PG&E Corp (PCG) 2006 Q2 法說會逐字稿

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

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

Thank you.

Have a great conference.

And go ahead, Mr. Togneri.

Good morning and thanks for joining our call.

All participants are in a listen-only mode through a simultaneous webcast and conference call, and a replay of the webcast will be accessible from the PG&E Corporation home page after the call.

Our earnings press release went out earlier today, and it is posted on our website, along with supplemental tables.

These materials have also been furnished to the SEC in an 8-K report, and we'll file our joint Form 10-Q for both the Corporation and Pacific Gas and Electric Company today.

Before we begin discussion of the quarter, let me remind you that our prepared remarks and the Q&A session that follows contain forward-looking statements based on assumptions and expectations reflecting information currently available to management.

Actual results may differ materially from those forward-looking statements, and we encourage you to review our SEC filings to obtain additional information and better understand the factors that can 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.

Other members of the team are also here and are available, if needed, to answer questions.

And with that, I will turn the call over to Peter Darbee.

Thanks, Gabe.

Good morning and thanks for joining us.

We are pleased to report very positive performance for the second quarter.

Total net income was $232 million or $0.65 per share.

Our financial results and the excellent progress we're making on our business initiatives keeps us on track to achieve our 2006 targets, and accordingly we are reaffirming earnings guidance for 2006 and 2007.

Chris Johns will review the financial results and the guidance in detail later in today's call, but first, let me highlights a few important accomplishments.

These are tangible successes in transforming our operations, finding win-win opportunities for our customers and shareholders in the regulatory arena and building our profile as an industry leader.

As you know, advancing transformation is at the top of our business priorities.

This includes consolidating and standardizing certain operations, as well as implementing new technology.

In June, right on schedule, we opened our first resource management center in Concord, California.

This facility brings a number of service functions under one roof in a way that makes sense for customers and employees.

Also, over the Memorial Day weekend, we upgraded our customer care and billing technology, giving our people better tools to assist customers when they call us.

These moves are crucial to serving our customers faster, better and more cost effectively.

And they are cornerstones for our new service model.

Simultaneously, we're managing costs and our business initiatives are delivering tangible benefits that will help our transformation effort pay for itself.

We are also pleased to report on a number of recent regulatory decisions.

These decisions underscore our continued constructive relationship with our regulators.

They also represent successes for both customers and PG&E.

The CPUC approved full deployment of automated meter reading, which allows us to install over 10 million SmartMeter devices by 2011.

This represents a $1.4 billion capital investment in leading technology.

We also received CPUC and FERC approvals for our Contra Costa Unit Number 8 project.

This allows PG&E to build the first new utility-owned generation in California in a decade.

The 530 megawatt facility is expected to deliver reliable power to our customers at an attractive price.

We also successfully obtained approval of our pension settlement.

This is projected to bring our pension plan back to fully funded levels over the next four years.

Finally, we are tremendously proud to have received the Leadership in Industry Award from the Keystone Center.

This award recognizes our leadership on energy efficiency, renewable energy and global climate change.

PG&E is uniquely positioned among electric utilities as an environmental leader, delivering some of the cleanest power and most effective energy efficiency programs in America.

For example, while we serve almost 5% of the country's population, we emit less than 1% of the total CO2 associated with the utility industry.

With our hydro and nuclear resources, about 95% of the generation plants PG&E owns emit no greenhouse gases at all.

If you factor in our purchase power, the greenhouse gas emissions from our electric portfolio are still less than half of the average utilities in the United States.

Our efforts in energy efficiency and conservation have been instrumental in keeping California's per capital electric usage flat over the past 30 years, and this is relative to about a 50% increase over the rest of the United States during this period.

During this period, we also successfully implemented innovative policies and programs that have reduced energy use and delivered huge environmental benefits.

In the past 30 years, we estimate our programs have avoided 61 million tons of carbon emissions.

On a going-forward basis, we project our current energy efficiency programs will deliver cumulative reductions of more than 23 million tons of CO2 over the next three years.

And our plan is to continue to build on this outstanding track record.

