PG&E Corp (PCG) 2008 Q1 法說會逐字稿

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

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

Thank you, and have a good conference.

Go ahead, Mr.

Togneri.

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

And I would like to thank you for joining us.

We're going to keep today's prepared remarks relatively brief, since we'll be holding our analyst day on May 22, just about two weeks from now.

And before we get into this quarter's results, let's go through the usual formalities.

This is a simultaneous webcast and conference call, a replay of which including the question-and-answer session will be available from our website.

We've issued our earnings press release this morning and it's posted on our website, along with all the supplemental tables, including Regulation G reconciliations.

We'll refer to some of the information in the tables, so you'll want to have them handy.

We provided these materials in an 8-K report furnished to the SEC this morning and we do plan to file our 10-Q report for both the Corporation and Pacific Gas and Electric Company a little bit later this morning.

I'll 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.

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

Important factors that can affect those results are described in the reports that we file from time to time with the SEC.

Those factors include the risk factors and other factors described in or referenced in our annual report on Form 10-K for the year ended December 31, 2007, and our 10-Q report for this quarter.

Since this is a short call today, you'll be hearing from Peter Darbee, Chairman, CEO and President of the Corporation, and Chris Johns, Senior Vice President and CFO.

Bill Morrow, President and CEO of Pacific Gas and Electric Company, and other key members of the team are here with us to participate in the Q&A session.

And with that, I'll turn the call over to Peter.

Thank you, Gabe, and good morning all.

The first item that we want to bring to your attention in the principal message of this call is that we are on track to deliver on our guidance for the year, 2008.

Our results for the first quarter do reflect the significant winter storms that we saw in January and these storms were the most severe since El Nino more than a decade ago.

The damage from the winds and trees during the first quarter were enough to down power lines that would stretch from San Francisco to Canada and as a result, we filed with the CPU C for partial recovery of storm costs.

The reason I say partial is because not all counties in California and in our service territory were declared disaster areas.

And we expect recovery for these costs early next year.

Now, turning to some of the other items during the quarter, the most significant one is that the results for the quarter do reflect the replacement of the steam generator at Diablo Canyon, as well as the refueling outage that occurred for Unit 2.

And last year during the first quarter, we did not have an outage, but rather it fell during second quarter.

The replacement of the steam generators are important in that what they will help enable is that we'll be able to run both units 1 and 2 when they are both completed very efficiently through the next licensing period, which is in approximately 2024 and 2025.

Chris is going to have more details with respect to our financial results, but the bottom line is except for the storms, there were no surprises and we're on course to deliver, as I say, our guidance for the year.

I want to turn now to the discussion of the feedback that we received during our recent trip to New York and Boston, and how that impacts on our upcoming analyst day.

In particular, we received a lot of feedback and we view that feedback as invaluable.

We heard loud and clearly that you want greater visibility into the components of our guidance and our team knows that's important for you in that we will provide that to you on analyst day.

Gabe's staff has already reached out to some of you in preparation for analyst day and that input has helped us in building a strong agenda for the meeting.

We intend to focus on those issues that are upper most in your mind.

And now for a few recent items.

The first is the proposed decision with respect to the cost of capital, the recent proposed decision maintains the 52% equity capital structure that we currently have and does so through the year 2010, and provides for a starting point on the equity return of 11.35%.

This stability is important to our business and to our outlook and therefore we see the preliminary decision as constructive and we're optimistic that we'll be adopted by the commission on May 29.

I want to also talk for a moment about the ruby pipeline project.

We have provided an announcement to the effect that we are terminating our participation in the ruby pipeline.

During the recent weeks and months, we have taken the opportunity to really examine very carefully the costs associated with that pipeline in the course of our due diligence efforts, and not surprisingly, and consistent with our previous communications with you all, we see the price of steel and pipe and construction rising very substantially, and when we took this backdrop of what's happening in the industry and compared it with the projections and the ruby pipeline, we saw a disconnect.

We frankly could not see the cost projections coming in at the projected level, and therefore we exercised our option to pull out of the ruby pipeline and we will no longer have any further participation at PG&E Corporation in the pipeline.

Pacific Gas and Electric Company will continue to interact with the folks at El Paso regarding this pipeline and the decision whether the pipeline will continue will be up to El Paso and their board of directors, but PG&E still thinks its useful to have access to the Rockies, so we will either endeavor to seek that through the pipeline or through some competing pipelines that are under consideration currently.

Also want to mention the BrightSource Solar contract.

