PG&E Corp (PCG) 2005 Q3 法說會逐字稿

Good morning and welcome to the PG&E Corporation third quarter earnings conference call.

At this time I would like to introduce your host, Gabe Togneri with PG&E.

Thank you, have a good conference, and go ahead, sir.

Thank you for joining our call this morning to discuss third quarter earnings.

All participants are in listen-only mode through a simultaneous web cast and conference call.

A replay of the web cast will be accessible from the PG&E Corporation home page after the call.

Our earnings release went out earlier today and is posted on our website along with supplemental earnings-related tables.

These materials have also been furnished to the SEC through an 8K filing.

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

Gordon Smith, President and CEO of Pacific Gas & Electric Company;

Tom King, Executive Vice President and Chief Operating Officer and other members of the team are also with us and will be available to answer questions.

Some of the members of our team are in an alternate location, so you may hear some background noise and, please, don't worry about that.

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

Good morning, and thanks for joining us.

Our third quarter earnings continue to demonstrate solid and steady earnings performance.

They give us confidence that PG&E is on track to close out 2005 well in line with expectations. [Technical difficulties] for the quarter on a GAAP basis were $152 million.

On a non-GAAP basis earnings from operations were $239 million or $0.62 per share for the quarter.

Year-to-date earnings from operations are $1.87 per share.

We believe our full year 2005 earnings from operations will come in toward the upper end of the guidance range and we're also reaffirming our 2006 guidance.

Chris Johns will cover this in more detail when he reviews the quarter's results.

We also recently announced a plan to raise PG&E's common stock dividend to $1.32 per share on an annual basis from the current level of $1.20 per share.

This represents a 10% increase over the current dividend.

In keeping with our policy, this adjustment allows us to maintain a dividend that is comparable with others and sustainable in the future, while also giving us adequate financial flexibilities to make capital investments to improve infrastructure and meet the needs of our customers.

On the operating side, we're heading into the winter months and record high natural gas costs are clearly a top issue for the industry and for PG&E.

Although we have passed through mechanisms for electric and gas commodity costs, we are concerned about the potential impact on customers, especially low-income customers.

Actual wholesale gas costs in California this winter are now expected to be $12 per million BTUs as compared to about $7 per million BTUs last year.

This is about a 70% increase.

Through the actions we've taken, bills will be lower than they otherwise would be.

Even so, customer gas bills for December and January are expected to be approximately 50% higher than last year.

We've been working intensively over the past several months to manage the challenge, as well as giving customers the tools and information they need to manage their bills.

The California Public Utilities Commission shares our concerns and they've been responsible and responsive in working with us to help customers.

At the same time, they are well aware of the lessons learned from the energy crisis five years ago and the importance of ensuring that utilities [technical difficulties] recover the cost for the energy they buy on behalf of customers.

Here's a quick update on the actions we're taking.

During the summer we bought gas when it was less expensive and we've been storing it for use this winter.

We expect to meet about 20% of winter demand using this less expensive stored gas.

In addition, even before Hurricanes Katrina and Rita affected gas supplies, we were working with the CPUC to set up smart gas purchasing strategies to support our gas and electric portfolios.

In September, we took the extraordinary step of going to the CPUC with a special request, for approval to further hedge the gas portfolio and help protect customers from future potential price spikes.

They responded quickly and decisively in October, and we're moving forward with hedging strategies.

We also fully engaged in a multi-faceted [technical difficulties] ability and funding for certain financial assistance and low-income programs.

We've expanded and increased the flexibility of various payment plan options.

We're increasing funding available for energy efficiency rebate programs, as well as providing weatherization programs and energy savings audits.

We're also looking at possible incentive programs to foster gas conservation.

We recently actively informed customers through advertising, direct mail and working with community partners and other channels, and we're asking them to take advantage of these programs.

While supplies are very adequate, rising gas prices are going to make this a challenging winter and all of these efforts are essential to help customers get through it.

In November and December, we will take other significant steps to deliver positive benefits to our customers.

In a few days, we will complete our second securitization this year with the sale of approximately $850 million energy recovery bonds.

You'll recall that this is a final piece of a securitization designed to deliver about $1 billion in customer savings over the life of the bonds.

