PG&E Corp (PCG) 2009 Q1 法說會逐字稿

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

At this time, I would like to introduce your host, Gabe Togneri with PG&E.

Thank you and have a good conference.

You may proceed Mr.

Togneri.

Good morning, everyone.

We issued our earnings release earlier today.

And as usual, it is posted on our Web site along with all of the supplemental tables including the regulation G reconciliations.

The same information can also be found in an 8-K report furnished to the SEC and we will also be filing our joint Form 10-Q report for PG&E Corporation and Pacific Gas and Electric Company today.

A replay of this conference call will be available from our Web site after the call.

Our prepared remarks and the Q&A session to follow contain forward-looking statements based on assumptions and expectations reflecting information currently available to management.

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

Important factors that we want to make sure to point out to you that may affect our actual results are described in the reports we file with the SEC.

Those factors include the risk factors and other factors described in our annual report on Form 10-K for the year ended December 31st, 2008 and our Form 10-Q reports.

Leading the discussion today will be Peter Darbee, Chairman, CEO and President of PG&E Corporation, and Chris Johns, Senior Vice President and CFO of the Corporation.

Jack Keenan, our Chief Operating Officer at the Utility and other key members of the team are also here and will participate as appropriate in the Q&A session.

With that, I'll turn things over to Peter Darbee.

Thank you, Gabe.

Thank you all for joining us today.

In February, at our Investor Conference, we outlined the investment case for PG&E which we believe is very compelling.

As you'll recall, we emphasized our substantial capital expenditure plans, our manageable financing requirements, the benefits of decoupled revenues, our ability to pass through procurement costs and 11.45% weighted average ROE tied to an automatic adjustment in mechanism and the strong environmental profile.

We believe this gives us a very solid foundation for the growth trajectory reflected in our guidance.

As you can see from the results posted earlier this morning, we are reporting first quarter earnings from operations of $0.66 per share.

This compares to $0.62 per share a year ago.

Our results this quarter show a 6.5% growth over last year which is a solid accomplishment in this challenging economy.

We remain on track to reach our financial and operational targets for the year.

Chris will provide you with a more detailed look at our first quarter results in a few moments.

In the meantime, I want to underscore that we're reaffirming our guidance for 2009 through 2011 and remain confident in our ability to meet it.

I would like to highlight some notable operational achievements for the first quarter.

We completed the second and final installment of steam generator replacements at Unit 1 of our Diablo Canyon Nuclear Power Plant in 58 days.

That's 11 days faster than last year at Unit 2.

This impressive result was not only ahead of schedule but was also done safely and the unit is now operating at full power.

We also reached a milestone with respect to the installation of our 2.3 millionth SmartMeter in April making ours the largest SmartMeter deployment in the US.

And with the commission's approval of our SmartMeter upgrade, we have significantly ramped up installations to over 10,000 per day and are on track to have 4.5 million meters installed by year-end.

The new meters had been performing well.

We expect to complete this project on time and on budget and provide the customer an operational benefits that we promised.

On a different front, the California ISO has recently implemented MRTU, that is the Market Redesign and Technology Upgrade after several years of work and with the active involvement of PG&E and the other California utilities.

The new Day-Ahead Power Scheduling System has more safeguards than the old system.

The MRTU implementation which launched on April 1 has been smooth so far.

Demand and system usage will increase during the summer and we are working closely with the ISO so that the market continues to operate smoothly.

Now, I'm going to turn it over to Chris for a more detailed look at our financial results as well as an update on regulatory matters.

So, Chris?

Thank you, Peter.

For the first quarter, PG&E Corporation earned $246 million or $0.66 per diluted common share in earnings from operations.

On a GAAP basis, we earned $241 million or $0.65 per diluted common share.

This compares to $224 million or $0.62 per diluted share for the first quarter of 2008 on both a GAAP and a non-GAAP basis.

For earnings from operations, the quarter's results reflect a couple of increases over last year's first quarter.

First, there was an increase of $0.07 per share relative to 2008 as a result of revenues associated with higher authorized rate base investment.

This comes from the increase in our CPUC-authorized revenues as well as our FERC authorized transition revenues.

The second item related to our storm experience.

In the first quarter of this year, we did not experience a repeat of last year's severe winter storms.

