PG&E Corp (PCG) 2006 Q3 法說會逐字稿

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

At this time I with like to introduce your host, Mr. Gabe Togneri, Vice President of Investor Relations.

Have a great conference and go ahead Mr. Togneri.

Good day and thanks for joining us to discuss our third quarter earnings.

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

These materials have also been furnished to the SEC through a 8-K filing and we are filing our Form 10-Q reports for both the Corporation and PG&E today with the Securities and Exchange Commission.

As we proceed with the discussion of results and the Q&A session that will follow, we will make forward-looking statements based on assumptions and expectations 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 could influence future results.

All participants are in listen-only mode right now through a simultaneous webcast and conference call.

A replay of the webcast will be available from the PG&E Corporation home page afterwards.

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

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

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

Thanks, Gabe.

As described in our press release we are reporting strong results for the third quarter.

Total net income was $393million or a $1.09 per share.

As I think you know by now, you can count on us to continue raising the bar for both financial performance and customer service.

Based on our year-to-date performance we are increasing the earnings guidance from operating earnings to $2.45 to $2.55 per share for 2006 and we expect to come in toward the high end of that range.

Chris Johns will review the financial results and guidance in detail in a few minutes.

I also want to highlight some important accomplishments that relate to the following focus areas: first, transforming our operations and our culture; second, finding win-win opportunities for our customers and shareholders in the regulatory arena; and third, building our profile as an industry leader.

On transformation we are making continued strides.

One important element of transformation is consolidating certain operations to improve the quality, speed and cost effectiveness of our service.

We have now opened four out of seven new resource management centers.

The three remaining centers will be fully operational by year-end.

These new facilities consolidate planning, design and scheduling functions that were previously handled in up to 70 different locations.

The SmartMeter project has now moved from pilot program to implementation.

We began the full deployment phase of SmartMeter installations in the southern part of our service territory this month.

In addition, in 2007 we will be rolling out new and better technology supporting our operations.

It will automate activities done manually today in the areas of materials, planning, procurement and distribution.

These accomplishments each represent clear milestones towards our overall goal, which is to improve the quality, speed and cost effectiveness of our service.

We are also pleased to report on a number of constructive, regulatory and public policy developments in the last quarter.

Our proposed general rate case settlement is moving toward final CPUC approval, which is anticipated in early 2007.

In August the CPUC reaffirmed our authorized ROE of 11.35% as well as our 52% equity ratio for 2007.

In October, an administrative law Judge recommended CPUC approval of seven new power contracts under the utilities long-term procurement plan.

The result will be about 2250 megawatts of new generation in northern California and this is an important element of our plan to insure that customers continue to have a reliable long-term power supply.

Finally, we are very pleased about our success in the municipalization efforts yesterday in the Sacramento area.

The Sacramento Municipal Utility District tried to use eminent domain to claim PG&E electric facilities that are adjacent to their territory.

The results of the vote are that the PG&E service territory remains as is.

We are proud to serve the 15 million people and businesses in northern and central California and will continue to vigorously oppose any similar efforts to take our customers.

In addition, through our transformation efforts, we will continue to make improvements to provide our customers faster, better and more cost effective service.

With that, I'd like to turn it over to Tom King, who will discuss additional accomplishments.

Thank you, Peter.

I would like to add a few details to Peter's highlights on our regulatory and legislative progress.

We continue to work with our regulators to help customers manage their bills.

You will recall that last winter we offered a 10 - 20 gas program to our marketplace.

Each customer who reduced their January through March gas usage by 10% received a 20% discount on their April bill.

Overall our customers received more than 40 million in rebates.

In October, the CPUC approved our proposal for a new 10 - 20 plus winter gas savings program.

This new program offers enhancements over last winter.

Customers will be able to earn partial or full 20% credit and we'll be able to increase the number of customers eligible.

Every 1% decrease in usage will generate at 1% credit up to 9%.

Customers who reduce their usage by 10% or more will receive a 20% bill credit.

This program is one way PG&E is helping customers to lower their natural gas costs during some of the most expensive months of the year.

All PG&E gas customers are eligible and they are automatically enrolled.

And a further effort to help keep the bills lower during the winter season, we have been purchasing gas during the summer and placing it in our underground storage facilities.

Our storage provides roughly 20% of the customer's winter needs.

We now have our storage essentially filled at a cost of about $1.50 to $2.00 less per MMBTU than buying gas during the winter based on today's forward prices.

This equates to about 50 million in savings to our customers.

PG&E is also focused on climate change and we are taking action to reduce greenhouse gas emissions.