Concurrent with these actions we are continuing to drive a variety of initiatives to deliver better, faster and more cost-effective service through our transformation efforts.

This involves a substantial reinvention of the ways we operate and deliver services.

To [technical difficulties] and measure progress, we've been utilizing a series of [technical difficulties] metrics that we believe are key indicators of our success.

We're tracking our performance and we've gained significant momentum over the past several months.

I'm happy to report that we are on target or ahead on a majority of our metrics.

We have a few for which we will not have performance indicators until the end of the year.

There are also a few where we are not yet achieving performance targets, but we have a clear view on what we need to do to improve our operating performance on these targets.

In upcoming 2007 general rate case filing, we will provide estimates of the savings expected and the benefits derived from our transformation process.

And we will reduce our [technical difficulties]. [technical difficulties] additional financial benefits we achieve beyond a 50 basis-point dead band around our 11.22% authorized ROE.

This will deliver additional transformational benefits to our customers and also create a strong incentive for the Company to achieve higher transformational savings.

We're looking forward to working with the CPUC and other parties on this application.

And now Chris Johns will review the quarter's results.

Thank you, Peter.

I will begin by reviewing third quarter results and then discuss our outlook and EPS guidance for 2005 and 2006.

PG&E corporation earned $252 million or $0.65 per diluted common share for the quarter on a GAAP basis.

This compares to $228 million or $0.53 per diluted share for the same quarter last year.

On a non-GAAP basis consolidated earnings from operations were $239 million, or $0.62 per diluted common share.

This compares to $242 million or $0.57 per diluted share for the third quarter last year.

The quarter-over-quarter change in EPS from operations was due to the following factors.

First, we had an increase of $0.03 because the utilities equity ratio is at authorized level of [technical difficulties] percent.

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

Next, we had approximately $0.02 of higher gas transmission revenues, partly due to more parking and lending activity, as well as other miscellaneous items.

We also had fewer shares outstanding which accounted for an [technical difficulties] of EPS.

Finally at the holding company, lower interest and other expenses accounted for another $0.01 per share.

These positive factors are partially offset, of course, by approximately 7 [technical difficulties], because the settlement regulatory asset was replace by the first series of energy recovery bonds this past February.

During the quarter, PG&E Corporation also recorded tax adjustments related to discontinued NEG operations for the 2003 and 2004 tax years.

These adjustments net $13 million and are recognized as income from discontinued operations in the Corporation's GAAP results.

On a year-to-date basis earnings from operations are $1.87 per diluted share.

During the fourth quarter of each year we generally experienced higher operational expenses for items such as [technical difficulties] storm responses, gas pilot relight procedures and higher maintenance work.

We've also begun a scheduled refueling outage at our Diablo Canyon power plant.

Considering our year-to-date results [technical difficulties] and these [technical difficulties] in the fourth quarter, we [technical difficulties] overall 2005 earnings to come in toward the high end of our guidance of $2.20 to $2.30 per diluted share.

We are also reaffirming guidance for 2006 of $2.35 to $2.45 per diluted share.

This assumes of course that we earn our authorized ROE on a [technical difficulties] rate base of approximately $16.2 billion for 2006.

Our [technical difficulties] also assumes that a second series of securitization bonds [technical difficulties] this month in [technical difficulties] approximating $850 million.

This amount, which is about $50 million higher than what we had previously disclosed, [technical difficulties] recent adjustments to generator settlements.

With cash that will come from this ERB issuance and other cash available, we are increasing our targeted level of repurchases to approximately $1.1 billion in an accelerated share repurchase by the end of this year.

This amount includes $950 million from the utility that reflects proceeds from the second series of ERBs and cash in excess of the authorized 52% equity ratio including the acceleration of cash originally assumed available in 2006.

The repurchase total also includes $150 million that the Corporation has received from stock option exercises this year.

After executing this accelerated share repurchase, we believe the potential for additional repurchases in 2006, beyond those associated with stock option exercises, is minimal.

We continue to manage our cash to ensure that equity funding is readily available to support our capital spending needs now and in the future.

The level of capital spending over the next five years will depend upon the outcome of several proceedings, such as the 2007 general rate case, automated meter reading, the long-term generation request for office -- offer, and Contra Costa Unit 8.

