PG&E Corp (PCG) 2010 Q1 法說會逐字稿

Good afternoon 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.

Thanks, Lynn, and welcome to our call.

And thanks for making time in what we know is a busy day of company calls and conferences.

The earnings release that we put out earlier today is posted on our website, along with the supplemental earnings tables we will be covering and including the Reg G reconciliations.

The same information is available in the 8K report that we furnished to the SEC this morning and we will also be filing our form 10Q report today.

I will remind you that our prepared remarks and the Q&A session that follows will include forward-looking statements based on assumptions and expectations reflecting information currently available to management.

And as outlined in more detail in our press release and SEC reports, actual results may differ materially from those forward-looking statements.

Important factors that can affect actual results are described in the reports we file with the SEC, including risk factors and other factors described in our annual report on form 10K for the year ended December 31, 2009 and our form 10Q reports.

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

Chris Johns is out of town attending his son's graduation, so we send out our congratulations to Ryan Johns.

Other key members of the team, as usual, will participate in the Q&A session.

And now I will turn things over to Peter Darbee.

Thanks, Gabe, and thank you all for joining us today on the phone and on the webcast.

We appreciate your interest in PG&E as always and this morning we reported solid results for the quarter.

Earnings from operations came in at $0.79 per share.

Looking ahead, we are reaffirming guidance for 2010 and 2011.

Kent will provide the details behind the quarter's financial results in a minute.

I am gong to focus my remarks on updates and progress on some key regulatory items since our recent investor conference.

I will start with our 2011 GRC.

As you know, the case is proceeding and we are looking forward to the start of hearings next month.

Late Wednesday, the Division of Ratepayer Advocates filed its testimony in the case, which Kent will cover in his remarks.

We put a lot of time and effort into this case and it's been prepared by an experienced management team.

We believe we put forward a good case and plan to work constructively with the Commission staff and other parties as we proceed.

Two weeks ago we received CPUC approval to own and operate up to 250 megawatts of new solar PV generation.

That decision also authorizes another 250 megawatts that will be purchased from third parties under long-term contracts.

We already have two megawatts that have been up and running since last year under utility ownership.

We expect construction on additional megawatts to begin later this year.

Moving to the FERC, in our annual transmission owner case TO 12, we've reached an all party settlement and have requested final FERC approval.

The settlement sets an annual retail rate base revenue requirement of $875 million.

This is an increase of almost $100 million over the current amount and will fund necessary infrastructure work on the transmission system.

Finally, at our investor conference we talked about our focus on PG&E's residential electric rate structure.

As you will recall we have a five tier rate structure with increasing rates for higher volumes of usage.

Our concern is that in recent years the rates in the upper tiers have increased much more than the lower tiers and have gotten too high.

In that regard, we reached a proposed settlement with the DRA and TURN two weeks ago that would eliminate the fifth, and highest rate tier altogether.

We believe we are track to obtain CPUC approval of this rate change in June before the summer cooling season begins.

We hope to make an additional progress on our residential rates next year.

In fact, we are addressing that through our GRC Phase II rate design proposal.

In this application, we've proposed eliminating the fourth tier to get a more balanced and equitable three tier structure.

Our highest residential rate would then be comparable to both Southern California Edison and San Diego Gas and Electric.

The result would be a fair rate structure, one that reflects the actual cost to serve different groups of customers while still providing the right motivation for energy efficiency.

We believe these various regulatory developments demonstrate that, in general, PG&E's priorities continue to be aligned with those of policymakers, regulators and with the interest of our customers.

We know that many of you were focused on the regulatory environment in California and are looking for signs that it remains constructive.

And to that point, we think the best gauge is to continue to observe what our regulators both say and do.

Their actions over the years had demonstrated a pragmatic and constructive approach to energy policy in California.

That is a policy guided by a vision of world class electric and gas infrastructure.

We believe there continues to be clear signs that the regulatory environment remains on track.

The most recent example being the Solar PV decision.

Our commitment to you is that we will work hard to maintain the support of key policymakers for our programs and plans.

And now we are going to turn it over to Kent Harvey, who is going to discuss the financial results in more detail.