As part of the leadership group for the National Action Plan for Energy Efficiency, we have been working with the legislators, citizens' groups and regulators to develop the model for utility energy efficiency programs going forward.

And earlier this week, Tom King met with British Prime Minister Tony Blair, Governor Schwarzenegger and other California business leaders.

Their discussions addressed how businesses can partner with government to advance and accelerate sustainable solutions to global climate change and energy policies that support a low-carbon economy.

This type of policy innovation is the primary focus of our Company.

As investors have told us, companies that are reducing their carbon emissions footprint will be in the best position to deliver consistent and continued value to shareholders.

This type of responsible vision and proactive engagement on issues that impact our customers is a key part of what it will take to be the leading utility in the United States.

And with that, I'd like to turn it over to Tom King, who will discuss these and other accomplishments in greater detail.

Thank you, Peter, and good morning.

I'd like to add a few details to Peter's highlights on our transformation progress.

Each of the individual achievements that we have shared with you is part of a cohesive vision for the future of how we manage our business to serve our customers better, faster and more cost effectively.

The successful launch of the first resource management center in June began the process of consolidating the estimating, engineering and mapping work activities.

These activities are currently performed in over 70 field offices and facilities, and we're consolidating these 70 locations into just seven resource management centers.

But this is much more than simply a facility consolidation.

The resource management center concept provides the platform to combine the right level of staffing with leading business processes and technologies, and we expect to have all seven facilities open by the end of November.

And with the new resource management centers implemented by the end of this year, we will then shift in 2007 to roll out our new information technology for enhanced operational effectiveness, including our geographic information system, or GIS, and other asset information technology, our work and resource management systems, and our advanced metering initiative using the SmartMeter technology.

And the SmartMeter technology will be a big part of how we are fundamentally changing the way we provide service.

This approach will deliver the same high-quality, consistent service to customers in all parts of our system.

Our enterprise-wide GIS will create a centralized database that includes not only the location of nearly every piece of equipment on our system, but crucial information about its age, condition, maintenance history and performance history.

And our work and resource management systems will enable the right resources and equipment to be assembled and ready for dispatch to any worksite within the field.

So when combined with GIS, the new work and resource management system, and our SmartMeter technology, we will then enable the automated deployment of our fieldwork, including routine maintenance, service restoration and storm response.

Now, with the CPUC approval of this SmartMeter technology, we will be gaining momentum through the rest of this year and forward, and the deployment of the automated meter technology will be the largest deployment in the United States.

Plus, we expect this SmartMeter technology to more than pay for itself over time through both cost savings and procurement-related benefits that result from load-shifting by customers who take advantage of the time of use rates.

During the recent California heat wave, we have seen the positive effects of providing customers with information that they can use to take actions to reduce their energy demands and consumption.

Faced with historically high temperatures in California and record levels of energy use, our business customers, who are already on the time of use rates, reduced their electricity consumption by 300 megawatts over the critical hours.

And our SmartMeters will allow many more customers to take the same kind of cost-saving actions and choices by the way they use their energy.

We expect to see the positive operational results of our transformation efforts reflected in 2006 performance on our 11 key performance metrics.

And we are currently on track to meet or exceed nine of the 11 metrics for 2006.

Our SAIDI metrics, which measures the duration of outages, and SAIFI, which measures the frequency, are two electric reliability metrics that were falling short of our goals.

Our cumulative results were adversely affected by the severe winter storms in the first quarter, and then just 10 days ago, we faced intense summer heat storms in California, causing the outages throughout our electric system, when transformers and other equipment became overloaded due to record temperatures.

In response, we more than tripled the workforce in the areas hardest hit in order to replace equipment and restore customers as quickly as possible.

This was an unprecedented event, with five continuous days of peak demand at least 15% higher than normal and system loads records repeatedly broken.

Our current estimates of the costs associated with this event are roughly 25 million of capital to replace the equipment and about 5 million of expense.

Our efforts allowed us to restore more than 96% of the 1.2 million customers impacted well within 24 hours.

We will continue to focus on our efforts to improve performance on our reliability metrics.

However, we do expect our performance on these two very important metrics to continue to lag our initial targets for 2006.