Altogether, decisions in these proceedings may result in average capital expenditures of approximately $2.5 billion per year.

Cumulatively over the 5-year planning horizon, we believe we will generate sufficient cash from operations to fund our equity needs.

However, in one or two of those individual years we may need to use internal options to generate equity capital from 401K plan issuances and employee stock option exercises.

Such amounts could total up to 200 million [technical difficulties] each of those years.

As always, a reconciliation of our guidance for 2005 and 2006 earnings per share from operations to projected GAAP earnings per share can be found in our earnings release.

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

Thank you, Chris.

As we near the end of 2005, we've made very strong progress with the five priorities that we set out this year.

You'll recall that they are completing our financial risk restoration, which is now essentially accomplished; advancing the transformation of our business; addressing procurement; enhancing internal and external communications; and finally, investing in utility infrastructure.

We've already touched on most of these, so let me close with an update on procurement.

We want to ensure that our customers will continue to have sufficient, stable power supplies. [technical difficulties] addressing this through our bid process for new long-term power supplies among other steps.

As early as year-end we anticipate completing contracts [technical difficulties] our long term need for up to 2200 megawatts.

In March, we issued our request for offers and attracted considerable interest.

We evaluated these responses, [technical difficulties] the most attractive officers, and received final [technical difficulties] offers last week.

At this time we are proceeding with contract negotiations.

The contracts we ultimately sign will depend upon these negotiations and will also reflect an updated assessment of our future power needs.

The completion of the Contra Costa Unit Number 8 unit may also complement the need for new resources.

The Contra Costa Unit Number 8 case is currently proceeding according to the CPUC's established schedule.

In the summer, we filed for CPUC approval of the transfer and authorization to complete construction.

The CPUC asked us to hold collaborative meetings to address the issues raised in the proceeding in an informal manner.

Those meetings took place in late August.

Discussions continue among the parties, and we expect a CPUC decision in early 2006.

To close, we're pleased with the performance through the third quarter.

As we look forward to the final quarter of 2005 and beyond, our outlook is for solid earnings and dividend growth.

We continue to focus on operational excellence for our customers, and delivering strong results for our shareholders.

And now I'd like to turn it back over to Gabe.

Thanks, Peter.

In addition to our earnings release, we're filing with the SEC today our form 10Q reports for both the Corporation and Pacific Gas & Electric Company.

I'll remind you our prepared remarks and the Q & A session contain forward-looking statements based on expectations and assumptions that reflect information currently available to management.

Actual results may differ materially from those forward-looking statements.

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

And now, Darryl, if you'd like to provide instructions for question-and-answer session, please.

[OPERATOR INSTRUCTIONS].

Greg Gordon, Citigroup Investment Research.

Thanks, just to review the share repurchase, the $1.1 billion share repurchase includes $150 million offset -- option related share issuance?

I just want to make sure I got that right.

Hi, Greg, this is Chris.

Yes, when you look at it, it includes $150 million which is from stock option exercises during the year so that generally will have an offsetting effect on -- and no impact on outstanding shares.

Okay.

Great.

And then you further indicated that over the forecast period you wouldn't need to come to the capital markets for equity, but that there were a couple years in there where you would vision issuing 200 million per year through the drip and 401K and other internal measures.

I just wanted to make sure I understood that.

Yes, over the 5-year period, net we would have -- we would generate capital -- I mean we would generate cash from operations to cover that.

But in any one or two years, we may have up to the high end of about $200 million that we would -- we think we can fund through the 401K and through stock option exercises.

So in other words, the high end of our cap expenditure plan.

Okay.

So I just want to -- I want to make sure that I'm clear on that.

That's because of timing differences and not because you're actually short on a net basis over the period?

That's correct.

Okay.

Thank you, guys.

Lasan Johong, RBC Capital Markets.

Good morning.

Peter, you had talked about a new strategy in terms of procuring gas for customers that would involve a new hedging strategy.

And I'm assuming that that would involve marketing and trading of natural gas.

How much collateral posting do you expect to have from this new activity, and what does this do to the risk profile of PG&E in terms of it being kind of a safe utility?

Then you had cut out for a few seconds and I didn't quite catch what you were saying.

Did you say that ROE of 11.22% is up for negotiations with the PUC?