Kent.

Thanks, Peter, and hello everybody.

For the first quarter PG&E Corporation earned $303 million or $0.79 per diluted common share in earnings from operations.

This compares to $246 million or $0.66 per diluted share for earnings from operations for the first quarter of last year.

On a GAAP basis we earned $258 million or $0.67 per diluted common share and that compares to $241 million or $0.65 per share last year.

The $0.13 increase in earnings from operations was the result of a number of factors and they're summarized in Table Four of the supplemental earnings package.

They include; An increase of $0.06 per share relative to 2009 because there was no refueling outage at Diablo Canyon during Q1 of this year.

An increase of $0.05 related to higher revenues associated with the our authorized rate base investment.

An increase of $0.02 due to positive market performance in our non-pension benefit trusts.

Another $0.02 was due to lower severance expenses and you will recall that last year we closed one of our regional offices and incurred some severance cost in the first quarter.

And finally, an increase of $0.03 in miscellaneous reflecting a number of smaller net positive items.

These positive factors were partially offset by a reduction of $0.03 resulting from the severe storms we experienced during the quarter, which required significant restoration work and a reduction of $0.02 due to increased shares outstanding as compared to a year ago.

Let me now briefly walk you through the items impacting comparability, which totaled $0.12 during the quarter.

For this I will refer you to our Reg G reconciliation table, which is table two in our supplemental earnings package.

One item impacting comparability is a $0.05 charge associated with the recently enacted Federal healthcare law, specifically the elimination of a tax deduction associated with the Medicare Part D contributions for post retirement medical plans.

I'm sure you've heard about this from others, but the loss of the deduction means that we have to reduce the deferred tax asset on our balance sheet resulting in a onetime charge.

The other item impacting comparability is the statewide ballot initiative that we previously discussed with you all.

And spending on this item is on track with our plan, which we expect will total $0.09 for the year.

With one quarter down, we believe we are on track for the year and we are reaffirming our guidance today for earnings from operations for both 2010 and 2011.

Guidance for 2010 remains at $3.35 to $3.50 per share and guidance for 2011 remains at $3.65 to $3.85 per share.

I will remind you that our guidance is based on various assumptions discussed at our analyst conference, including those related to our ability to invest capital and achieve a return on equity of at least 11.35%.

In terms of our financing outlook overall, including our equity needs, from my perspective there really are no significant updates since our investor conference two months ago.

Our CapEx program got off to a bit of a slow start in Q1 due to the January storms I mentioned, as well as some permitting and other delays.

At this point we expect to make up most of it as the year progresses.

As Peter mentioned, we received approval of the Solar PV program.

And we had shown a 2010 CapEx range at our investor conference of between $0 and $160 million for this item.

However, given the timing of the decision, which was a bit later than we had hoped but also with the procedural requirements that were included in the final decision, we expect our 2010 CapEx spending for this program to be at the lower end of that range.

Perhaps up to $20 million or $30 million will actually get done in 2010.

Of course we expect the program to ramp up significantly next year.

Obviously we are still awaiting regulatory decisions on the Cornerstone program and the Manzana wind project, so there isn't much new on those at this point.

As planned, we did resume equity issuance from our 401k and DRIP programs in March and we continue to expect that we will issue between $100 million and $200 million of equity through these programs by the end of the year.

This will likely be sufficient to meet our 2010 needs.

Finally, as Peter mentioned, in our 2011 general rate case the Division of Ratepayer Advocates submitted its testimony late Wednesday.

They recommend an increase of $227 million, which is about 21% of our request.

This is pretty similar to past GRC's.

For example, in Edison's last case I think DRA's recommendation was about 18% of what Edison requested.

It's clear that there are substantial differences from what we believe is necessary to provide the level of service our customers want.

DRA's recommendation for our 2011 revenue requirement is $874 million lower than our request and the biggest categories are lower O&M expenses of about $445 million, lower A&G expenses of about $230 million, and lower capital related expenses of about $165 million.

Lots of individual items make up each one of these categories and we are still digging into their testimony so that we can understand their logic for each recommendation.