As one part of our approach to climate change, we are aggressively adding renewable resources to our overall supply base.

This year we have entered into new agreements to purchase 274 megawatts of wind, solar, geothermal and other renewable energy.

We continue to be proactive in contracting renewable resources to meet our RPS milestones on time.

We currently stand at 12% actual renewable deliveries and we have an additional 6% represented by new contracts by year-end.

In support of our strategy to increase supplies of renewable power, we have also signed a memorandum of understanding in August with [Lus 2 LLC] to purchase at least 500 megawatts of solar energy beginning in the spring of 2010 and we are working hard to finalize other transactions.

We are also taking action to get electric transmission lines up where they are needed for these renewable resources so that we can achieve actual deliveries and our goal of 20% renewables by 2010.

Lastly, we also look at conventional resources to fill the remaining need.

In light of this summer's heat storm, we evaluated our outlook for reserve margins.

While they were sufficient throughout our entire service territory for the heat storm, our analysis showed that we could use additional resources and it would be a prudent investment in some locations.

We propose a development of roughly 200 megawatts of new, clean and efficient peaking generation.

And we also committed to the Commission to work with our customers to reduce demand during these peak periods with incentive programs.

This peak reduction is expected to allow us to shift the need for incremental peaking generation from 2007 to 2008.

So now we are proceeding with a request that targets authorization of operation of incremental peakers for the system for 2008.

Our commitment to the environmental leadership extends beyond energy efficiency and renewable resources.

Working closely with the California Energy Commission, we have proposed to use dry cooling for Contra Costa Unit 8, a technology in which the Energy Commission favors rather than more conventional once through water cooling techniques.

Dry cooling uses only 3% of the water used in conventional cooling.

This will add 75 million to the cost of the plant and the approval we received from the PUC on Contra Costa 8 includes a provision that allows for us to request coverage for additional costs relative to permitting.

We are confident that these costs will be approved by the PUC and we are working towards that approval as early as year-end this year.

Our target operation date for Contra Costa 8 is now early 2009.

Our customer rate and usage programs and our focus on clean, environmentally friendly energy is part of the cohesive vision for the future.

So now, let's turn it over to Chris and he will walk us through a review of the quarter financial results.

Thank you, Tom.

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

PG&E Corporation earned $393 million or $1.09 per diluted common share for the quarter on a GAAP basis.

This compares to $252 million or $0.65 per diluted share for the same quarter last year.

On a non-GAAP basis, consolidated earnings from operations were $310 million or $0.86 per diluted common share and this compares to $239 million or $0.62 per diluted share for the third quarter last year.

The specific quarter over quarter change in earnings per share from operations was driven by several factors.

First, as a result of the stock repurchases we completed in 2005, we have a positive $0.05 per share impact from lower shares outstanding.

Second, park and lend service fees on our gas transmission business accounted for about $0.02 per share.

Next, lower employee benefit expenses, primarily from favorable experience in our long-term disability plan, were worth $0.02 per share.

Recent regulatory proceedings which allowed recovery of litigation costs associated with disputed energy claims from the California Energy Crisis totalled $0.03 per share.

And in addition, we were able to utilize some capital loss carryforwards which resulted in a tax benefit worth $0.05 per share.

And finally, there were about $0.05 of charges incurred in the third quarter of 2005 that did not reoccur again this year.

Moving beyond earnings from operations, there are two items impacting comparability that also effect this quarter's earnings.

One item reflects increased earnings associated with the recent FERC order granting us recovery of ISO scheduling coordinator costs that were incurred from 1998 going forward.

The other item is a recovery of net interest cost for the period of April 2004 to February of 2005, associated with disputed generator claims stemming from the energy crisis.

Each of these are more fully described in our 10-Q disclosures.

Moving on to guidance.

We are increasing our guidance for 2006 to $2.45 to $2.55 per share from operations.

And we expect to be towards the high end of this range at the end of the year.

Our guidance for the year-end reflects our strong year-to-date performance, partially offset by the expectation that fourth quarter spending levels will be slightly higher than normal as a result of two factors, anticipated spending on our transformation efforts and deferred maintenance associated with the summer heat storms.

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

Our guidance for 2007 assumes we earn our authorized return on equity on the projected rate base of $17.3 billion and it assumes the approval of the proposed GRC settlement.

It also assumes average gas transmission revenues, litigation and expenses and the use of tax benefits, all of which have contributed to our positive 2006 year-to-date results.

As always, a reconciliation of our guidance for 2006 and 2007's earnings per share from operations to projected GAAP earnings per share can be found in our public materials.

On the general rate case, the administrative law judge recently denied the intervener's request for additional hearings.