There was a little noise in the middle of your question, but let me try and address as much of your question as I understand, and then proceed from there to give you a chance to clarify anything that we missed.

Okay.

On the -- what we're seeing is that we believe for guidance purpose you should assume that we will earn our 11.22% return on equity, so that's what I believe I was communicating there.

And that doesn't relate to any negotiations with the CPUC, that is our authorized rate of return.

Okay.

Going back to your earlier question, I want to underscore the point that we are not getting into the marketing and sales business around gas, that some companies are in and we previously were in where by our National Energy Group.

Historically we have hedged the gas that's required for our electric operations and [technical difficulties] entered into long-term contracts in that respect.

Historically, we have not hedged for our gas customers, and what we communicated to the Public Utilities Commission is we were concerned about raising -- rising gas prices back in the fall and several months back, and we [technical difficulties] --

Hello?

Hello?

-- and in fact, in fact, we have gotten out [technical difficulties] and have moved forward [technical difficulties].

But that's [technical difficulties] specific gas amounts that are required for customers.

I'm sorry, Peter, you cut out for about 10 seconds but I think what you were saying was that the new hedging program is not a risk enhancing or risk increasing activity; it's a risk mitigation activity that lowers volatility to customers but doesn't affect PG&E.

That's exactly correct.

Okay.

Great.

Thank you.

Doug Fischer, A.G. Edwards.

Just to clarify it, because you guys have been breaking up a little bit, this need for equity, at least on a timing basis, over the next five years, is -- that's up to 200 million in one or two of those years, and would you repurchase shares to diminish that in years of excess cash flow, or should we consider that -- that being permanent equity?

I mean, being out there over the long term.

Yes, when we look at it over the five-year horizon, and again, in -- because we're making estimates of what we believe our capital expenditures would be, if we're at the high end of what those capital expenditures would look like, there may be one or two of those years where we would have to utilize equity from items such as stock option exercises.

We believe over the five-year period of time we would potentially to be able to then retire those shares through share repurchases, because net over the five years we will generate sufficient cash from our operations to fund all of the equity needs.

So your current planning assumption is that you would retire enough to make it net -- increase in shares over the five years?

Over that five-year period of time, that's correct.

Okay.

And just to clarify about '06, you're moving forward about 150, so we at this point shouldn't look for stock repurchases in '06 beyond stock options?

And any rough guess what stock options might be?

I know that's a speculation --

Yes -- from -- yes, stock -- you're exactly right.

We don't anticipate in '06 any additional share repurchases other than those that we utilize cash from stock option [technical difficulties] and our stock option [technical difficulties] can generally be anywhere from 100 to $200 million in a given year.

Okay.

And then in the -- when you were talking about the -- I guess '07 general rate case, it broke up a little bit, and were you talking about the fact that you're going to propose some kind of sharing above and below the ROE after 50 basis point plus or minus debt band?

Is that what you said?

That is correct.

And that would be a proposal?

That is a proposal that we have laid out in our NOI that we filed with the commission this summer and it will be formalized in our general rate case that we will be filing later this year in November.

And then a last question.

Just remind me what the issues are, that were raised by interveners in the Contra Costa case that are the more substantial ones that are being discussed in these negotiations.

Yes, Chris Warner is going to address that for us.

Yes, this is Chris Warner.

The issues are generally those you'd expect in a capital filing.

Some of the interveners are questioning the cost estimates for completing the plant.

Other interveners are looking at issues such as stranded cost recovery.

But as you may recall, the plant is being proposed at a significant discount to its actual overall costs.

So we believe those issues will be resolved favorably to us in the final commission decision.

With regard to -- I'm not sure I understand why somebody would raise the issue of stranded cost recovery.

Just saying there shouldn't be any if this becomes stranded at some future date?

Yes, exactly.

There are some -- there are just a couple interveners who are irrigation districts that are looking to engage in municipalization efforts and they traditionally come into our proceedings and ask that they be exempted from any stranded cost recovery well into the future.

This is something we see this repetitively in CPUC proceedings.

And remind me, have you put on a cap on the cost or is this a traditional regulatory filing?

I realize it's a discount replacement cost.

We've come in with an overall cost estimate of what we expect to complete the plant, but we don't propose cost caps generally in terms of these proceedings.