But I will give you a quick expense example in my own organization.

DRA recommended funding for our tax department of zero.

And their rationale is that the Corporation rather than the Utility is the legal entity that files the return.

So even though our tax department is actually in the Utility and the Utility accounts for the vast majority of our taxes, DRA argues that their costs should not be included in Utility rates.

DRA's lower capital related revenue requirements reflect proposed reductions in CapEx and rate base.

The biggest differences in CapEx are in electric distribution, I.T., and other support areas like Fleet and Real Estate.

In terms of attrition for 2012 and 2013, DRA came in substantially below our numbers and this appears to be based on a simplistic application of CPI escalation across the board and without consideration of rate base growth.

So that's DRA.

Now as a reminder of what is to come in the proceeding.

Testimony from other interveners is due May 19th.

We will respond to all the interveners with rebuttal testimony and then the GRC hearings will begin in the latter half of June.

They're scheduled to conclude by mid July and then briefs would be filed in August.

So the schedule overall calls for the Administrative Law Judge to issue a proposed decision in November with a CPUC final decision in December.

As Peter said, we continue to believe that our request is reasonable and well supported and obviously we will keep you informed of our progress in the months ahead.

Now I'll turn it back over to Peter.

Thanks, Kent.

I'd like to wrap up with a brief but timely set of comments on climate and energy legislation.

Policy makers are now at a critical point in the effort to advance a bill this year.

We feel it's important to underscore our view that passing a smart federal climate and energy bill and setting a price on carbon emissions is critical.

It's necessary to create clarity for business and consumers.

It's necessary to drive investment that will support a competitive low carbon environment.

And it is also necessary to begin moving in this direction sooner - not later.

We recognize the headwinds that have been buffeting the current efforts in Washington over the past few weeks.

That said, we count ourselves among the large group of major companies and other groups who believe that this issue is simply too important not to address.

As a result, we continue to urge action this year in Congress, together with our many partners in USCAP, the Clean Energy Group, as well as other organizations, and we remain hopeful that the good progress that was underway in the Senate will come to fruition.

And now we are ready to take your questions.

(Operator Instructions) Our first question comes from the line of Leslie Rich with Columbia Management.

You may proceed.

Thank you.

I have two questions on regulatory developments in California.

One on the cooling tower decision and what impact that will have on your generation?

And then secondly, on the CPUC brouhaha about REC trading and how you see that impacting your business?

Okay.

We are going to start with Jack Keenan our Chief Operating Officer.

He's going to address the first part of that question with respect to cooling towers.

Good morning.

As you are aware the State Water Resources Board did approve its policy to limit the use of once through cooling.

It does affect two of our generating stations.

The first of which is at Humboldt.

We have two small generating stations that use gas.

Those plants right now are in the process of being replaced by a new station up at Humboldt which is under construction which will go online this year.

So shutting that unit down by the end of this year was in our present plans.

So it will have no affect on the new station which uses air cooling.

The second plant that this affects is our nuclear station.

And the Water Board was very considerate when it took into account how this would affect the California nuclear stations and in fact for Diablo Canyon the date of compliance is actually 2024.

And initially what they will do is a study that will take up to three years, which will determine whether or not the cost that they've used in estimating what it would take to convert Diablo Canyon to an alternate technology is a reasonable cost or whether it would be wholly out of proportion to the cost that the board considered.

So that would be the first step.

In addition to that, they will then look at whether it's feasible to permit the technology in the locations which would be where Diablo Canyon is located and if the environmental impact would be reasonable for that area because it would have considerable environmental impacts such as we build cooling towers.

So ultimately we believe that we will continue to operate Diablo Canyon and provide clean electricity to our customers for a long time.

I'm going to ask Fong Wan to dress the second part of the question that relates to renewables and RECs.

Thank you for the question.

This is Fong, I oversee Energy Procurement.

As you know in March of this year the CPUC issued a decision authorizing the trading of renewable energy credits.

And a tradable renewable energy credit refers to our certificate that demonstrate the proof of procurement of the green attributes that is separate from the renewable energy.