And you can continue to follow our 2006 performance metrics on Table 6 of our supplemental earnings package.

On a quarterly basis, they are also available on our website.

And we should remind you that these same metrics are tied directly to both management and employee incentive compensation.

Now I'd like to talk briefly about an important energy solution in our home community of San Francisco.

In 1998, we promised customers in the Bay View neighborhood that we would close our Hunters Point power plant as soon as we could find alternative sources of reliable energy.

The Hunters Point plant was first placed in service in 1929.

And despite subsequent upgrades, the plant remained one of the least effective plants in our fleet, both with regard to fuel use, as well as carbon emissions.

And in May, we were able to keep our promise and close the plant by replacing its capacity with the newly completed Jefferson-Martin transmission line and other transmission upgrades.

Our transmission upgrades doubled the capacity into the area, ensured sufficient energy could reach the growing demand in San Francisco and the Peninsula, eliminated poor-quality air emissions and increased overall reliability for San Francisco and the neighboring cities we serve.

This type of cooperation in our communities demonstrates the virtuous circle that drives our service vision.

Delighted customers lead to satisfied regulators, with results and rewarded shareholders.

The project was completed with help and assistance from the California Public Utilities Commission, the California ISO, and the city of San Francisco.

And I'd also like to thank the PG&E team, who were instrumental in making this happen.

So in a quarter of tremendous business accomplishments to better serve our customers, we are especially proud of the results of Hunters Point plant closure.

And now I would like to turn it over to Chris Johns, who can review the quarter's financial results.

Chris?

Thank you, Tom.

I will begin by reviewing second-quarter results and then discuss our guidance and other financial developments.

PG&E Corporation earned $232 million or $0.65 per diluted common share for the quarter on a GAAP basis.

This compares to $267 million or $0.70 per diluted share for the same quarter last year.

On a non-GAAP basis, consolidated earnings from operations were $228 million or $0.64 per diluted common share.

This compares to $262 million or $0.69 per diluted share for the second quarter last year.

Although these results reflect decreases from the prior year, they are in line with our previously stated expectations.

As you will recall, in 2005, we refinanced our $2.7 billion settlement regulatory assets, saving our customers more than $1 billion over the next nine years.

This resulted in reducing earnings because, one, we were previously earning a return on the regulatory asset, and two, we are now providing a carrying cost credit to our customers.

These effects were partially offset by the use of the cash from the refinancing to repurchase Company stock.

The specific quarter-over-quarter change in earnings per share from operations was driven by a number of factors, which are provided in Table 4 of our supplemental earnings package.

I want to highlight a few of them in particular.

First, the reduction in the number of shares outstanding due to last year's share repurchases contributed $0.05 to the change in quarterly earnings.

Higher gas transmission revenues contributed about $0.01 due to higher gas volumes and higher parking and lending revenues.

These positive factors were more than offset by the impact of the carrying cost credit that I just mentioned and the expenses associated with the scheduled refueling outage at Diablo Canyon Unit 2.

The Diablo outage was similar in scope to the work completed on Unit 1 last December.

You may recall, we collect the revenues to cover the expense of scheduled outages over the course of the year, while the cost is incurred in a single quarter, resulting in a timing difference that will be earnings neutral for the full year of 2006.

On a related note, Diablo Canyon's refueling outage was completed ahead of schedule and on budget.

In addition, the replacement of the Diablo Unit 2 low-pressure turbine during the outage, along with a similar upgrade performed on Unit 1 last year, has increased the output of the plant by more than 80 megawatts.

Beyond the items we've highlighted in earnings from operations, there are two items impacting comparability that affect this quarter's earnings.

One item reflects increased earnings associated with a recent FERC order authorizing collection of prior years' electric transmission-related costs.

The other item is a decrease in earnings for environmental remediation costs associated with an ordered change in the standard used to determine the level of required remediation.

These are each more fully discussed in our 10-Q disclosures.

Moving on to guidance, we are reaffirming guidance for 2006 of $2.40 to $2.50 per share from operations and for 2007 of $2.65 to $2.75 per share from operations.

The primary assumption associated with this guidance is that we earn our authorized return on equity in each of these years.