Thank you.

I might just add that basically this looks like about a 40% [technical difficulties].

Kit Konolige, Morgan Stanley.

Good morning.

Question -- two separate questions on your future spending.

On the -- on the procurement process that's under way, you mentioned that final offers went out last week.

Are there -- are there any offers that are being made to affiliates of yours, or are these all to other companies?

Kit, I'm sorry.

In the course of your question you broke up -- broke out.

So could you repeat that?

Yes, on the procurement process, you mentioned that final offers are under -- I guess went out last week, or are under negotiation or you've requested the final offers.

Are you expecting offers from affiliated companies -- in other words, are other units of PG&E in the mix to potentially build other power plants, or are these all unaffiliated, either existing or new plants that are being bid in?

Kit, we don't have any affiliates with a capital A currently in our corporate structure.

It's not our intent to create a separate subsidiary which would be unregulated that would provide power generation bids into the Company or its RFPs.

What we do include in the RFP process are requests that people provide us bids on a contract basis, but also provide us bids if they were to build the plant and deliver it to us on a turn-key basis.

Right.

And so there could be a mix of generation that is Company-owned and that would be in rate base, that would result from that process.

But the preponderance of the alternatives, at least the bids that we've seen, have been proposals for how people would provide procurement services in energy and capacity to us on a contract basis.

Okay.

Thanks for that.

And, secondly, on -- can you give us any update on AMR?

For example, at this stage do you -- have you settled on a format or is it still at an early stage where you're just kind of looking around for ideas?

Yes, we're going to have Tom King address that.

Kit, this is Tom King, we have filed with the Commission.

We do expect to have a -- an order out from the Commission in the first or second quarter of 2006.

And we are progressing on technology.

We have executed with a -- the vendors associated with the project, so the -- have executed contracts.

So that project continues to move in lock-step with the overall proposal that we have in front of the Commission, and we do expect to see an order from them in the early 2006.

And can -- well, have you disclosed what type of AMR this is?

Mobile?

Fixed?

Et cetera.

Yes, Kit, there's a handful of vendors in it, primarily on the electric side.

We're going with an organization that is called Distribution Control Systems.

It's DSI, for the technology, for the powerline carrier system.

And on the gas side, we are proceeding with an organization called Hexagram that has extensive experience in automated meters on the gas side of the distribution system.

Very good.

Okay.

Thank you.

Jeff Corvella [ph], Duquesne Capital.

Good morning, how are you?

I just have a question -- a few questions.

The first one is about the stock buy-back that will take place before the end of the year.

Now, you refer to it as an accelerated repurchase, so I guess that means the shares will be off your books by the end of the year.

Is that correct?

That is correct.

And as far as the other -- the agreement goes with the -- who ever you might use to do the buy-back, if I remember correctly in the first tranche you had an agreement with a bank to purchase the stock over some period of time, during which there there was a true-up for the price they're able to purchase it in the market.

Is that the same type of agreement you envision having for this tranche?

Yes.

We anticipate a similar type agreement.

Is there any sense of how long the duration if of that window where the true-up exists for the bank?

Well, I can tell you that when we entered into the last one, it was about a five to six-month period of time.

Okay.

Okay.

And my second question relates to -- you mentioned, and I guess there was a question about it earlier, that you might have some -- use some options to finance CapEx, if you were near the high end of your CapEx projections.

I was wondering -- those high -- at the high end of the CapEx projections, what sort of growth rate does that equate to for the Company, if there's a way to make that connection?

I'd just like to clarify what was said earlier and is embedded in your question first, and then I'll go to the specific answer to your question.

And that is that what we mentioned was that there are stock options that are exercised yearly.

And what we would be intending to do is to neutralize the effect of those stock options in certain years by repurchasing shares.

Sure.

What we also mentioned was while we are overall cash-positive for the five-year period, and would not need to issue stock on a cumulative basis, in any one year or another, we might be a little short, and so what we might do is issue stock in connection with the Company's 401K plan, or something like that.

Sure.

So that's a possibility.

What we also said was we have a significant uptick in the amount of capital expenditures that we're making, up to 2.5 billion on average.

And what that will do is put us at the high end of the 4 to 6% EPS growth rate that we discussed back in the spring of this year.

