.

Okay.

Thank you very much.

Sure, Steve.

There are no further questions waiting at this time.

All right.

Well, I would just like to thank everybody for their interest in PG&E Corporation.

Have a great day.