PG&E Corp (PCG) 2006 Q1 法說會逐字稿

Good morning and welcome to the first quarter 2006 earnings call for the PG&E Corporation.

At this time, I'd like to introduce your host Gabe Togneri of PG&E.

Thank you and have a great conference.

Thanks for joining our call this morning.

All participants are in listen only mode through both a simultaneous webcast and conference call and a replay of the webcast will be accessible from our home page after the call.

Our earnings release went out earlier today.

It's posted on our website along with supplemental tables, and these materials have also been furnished to the SEC through an 8-K filing.

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

I'll remind you that our prepared remarks and the Q&A session that follows contain forward-looking statements based on expectations and assumptions that reflect information currently available to management and actual results may differ materially from those forward-looking statements.

So as always, we encourage you to review our SEC filings and obtain additional information to better understand the many factors that could influence future results.

Peter Darbee, Chairman and CEO of PG&E Corporation, Tom King, President and CEO of Pacific Gas and Electric Company, and Chris Johns, Senior VP and CFO, will take us through the results and other highlights this morning.

Other members of our team are also here and will be available to answer questions and now I'll turn the call over to Peter.

Thanks, Gabe.

Good morning and thanks for joining us.

Today's results show that we are off to a solid start for 2006.

The Corporation reported total net income of of $214 million for the quarter or $0.60 per diluted common share.

Additionally, we're reaffirming earnings guidance for 2006 and 2007.

Chris Johns will review the financial results and guidance in detail later in today's call.

The first thing I'd like to do in today's call is to point out a few key areas where we're continuing to make significant strides.

As you know, the top priority is advancing the business transformation effort.

On that front, we are now in the process of consolidating and centralizing several major areas of our operations.

These plans are a critical piece of the overall transformation strategy and they are moving forward on schedule.

Another important piece is reaching agreements with our labor unions and I'm pleased to report that we recently achieved that objective.

The bottom line is we're on track, and we expect to realize the transformation related benefits we targeted for 2006.

We would also like to highlight progress on long term energy procurement.

This has been a priority for PG&E, as well as our customers and regulators.

Specifically, the focus has been on getting new steel in the ground to meet customer needs in the 2008 to 2010 time frame.

We've now executed a series of long term contracts that will ensure this happens.

This will be one of the largest single infusions of new generation in California in decades with seven new plants being built and two of these plants will be owned by PG&E.

The new contracts were the result of a highly competitive and very thorough bidding process.

We're confident that they represent the lowest cost and best bid options for our customers.

These contracts had been filed with the CPUC for expedited approval and we've requested a decision by year-end.

We're also continuing to make progress on infrastructure investment.

This includes projects such as automated metering or what we're calling PG&E's marked meters.

And rounding out our accomplishments for the quarter, we now have a proposed settlement that will provide for the funding of employee pensions for the next four years.

I'm now going to Tom King to have him address several of the key accomplishments I've mentioned in more detail so Tom?

Thanks, Peter and good morning.

I'd like to start with our progress on business transformation.

Transformation requires the support of our employees so we recently took a major step toward ensuring that support by reaching agreements with both the local International Brotherhood of Electrical Workers and the Engineers and Scientists of California.

These agreements enable numerous changes that we believe are necessary for PG&E to become the leading utility in the United States such as changing and staffing of specific work, broadening the type of work assigned to certain job classifications, and providing enhanced training and skill development opportunities to employees.

Our unions account for almost 14,000 of our 20,000 person work force, so we're delighted to have them on board with the direction PG&E is headed.

On the customer service side of our business, we are improving the way we handle customer requests by forming a new resource management center.

Each resource management center will consolidate functions such as job designing and estimating, job scheduling and dispatching.

Today, all of this work is done in over 80 separate field offices scattered throughout our service territory.

We're bringing that number down to seven by the end of 2006.

Consolidating these operations will improve the consistency and quality of work, enable us to use technology more efficiently, and help us to implement future process improvements on a much faster basis, and finally, we will provide our customers with a consistent positive experience throughout our 70,000 square mile service territory.

Our first resource management center, which will be located in Concord, California will begin to house employees as early as next month.

PG&E has also introduced a new process for real estate developers to get new gas and electric services installed for large subdivisions.

This process is now seamless to builders.

Builders will continue to work with the same local PG&E representatives but the back office work is now done by a new centralized subdivision design team that specializes in designing the new subdivision connections, and I'm pleased to report that our productivity and serving these customers has risen dramatically.

We have now processed over 58,000 new units for over 800 subdivisions at a 30% faster rate than last year.