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 materials.

With the regulatory decisions that we received this quarter on the SmartMeter implementation, Contra Costa 8 and the pension, we continue to deliver on our plan for achieving our projected financial results for shareholders.

I'll move on now to a couple of key items of interest -- our progress on the 2007 general rate case and an update on some financial results of our transformation efforts.

We continue to move through our 2007 general rate case process.

Hearings were complete on schedule on July 7.

In addition, we are currently engaged in confidential settlement discussions with the DRA to resolve all the issues in the proceeding.

To accommodate continuing settlement discussions, the GRC schedule has been revised.

If a proposed settlement agreement is reached, the revised schedule provides that a settlement conference, followed by a motion to approve any proposed settlement agreement, would be filed later this month.

We cannot be certain that a settlement agreement will be reached, and if a settlement agreement is reached, whether it will ultimately be approved by the CPUC.

Although we have consistently deliver transparent communication to you, our investors, because the settlement discussions are confidential, you will understand why we're not able to provide any further information regarding these discussions.

Moving on to an update of our transformation efforts, as we have said before, in 2006 and 2007, our transformation initiative are anticipated to generate net costs that will be only partially offset by the initiative benefits.

The remainder of these costs are being offset by savings in other areas of the business.

By reprioritizing our work and focusing on better, faster, more efficient customer service, we intend to provide the returns expected by our shareholders.

Of the $290 million of capital and expense that we forecast to spend on transformation in 2006, we expect approximately 55% will be offset by benefits.

These benefits are the results of initiative that were or will be implemented in 2005 and 2006.

As an integral part of our transformation, we are investing in new technology and more efficient processes.

As we make these changes, we continue to evaluate our workforce needs to ensure that they properly support our business processes and priorities.

We anticipate that we will incur severance and retraining costs in 2006 and beyond as we consolidate jobs from numerous California locations in order to streamline processes and sharpen our focus on our customer needs.

For 2007, we forecast that transformation benefits will continue to grow relative to costs, moving us significantly closer to the net benefits we are projecting for 2008 and beyond.

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

Thanks, Chris.

Our progress this quarter cast a very positive light on 2006 and beyond.

Transformation is advancing.

We are continuing to execute on our business priorities for the benefit of our customers, shareholders and employees.

And our Company and people are being recognized as leaders for our efforts.

In addition to the Keystone Award, Black Enterprise magazine recently recognized our leadership in workforce diversity.

And Donna Jacobs, our vice President of Nuclear Services, was honored with the Women In Nuclear Global Award for personal dedication, innovation and effectiveness in communications about nuclear energy.

We are celebrating these accomplishments and successes, but we are also mindful that the changes we're making don't just come from process and technology improvements.

They also come from the commitment of our people to their work and their pride in their Company.

This engagement is the only way to ensure the success and sustainability of our vision to be the leading utility in the United States.

So I want to express my appreciation to the 20,000 men and women of the Company for their support.

Change is difficult, and we've asked some individuals to make hard choices for the greater good of the Company as a whole.

This summer, we have launched a massive system-wide engagement effort to galvanize employee support for the changes we're making.

And the response to this has been overwhelmingly positive.

Let me give you a sense of the scope of this effort.

Officers and directors have been meeting with employees throughout the service territory nearly every day this summer.

We are reaching out to employees in 14 different locations.

And so far, we have engaged face-to-face with 14,000 of our employees, and by the end of August, we will have met directly with virtually every one of our full 20,000 employee workforce.

Our people are getting a hands-on look at the new technologies and processes we are implementing, and they are getting a chance to engage in give-and-take discussions with the officer team about the reasons for these improvements.

We are not aware of any comparable effort that has ever been undertaken by another utility in support of this kind of change.

But by engaging our employees at all levels, we are empowering them to become leaders and proponents of business transformation, not just spectators.

We believe we are achieving that objective and that it will be critical to our long-term success.

So once again, thank you to our employees, the majority of whom are also PG&E investors.

And now I would like to open it up for questions.

(OPERATOR INSTRUCTIONS).

Tom O'Neill, Citadel.

Just curious on any timing around the settlement discussions, if there's any tail date on it?