This adds back approximately $0.07 in the comparison.

Partially offsetting these two increases were a series of small items.

First, we had a $0.02 impact from increased uncollectibles expense this quarter.

This is a reflection of the current state of California's economy which has seen record job losses and foreclosures compared to the first quarter of last year.

Although the amount of uncollectibles is significantly higher than the first quarter of last year, it is still generally in line with what we anticipate for 2009.

Second, we had an increase in shares outstanding which accounts for a $0.02 decrease in EPS quarter over quarter.

This came from higher than normal activity in our 401(k) and DRIP programs resulting in almost $100 million of cash in the first quarter alone.

As a reminder, we generally anticipate $100 to $200 million of cash from these programs on an annual basis.

Third, the Diablo Canyon refueling outage accounted for a $0.01 decrease in quarter-over-quarter results.

While the overall outage was shorter than last year's, it occurred entirely in the first quarter while last year's outage spread across both first and second quarters.

The fourth item relates to severance cost.

During the first quarter, we consolidated some of our facilities and the related severance accounts for an additional $0.01 of expense in the quarter.

Finally, we're also showing a $0.04 negative impact from a number of miscellaneous items.

About half of those items relate to market-driven valuation of our non-pension benefits such as our long-term disability and post-retirement medical trusts.

These trusts rely on stock market performance to match their projected liabilities.

As Peter indicated, we're reaffirming our guidance for 2009, 2010 and 2011.

Our operational plans are on track and we continue to remain on budget on our major capital projects.

Some of the items that negatively impacted the quarter are timing in nature.

For example, although we had planned for severance costs at this level during the year, as we improve our processes and operations, we were able to take advantage of consolidating some facilities and incurred the majority of our planned severance during the first quarter.

This will enable us to recognize the benefits of the changes earlier than originally planned.

With respect to the impact of share dilution, this is actually a positive for us.

It provides us cash earlier than originally planned and provides us greater flexibility in managing our capital structure throughout the year.

The remaining items that I discussed previously such as the uncollectibles and the non-pension benefit trusts are items that we are taking actions to help mitigate or offset their impacts going forward.

For example, as to our uncollectibles, we're increasing the credit analysis of our major accounts in requiring additional security where needed.

We're also reducing our collection cycle time to be in line with the regulatory tariff thus reducing our exposure to bad debt.

And we're reaching out to our affected customers to educate them on current payment assistance programs and investigating new programs to enhance our customer's ability to meet their payment requirements.

We believe these actions will prevent uncollectible losses from increasing substantially in excess of our forecasts.

With our non-pension benefit trusts, we are currently reviewing the asset allocations in these trusts to see if a different portfolio structure makes sense for us.

However, based upon the increase in the market in April, we've already seen the value of these trusts substantially return to their beginning of the year levels.

These considerations, together with increased productivity and some routine belt tightening, will keep us on course for the year.

We also anticipate other current factors will provide offsets to some of the items I just discussed.

For instance, we will begin to see the positive impacts to our cash flow bonus depreciation later this year resulting in lower financing needs than we otherwise had expected.

And because of the favorable rates we obtained in our March financing, we expect to see interest expense to come in a little lower than we had originally anticipated for the year.

Speaking of those March financings, at the Investor Conference, I told you that we had planned to be opportunistic and increase the size if rates were favorable.

We were able to increase both of our offerings in March.

At the Utility we issued $550 million of 30-year debt at a rate of 6.25%.

At the holding company, our initial five-year offering was increased from $250 million to $350 million at a rate of 5.75%.

The combination of these financings puts us in a strong liquidity position during this continued economic downturn and enables us to continue with our capital expenditure program and provide the infrastructure and the reliability that our customers expect.

Moving on to the regulatory update, we received a positive decision in the SmartMeter Upgrade file as Peter mentioned.

This authorizes us to spend an additional $467 million over the next several years to install the enhanced SmartMeters of which about $400 million is capital.

In addition, we are continuing to work with the CPUC regarding the CEE incentive revenues.

There, the goal is to develop a more streamlined process for both the rest of the 2006 to 2008 cycle and the 2009 to 2011 cycle.

In our Cornerstone filing, we received a scoping memo from the assigned administrative law judge that calls for a proposed decision by year-end.