We expect similar results from other process changes through our transformation efforts and these accomplishments speak to how we're taking a hard look at our operations, asking ourselves the tough question of what needs to be more efficient, faster and more cost effective.

We are tracking our progress on 11 major transformation metrics, and the customer service improvements that I've outlined this morning will improve our performance on two key metrics, our overall customer satisfaction and our total operating costs per customer, and you can track our 2006 performance metrics in Table 5 of our supplemental earnings package.

Now, let's move on to energy procurement.

As Peter mentioned, Pacific Gas and Electric Company reached a major milestone in April with the filing of seven agreements for new long term generation in California.

These agreements are listed with key details in an exhibit of the Company's 8-K filing and this information is also available as a separate page of the supplemental earnings package available on our website.

These new generation agreements are part of our strategy to meet customers' future energy needs after the maximum feasible use of conservation, load management, and renewable resources.

The agreements include 800 megawatts of new utility owned generation and over 1,400 megawatts of new power purchase agreements.

The utility owned generation consists of a new 660 megawatt project in northern California known as the Caloosa facility and the 163 megawatt repowering of our Humbolt Bay power plant.

We expect these plants to fall in line with the typical construction cost of new generation across the United States and adjusting for business conditions here in California.

That means the capital expenditures should fall in a range of 900 to $1,100 per kilowatt.

Upon CPUC approval, PG&E will disclose more information on capital costs, estimate and contract pricing.

Now, turning to infrastructure investment, we have finished installing the 5,000 meters of our smart meter pre-deployment and we are now performing system tests with supporting communications network and I'm happy to report that initial test results are very positive, and on the regulatory side, we concluded hearings in March and we expect a CPUC decision as early as July.

All in all, the first quarter of 2006 delivered tremendous accomplishments and now I'd like to turn it over to Chris Johns for a review of the financial results for the quarter.

Chris?

Thank you, Tom.

I'll begin by reviewing first quarter results and then discuss our guidance and other financial developments.

PG&E Corporation earned $214 million or $0.60 per diluted common share for the quarter on a GAAP basis.

This compares to $218 million or $0.54 per diluted share for the same quarter last year.

On a non-GAAP basis, consolidated earnings from operations were also $214 million or $0.60 per diluted common share.

This compares to to $226 million or $0.56 per diluted share for the first quarter last year.

The quarter-over-quarter change in earnings per share from operations was largely driven by fewer shares outstanding.

As you will recall, we utilized the cash proceeds from the two securitizations last year to balance our equity structure and repurchase over $2 billion worth of stock.

This reduction in the number of shares outstanding accounted for $0.07 of the quarter-over-quarter change.

In addition, in the first quarter of 2005, we recorded a charge related to environmental remediation in our service territory, accounting for approximately $0.04.

There was no similar charges in the first quarter of 2006.

These positive changes were offset somewhat by the loss of earnings on the regulatory asset that was securitized in the first quarter of 2005 and the impact of the carrying cost credit that arose from the second securitization in 2005.

These items were worth approximately $0.04 each.

Specific details on the quarter-over-quarter EPS comparison can be found in Table 3 of our supplemental earnings package.

Moving on to guidance.

We are reaffirming guidance for 2006 of $2.40 to $2.50 per share from operations.

The primary assumption associated with this guidance is that we earn our authorized return on equity on a projected rate base of approximately $15.9 billion for 2006.

For 2007, we are also reaffirming guidance at $2.65 to $2.75 per share from operations.

This assumes that we receive a timely GRC decision and one that allows us to earn the authorized ROE on a projected 2007 rate base of $17.4 billion.

As always, a reconciliation of our guidance for 2006 and 2007 earnings per share from operations to projected GAAP EPS can be found in our supplemental material.

As we've said previously, with the approval of the general rate case request, the PG&E smart meter project, contra cost to eight and the like, we are targeting a 7.5% average annual growth in EPS from operations over the 2006 to 2010 period.

Projects like our proposed Caloosa generating facility, as part of the long term RFO that Tom just referred to, and other investment opportunities that may rise in the future, are incremental to those forecasts.

I'll move on now to a couple of important milestones recently reached.

In early March, Pacific Gas and Electric Company requested CPUC approval of a proposed settlement on the pension contribution.

The agreement between the utility, the CPUC's Division of Rate Payor Advocates and the Coalition of California Utility Employees is consistent with total contributions of more than $700 million to the utility's pension plan trust over the period of 2006 through 2009.

This allows us to target a fully funded pension trust by 2010.

This represents a win/win agreement between all of the settling of parties.

It allows us to continue to provide competitive benefits to our employees with a moderate impact on customer rates and ultimately helps us to avoid the added costs and time to litigate the matter.