We recently signed a contract with BrightSource for potentially up to 900 megawatts.

The contract provides for 100 megawatts of renewable power as early as 2011.

Our team's looking for additional contracts and exploring opportunities for direct investment by PG&E in renewables.

While I'm on that topic, I wanted to talk about the overall outlook for renewables.

From a policy standpoint, we face a current challenge with respect to renewables and it appears that the long-term extension of the renewables energy production and investment tax credits, the so-called PTC and ITC, have stalled in congress.

And we believe that a lack of long-term certainty regarding tax treatment will have an effect on the financial viability of many renewable projects, and this comes at a time, of course, when the achievement of the renewable portfolio standards is beginning to gain momentum across the country.

So ultimately, it's important for everyone to recognize that the success of the renewable projects is key to addressing greenhouse gas issues and the overall issue of global climate change.

We want you to know that we're working hard with a broad coalition of companies on this issue.

They include renewable energy producers, utilities, environmental groups, and others to make the case before congress with respect to the PTC and ITC extensions, and we believe it's most productive if those extensions are not just on a one-year basis, but are actually on a multiple-year basis to provide the necessary investment environment.

We're hopeful for a positive outcome from congress, but a lot of work still is on the horizon before we accomplish that.

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

Thank you, Peter.

I'll begin by discussing our first quarter results and our guidance, and then I'll update you on some key regulatory developments.

For the first quarter, PG&E Corporation earned $224 million, or $0.62 per diluted common share on both a GAAP and non-GAAP basis.

This compares to $256 million, or $0.71 per diluted share for the first quarter of 2007, also on both a GAAP and a non-GAAP basis.

During the quarter, rate base revenues increased earnings by $0.08 per share quarter-over-quarter relative to 2007, as a result of the additional CPC authorized revenues and the current FERC transmission owner rate case.

These increases were offset by the costs associated with the January storms and the Diablo Canyon outage that Peter just mentioned.

The January storms and outage restoration had a negative impact of $0.07 per share.

As we incurred approximately $43 million of storm-related expenses.

There were no similar expenses in the first quarter of last year.

The Diablo Unit 2 outage also accounted for a negative $0.07 per share.

As expected, the steam generator replacement required this outage to be about double the length of a typical outage, starting in February and wrapping up in mid-April.

As you recall, the Diablo Canyon Unit 1 outage occurred entirely in the second quarter of 2007.

Miscellaneous items accounted for a negative $0.03 per share.

This included a $0.01 for severance costs and another $0.01 for a required change in accounting for the dividend participation rights on our convertible debt.

Our guidance range for earnings from operations remains at $2.90 to $3 per share for 2008 and $3.15 to $3.25 per share for 2009.

Our supplemental earnings materials include a reconciliation of guidance with projected GAAP EPS.

We are also reaffirming our target of 8% compound average annual growth in EPS from operations from 2007 through 2011.

As a reminder, our current guidance and our target growth rate are based on several key assumptions.

First, is an 11.35% authorized return on equity for the CPUC regulated.

For the FERC jurisdictional business we assume that we earn at least 12%.

We also assume that we achieve our projected rate base of approximately $18.4 billion for 2008 and $20.8 billion for 2009, while maintaining our rate-making capital structure at 52% equity.

As a reminder, our overall long-term guidance also assumes that we will augment rate-based earnings with items like customer energy efficiency incentive revenues, identify additional investment opportunities, and realize operational efficiencies and amounts consistent with achieving our earnings targets.

Now for a few regulatory items of interest.

On April 29, we received a proposed decision in the second phase of our cost of capital proceedings.

You will recall our CPUC jurisdictional ROE and capital structure are set at 11.35% and 52% equity for 2008.

This phase of the proceeding is focused on approving a mechanism for all three California utilities to set the ROE and cost of debt for preferred stock in 2009 and going forward until the full, next full cost of capital case.

The proposed decision recommends a three year mechanism starting in 2008 tied to the Moody's utility bond index with an ROE starting point of 11.35% for PG&E.

An adjustment to ROE would be triggered by a change in the index, up or down, of more than 100 basis points.

Under the proposed decision, PG&E would maintain its 52% equity capital structure until the next cost of capital proceeding effective January 1, 2011.

We expect a final decision in the second quarter.

The first CPUC meeting when this can be voted on is May 29.

The other regulatory item is our Sema filing, or our catastrophic event memorandum account that we made in late March.

Through the Sema mechanism we can request recovery of storm cost associated with declared disasters.