Proceedings have started on this application.

On April 20th, we requested that FERC approve an uncontested settlement for [RTO11] case.

The settlement proposes a $776 million annual revenue requirement which is about $58 million higher than our current revenue requirement.

We expect a final decision on this in the third quarter of this year.

Finally, also in April, we received a decision in the hydro divestiture case for recovery of approximately $47 million.

This decision will be reflected in our second quarter results as an item impacting comparability.

Now, I'll turn it back over to Peter for his concluding remarks.

Thanks, Chris.

Looking ahead, we remain focused on our key goals of operational excellence, safe and reliable service for all of our customers and continued progress toward our goal of being the leading utility.

I want to close with some comments on a few key areas that round out our vision including some recognition that we are proud to receive.

We were named one of the top ten companies for supplier diversity by Diversity Inc.

Supplier diversity is a major priority for us and for our regulators.

This award demonstrates our commitment to help small and local businesses grow and we think this is critical for the California economy.

We were also named one of the top 100 companies for corporate responsibility by CRO Magazine.

This award acknowledges our commitment to employee relations as well as corporate governance.

But I especially take pride in the acknowledgement of our commitment and our employees' commitment to community service, environmental leadership and climate change.

On that last topic, I would like to discuss the action we're seeing on climate change in the new Congress.

The most significant step thus far has been the release of the discussion draft by Chairman Waxman and Markey.

We believe that this creates a solid starting point.

Importantly, many key aspects of it are aligned with a blueprint we helped develop as a member of the US Climate Action Partnership for US CAP.

Most significant, it calls for a cap-and-trade approach which we support.

It also includes a measure to promote technology development and to help create a smooth transition for customers.

We look forward to working with Chairman Waxman and Markey to continue refining certain provisions.

PG&E will continue to emphasize the importance of returning the value of the mission allowances back to Utility customers.

And this is a vital component of any effort to contain costs.

We'll also look to ensure that the cost containment and offset provisions are robust and will help customers and businesses.

As we said before, we believe PG&E is well-prepared to thrive in a lower carbon environment.

We look forward to extending our leadership in this arena and now we'll open it up for your questions.

(Operator Instructions) Our first question comes from the line of Michael Lapides with Goldman Sachs.

Please proceed.

Large scale potential projects that are down the road.

Can you give an update on the regulatory process going forward for bringing transmission down from Western Canada?

And can you talk a little bit about pipeline coming down from Jordan Cove.

Sure.

Let me take a crack at it.

First, with respect to the British Columbia Transmission Line, where we stand in that respect is the Commission has authorized the expenditure of, I believe, the number was $14 million approximately for us to study this issue.

And where we stand in that respect is that we have been working with the other utilities to identify the specific geography as to where the line would be located.

And so we've engaged in discussions with them.

We've also engaged with respect to the counterparties in Canada both on the transmission side and, to some extent, on the generation side.

What we need to do is finalize our plans in that regard and complete the study that will identify the costs and other issues and then presumably we would submit that to the Commission.

But what I do want to emphasize is the commencement of this project, assuming all of the hurdles between the cooperation and agreement on the Canadian side, the cooperation of the Utilities in the United States and then here in California.

Assuming that we hit all of that, the commencement of the construction would be really at the far end of the guidance period.

And so very little if any - - I don't believe any expenditures are included in our guidance for that.

In terms of approvals, I'm going to ask Chris if you would extend on what I have to say.

But presumably, we would complete that study.

We would outline the detailed plans for this to the Commission and they would either agree to a next phase or ultimately we would present the total plan to them and request their approval.

Then, we're going to need the approvals of the states in between and their PUC's FERC approval.

The ISO is involved in the process and we will need the Cooperation Agreement of the British Columbian government.

That's correct, Peter.

Ok.

So, there are quite a number of hurdles.

That's why we put this as something at the far end.

Now, let me turn to the Pacific Connector situation.

We have - - they have filed their application with the FERC.

They're moving toward the latter stages of that process.

There have been environmental filings associated with that.

And I think, really, the key issue has to do with lining up the contracts for LNG because this project will only move forward if the partners are able to line up product to move through that pipeline.

In addition to that, there is some local permitting that has to be completed up in Oregon in the area of Coos Bay.