Okay.

Is there any -- I mean, is there -- I guess that's the long-term looks, that certain years within the period where that could be, I guess, even like a post-rate case year, where it could be above that even, but when you think about long term, you're talking about a long-term 6 -- potentially towards the high end, if you're at the high end of CapEx.

Is that the right way to think about it?

I think what we're prepared to say is just exactly what we said, which is that we see our long-term growth rate being in the range of 4 to 6%, and given the high capital expenditure level that we've set, we expect that we'll be at the high end towards the 6% end of that range.

Got it.

Okay.

Thank you very much.

Patrick Forkin, Piass [ph] Securities.

Good morning, just to clarify on the comments on the AMI initiative.

First question is, did you indicate that you've already executed contracts with the vendors -- the primary vendors?

And long term, assuming you get CPUC approval, what kind of impact will this AMI initiative have on EPS?

I think we'll have Tom King address that.

The overall long-term impact from an EPS standpoint, this is actually an overall efficiency from an earnings standpoint, so I think the overall expense side actually -- very, very minor increase in expense and then over time it begins to trail off and actually is an enhancement on expenses.

And then from an investment standpoint, it's about $1.6 billion project, 1.4 billion of it would be rate based as to capital.

And the remaining 200 million is expensed.

So it's an enhancement to the overall rate base of about 1.4 billion, which is under the earnings opportunity.

Okay.

And have the -- have you executed contracts with the primary vendors?

No, we're -- we are -- we basically have -- have landed on the primary vendors and we're just minor, minor issues associated with then proceeding with execution.

Okay.

Thank you very much.

You're welcome.

Daniele Seitz, Maxcor Financial.

Thank you.

I just wanted to sort of see if you could elaborate on the procurement issue.

Do you sense that the Commission is moving toward a policy of regular supply with long-term contracts in which PCG will also participate in the construction of new power plants, or is it going to be on the [inaudible] basis and with limited amount of visibility?

We're going to have Kent Harvey address that issue.

Yes, Danielle, this is Kent.

The PUC now has had efforts under way for some time for the utilities to enter into long-term contracts and that is our long-term RFO that we're doing on the electric side.

And I think we commented earlier on the status of that process and we would anticipate additional similar auctions in future years to continue to meet our needs, potentially through a combination of long term contracts as well as utility-owned resources that would be proposed by third parties.

On the gas side, the policy in the state has been focussed on shorter-term gas supplies and essentially pricing that is linked to monthly indexes.

And that's an area where some time ago we have initiated discussions to try to have a little bit more balance in the gas portfolio, similar to what's been done on the electric side.

And the first real positive step we saw was this fall when the Commission agreed to allow us to do some additional hedging there, that essentially starts stabilizing a portion of the gas portfolio for customers.

When do you anticipate the final decision to be made on the procurement?

I think we're targeting sometime next year, I believe towards the middle of the year is what we'd like to see happen.

Is there going to be any milestones before that where there will be some more definite indications?

When we actually file the proposed contracts, we kind of see the next milestone you should watch for.

Great.

Thank you.

Reza Hatefi, Zimmer Lucas Partners.

Good morning.

Just wanted to clarify one last thing on the share repurchase.

This year, just looking at your latest 10Q, you've repurchased 1.08 billion, and you've issued 231 million.

With additional 1.1 billion of repurchases in '05, that'll make the total about 2.2 billion.

Is that going to be offset by between 2 to 300 of issuances under these stock options thereby giving you a -- sort of a net buyback of like 1.9 billion for '05?

I think that those numbers are pretty close.

We do have from stock option exercises anywhere for '05 from 2 to $300 million.

So net buyback of 1.9 for '05 and then going forward, like you reiterated, it should net out over the 5-year span -- over the next five years in a sense.

That's correct.

Okay.

Great.

And one thing I wanted to clarify with the second series of ERBs, you get 850 million of cash in the door, but then you actually have to repay this 850 over the next seven years to settle the tax liability?

We used the proceeds -- the way that the energy recovery bonds are structured is that that those proceeds are for us to use to -- as a prepayment for the taxes that we will have to pay on the energy recovery bonds as we collect those in revenues over the future seven years.

And so we get that.