The settlement illustrates the value we've created by developing constructive relationships with our regulators and other stakeholders.

We continue to move through our general rate case process.

Over the past couple weeks, both the CPUC's Division of Rate Payor Advocates and the consumer group Turn have filed their testimony on PG&E's 2007 GRC application.

The DRA has recommended 2007 electric and gas revenue requirement is approximately $450 million less than our current request.

Turn filed its recommendation just last Friday and based on our first rough analysis, Turn's proposal is at least $500 million lower than what we are requesting.

Both of these recommendations are part of the normal process of a GRC proceeding.

We're still early in that process and these proposals are similar to those in past proceedings.

Hearings are due to begin at the end of this month.

We remain convinced that our GRC request is consistent with the level of service and reliability desired and demanded by our customers.

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

Thanks, Chris.

We're quite positive about the outlook for 2006 and beyond.

Transformation is advancing and our infrastructure investment plans are on track and finally we've reached a critical milestone on energy procurement.

We also want to emphasize that in addition to our business priorities, we're focused on emerging issues for the industry and the Company.

In that regard, let me touch on the increasing attention to climate change.

You may know that PG&E's greenhouse gas emissions are among the lowest of any large utility in the country.

In fact, we generate about 4% of the C02 admitted by the average utility in the United States.

Thanks to our hydro and nuclear resources, about 95% of our utility owned generation emits no carbon dioxide.

Recently we participated in Governor Schwarzenegger's climate summit to discuss his climate action plan for California.

Among other actions, this calls for companies to report greenhouse gas emissions and recommends exploring a mandatory cap trade system.

We have been and continue to be supportive of a market based cap trade concept.

The key will be in the details around such an effort but in our view, limits on greenhouse gas emissions are inevitable at some point.

We believe these are the most appropriate to be implemented at the federal level.

If they can't be achieved there, our next preference would be at the regional level and if that proves unworkable, we would support action even at the state level.

We have also clearly supported steps like increased investment in energy efficiency programs and mandatory emissions reporting.

In fact, mandatory reporting is an essential prerequisite for establishing a cap trade approach.

I should point out that PG&E already reports our greenhouse gas emissions through the California Climate Action Registry.

As a result of this work and our low emissions profile, we think PG&E is well positioned as a leader on this issue.

Others share that view as well.

For example, we were recently invited to join Series.

This is a highly respected national coalition of investment funds, environmental organizations and other public interest groups.

PG&E is the first California utility, first California company, and one of only 15 Fortune 500 companies selected to join.

We are also demonstrating our leadership with our regulators.

For example, we recently asked the CPUC to approve a new climate protection program.

This would allow customers to pay a small premium on their monthly utility bill to fund independent environmental projects aimed at removing carbon dioxide from the air.

Our pro-active focus on climate change is a perfect example of the kind of leadership we are bringing to issues that will be important to our customers, regulators and shareholders.

It reflects the leading utility mindset we have embraced and it's an example of the positive change that people tell us they are seeing in PG&E.

We're hearing from a number of customers, policy makers and other stakeholders that PG&E is more responsive and more engaged than it has been for a long time and this gives us tremendous confidence that we are on the right track.

And now, I'd like to open it up for Q & A.

[OPERATOR INSTRUCTIONS] Our first question comes from Michael Goldenberg with Luminus Management.

Go ahead, please.

Hi, how are you guys?

We're great, thank you.

I only had one question.

I wanted to ask you about your upcoming rate case and where you guys stand on this ROE sharing band.

I guess you received sort of a recommendation from the Office of Consumer Advocate, I'm not exactly sure of the exact name.

I think staff, the actual non-partisan staff has not come out yet.

What do you guys think in terms of your chances of getting some sort of a sharing band and including a sharing band that would actually be at least neutral to PG&E?

Michael, this is Chris Johns.

As you mentioned, we did propose a sharing mechanism in the rate case.

The Department of Ray Payor Advocates, which is part of the CPUC, has put a proposal out there that would change the sharing mechanisms slightly.

I believe as part of their proposal, they would do away with the sharing on the downside and then they had some changes in the percentages on the upside.

It's still very early in the process for us to be able to make a determination as to the likelihood of being able to prevail in getting the sharing mechanism in place.

We continue to believe that it is a win/win for both the shareholders and our customers because it allows us to focus on transformation and continue to provide better service to our customers, which then allows for the shareholders to recognize gains associated with that and for our customers to recognize the benefits of that.

But as far as being able to prognosticate the probability of actually getting one?

You know, Michael, again, I think it's really early in the process to do that.