The portion of our service territory that qualified under this standard allows to us request recovery of roughly $20 million in revenue requirement associated with the January storm costs.

Included in this amount are about 12.5 million of expense items.

We are not counting on a final regulatory decision on this request in 2008.

However, we have fully reviewed the quarter's results and our expectations for the remainder of the year in order to be able to reaffirm our guidance range for the year.

With that, I will turn it back to Peter.

Thanks, Chris.

Just to recap and summarize, we are reaffirming guidance for the full year.

We had a solid quarter from an operational standpoint.

We met significant storm challenges during the quarter and we executed well with respect to the steam generator replacement at Diablo Canyon.

So to wrap up, we're looking forward to sharing with you more in a few weeks at our analyst day meeting.

Thanks very much, and now we're ready for questions.

(OPERATOR INSTRUCTIONS).

Lynn, can I assume that means there are no questions?

Well, Gabe, let me interject, and Lynn, can you just make sure your system is working correctly?

Because this has happened to me once before in my career and it was because the system wasn't working properly.

Can you just verify the technology is working correctly?

Yes.

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

Please proceed.

Good morning, everyone.

Good morning, Jonathan.

Good morning Jonathan.

I actually registered my question before, so there may be other people out there, too.

Quickly on the cost of capital decision, I think you noted this in your 8-K at the time.

I apologize if you have covered it.

I've been jumping back and forth, but this uncertainty seems to contradict itself whether the intent was to adjust for the amount by which change in the bond index exceeded 100 basis points or whether it would be the entire Delta in the bond index, including the 100 basis point debt band.

Any extra color on sort of how that -- why there's a conflict in there and what the intent may have been within the PD?

Yes, Jonathan, this is Chris.

And you are correct.

As you read through the entirety, including the examples that are in the proposed decision, there does appear to be some conflict and some uncertainty as to the intent there.

And so we are working with the CPUC staff and team to try to resolve what that conflict is.

I don't have any more color on that right now, being that it was just issued and we will continue to work with them to try to clarify that.

Okay, thank you.

Thank you, Mr.

Arnold.

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

These proceed.

Thank you.

Couple questions on the situation with Ruby.

What is the plan for the replacement of the gas that was supposed to come from Ruby?

And also, would it be fair to say the cost escalation was at least 50% from the $2 billion original number?

And generally what kind of cost escalations would you be expecting going forward?

Okay.

In terms of the gas supply, we, of course, draw gas from the Northern part of California, down from Canada.

But we also draw gas up from the south, and so we have access.

This would have provided for an additional avenue of gas from the Rockies, which is a basin that we don't currently have good direct access into.

There are one or two competing pipeline projects to Ruby, so I think the options are that those projects will advance, and I think that's very likely.

There's also the chance that the board at El Paso will say we're not moving ahead with this transaction as currently configured, and as I understand it, they have the right to withdraw from their commitment, which is subject to board approval, and then they have the opportunity also to come back and rebid presumably.

So at this point, we think that there are considerable options still available to Pacific Gas and Electric Company, and we're not concerned about a shortage of gas.

I think it's a question of more availability and also that reduces the cost pressure on our customers as a result.

So that's the first one.

The second question you, had or item you had was the suggestion that the cost associated with Ruby must have increased by maybe 50% or more in order for us to make this decision.

I don't think we're going to comment on what the percentages are.

What we have communicated to you over a period of time, and we've heard universally across the industry is cost pressures have been very considerably across all types of electrical equipment and that's supporting it.

So we've talked about copper prices up more than 50%, aluminum prices up on that order, transformer prices have been up very substantially on the order of 30 to 50%, depending on the type.

So we're seeing those levels of cost pressures.

The good news is that we made a lot of our commitments previously and have locked things in, and so it will be on a prospective basis going forward for us and also the industry to deal with this rising cost environment.

Generally what kind of rate, I mean cost pressures are you feeling?

And then on the earnings results, there was a $0.03 miscellaneous.

Could you kind of walk us through what that was made up of?

Yes, this is Chris.

On the $0.03, we said one of those pennies is due to severance and that's consistent with what our plans were earlier in the year, as we've looked at the, some of the initiatives that we had take place late in 2007, driving some of the efficiencies out of there.

We were aware that we would have some severance and so that $0.01 was associated with that.

Then in addition, there was a new accounting standard that came out on fair values and we had to adjust the fair value of the embedded derivative in our convertible debt that had to do with our dividend participation rights, and that was about a $0.01.