And then I wasn't able to hear exactly what you said about the storms in the winter and then these peak periods in the summer, how they affected the statistics for the savings mechanism.

Sure, Tom, I will start with the schedule.

The administrative law judge put out a new proposed GRC schedule that would have a potential settlement conference around August 16 and a potential for a filed settlement and brief on any issues around August 21.

And then beyond that, we really don't have any definitive timeline as to what the remaining schedule would look like.

And Tom, this is Tom King.

On the storms, the major objective I had there was to give you a sense of the magnitude of the capital and expense side on the summer heat wave.

And that was roughly around 25 million in capital and 5 million in expense for 2006.

And we expect to absorb that and remain on target for our '06 guidance.

Lasan Johong, RBC Capital Markets.

A couple of questions.

Strategically, obviously, the automated meter reading is a good project, but at the end of the day, what is the end game for that project?

Is it to deregulate retail business?

Should we be thinking about that going into the future?

Or is that just an optionality at the point for the meters?

Really, the focus behind putting in place the meters was to, one, really bring to the end of an era the collection of data manually through a workforce of 800 meter readers, so we will be doing that electronically, and then to dramatically improve the quality of service that we provide our customers by increasing reliability and response times.

To be candid, we have tied in no way in our thinking automated meter reading to opening up retail choice.

We just haven't seen that linkage or thought about that linkage at all, and that has not been part of our motivation.

Our motivation is better service to our customers, faster, better and more cost effectively.

I understand.

Due to the weather impact, obviously, the [sole flex] date the third quarter has been blazing hot in California.

Other than the impact of replacing capital goods and expenses, how much additional purchase power has PG&E have to have bought so far?

Basically, we have been able to -- there has been no problems with obtaining resources.

As far as the incremental megawatts, I think we had roughly a peak in the 22,000 to 23,000 within our service territory.

And there were plenty of resources to meet that.

So the bigger impact that we have within the service territory was the impact on transformers and related equipment that have never experienced that level of heat on a sustainable basis.

Resources were not a problem.

But obviously, PG&E had to spend more money to buy the extra resources, correct?

Yes.

We were in the market; we were procuring in the market.

And that basically will be through our overall balancing account of our energy resources, and we will recover that through our customers.

And Lasan, this is Chris.

We don't have a number for what the incremental amount was for the month of July yet.

And then another strategic question.

Peter, you've been talking a lot about being a clean carbon company.

That leads me to a logical question -- why isn't PG&E building a new nuclear power plant?

Two responses in that respect.

Currently, in California, it is illegal for any utility, or others, as I understand it, to construct a new power plant -- new nuclear power plant until there is a permanent disposal center for used fuel.

So that has precluded it.

On the other hand, we do believe that among the solutions that will be required to meet America's energy needs that nuclear should be a part of that.

And so we are evaluating other opportunities, let's say, outside the state of California.

And nuclear would be included among them, as well as things like increased supplies of LNG and the like.

So we have not ruled that out.

But we're in the very formative stages of that.

We see nuclear as a source of fuel that does not create dependence on other countries and the supply of natural gas or oil from them and also one that is consistent in the effort to reduce carbon and (technical difficulty) CO2.

Steve Fleishman, Merrill Lynch.

I guess a couple questions.

How long have you been engaged in settlement discussions at this point?

And you mentioned a settlement with DRA, being who you are kind of engaged with.

How many parties are involved?

Is it just DRA?

Is it a broader group?

Steve, this is Chris.

You may recall that the assigned commissioner, [John Bonds], had actually scheduled a couple of mandatory settlement conferences in the GRC process.

And so we utilize those at the beginning of a process to engage in discussions.

We have been working with DRA, as I previously said, and we are really not going to be in a position to comment on any other parties' involvements at this time.

And with respect to your share repurchase plan, is that now pretty much completed?

Yes.

We did complete the share repurchase plan in the May timeframe -- April/May timeframe.

I'm sorry, beginning of June timeframe.

So that is complete for this year.

And then Peter, you had talked a little bit over the last year on thinking about an M&A strategy.

And I'm just curious, is there any update in your thinking there?