And now we do have to also pay to the customers a carrying cost credit over that same period of time in recognition of the fact that we're getting that cash up front, and we won't have to pay the taxes until over that seven-year period of time.

And so we're supplying a credit that will diminish -- starts out around $55 million for the energy recovery bonds next year and this is [technical difficulties] the term of the bonds.

Just -- the only thing that confused me was the customers have a rate in their total rates which end up paying back the bond-holders of the 850 million, but PCG has to pay the 850 over a seven-year time back to settle the tax liability, meaning that some modelling your '06 tax -- or cash flow or your '07 cash flow and basically have a negative cash outflow of 850 divided by 7, which 7 represents the years.

So, like 100 million, or so of negative cash flow going forward after you receive the 850 this year?

Because my understanding is the -- customer pays off the 850 to the bondholder and then you get the 850 in the door right now, but then you have to sort of pay it back over the next seven years to settle the tax liability.

Is that correct?

Kent Harvey's going to address that.

Yes , that's right.

We do pay back the tax liability over time.

We do end up collecting those costs from customers to pay the tax liability, but, you're right, we get the cash at the beginning and we have the benefit of the cash at the beginning and it essentially is used to displace rate base until we slowly but surely pay off those taxes and then we're back to where the rate base would otherwise be.

And that's that tax carrying cost credit that we've referred to.

But essentially the customer only pays the 850 -- 850 million back to the bondholders, they don't also pay another 850 to -- to settle the tax liability.

That's what you do with these up-front --

They also -- they do pay the tax liability.

In other words, from a revenue requirement perspective, customers pay their full fair share for all the costs, including the taxes.

Ah.

So the customer pays 850, plus another 850, so like 1.7 billion?

Well, I'm not sure that the way you've articulated is right, but the full revenue requirement is paid by customers.

Okay.

So meaning that from PCG there's no net cash outflow going forward after you receive this 850 on this issue.

No, that's not true.

Year-by-year there are differences in cashes but over the collection period, shareholders are made whole and customers pay their fair share, including the tax revenue requirements.

Okay.

Thank you.

John Kiani, Credit Suisse First Boston.

Good morning.

Good morning, John.

Can you talk a little bit about the potential for receiving performance base rate making kind of like San Diego Gas & Electric and SoCal Gas and any discussions you've had with the CPUC over PBRs?

Yes, we have not explicitly gone out and requested a PBR, however, this mechanism that we've proposed relative to transformation is an incentive mechanism, somewhat like the same family of mechanisms as a PBR.

So what we're proposing under our plan is that we will give back specific dollar amounts in '08 and '09, related to transformation.

It's about 41 million and a little over $90 million, respectively, for those years.

And then what we've proposed is that our authorized rate be 1122 with a dead band around that of 50 basis points and then anything over the dead band we would share 50-50.

So the point to be made there is that's an incentive mechanism and has certain characteristics which are similar to a PBR.

Sure.

Got it.

And how about anything else like a GCIM for natural gas purchases, or other types of incentive mechanisms, as well?

Kent Harvey, would you address that?

Yes, there actually is an incentive mechanism in place for natural gas purchases on behalf of our core customers, which are residential and small commercial customers that is -- that is linked to gas indices, mainly monthly gas indices.

And generally, so long as our purchases significantly match those monthly gas indices, then there's a dead band around that, and there's just simply a pass-through of those costs.

To the extent we're able to purchase at levels that are slightly lower than the indices, there's the potential for a modest shareholder pickup.

Although as part of our hedging activities that we've been doing, we've indicated to the Commission that we're willing to forego that.

And for the most part, the shareholder dollars reflected in the gas PBR are very, very minor.

Got it.

Thank you.

Greg Gordon, Citigroup Investment Research.

Just to follow up, guys.

The earnings growth aspiration that you've articulated does or does not include the potential for the approval of this new incentive?

Oh, the sharing mechanism?

It doesn't include any -- any kind of expected increase in revenues above and beyond the 1122.

We've said that we -- all our forecasts include the assumption that we'll earn our 11.22% return and the growth rate in capital expenditures.

So, in other words, if that were approved , that would be in increment over and above.

What, if any, public statements or -- have the regulators and consumer advocates said in terms of your notice of intent, if any?

