PG&E Corp (PCG) 2007 Q1 法說會逐字稿

Good morning and welcome to the PG&E Corporation's first quarter 2007 conference call.

At this time, I would like to pass the conference over to your host, Gabe Togneri, Vice President of Investor Relations.

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

Togneri.

Good morning, everyone, and welcome to our first quarter earnings call.

As always, this is a simultaneous webcast and conference call and all participants are in listen-only mode.

A replay of the webcast will be available from the PG&E Corporation website after the call.

Our first quarter earnings press release was issued earlier today, and it is posted on our website, along with supplemental tables, including Regulation G reconciliations.

We've also provided these materials through an 8-K filing with the SEC, and we will file our Form 10-Q reports for both the Corporation and Pacific Gas and Electric Company today.

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

As we discuss in more detail in the earnings press release, actual results may differ materially from those forward-looking statements.

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

Given that we hosted our 2007 investor day in April, our prepared remarks today will be relatively brief.

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 quarterly results and recap some highlights.

Bill Morrow, the President of the Utility and other members of our team, are here and they'll participate in the Q&A.

Now I'll turn the call over to Peter Darbee.

Thanks, Gabe.

And thank you all for being with us.

We certainly enjoyed recently having the opportunity to meet with you in New York during our investor day conference.

And I hope what came across in the course of that day was the conclusion that PG&E is well on its way in the journey to become the leading utility into the United States.

By focusing on our customers, we've been able to move the customer satisfaction ratings from the fourth quartile to the first quartile, and second highest in the United States as measured by J.D.

Power and Associates.

In our wholesale gas business, we've also been able to obtain a position of number one in the western region as measured by Mastiogale's, and we're committed to doing the same thing in our residential business, but obviously, there there are a lot more customers in the residential business and it takes longer and it's a harder job to move those numbers.

But we continue to be convinced that the virtuous circle is an appropriate way to look at our business.

And that is if we really do a great job for our customers, our regulators will be very satisfied with the results and that gives us the best opportunity to earn a good return for our shareholders.

And in fact in 2006, we did that by providing a total return to shareholders of over 31%.

In addition to delivering for our customers and also for our shareholders, we think it's really important to step out and be a leader with respect to key issues that are confronting our industry.

And we've done that with respect to global warming and we will continue to do that.

The feedback that we've gotten from policymakers is that through our efforts and the efforts of USCAP, we've really been able to shift the dialogue on greenhouse gas abatement and also on the topics of energy efficiency and conservation.

Now, through these actions and others that we're taking, we believe that the momentum with respect to becoming the leading utility in the United States is increasing day by day.

Now, what I wanted to do was turn to the first quarter of 2007.

And in particular, we delivered total net income of $256 million, or $0.71per share.

And as a result of that good performance, we're reaffirming our 2007 and 2008 guidance, as well as our EPS growth target of 8%.

With that, I'd like to turn it over to Tom King for a discussion more specifically of recent accomplishments.

Thank you, Peter, and good morning, everyone.

I'm going to provide a brief update on our progress toward ensuring a clean and secure energy future.

So I'll be focusing on three areas, renewable resources to meet our 2010 RPS goal, electric transmission to ensure we access the future generation opportunities, and emerging technologies to serve future energy needs.

So as to renewables, we continually move forward to aggressively contract for our renewable energy.

By the end of the second quarter, we expect to file with the CPUC the remaining contracts from our 2006 renewable solicitation.

In addition, just this past December, we issued a new 2007 renewable solicitation, and bids on the 2007 process are due May 31.

Now, turning to electric transmission, we have CPUC approval for a $14 million transmission feasibility study to assess bringing the wind resources from British Columbia here into California.

So, over the next few years, we'll assess the feasibility of importing the Canadian-sourced wind, of roughly 8,000 to 10,000 megawatts of potential wind generation.

This study will also look at the large supplies of wind, biomass and hydropower in the Pacific northwest.

Let's move to the third area that I'd like to discuss with you, which is our work to go beyond our traditional core investments to explore emerging growth investments.