And then the last $0.01 was just an accumulation of a lot of really small items.

On the cost issue, it's really difficult to generalize what we're seeing there.

For example, we have the Gateway Facility that we've been working on.

That was started before the most recent pressure on prices.

And so that project is proceeding somewhat ahead of schedule and below budget.

On Colusa, we've been able to jump in on that situation that we described before and we're using, in effect, some of the profit margin that the EPC had in mind as a contingency cushion for us.

So, I think right now what we're seeing is like most people, when they go to the store or the gas station, they are seeing it crop up at the fringe, at the margin.

And that will have an impact over time on people's cost structures.

But it's too early to generalize what that impact would be.

Okay.

Thank you.

Thank you, Mr.

Johong.

Our next question comes from the line of Steve Fleishman with Catapult Capital Management.

Please proceed.

Yes, hi, Peter.

Hi, Steve.

How are you?

Good.

Just to clarify on your 2008 guidance, you're basically reiterating the same guidance, but within 2008, absorbing $0.07 of storm costs that you weren't expecting because you're not going to get any recovery of any of that until '09?

Is that correct, or--

That is.

We have picked up a little storm cost from the previous year, but let me have Chris elaborate.

Okay.

Steve, when we look out forward for this year, there's really a couple of things that we looked at.

Obviously we have to always manage our costs and there will always be things that might increase or decrease, but as we looked out during the year, there's really two things that we see on the horizon that are going to help us overcome these storm costs.

One is that we have reached some smaller settlement agreements with the IRS on some past tax issues that are going to contribute a couple pennies to us.

And then also as you've seen, interest rates have been less than what we had originally anticipated during this year, and so we, when we look at our variable debt and our commercial paper programs, we're anticipating that interest expense is going to be a pretty good number less than what we had originally anticipated.

So when we look at the balance of those versus our storm costs, we see them pretty much offsetting each other.

Okay.

The IRS tax settlements, that will be in the second quarter, then?

No, probably later on during the year.

Okay.

One other question, just in terms of the Ruby pipeline, could you remind me if that was in your long-term CapEx guidance or not?

It was not.

Okay.

Thank you.

Thank you, Steve.

Thank you, Steve.

Thank you, Mr.

Fleishman.

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

Please proceed.

Hey, guys.

Can you talk a little bit about some of the projects that aren't necessarily in your current rate base guidance, kind of for the long-term, but that , that are potentially sizable projects, whether gas pipeline, whether electric transmission, just so investors can get kind of a feel for what the things are that could move the needle over the next couple of years on rate base

Yes, Michael, this is Chris.

I'll be glad to do that.

As a reminder, as we've said in our last couple of calls, we constantly look at a portfolio of items that will impact our earnings and that includes the capital investment, CEE revenues and various cost initiatives and we need to look at all of those and trade them up.

But having said that, when we look at what's been previously communicated as to within our capital forecast and what's not, the items that are not in there are things like the Pacific connector gas pipeline project that we've talked about many times in the past, the potential British Columbia to California electric transmission line, the upgrade of our SmartMeter project, and then any generation, whether that's conventional generation or renewable generation, up and above the Gateway, Colusa and Humboldt projects and then we're constantly looking at other opportunities whether it's in gas storage or further electric transmission opportunities.

Okay.

Can you talk about the time line for when you might know about potential new generation projects?

I mean I understand the long-term procurement planning process has wound up and now you're at, probably at the RFO stage.

Yes, this is Bill Morrow.

So, Michael, you know, as you recall, the 2004 RFO that we sent out, we have I think seven projects in it.

And there's a number of those projects that are being delayed and of course we talked about Colusa and how we had to take that over.

We did get permission basically within the '06 RFO from the CPUC to extend and look at ways to which we can recover from this loss of energy out there and that might have some potential, as Chris just mentioned for that to be within our rate base of that.

We're looking at a number of projects right now.

I would say it's probably at the earliest, looking at the third quarter before we would know anything definitive there.

But that could stretch all the way into the turn of the year.

And is there a specific docket we should follow in that regard?

No, I think we would update you as we would go through on the calls here.

Great.

Thank you, guys.

Thank you, Mr.

Lapides.

Our next question comes from the line of David Grumhaus with Copia Capital.

Please proceed.

Good morning, guys.

Good morning.

Just a quick clarification on the storm costs.

Have you assumed the full 43 million of expenses, the negative $0.07 hit in your guidance, or are you assuming you get some of that back from this filing?

No, we're assuming the full hit in 2008.