Some of the other M&A deals have hit a lot of hurdles.

Does that create any change?

Really, what we have been saying is highly consistent, which is we continue to evaluate opportunities out there in the marketplace.

And certainly part of that evaluation is observing very carefully what difficulties and challenges other companies are having in trying to accomplish their deals.

I think there are at least two notable ones that really have been -- that people have been focusing on.

So we're studying those, as well as others, in great detail, and asking ourselves what are the key learnings that we take away from those.

One last question -- when would you be planning to address growing the dividend again?

Would that be, I assume, after this rate case is resolved?

Steve, you hit it exactly.

The Board periodically looks at our dividend.

But we don't anticipate really revisiting that until we get through this general rate case process.

Vic Khaitan, Deutsche Asset Management.

Just a question regarding this pension funding, which you mentioned earlier that was the prefunding to make up the shortfall in pension.

Now does that require commission's approval for rate case treatment?

We have seen some other jurisdictions in other states where that may not have been allowed in the rate case.

Vic, this is Chris.

We actually reached a settlement agreement earlier this year and it has been approved by the California Public Utilities Commission to fund our pension over the next four years, including starting in 2006.

And that will target to get us up to 100% funded by the end of that four-year period of time.

So we have gotten all regulatory approvals for that.

Ashar Khan, SAC Capital.

I just wanted one question -- in the settlement discussions, I'm assuming all issues are being addressed, including the incentive ROE?

Is that a fair assumption?

Ashar, this potential settlement agreement would address all issues associated with the rate case.

Daniele Seitz, Dahlman Rose.

I just was wondering -- do you feel that the commission is receptive to the idea of utilities starting to contribute and participate in building of new capacity?

Is it now totally accepted and the commission seems to be receptive to it?

The answer to the question is yes, I think that the commission has been very concerned about ensuring adequate supplies of power going forward in light of the crisis that we went through in the early 2000 years.

We have undertaken that RFT process and gotten responses back from that.

And the commission has not only encouraged us in that process, but actually has acted in an expeditious fashion moving that forward.

So we feel that this is a commission that understands the need for resource adequacy and has matched its acknowledgment of that need with specific actions.

And in terms of structure, they seem to be receptive either way -- that it can be he either under the utility umbrella or outside of it?

Or do they feel that they would prefer one way or another?

We had proposed back several years ago a hybrid approach.

And they embraced a large part of that hybrid approach.

We proposed a 50/50 utility-owned generation and contracting.

They came back and said we embrace the hybrid approach, but we want to have a competitive solicitation process for what the breakdown is between utility owned, as well as contracted power.

And we have moved forward with that.

The way it has roughly come out is I think in rough numbers -- I may not have this precisely, but about 60% of the power has been contracted for.

And what we're proposing is maybe 40, in round numbers, 40% of the power will be utility-owned generation in this first round of solicitation.

Reza Hatefi, Polygon Investment Partners.

Could you give us an update on those CapEx projects -- Sea Breeze and Tehachapi and the turnkey plant as far as getting the go-ahead, I guess?

Yes, Reza, this is Chris.

You know, you mentioned a couple of projects that we have talked about as potential down the road related to natural gas transmission and to electric transmission.

There hasn't been a lot of movement on that.

We've got the investment that we're looking at that would bring a natural gas transmission line from Coos Bay, Oregon into the state of California.

And we continue to work with other partners in seeing the development along those lines.

And we are continuing to investigate what investment opportunities we have in Sea Breeze and Tehachapi, but there hasn't been any real update in movement on any of those.

But the turnkey plant -- you'll have a decision on that by the end of the year, if I am not mistaken?

Yes, as part of our long-term RFO, we have made the filing with the commission.

And we are still anticipating a final order by around the end of this year.

And is there an update to the anticipated transformation cost or benefits?

I know you guys have this slide usually.

Are those numbers basically around the same -- your estimated benefit range?

We have not updated those since the filing of the GRC.

And they are still consistent with what we filed with the GRC, which is the same information that we've presented in past conferences.

Paul Patterson, Glenrock Associates.