Ok.

Can you also, in terms of thinking about transmission, what is your view on the various bills whether it is by Senator Reed or Senator Dorgan or even Senator Bingaman about changing federal versus state authority on citing and permitting transmission?

And how you think this A plays out and B, if it has any impact on PG&E over the next three to five years?

As we've discussed, building transmission is a very difficult process, and typically, it takes about eight to ten years from the time you start moving forward with an effort to the time it gets completed.

I think our fellow utilities south agree the transmission hurdles are just really pretty extraordinary.

And that's been a view that's been voiced across the United States.

So, there has been a substantial effort to try and see if we can change the citing rules with respect to electric transmission and the model many people have pointed to is pipeline, the pipeline model and if we can move in that direction.

Now, what I would say is I think there are a lot of people from the industry who would say we really ought to make that move and if the transmission is going to be built, that's what we need.

It is so important that it be built to support the renewable portfolios.

So, I think the FERC is warmly receiving that point of view.

But what will ultimately come down is an issue of state's rights and the states have a lot of say on it now.

So, it is a bit of a tug-of-war between federalism and state's rights and that's a tough one to call as to what the outcome of that debate will be.

But clearly, if we need to - - if we're going to make the progress we need on renewables and electric transmission that is necessary for this country, we'll have to move to a model more like the gas transmission model.

Got it.

Ok.

Thank you.

Much appreciated.

Thank you Mr.

Lapides.

Our next question comes from the line of Emily Christy with RBC Capital Markets.

Please proceed.

Good morning.

Just a couple of clarifications on the quarter.

No further miscellaneous items.

I think you said that about half of that was market-based driven.

Can you give anymore color as to what the other half, the other $0.01 or $0.02 relates to?

Yes, Emily, this is Chris Johns.

I'll tell you, it is really a bunch of very, very small things that when we look at it, maybe spending in some of the various parts of the business.

But none of them generated up to a number that makes it easy to break out separately.

As I said, half of it is all of the stuff on some of our benefit trusts.

But the other ones are all very small things that related to just spending in various parts of the business.

Ok.

And in terms of the uncollectible expenses, now, you're able to recover that in your next rate case, is that correct?

The way it works is as we go through a rate case, they allow as part of the revenue requirement, a certain amount of money for - - to recognize the amount of uncollectibles that we have.

So, each time that we go in, we'll get a new number based on the history that's been out there and the projections as to what it will be.

We don't get to collect anything from previous uncollectibles.

So, to the extent we have uncollectibles this year or last year in excess of what was in our rates, that is a number that we have to work with and offset through our operations.

Ok.

And do you have a cumulative impact over the last couple of years as to what that total might be?

As to the total of what?

In terms of the delta between what you actually incurred in bad debt and what was forecasted in the last rate case?

Yes, I think last year, it was somewhere a little bit over $30 million more than what was included in our rates.

This year, so far, it's - - I don't know, about $15 million to $20 million we've seen.

And again last year, we saw most of that come in the third and fourth quarter because of the economic downturn.

Right.

Ok.

Thank you very much.

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

Please proceed.

Good morning.

Hi, Jonathan.

I wanted to ask about the broader renewables filing that you had talked about at the Analysts' meeting to follow up on some of the more specific filings that you've made.

Any thoughts around timing or the nature of it?

Great.

Just for the benefit of the larger audience, so, we have made one filing already which is, to some extent, similar to what Edison and Semper have done.

So this would be for photovoltaics on land that we own and maybe at our substations and places of that nature.

I did discuss the idea of a broader filing that would lay out a broader strategy where we might invest opportunistically, but also in places where counterparties were running into financing difficulties.

After strategizing with our team and some other parties, I'll leave it at that, the conclusion was the optimal way to approach this would be to bring specific contracts to the Commission.

So, in other words, rather than file a big, broad strategic plan that many people might have difficulty with, is take specific deals to the Commission if we're able to negotiate them and get their approval on it.

And so that's the tactic that we're currently on.

We're looking at different investment alternatives.

What I have asked our team to do is to look at all of the contracts, the counterparties that we've been dealing with and contracts, to prioritize them relative to a set of criteria and basically, develop a list from lowest risk for PG&E to highest risk.