We have filed with the CPUC for approval to fund $30 million to advance our work on emerging technologies.

This allows us to press forward on new technologies such as wave, concentrating solar, energy storage, and some of which we discussed with you at our investor day back in April.

And we are making progress.

We made an important, tangible step toward our vision of plug-in hybrids and a smart energy grid.

Just a few weeks ago, PG&E showcased the first ever utility vehicle-to-grid, or V2G, technology demonstration.

This project also helps our governor's efforts to establish a low carbon fuel standard right here in California.

V2G would let our electric customers charge their vehicles with off-peak energy from the utility grid at night and sell that electricity back to the utility during peak periods of the day, turning our customers' vehicles into mobile power storage units.

We're really excited about this demonstration and its winning proposition for both PG&E and our customers.

This technology will increase system reliability and the overall capacity factor for generation resources.

And, at the same time, it will drive to lower rates for our customers and higher levels of renewables in our energy mix during peak energy periods.

Finally, we are moving forward with innovators to discuss this technology such as battery grid communications, automotive technology just to name a few.

And as we proceed, we'll get a better view on the timetable to bring these investment opportunities to a wider commercial application and we'll keep you posted on that progress.

But before I turn it over to Chris, let me give you a quick example of a technology advancement.

That's our recent work with IBM.

As PG&E has been working with IBM, we're looking at moving forward for server replacement incentives and new server software technology.

This new technology delivers the same level of computing power, but with fewer machines.

We call it server virtualization.

This server virtualization has already resulted in significant energy savings for some of our high-tech customers.

In fact, we expect to reduce our energy use at PG&E's own data centers by roughly 80%.

This is a significant energy savings.

We'll then take this success and deploy it throughout our own service area.

The work on our emerging growth opportunities is being done in parallel with our activity to improve our operational performance and customer service, much of which we discussed of our transformation efforts in detail with you at the analyst day.

So with that, I'll turn it over to Chris to review the financial highlights of the quarter.

Chris?

Thank you, Tom.

This morning, I'm going to cover our quarterly results, our forward guidance and I'll provide an update on some of our regulatory filings.

On both a GAAP and non-GAAP basis for the first quarter, PG&E Corporation earned $256 million, or $0.71per diluted common share.

This compares favorably to $214 million, or $0.60 per diluted share, GAAP and non-GAAP, for the same period in 2006.

As you can see from the table 4 of our supplemental earnings tables, our quarter-over-quarter changes in earnings per share from operations include earning a return on a higher rate base consistent with our recently approved general rate case.

This accounted for approximately $0.07 of the change.

In addition, the current year absence of the level of storm expenses we experienced in the first quarter of 2006 accounts for $0.02 per share.

Now these positive impacts were partially offset by about $0.01of environmental remediation costs.

A couple of things to remember as we look at our results for this year.

First, as a result of decoupling, revenues are spread evenly over the year, while expenses can vary from quarter-to-quarter.

And second, since we completed our last share repurchase in November 2005, share variance is not a significant driver in explaining quarter-over-quarter results.

Moving forward to guidance, we are reaffirming our 2007 guidance of $2.70 to $2.80 per share from operations, and our 2008 guidance of $2.90 to $3.00 per share.

The primary assumptions supporting our guidance are that we earn at least a CPUC authorized return on equity of 11.35%, at least 12% at the FERC, and we achieve our projected rate base of approximately $17 billion for 2007, and $18.7 billion for 2008 with our rate-making capital structure maintained at 52% equity.

We continue to target an 8% annual growth in EPS from operations over the 2007 to 2011 period.

As always, a reconciliation of our guidance for 2007 and 2008 earnings per share from operations to projected GAAP EPS can be found in our supplemental materials.

I'll move on now to a few regulatory items of interest.

We expect to receive approval at the FERC of the all party settlement of our transmission owner case this month.

This will result in a $68 million annual transmission revenue increase, which will be effective retroactive to March 1, and was previously contemplated in our earnings guidance.