The hearings haven't even started yet and it's really tough to say one way or the other whether we'll be able to get this in.

Gotcha.

Thanks a lot.

Our next question comes from the line of Tom O'Neill with Citadel.

Go ahead, please.

Our next question comes from the line of Leslie Rich with Columbia Management.

Go ahead, please.

Hi.

You said that the new generation that's part of the RFO is not included in your projected rate base.

When are you proposing that construction will commence on that, in 2007 or 2008?

Leslie, I'll let Tom talk about the construction but as far as the projection, you do need to recall that it will be constructed through a turnkey process and so we won't take ownership until the construction is complete and that's going to be at the back end of our five years so probably around the 2010 timeframe, so when you look at our five year projections, it's not going to have much of an impact over that period of time, but Tom, you might want to comment.

That's right, Chris.

The only thing I would add to that would be for the facilities that we intend to own, the way we have the schedule mapped out for the long term RFO with Commission is we are hoping to seek approval in 2006.

Therefore, as we watch and help that proceeding proceed forward, we'll have a better idea by the end of the year on how we're going to bring that incremental cost into our new capital projections and facilities come on line in the '09, 2010 time range, so this capital as it becomes approved by the Commission, will begin to be introduced in '07, '08 and '09, and we'll be able to update the numbers as the proceeding goes forward.

Okay and then could you just repeat, I think I missed what you said about the pension settlement?

You said that it was going result in the fully funded pension by 2010 but I'm not clear.

Is that recovered from rate payors and what kind of contribution do you need to make?

Yes, this is Chris again.

That is included in the rates under this settlement.

It is a proposed settlement agreement that still has to get approval by the CPUC this year but under that settlement agreement, it will allow us to make contributions that over the next four years, including 2006, total about $700 million and those will be recovered through the regulatory process and will allow us to be fully funded by 2010.

Okay, great.

Thank you.

Our next question comes from the line of Doug Fischer with A.G. Edwards.

Go ahead, please.

Thank you and good morning.

A couple questions.

The rate base number for, I believe it's '06, is a little bit lower than the number that in your New York conference.

Can you comment on that?

And then you also commented I think a little bit about the potential cost.

I missed it, or investment dollars in the utility owned degeneration.

If you'd repeat what you said there, I happened to miss that.

And then on a longer term basis, as we're looking at those new projects and rate base growth beyond 2010, would it be fair to characterize the investment program over the current five year period as being particularly robust versus what it might be after that period?

We'll tackle those --

Sorry.

No, that's quite all right.

We'll tackle those as a group.

The first question on rate base.

You're right.

The average rate base number for 2006 is a little bit less than what it originally had been forecasted earlier in this year, and there's a couple things driving it.

One is that the timing of some of the investments are going to be a little bit later in the year than we had anticipated and remember it's an average rate base so as you push things out, that will have an impact of actually lowering it a little bit, and then the amount of working capital that is included in rate base is a little bit less than what was originally projected.

Those will not have an impact on our earnings this year because our earnings revenue requirements already set through the 2003 general rate case plus attrition numbers and so that won't have an impact on the range on our estimates for this year.

Tom, you may want to talk about you had put out the utility owned generation in dollars associated with that?

Yes.

And actually the dollars associated with all seven facilities, our current estimate is around the 900 to $1,100 per kilowatt and as Chris mentioned in the previous answer, much of that is turnkey other than our own facility which one is turnkey and one, the Humbolt is one that we will put into our capital and build over the coming years.

So the overall range is the 900 to 1,100 and I think that as we proceed on the regulatory process, we will be in a position to provide you those details as we proceed through and hopefully by the end of the year, we'll have updated capital numbers.

But the Humbolt project will be expanding rate base as it is built because it's not turnkey?

That's correct.

That's correct, and that one has already been included in our previous projection.

The only one that has not been included in the projections was the Caloosa item.

Which is turnkey.

And the last part of your question was well how does this five years look with the five years beyond 2010?

And I think we're not prepared to talk about the period beyond the current forecast that we've provided people.

Let me just say that there are two ways things could cut.

First, we have advanced metering that is going in place right now and that is creating an increase.

It's a significant investment so that's representing an increase compared to what we've had in the past as well as some of the other step-ups of CapEx.

On the other hand, in the period beyond the five years that we've included in our forecast, there could be other factors that come in.

For example, at that point, people in California might look at the infrastructure and say we need to step up the level of investment now that AMI has been taken care of, that leaves room for more investment to modernize the infrastructure.

So I think that there are factors that could go both plus and minus and we're not prepared yet to provide any kind of projection of what CapEx might look beyond the current planning period.

Fair enough and thanks.