Just wanted to -- I know you guys are limited in what you can say because of the settlement discussions, but you guys are sort of having an unusually innovative approach to this customer service workforce approach that you guys have.

And I'm just wondering, just generally speaking, the general reaction that you are getting from interveners or commissioners or what have you to this approach.

Do they share your enthusiasm, or do they -- I mean, are they sort of on the same page, at least?

Can you give us any feel at all for that?

Yes, let me provide the discussion along several lines.

The first is, to remind everybody of the strategy, the strategy is first, really understand customer needs and understand them by segment, what they're looking for, then deliver on those needs with operational excellence.

That will result in a very pleased customers.

Pleased customers will result in very satisfied regulators.

Very satisfied regulators will lead to very well-rewarded shareholders.

Now, what we have seen in that regard is the operational metrics are improving significantly.

Consumer reaction -- we look at just many metrics, but during the energy crisis, our consumer approval ratings were down in the 35%, 37%, so it is in line with key political figures right now.

And the last time we looked at them, they were up in the 65% level.

And we should have those numbers updated, but we hope they are moving north.

So there has been a dramatic improvement in the Company's reputation, and that has been reflected in the press.

In terms of the regulatory reaction, I would say it's been very, very positive.

And they have commented repeatedly back to us about the new approach they see at PG&E.

At the commission, what they have said is, we are very responsive, listen well to what their concerns are, respond promptly to them, provide substantial analytical support -- better analytical support than they have seen in the past.

And they are, frankly, delighted with sort of the new image we are conveying to them, and also delighted when they compare that with other telephone and electric utilities that they are seeing.

And so our belief is that this strategy is proving out.

And I think as we look forward with not only what regulatory decisions have occurred, looking backwards, but also you'll be able to observe that in the upcoming decisions as we move forward.

If you looked at -- there's just been a huge string of approvals of our requests, which have been with respect to, for example, Contra Costa Unit Number 8, with respect to SmartMeters, there have been others as well -- a whole line of them.

Now, let me just comment on some of the consumer groups.

Some of the consumer groups have said talk is cheap, and we will recognize your performance when you deliver.

And so they haven't -- they've been a little more cynical, is the way I would describe it.

But we feel we are going to deliver.

So that will be appreciated.

Michael Lapides, Goldman Sachs.

A couple of easy questions.

One, can you just remind us why the big difference year over year in O&M?

And two, can you talk a little bit, walk us through the put option on the convert notes next summer and just kind of how you think that may work out?

Sure.

On the OM, you have to look at the non-fuel pieces, because fuel pieces are obviously driven by the increased costs of fuel during that timeframe.

Generally, what you will see when you look at the three-month year over year, you will see a pretty large increase because of the pension that was just approved.

So we got that in rates.

Even though the costs are going up, somewhere around 100 -- a little bit over $100 million level, we have that approved.

And so our revenues will go up associated with that.

You also see a little bit of a cost driver from the Diablo Canyon outage during the quarter that you wouldn't have seen that same outage last year.

It occurred in the fourth quarter last year.

And then as we mentioned earlier, we had an increase in our costs associated with some environmental remediation that was about $30 million during that time frame.

And so you'll see those are probably the biggest drivers of our cost increases during that timeframe and the majority of which we've got included in our rate structure.

So you will see an increase in revenues on the same vein.

And Michael, this is Gabe.

Just for your use and everybody else on the line, there's a very good section in the 10-Q that you'll see filed -- actually, the results of operations section does a good job of reconciling all the revenues in the expense categories and sort of gives a -- what's increased by how much and what's decreased by how much compared to the quarter and year before.

I was just looking at PG&E on page 21 of one of the handouts where operation and maintenance costs were 982 million in this quarter and 670 in the prior year.

Your second question about the convertible debt -- you're right, there is a one-time put option involved in that.

And in fact, you will see in our current disclosure because of that, we had to reclassify that debt as current, because the option does exist.

We obviously don't have an idea as to whether or not anybody will exercise that option.

I will just remind you that the strike price associated with it is down around the $15 level.

And you can make your own conclusions as to what you think the likelihood is around that.

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All right.

We'd like to thank everybody for your interest.

And have a great day.