On May 8, we filed our annual cost of capital application at the CPUC.

The filing requests a return on equity of 11.7%.

We're also requesting a 52% equity ratio consistent with the provisions of our bankruptcy settlement agreement.

In response to the Commission's interest in alternatives to the annual cost to capital proceedings, we're also proposing a five-year cost of capital adjustment mechanism.

This feature would provide for an annual return on equity adjustment based on changes in the AA utility bond index.

No ROE adjustment would be made for index movements of less than 75 basis points.

The cost to debt in preferred stock would be reset to actual once a year.

And the adjustment mechanism would not impact the authorized capital structure.

If approved, our cost of capital adjustment mechanism would be effective for 2009 through 2013 with the next full cost of capital filing for 2014 and going forward.

As a reminder, our current guidance includes an authorized return of 11.35%.

Finally, on energy efficiency shareholder incentives, the CPUC recently determined that it would hold hearings to consider competing shareholder incentive mechanism proposals.

We filed testimony supporting our proposed level of shareholder incentives and performance thresholds on May 3.

Under our proposal, the cumulative amounts of potential pre-tax incentive earnings over the three-year period could range from zero to approximately $280 million once we achieve savings at or above 80% of the CPUC target.

If our performance is less than 40% of the target, PG&E could be subject to a penalty.

Now the range of incentives and penalties is more fully described in our 8-K dated May 8.

Hearings in the case are scheduled to begin at the end of this month, and given the importance of this mechanism for the continued success of California's energy efficiency and conservation efforts, we hope that the Commission will expedite the schedule to act well before the end of this year.

As a reminder, our current guidance does not include the potential impact of any energy efficiency mechanisms.

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

Thanks, Chris.

People leading utility delivers first quartile performance for both customers and shareholders by helping our customers use energy more efficiently and more wisely.

A leading utility looks for attractive low-risk growth opportunities related to its core business.

And the leading utility also creates new and innovative opportunities, which represent a logical extension of its core business.

This management team won't be satisfied until we've delivered on all of these things because we intend to be that, a leading utility.

And now I'd like to open it up for questions.

(OPERATOR INSTRUCTIONS) The first question comes from the line of Greg Gordon with Citigroup.

Please proceed.

Thanks.

Two quick questions.

First, can you explain a little bit more why the Commission decided to reopen the proceeding on the incentive mechanism for the, the demand-side management?

Yes, this is Chris Warner.

The Commission wanted to hold evidentiary hearings on the benchmarks for performance under the customer energy efficiency program.

And so that was the reason they've scheduled those evidentiary hearings.

And why had there been a prior bias to not holding hearings?

We had, and other parties had expected, that hearings would not be necessary on those issues, but the Commission decided otherwise.

We do expect a decision by the end of the year in any case.

And then second, if you were to hypothetically speaking, take this ROE, this cost of capital adjustment mechanism you proposed and apply it to PG&E based on today's economic backdrop, what return on equity would it support?

Greg, the way the mechanism in the proposal would be, it would start at the 11.7 that we proposed in our recent filing.

And then it would be adjusted based on whatever the AA bond ratings did moving forward.

So it would baseline at 11, 7 and adjust--?

Yes.

Incrementally based on changes in the rating, in those related bonds for that rating?

Yes, that's right.

Yeah, and, Greg, just to be specific, under our proposal, it would take at least the 75 basis point move in the AA bond rating before there would be any adjustment to our ROE and the adjustment to our ROE would be half of the AA bond change.

And what's the timeline for hearings on this and final decision?

Expect that final decision by the end of the year.

Thank you, gentlemen.

Thank you, Greg.

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

Please proceed.

Great quarter.

Thank you.

Chris, hypothetically, let me kind of put a scenario out there for you.

Let's say the AA bond ratings, AA bond yield goes to 74 basis points above where it is today, and assuming you get 11.7% rate of return, does that mean you guys can actually earn hypothetically 12.4% on your ROE, and not have an adjustment made to your baseline?