Instead, the ALJ will issue a proposed decision which we expect in January.

After which there will be oral arguments before a quorum of the CPUC commissioners.

We expect the final CPUC decision around February of 2007.

In addition, in October the CPUC unanimously granted PG&E's motion to make the 2007 GRC revenue requirement effective on January 1, 2007, should the CPUC issue a final GRC decision after that date.

I will now move on to an update of our metrics.

Of the 11 key performance indicators that you can follow from our supplemental material in table six, as of September 30th we are on target for all but the two tied to outage frequency and duration, sadient [safety].

In large part due to the storms, including this summer's heat storm, we don't anticipate achieving our benchmark for those two metrics this year.

Looking to the other nine metrics, I am particularly excited about our annual JD Power residential and business survey, which recently came in with the result that is above target.

In addition, our total expense per customer and telephone service level have also come in better than targeted levels.

With these results we are confident that we are on track in our transformation efforts to continue to improve our customer service.

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

Thanks, Chris.

Our accomplishments this quarter demonstrate that we are continuing to execute on our strategy.

This encompasses delivering for our customers, focusing on first and second quartile operating performance, establishing a strong cultural and business foundation across the Company and building a stronger presence in our communities.

It also includes leading on environmental issues.

And on that subject, I will close with a few comments about environmental leadership and climate change.

As Tom mentioned, our focus on this issue is driving a variety of activities.

So let us provide the context for our view.

First, it is our conclusion that the signs have been clear and compelling.

We know climate change is occurring and the evidence points to greenhouse gases as the cause.

Second, as more and more Americans are beginning to recognize, this represents a profound risk to long-term stability and a prosperity for our nation.

We see this awareness driving new customer expectations.

It is also driving action by policy makers, including California's new climate change law, which we support.

There are signs of long-term change in the landscape and our strategy is designed to help drive and shape that change.

This is consistent with our vision to be the nation's leading utility.

It is also consistent with our long standing track record of excellence in areas like energy efficiency and it is consistent with what customers are increasingly expecting from a leader.

With that in mind, our focus is on solutions.

This includes helping to create a pragmatic and workable regulatory infrastructure in California to achieve the state's greenhouse gas production goals.

We are looking forward to joining with leaders in business and other sectors in this effort just as we do through organizations like Ceres and the Clean Energy Group.

Our commitment to investors is that we will meet this challenge and continue to deliver solid returns.

In fact, we think that the Company's step up and meet this challenge will emerge as the top performers and leaders in this industry.

Now we are ready to take your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Doug Fischer with A.G.

Edwards, please proceed.

Thank you and congratulations on another fine quarter.

What are the primary drivers of the higher guidance for the year?

Is it the tax benefit?

Was that contemplated originally or is it something else?

Yes, this is Chris Johns, and really the higher guidance is a result of when you look at our year-to-date performance, it is in line with higher than what we had expected and a lot of it was the items that I mentioned which we did have some of the tax benefits.

We also had some favorable regulatory decisions during this year.

And we also saw an increase in our electric transmission revenues during the time period.

As we look forward to the end of the year, although we have some cost coming down the line that is connected with our transformation and with our maintenance that we had to defer during the storm season, we do believe that we will be able to reach that upper end of that range.

Okay, thank you, Chris.

That is really it for me right now.

Thank you.

Our next question comes from the line of Jonathan Arnold with Merrill Lynch.

Please proceed.

Good afternoon.

Hi, Jonathan.

I have a couple of questions.

First is you mentioned that guidance for 2007 includes normal levels of various items and some of those appear to have come in this quarter.

You know, I look back to the third quarter of last year, these two items that you say were there but now aren't there, were not really called out at the time and I am just wondering if you could be a little more explicit what we mean by normal levels of these litigation items and other such.

All we are trying to say is that when you look at our earnings for this quarter, there are a couple of things such as the tax benefits and some of the regulatory items.

We will always have in any given quarters some items that come in at $0.02, $0.03, $0.04 levels and a lot of times they will be offsetting.

In this quarter we saw some that all generally were on the positive side.

And so when we look forward, we are not anticipating that we will necessarily be able to repeat being able to utilize capital loss carryforwards on a tax basis or that we will see the same level of transmission revenue.

All we are trying to say is that as we reaffirm our guidance for next year, we are anticipating that it will be pretty normal years on those kind of items.

Is '06 expected to be normal as well or is it running a little above normal on that side.

It is running a little bit above which is why we've raised the guidance for the end of this year.

One other thing, Chris, was that I am guessing some of these things hit at the parent because it seems like you had about $0.05 of earnings with the parent this quarter or outside of the utility, let's say, is that correct?