And then for us to evaluate, are there investment opportunities among the lowest risk for us to participate?

One of the criteria also would be, is the contract in jeopardy and is it a large contract?

And therefore, by providing our financing, it would help us in a significant way toward ensuring compliance for the 2010 and after period.

Peter, if I could just clarify, you were referring to, say, contracts that you already have with the developer that you might then seek to shore-up effectively.

Or are you talking about projects that you might not necessarily be involved with currently?

What I would say, Jonathan, is either contracts that we currently have or ones where we've been negotiating with third parties to bring in and have, for some period of time.

So, we've been working on seeing how we could bring a meaningful number of more megawatts online in that post-2010 period.

Ok.

May I ask one other on a different topic?

Yes.

I believe I heard correctly but to be in and out that you did a $96 million of DRIP equity in the first quarter.

How should we think about how you'll handle that?

If you continue to see numbers come in above plan, are you going to hold to this 100 or 200 for the year or would you let it run higher than that if it so happened?

Jonathan, this is Chris.

We would have to look at what the forecast looks like and obviously what kind of cash we see currently coming out of them.

On the one hand, what we would want to balance is what's the impact on net income but also then what is the impact on our future equity needs and our future financing flexibilities.

So, when I look at this economic situation that we're in now with the downturn, I still continue to focus on, it is good to have the cash and more liquidity we can get, the better off we are.

So, I would tend to lean toward keeping it and continuing to build that up and because it does.

It impacts the amount of equity we would need not only this year but into the future.

Having said that, obviously we will always measure that against what's the impact on the earnings this year and into the future.

And we have to take that into consideration and as you know, we always have the ability to stop those programs if we need to.

Thank you very much.

Our next question comes from the line of [Adella Marty] with CDP US.

Please proceed.

Good morning.

Good morning.

Just to follow up on Jonathan's question with the DRIP running ahead now of plan and with economic turndown, I'm wondering whether the bias now between the low case and the high case with regard to capital expenditures is now biased more toward the low case at this point for the out years.

And secondarily, when you look at the equity requirements beyond DRIP, the 675 to 750 that you highlighted at your Analyst Conference whether given the acceleration on the DRIP at this point, whether that's now more a 2010, 2011 event in May well may be toward the low end if not a little less than that.

When I look at it, I don't know that I would automatically say that because we got $100 million from the first quarter, you would multiply that by four and say we'll well exceed the $100 to $200 million of proceeds from DRIP in this year.

Those can tend to be reflective of what's happening in the economy at the time versus anything else.

So, I don't know exactly how much we'll get into that.

But as I was saying in the previous response, one of the things that we would look at before we would even consider whether we keep that running or not is what does that do to our equity needs beyond 2009.

And to the extent that we want to, we could utilize that cash to continue to push out equity needs in 2010 and 2011 as we look at it and be opportunistic about that.

We know that people have told us many times they generally prefer us not to have to go out and do a big equity trade.

So, to the extent we can get cash in through this method, we may utilize that.

As far as the timing of our capital expenditures and the amounts that I think you said at the first part, we're still sticking with the schedule that we have and our capital plans haven't changed.

And so I would say we continue to do those things as you saw.

We got the Automated Meter upgrade approved and so we're moving full-steam ahead with that capital expenditure.

We will continue to look at what opportunities we have to push toward the upper-end of our forecast that we gave you in late February.

So, I mean with the Automated Meter Reading Program, if we're looking at 2011, between 33 and 48, would you say that -- I'm just wondering where, within that range, our bias should be.

We understand it is quite fluid.

But if you were thinking about it today, where do you think - - where would you tend to think it would fall?

We're not going to really provide something other than we've got the high and the lows out there and we've reaffirmed our guidance.

We've given you what was included in the low case, what was included in the high case, and all we can do is tell you that when we add something, we tell you about it and you guys can figure out where you want to put us in that range.

All right.

Thank you very much.

The other thing I would add is with the 401(k) program, we have the ability to titrate the amount of equity we're bringing into the Company.

That is, how much in terms of new equity do we issue into the program or do we go out and conduct open market purchases to buy equity to fund the 401(k) program?

So, to the extent that we were running over and we had more equity than we thought was appropriate given management of EPS, we do have that tool and it is pretty easy to use in a very flexible fashion.