We have not heard any public comments about the NOI.

All right.

Thanks, see you next week.

Thank you, Greg.

Ashar Khan, SAC Capital.

Good morning.

If I compare your information on rate base, in June when you came up with your guidance, it was 235 to 245, the rate base number estimated for '06 was 16 billion.

And if I look at the same information provided today, it's 16.2 billion, and you're -- and you had mentioned on the next page that the variance for 100 million increase in rate base is 6 million in net income.

So I can kind of conclude that net income should have gone up by 12 million, just by the rate base number going up from last quarter to this quarter's presentation.

Are there any negatives which have happened to kind of -- against that rise in rate base that I should look at from '06 projections?

Ashar, this is Chris.

The only additional items out there are just as we finalized the sizing of the energy recovery bonds at the 850 level, that impacts the level of the carrying cost credit in '06.

Okay.

I don't know if you mentioned, have you given out what approximate share count we should use for the '06 projection?

No, we haven't.

We've given you the dollar amounts that we anticipate utilizing, but we basically allow you in your modelling to calculate the number of shares.

Okay.

We assume that you're experts in identifying what the share price will be.

Okay.

And then can I just ask you, as we look forward kind of on the dividend, when -- what should we really look as the dates for -- for going forward for dividend hikes?

Is that going to be changed every quarter or is that -- you're going to come up with a more schedule that it's middle of the year or how should we look at dividend increases going forward in term of timing?

We haven't identified a regular schedule for when we would look at the question of increasing the dividend.

Had we taken an approach of a regular schedule, then we might have waited until next spring to do it.

But the conclusion that we've drawn is that the market would really like us to look at when we're ready for a dividend increase, and to make those increases at the earliest possible time and that's exactly what we did in this instance rather than waiting 'til next spring.

So the short answer is we don't have a regular schedule.

We'll be monitoring that carefully, and when we feel relatively certain with respect to earnings growth and the outlook for the Company, we'll look at the issue of increasing the dividend as soon as possible.

So, Peter, if I can just follow up, then should we then not look for -- this dividend came in in place of the spring dividend, so we should not be expecting something in the spring?

It would -- is that a fair statement, or how should we look at this spring?

From your comments?

I think that's a fair statement, yes.

This dividend increase I think was -- is much or more than most people would have expected and sooner and, therefore, it wouldn't seem logical that we would have follow-on just shortly after with another dividend increase in the spring.

Okay.

Thank you very much.

Steven Roatsens [ph], Talon Capital.

Good morning.

Couple -- actually, one follow-up to Ashar's.

The 16.2 billion of rate base at the year for '06, how much of that is AMR?

This is Gabe Togneri.

We've -- we put out a schedule in the Lehman conference, I believe it showed about 165 million in capital in '06.

That assumes that we don't get CPUC approval until the middle of the year.

Okay.

And so is -- are the ranges around the high end of the CapEx for '06 incremental to that 16.2, or -- because I think some of the AMR got you to the high end of the CapEx in '06.

Right?

The number for '06 includes the assumed spending I just outlined for AMR.

Yes, this is Chris.

That number is at the 16 points what we anticipate for '06 and that includes the AMR and other things that we anticipate getting regulatory approvals for this year and next year.

So -- I think previously you put a number of 16.3 or so was the high end.

That's still the high end, right?

It is not incremental, so it's like 16.5, it's -- 16.2 is the high end of your previous plan, right?

Yes, we haven't really given out any range around the 16.2 lately.

I mean, 16.2 is about what we're thinking we're going to be next year.

Okay.

And to clarify the share repurchases.

You assume that in '06 for your guidance there's no net dilution from stock option exercise?

That's correct.

That's right.

So what are the years that you would need to sort of issue -- or issue equity through 401K and options exercises, what are the years that you would do that versus having cash -- I guess the cash is probably back-end loaded, right?

We have not put out which individual years it was, just over that five-year period of time.

Got it.

Okay.

Thanks.

And we have time for maybe one more question before we end the call.

[OPERATOR INSTRUCTIONS].

We have no further questions at this time.

All right.

In that case, I'd like to thank everybody for joining the call.

I apologize for some of the technical difficulties that we had, and we look forward to seeing many of you at the EEI conference next week.