Recently on May 6th, the CPUC voted to stay its earlier decision that allowed the utilities to use RECs.

In addition the CPUC issued, a temporary moratorium on any additional use of RECs while it is considering this issue and we expect the commission to further consider this issue in June.

At the current time, the inability to use RECs will reduce our ability to use out of state renewable energy.

Leslie, I heard you try to come in.

Does that impact your ability to meet your renewable targets, if you are not able to use those out of state RECs?

It would diminish our ability to meet our target.

And as you know we had 14% in 2009 of renewable energy and we have mentioned earlier in the year that we expect to have 17% to 19% in the year 2010 on a delivery basis.

We also have talked about in the past that we have the ability to use flexible compliance, which allows us to use makeup deliveries that extend the 20% throughout the year 2013.

So the 20% is very challenging and we are certainly working very hard at it.

And we are hopeful we can get to the 20%.

And then I just had a follow-up question on that cooling tower thing.

You said they were going to do a three year study, a cost benefit analysis, feasibility of permitting and environmental impact.

Will they do that for all the power plants in the state or are they just doing it for the nukes.

How are they sort of going through that process?

That's three year study applies to the two nuclear facilities in California .

Okay, thank you.

You're welcome, Leslie.

Thank you, Ms.

Rich.

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

You may proceed.

Hi, guys, congrats on a good quarter.

Actually, I have two questions.

One related to the RECs issue.

That is what happens to contracts you've already signed but maybe aren't yet taking delivery of renewable power from for out of state renewable facilities.

I'm thinking of, I don't know, maybe solar plants in Nevada that could serve you, something like that?

Fong.

The contracts we have signed and also have been approved by the PUC, it's my understanding that these will qualify and continue to count as renewable energy.

And we have a few contracts in front of the PUC pending their approval that also falls in this category and we certainly hopeful that the commission will approve them and count them towards renewable energy.

So if I'm the owner of one of those facilities and I signed an off-take agreement with you, I assume there has been no change to kind of my economics.

That's my expectation.

Okay.

Second question relates to the Rate Case and really the timing of changes on the PUC.

As I understand it, at least one probably two members of the Commission will roll off at the end of the year.

If your GRC runs the same length that the Southern Cal Edison one did its last go around, where it went into March the following year, would that mean two new commissioners would rule on it or would these two commissioners kind of get grandfathered into that?

How would that play out?

We are going to have Tom Bottorff, the head of our regulatory relations address that question.

Tom.

Yes, thank you, Peter.

There's a couple ways this can play out.

First, the governor does not need to appoint two commissioners to replace them in order to receive a decision on our general rate case.

So if there are three commissioners in place in January or February of next year, as long as a majority of those three vote on the decision then it can be issued.

The other option is, of course, the governor can issue two more and we could have a full commission vote or maybe just one.

So anywhere from three to five commissioners could be in place, but as long as a majority who are there are available to vote that's all that's necessary to get a decision.

Got it.

Okay.

Thank you.

Much appreciated, guys.

Alright, Michael.

Thank you, Mr.

Lapides.

Our next question comes from the line of Lasan Johong with RBC Capital Markets, you may proceed.

Thank you.

Just following up on Michael's question, what happens if there is four commissioners and it's a two-two tie?

Tom?

In that event there would be no decision.

We would have to wait for a subsequent action by the Commission.

We would need at least a majority of those present to rule in favor to receive a decision.

It has to be an absolute -- okay.

I saw in another company's presentation that expectation for the Pacific Connector was 2014, commercial date of operations.

Is this something that PG&E has agreed to or is this something that they are kind of speculating on their own without any kind of real confirmation?

Lasan, this is Gabe.

As to the operation date of Pacific connector, it's really going to be dependant on the ability of the terminal to sign up long-term contracts to supply gas to the terminal and then the corresponding long-term capacity commitment on the pipeline.

So that's going to dictate what the operations date could be for both the terminal and the pipeline.

Has it even been approved?

Yes.

Both the terminal and the pipeline received their final FERC certificates in December of last year, but that does not resolve some remaining state and local permits that the project is still going after.

Okay.

That's what I thought.