The filing that we're making, we don't anticipate that we would see a final order on that until 2009, and so we wouldn't be able to book any of the recovery of that cost until we got that final order.

Okay, so when you get that, do you then book it in 2009?

You don't book it until you have it?

That's right.

Okay.

That's helpful.

Thanks for the time, guys.

Sure.

Thank you, Mr.

Grumhaus.

Our next question comes from the line of Patrick Forkin Tejas Securities Group, Inc.

Good morning.

I was wondering id you could give us a quick update on your SmartMetering program, are you on track with your CapEx spend for 2008 and how many gas and electric end points do you think you'll have deployed by the end of the year?

Patrick, this is Bill Morrow.

Yes, we are on track with our schedule, just some reminders of this.

Last year we ended with about 270,000 meters deployed at the end of the first quarter of this year, we were just over 430,000.

The capital program is exactly on track with where we thought we would be at this point, and just a reminder, there was an overall 1.7 billion initial program approval, 1.4 of that was associated with capital, and we fully expect this year to cross over the million mark, probably in the 1.2 million range for the number of meters that we should have deployed.

And just as a reminder, we have filed, of course, the supplement we've talked about and that was a $623 million overall expenditure with 565 of that associated with capital.

Okay.

Just to clarify, you were at 430 at the end of the quarter and you plan on being at 1.2 million by the end of the year?

Over a 1 million is the way I would categorize this right now.

Okay, thank you.

Thank you, Mr.

Forken.

Our next question comes from the line of Hugh Wynne of Sanford Bernstein.

Please go ahead.

I was wondering if I might just have some comments from you on the progress you're making in the two other areas that you mentioned, sustaining your EPS forecast, which are the conservation incentive revenues and the other operational efficiencies.

Sure.

This is Chris.

As far as the, the energy efficiency items, you know, the CPC staff has recently released some of their draft energy measurement and verification values that we and the other utilities are reviewing and commenting on, and these draft values will continue to be released throughout the June period of time.

We continue to work with the commission and the other IOUs to reach consensus on the measurement methods to be employed and with respect to energy savings and the associated incentive awards.

There's a public comment period that will happen through the next couple of months and that we expect in the CPC to release final values later this summer.

These final energy measurement and verification values will be used to determine our net energy savings and thus our interim incentive claim for 2008.

We'll make that claim in the September timeframe and would expect a final CPUC decision before the end of the year.

And then as far as looking at the next program 2009 through 2011, we're due to make a filing and believe it be in the June timeframe to layout the foundation for that portion of the incentive mechanisms.

And then as far as the initiatives are concerned, we do plan on at our analyst conference talking a little bit more in detail about that, but I'll hand it to Bill Morrow to tell you the general areas that we've been working through.

And as we reported on the last call, we do see more opportunity within the company to continue to find productivity improvements.

We're seeing areas right now that will further the advancements that we made within the procurement of the strategic sourcing, and we see opportunities in real estate.

There's some vehicle management elements, and of course some system data enhancements that we think will be able to help us with a number of product lifts improvements, as well as effectiveness on delivering for customer service.

And as Chris has said and Peter mentioned in his opening remarks on this, we're going to get into some more detail when we're up in Sonoma with many of you.

Great, thanks a lot.

Thank you, Mr.

Wang.

Our next question is a follow-up question from the line of Lasan Johong from RBC Capital Markets.

Please proceed.

Thank you.

Chris, what was your normal, or normalized storm costs the last, say, about 10 years?

Yes, on a normal basis, I think they run around 5 to $10 million.

Thanks, Chris.

Thank you, Mr.

Johong.

Our next question comes from the line of Ashar Khan with SAC Capital.

Please proceed.

Good morning.

Chris, I just wanted to make sure -- I don't know if you can comment on this, the three remaining quarters, is there anything, why any of them should be down versus last year?

Structurally in terms of outage or something like that?

Yes, Ashar, other than there's a little bit, as we said, the outage for Diablo last year was in the second quarter.

This year it was in the first quarter.

I think those will be the biggest structural differences that you'll see from that aspect.

Otherwise, operationally, we're not anticipating anything that is scheduled to be a large difference.

Okay.

Thank you.

Thank you, Mr.

Khan.

There are currently no additional questions waiting from the phone lines.

All right.

In that case, I would like to thank everybody for their interest and whether you're with us in Sonoma or you're listening via webcast a couple of weeks from now, we'll have lots to discuss at that time.

Thanks, and have a great day.