Well, Lasan, the way, the proposal would work and using your hypothetical, if it went up 74 points, then there would be no adjustment to our authorized return.

Obviously, we are able to earn either up, or either above or below whatever the authorized is based on our ability to control our costs on an annual basis.

So this would be strictly based on if the AA bond in your example went up by 74 points, that's below the threshold.

So we would still have a maintained authorized at the 11.7%.

The authorized would only change based on changes greater than the 75% change in the AA bonds.

I understand.

So that does not necessarily mean you can earn up to 12.4%?

It means that we can, there are no restrictions on how much we could earn or how little we could earn.

That is based on our ability to run the Company efficiently.

Okay.

I understand now.

And in terms of the guidance, I'm a little puzzled.

Why not increase the guidance?

It seems like the numbers were very good.

We're definitely pleased with the results.

Our guidance was based, though, on our expectations around the general rate case and around our FERC settlement agreement and our gas accord settlement agreement, and we believe, based on looking at our expectations for the rest of this year, that that guidance range is still the appropriate guidance range.

I'll remind you, we do have a refueling coming up at Diablo that will have a big impact on us in the second quarter.

And as we've talked about before with our transformation efforts, there's a large amount of those that are scheduled to be completed in the third and fourth quarter of this year that will have a lot of significant investment in them over the rest of this year.

Okay.

Thank you.

Thank you, Lasan.

The next question comes from the line of Tom O'Neill with Highbridge Capital Management.

Please proceed.

Good morning.

I had a question for Peter.

Just wanted to hear any updated thoughts on M&A opportunities, and how they compare to your own bevy of organic growth opportunities in California on a risk adjusted basis?

Well, a couple thoughts we have in that respect.

First, obviously, the industry took a step back after the FPL/Constellation deal and the Exelon/PSEG deal fell apart.

What we are hearing from investment bankers in the industry is that people continue to look at opportunities and that one shouldn't conclude that there will be no more M&A activity, or there would be significantly less M&A activity in the utility industry in the United States.

The second thing is, we've seen significant opportunity or activity in Europe.

So that is going on as we speak.

And some people feel that it's quite possible that after the European players wrap up in Europe, that they'll turn their sights to the United States.

And so that's just the backdrop.

With respect to our activities, I think we continue to see the fact that we're scanning the different opportunities and we have not found one that we thought was appropriate to do and to announce.

And so I think we continue to feel that the lowest risk opportunities and the greatest growth opportunities are extensions of our core business.

And so as we look at our priorities, they are the following: Grow the core business as rapidly as we can, consistent with what is appropriate and meets the needs of our customers.

So you've seen the ramp-up from $1.8 billion to $3 billion over the next couple of years.

Then, secondly, we've been focused very much on hybrid cars and logical extensions, and then the third priority that we look to but recognize that there's not any material risk associated with it is M&A.

Great.

Thank you.

The next question comes from a line of Dan Eggers with Credit Suisse, please proceed.

Hi, good morning.

Question for you related, just to make sure I under this incentive ROE mechanism.

The ROE that would be implied or set off this structure, there would be a carve-out for benefits from conservation so the incremental savings, the up to $280 million would be on top of, say, an 11.7 adjusted ROE, is that right?

Yes, that's correct.

This is Chris Warner.

On these zero to $280 million savings, can you just give us a little more flavor as far as how we could think about those timing out, and how we would track from our seats the benchmarks to see that money flowing through?

Yes.

There's, obviously, a proceeding going on, so some of this is going to be subject to that outcome.

But the earnings are tied to the achievement of energy efficiency savings and, as you may know, energy efficiency savings tend to accrue and ramp up as you go along.

So the earnings would generally ramp up over the three-year period as the savings are achieved.

And are you guys hashing out the mechanism for how you determine what is conservation to get credit for, versus other things?

I assume this is a pretty tricky calculation to get your hands around?

Well, actually, we've had a long history, as you know, of achieving these energy efficiency savings so that the actual programs and success of the programs are already out there.