There is this issue of PG&E being sued by I think it's the Consumer Ratepayer Advocacy Department again about community aggregation that PG&E is interfering with this process for a particular community.

Do you have any kind of thoughts and comments on that?

Tom, do you want to address that?

Yes.

Parties have taken issue with some of our activities on CCA, but I think the most recent action was that on behalf of the Commission letter issued by the executive director who provided clarification on how we should engage in soliciting customers with respect to asking them to opt out of the CCA's program and remain with the Utility.

So I think at this point the program continues, both the Utility and the community choice aggregator can seek to inquire with customers with respect to what kinds of options they would prefer, but we are guided by the rules in the letter that the executive director issued.

So no real big deal?

I don't see it as a big deal.

Okay.

Last question, I guess this is for Wan, gas prices and power prices are probably at the bottom of the foreseeable future.

Any chance PG&E comes in and starts layering in purchases of both power and gas for much longer periods than you normally would to secure a very cheap price?

Lasan, thank you for the question.

We are going to stage, of course, not try to speculate on market prices.

We have an approved hedging program for both gas and electricity and we are going to keep implementation of these programs.

So, I see, you are viewing that as a speculation and you don't want to do that?

That's correct.

I understand.

Thank you.

Thank you, Mr.

Johong.

Our next question comes from the line Dan Eggers with Credit Suisse.

You may proceed.

Hi, good afternoon.

This is actually Kevin.

With regards to the rate at which the CapEx was deployed in the first quarter.

Can you remind me what was the weather event that stalled the spend and should we think that the -- that the last $0.01 wasn't one specific area, like smart metering?

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

Hello?

Ladies and gentlemen, please remain holding.

We now have Gabe Togneri rejoining.

Hi, everybody, I apologize for the inconvenience.

I'm not quite sure what happened but our phone got hung up.

We are told that everybody is still on the line with us, so we are going to go ahead and answer the question that Kevin asked regarding CapEx.

This is Kent Harvey.

I mentioned CapEx being a little behind in the first quarter from our plans.

And one of the factors was that we had very severe winter storms in January.

And so obviously our work force was focused on service restoration instead of planned capital expenditure programs.

The other factors that affected our CapEx in the first quarter was we did have some permitting and other delays and maybe I think my final point was just that for the most part we think that we will make up for this during the year and will largely be back on plan by the end of the year.

We will keep you posted as, obviously, as the year progresses.

Next question?

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

I'm sorry, we do have a question from the line of Dan Eggers with Credit Suisse, you may proceed.

Hi, sorry, this is Kevin again.

So, how is the service restoration cost getting booked, I guess?

That was one of the factors, Kevin, that I talked about in the Q1 results.

That we did have higher expenses during the quarter for storm related costs.

Overall, our quarter was positive in terms of earnings from operations compared to first quarter of last year.

But that was one of the mitigating factors was the higher storm response.

Yes.

That was the $0.03 charge, Kevin.

Okay.

So we should expect the catch up to be equally spread out between the three remaining quarters.

Yes.

Okay.

And then do we have clarity on the use of bonus appreciation to offset equity in 2010?

Kevin, this is Kent, also again.

We don't at this point.

It's still pending in Washington.

And so we hope we are going to get some clarity in the next month or two, but we don't have any further clarity than we did at the beginning of March.

Okay.

And then lastly with Cornerstone, did you receive the proposed decision in March or April?

No, we did not yet receive the proposed decision for Cornerstone.

And when are we expecting that?

Any time.

So, has the final decision got pushed back from June and July to August or so?

Tom, maybe you can just kind of comment on your outlook for it.

Yes, we are expecting a proposed decision this month and it could be on the Commission's agenda 30 days following that.

So we are expecting a final decision probably in June or July.

Great, thank you.

Thank you, Kevin.

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

Alright.

Well, in that case, I will apologize again for the technical difficulties.

I'm sure it's been a long week for everybody.

Have a wonderful weekend, which includes Mother's day on Sunday.

And if you happen to be in Florida at the AGA conference in a week and a half, you will see me and Chris Johns there.

Have a great weekend, everybody.