And which pieces were in the parent numbers.

That's because we file a consolidated tax return and so the tax benefit utilization is generally up at the holding company level.

Thank you.

Sure.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of [Adar Zingo] with Zimmer Lucas Partners.

Please proceed.

Hi.

As you mentioned ALJ has recommended approval of your long-term RFO, which improves the 660 megawatt Calusa plant that you guys are going to own.

You've previously referred to capital costs of about 900 to 1100 per kilowatt for this type of plant.

Does this range still stand and can you guide to a tighter point in this range?

You roughly, this is Tom, you roughly have the right range and I think you ought to be thinking in the 1000, I would target around the 1000 point.

Adar, this is Gabe.

What you will see in our disclosures, I think we've mentioned or it was in the 8K, that there is a tighter estimate but it has been filed under confidentiality provisions with the CPUC.

So for now the best we are going to give you is that range of 900 to 1100.

Okay.

And when do you expect a final decision in this proceeding?

We should hopefully have that by the year-end.

Thank you.

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

Hi, guys, congrats on a great quarter.

One question.

When we go back and look at some of your investor presentations over the last few months and after talking with you over the last few months, you talk about a rate base of roughly $20 to $20.5 billion by 2010.

Is there upside to that number and if so, where with it come from?

Sure.

Michael, what I will say is that we have not changed the capital forecast.

At this call we are not updating it or reaffirming it today.

But, if you go back to what we have previously disclosed as far as our planned capital expenditures, items that have not been included in those are things like our Calusa plant that we have talked about, that is not included in any of those projections, any additional investments in transmission plants, both electric transmission and gas transmission type plants.

For instance, we've talked about a project that we are looking at up in the northeast that would be what we refer to as the Pacific Interconnect project, which would be building a gas transportation pipeline from Coos Bay, Oregon down to the California border.

Would be about $1 billion total project of which we would be probably about a one/third investor.

That is not included in there.

So that as we look at those numbers we are continually looking for what are opportunities to continue to invest in, especially our electric and gas transmission areas, to continue to make those investments for our shareholders.

Thanks, guys.

[OPERATOR INSTRUCTIONS] We do have another question from the line of Lasan Johong with RBC Capital Markets, please proceed,

Chris, did you say that the CapEx on Contra Costa 8 was going up by 75 million due to the, I think, it was use of dry cooling, was that correct.

That is correct.

Our estimate on the capital cost associated with Contra Costa 8 is going to go up about $75 million.

You have applied to CPUC for that to be included in the rate base?

This is Tom.

There is two things.

One is that the original order authorizing Contra Costa 8 there is language that allows for as environmental changes and other permitting issues for us to have the ability to come back and seek recovery of those costs.

We have -- this new technology and the direction is being supported by the Energy Commission.

We will go back and it is either today or tomorrow to file that advice letter and we have every expectation that we will get authorization for that.

Tom, you said that PG&E's either contemplating or thinking about adding another 200 megawatts of peaking generation in '08?

If you go back a few months, we did file for peaking opportunity for about 200 megawatt in '07.

We are going to shift that to '08 because we are working with the Commission and our customers to enhance the demand response program and that focus will be for 2007 and then we will seek 2008.

And the reason for that is we actually have enough resources.

We had plenty through the heat storm.

We have enough resources now.

This is more of a potential backstop for peaking needs and extreme situations and we think we are fine for '07.

So we are going to move it to '08.

I see.

You basing that decision on what happened in '06?

Yes, we are basing that decision on what happened in '06, as well as progress we are making on the demand reduction program.

Does that take into consideration the fact that '06 was a pretty nice hydro year?

Yes, it absolutely takes that into consideration.

We've run a complete analysis of their energy needs and we are okay for '07.

Great, thank you.

That's it for me.

Thank you.

Our next question comes from the line of Jonathan Arnold with Merrill Lynch, please proceed.

Another question, please, guys.

On the heat storm, you mentioned that that would result in additional maintenance costs from deferrals in the fourth quarter.

Things that you didn't spend in the third quarter I guess.

Can you quantify what the impact of the heat storm was on a net basis on the third quarter?

Chris, you may have the heat storm number.

We actually gave that in our last quarter call, Jonathan.

As I recall I think we said about $25 million in capital costs and about $5 million of expense.

So that's somewhere in these miscellaneous items.

Yes, right.

Great.

Thank you.

You bet.

At this time, there are no further questions from the phones.

Again, we would like to thank everybody for your interest and we will be in touch as further developments and regulatory approvals come through.

Thanks very much.