What we are working with the CPUC and other parties on is how to actually benchmark and set the particular incentive mechanism.

That is what will be in the decision by the end of the year.

Okay.

And I guess one last question.

Any update on the long-term procurement plan for new generation and how that's progressing, and any changes in that role as far as what parties will be involved?

Yes, Dan, this Tom King.

We did complete the 2005 solicitation which led to the current activity of 2,800 megawatts that are either under construction or about to go under construction.

And then just this past November, December time frame we filed the new long-term plan, which, after energy efficiency, demand management and other renewables, we get to an additional 2,300 megawatts that we filed for the Commission with for authorization to proceed and do an additional solicitation.

And that's targeted to come on line roughly 2011, 2012 time frame.

Is there anything, or what is the process, I guess, for the next solicitation or, longer-term planning balance between utility-owned versus merchant-owned?

The process that we'll go under will, hopefully, by the end of the year, we've got Commission authorization to move forward on the 2,300 megawatts.

We'll do a public RFO and then out of that process is where we whittle down the best fit, best price structure, and that is what drives the ultimate decision on whether we have an investment opportunity or it's contracted

Okay.

Thank you.

You're welcome, Dan.

The next question comes from the line of Greg Gordon with Citigroup.

Please proceed.

Thanks.

Just a follow-up question for Peter.

When you commented on the question regarding M&A, it wasn't clear to me, it seemed like you were saying that M&A activity in general might pick up driven, at least from your perspective, by foreign buyers coming to the U.S.

But you didn't really address the question directly as to whether you think buying another infrastructure utility gives you a better risk adjusted return than the projects that you have on the next drawing board over the next three to five years?

I thought I did.

But maybe not as specifically as you would have liked.

In terms of the, and that's the hierarchy, where we look.

We feel the core business is the first place and lowest-risk opportunity.

The extensions off of the core business are the next, somewhat more risky, but very manageable.

And then beyond that would be M&A in terms of risk.

So there are really three tiers as we look at it in terms of risk.

Selling to a European buyer for a big premium would be the lowest risk.

Just joking with you.

(LAUGHTER)

Right, okay.

Thank you, gentlemen.

Thanks, Greg.

(OPERATOR INSTRUCTIONS) The next question comes from the line of Lasan Johong with RBC Capital Markets.

Please proceed.

Yes, I just wanted to see if there are any updates on infrastructure projects including the various different transmission lines and gas pipelines that you guys contemplated building up to the Northwest, and I guess the East as well?

Yes.

This is Tom.

Above and beyond what we've discussed at the analyst meeting, there isn't any significant update.

Just specifically to the things that you mentioned, relative to the Pacific Connector, which is the pipeline that runs from the Oregon/California state border over to Oregon, they have completed their open season and it's currently preparing an application to file with the FERC, hopefully, by the second quarter of '07.

And give you a sense of the results of that, that capacity solicitation, they roughly, the design of that system is roughly about a bcf a day.

They have precedent agreements signed of about 1.49 bcf a day.

That will go into the overall FERC filing and be filed in second quarter of '07.

And then the L&G terminal on the Oregon coast is moving through its permitting and applications, somewhat similar relative to a timeline.

As to the transmission lines, and our transmission project, Midway/Gregg, et cetera, all that is continuing to move and it's on schedule based on the previous timelines and milestones that we have communicated.

Okay.

Does that mean on the Pacific Connector pipeline that the capacity may be expanded to accommodate the increased volume or expectations?

It has the capability, absolutely, to be expanded from the current target of about a bcf a day up to 1.5.

That will all directly relate to the L&G terminal.

Its success in attracting supply in the ultimate volume that flows to that facility.

So compression or bigger pipe?

It will be compression at that point because the pipe will be installed if it ever gets to the 1.5 level of volume.

Great.

Thank you.

You bet.

(OPERATOR INSTRUCTIONS)

Jackie, do we have any remaining questions?

No, sir, there are currently no further questions.

All right.

Well, we'd like to thank everybody for their interest in joining us on the call today.

Have a good day