You're welcome, Doug.

Our next question comes from the line of David Frank with Tinkett Capital.

Go ahead, please.

Hi, good morning.

Good morning, David.

Going back to Michael's question on the sharing, did Turn comment regarding the proposed ROE sharing mechanism?

Chris?

Yes.

We are still analyzing Turn's filings so we don't really have a response on that at this point.

That was Chris Warner, our Chief Counsel for CPUC matters.

That was my only question.

Thank you.

Our next question comes from the line of Lasan Johong with RBC Capital Markets.

Go ahead, please.

Good morning.

A couple quickies.

Am I understanding that the 900 to $1,100 in QW is for the entire seven projects, and not just Humbolt Bay and Caloosa?

This is Fong Wan.

I'm the Vice President of Energy.

Hello, Fong.

Good morning.

The answer to your question is that there's the 900 to 1,100 would apply to the two projects that PG&E would own, and for the other products which we would contract, we are buying those under a fixed capacity payment structures and we do not know exactly how much it would cost to construct those plants.

So I'm a little confused then.

Typically to build a CCGT, it takes about maybe 600,000 in KW.

What's the increase in cost?

How do you account for the increase in cost?

According to the California Energy Commission, building a plant in California typically costs about $1,000 per kilowatt , the combined cycle that you referred to, and the possible higher estimate would be associated with higher environmental standards and possibly with the higher cost of doing business in California with land, labor and foreign material.

I think the number that you just threw out is a historical number and what we've seen is the cost of new combined cycles generation has gone up materially.

Yes it has if that's the case.

That's actually quite surprising.

Okay, I'll buy that.

Second, just administrative question.

The $700 million pension recuperation -- is that going to be a flat line recovery of 175 million a year?

No.

Not quite.

We actually in 2006 have a revenue requirement of about $155 million and then from '07 through '09, that will drop down to about about $100 million.

On a cash --

That's on the revenue requirement so that's the recovery mechanism.

That's only about $455 million.

Right, and the difference is that a piece of our pension contribution actually gets capitalized so when you think about a revenue requirement, there's an expense piece and then you're recovering the annual amortization piece of it.

Okay, so your revenue line, you are only going to recoup about 455 million of which you would expense all of it and then you would have another additional 245 million of capitalized cost?

That's right and that gets recovered over a longer period of time.

I see.

Okay, thank you.

Our next question comes from the line of Michael Lapides with Goldman Sachs.

Hi, guys, thank you.

Just one question regarding the rate case and specifically regarding the Rate Payor Advocate's comment and filing.

Kind of ignoring their comments on what expense inflation for 2008 and 2009 and only focusing on their adjustments to '07 rate base, what do you view as the earnings impact if the Commission were to adopt the Rate Payor Advocate suggestions?

This is Chris Johns.

Turn just put this stuff out on Friday.

We don't even have their detailed work papers that support all of the assertions that they've got in there, and so we've got the team analyzing it.

As I said in my comments, it looks like it's about $500 million or more of a reduction from what we've proposed, but we still are in the process of really digging into the details around that.

Okay.

I mean a large chunk of that 500 million was wage, was related to your operating expenses, but a decent chunk and I'm just looking at the documentation filed on the 14th, seem to be roughly $350 million difference of generation rate base and about about $100 million difference of the Electric distribution rate base.

I'm just trying to understand just that piece of the impact there.

Yes, and I'm not going to comment.

You're talking about Turn, or are you talking about -- ?

I'm talking about Rate Payor Advocate.

Oh, the Rate Payor Advocate.

Yes, filed --

Oh, okay, I'm sorry.

I was thinking you were referring to Turn.

When we looked at the DRA, there's about about $120 some million worth of a difference on their proposals on A&G costs that they just believe that the costs should be less and then there's about about $100 million on depreciation expense which is really tied to the cost of removal and the timing of recovery associated with those items.

I would just add that I think we're prepared to describe what their points are but we are not prepared in the least to speculate on what the impact would be on the Company because the reality is in this process, the Company makes a proposal, there are all sorts of speculative proposals by Rate Payor Advocate organizations, and results usually come in somewhere between them and we're not going to get in the business of trying to create multiple scenarios and multiple earning impacts and so I just want to make that clear that the Company will not be doing that but we're happy to explain to the best of our knowledge what it is that somebody like the DRA or Turn is proposing.

Okay.

I appreciate it guys.

Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, press star followed by one.

To remove that question, press star followed by two.

We have no additional questions at this time.

All right.

Well, I'd like to thank everybody for their interest in PG&E Corporation and we look forward to talking to you as we go forward.

Thanks very much.