Ok.

Thank you very much.

Our next question comes from the line of Travis Miller with Morningstar.

Please proceed.

Good morning.

Good morning, Travis.

I see on your details of the customers and usage.

Customer account looks like it was up pretty - - what a percent or so and yet the usage was down 6% or so.

How much of that was weather and how much some other dynamics in the market that you're seeing there?

It is a reminder just so you were right.

If you're looking at pure sales, this is Chris, whether it will impact the sales.

It won't impact the revenues because of the decoupling.

I just want to remind people of that.

I want to turn it over to Stephen Cairns, our Controller, to talk a little more about why you see the fluctuation that you see in the first quarter.

The main driver was lower was a lower number of meter read days during the quarter..

During quarter one of 2009, we had 60 read days whereas in the previous year, we had 65.

Ok.

So, when we've looked at it and weather adjusted, our sales are basically flat year-over-year.

Ok.

Ok.

And then when do you collect that cash?

Again through the decoupling, remind me?

Well, we - - if you think about it, we collect cash on the approved revenues pretty much equally throughout the year.

And then what we'll do is we'll either book a receivable or a payable if we've over or undercollected based on the actuals.

So, to the extent that we see demand going up and we're actually collecting more, we collect that cash right away we'll have to pay it back later.

To the extent that we see sales drop and we're not collecting cash as much as we would have, we put that into a receivable.

And as long as it doesn't get to more than a couple hundred million dollars, we end up collecting that the following year.

But we do have the ability to, if it gets too big, to go in and file for a change in rates.

Annual adjustment?

Yes.

Ok.

Great.

Thanks a lot.

(Operator Instructions) We have a follow-up question by Michael Lapides with Goldman Sachs.

Please proceed.

Hey, guys, can you refresh us in terms of the California Commission and rate cases and really -- this isn't really for a GRC but for review.

Any potential time when they might review the cost of capital mechanism given changes in the bond interest rates to the Moody's bond.

The capital structure piece, do they look through to the parent or will they look just at PG&E's capital structure if the bond yield made that greater than 100 basis point move and therefore they had a chance to look at what the appropriate ROE level is.

Michael, this is Chris.

First of all, as you know, we've put in a new mechanism in 2008 and so that mechanism stays in place through the end of 2010.

And so there isn't another formal rate case-like hearing or cost of capital hearing until the 2010 timeframe for 2011.

There is the automatic adjustment mechanism and that calls for an advice filing which is not the same thing as a normal cost of capital hearing which involves all of the witnesses and testimony and legal process.

The advice filing is just where we will just file and say based on this mechanism, here's what it says we should or should not get.

To your question of when we actually go through a formal cost of capital proceeding which is when they would have the ability to adjust the equity ratio which right now, they wouldn't and in these advice filings, they wouldn't.

At that point in time, they'll look at the risks and such, but it is focused on PG&E, the Utility, not PG&E consolidated or the holding company.

That it is focused on the Utility.

Ok.

But I guess -- I apologize.

Let me see if I can rephrase.

If there is an advice filing process, because the bond yield made the greater than 100 basis point move, do they only look at the allowed ROE or authorized ROE or do they have the opportunity to evaluate the capital structure at the same time or is the capital structure solely dealt with in the 2010 cost of capital proceeding for 2011?

Thanks, Michael.

I'm sorry.

It is only on ROE.

The capital structure stays in place through the end of 2010.

The advice filings don't and aren't looking at cap structure.

Got it.

Ok.

Thank you.

Michael, I might add that the debt at the holding company really relates back to the financial crisis.

That's when we've initially put on the vast bulk of the debt at the holding company.

And so that related to the National Energy Group issues and things of that nature.

All right.

Thank you, guys.

Appreciate the clarity.

Sure.

Thank you.

Our next question comes from the line of Tom [O'Neill] with [Green Amro].

Please Proceed.

Good morning.

Just curious if there is a specific date on the timing of the generation RFO disclosure, just who and when the bidders are.

For the 2008, we would announce that sometime in the next two months.

You said next two months?

The next few months.

Got it.

Ok.

Thank you.

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

All right.

In that case, I will just say I appreciate - - we appreciate your interest in PG&E.

And have a great day!