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PG & E (NYSE:PCG)

Q1 2010 Earnings Call

May 07, 2010 1:00 pm ET

Executives

Kent Harvey - Chief Financial Officer and Senior Vice President

Gabriel Togneri - Vice President of Investor Relations

Fong Wan - Senior Vice President of Energy Procurement-Pacific Gas & Electric Company

Jack Keenan - Chief Operating Officer of Pacific Gas & Electric Company and Senior Vice President of Generation-Pacific Gas & Electric Company

Peter Darbee - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Thomas Bottorff - Senior Vice President of Regulatory Relations-Pacific Gas & Electric Company

Analysts

Michael Lapides - Goldman Sachs Group Inc.

Kevin Cole - Crédit Suisse First Boston, Inc.

Lasan Johong - RBC Capital Markets Corporation

Leslie Rich - Columbia Management

Operator

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.

Gabriel 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'll be covering and including the Reg G reconciliations. The same information is available in the 8-K report that we furnished to the SEC this morning, and we'll also be filing our Form 10-Q report today.

I'll 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 10-K for the year ended December 31, 2009, and our Form 10-Q 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'll turn things over to Peter Darbee.

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're reaffirming guidance for 2010 and 2011. Kent will provide the details behind the quarter's financial results in a minute. I'm going to focus my remarks on updates and progress on some key regulatory items since our recent Investor Conference.

I'll start with our 2011 GRC. As you know, the case is proceeding, and we're looking forward to the start of hearings next month. Late Wednesday, the Division of Ratepayers Advocates filed its testimony in the case, which Kent will cover in his remarks. We've put a lot of time and effort into this case, and it's been prepared by an experienced management team. We believe we've put forward a good case and plan to work constructively with permission 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 Rate Case TO12, 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'll recall, we have a five-tier rate structure with increasing rates per higher volumes of usage. Our concern has been in recent years the rates in the upper tiers have increased much more than lower tiers and have gotten too high. In that regard, we reached a proposed settlement with the DRA in turn two weeks ago, that would eliminate the fifth and highest rate tier altogether. We believe we're on track to obtain CPUC approval of this rate change in June before the summer cooling system begins.

We hope to make an additional progress on our residential rates next year. In fact, we're addressing that through our GRC Phase II rate design proposal. In this application, we 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 & 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 have 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'll work hard to maintain the support of key policymakers for our programs and plans.

And now, we're going to turn it over to Kent Harvey, who's going to discuss the financial results in more detail. Kent?

Kent Harvey

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 a result of a number of factors. And they're summarized in Table 4 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 our authorized rate base investment, an increase of $0.02 due to positive market performance in our non-pension benefit trust, another $0.02 was due to lower severance expenses, and you'll recall last year, we closed one of our regional offices and incurred some severance costs 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'll refer you to our Reg G reconciliation table, which is Table 2 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 plan. 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 one-time charge.

The other item impacting comparability is the statewide ballot initiative that we've 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're on track for the year, and we're 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'll 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 Photovoltaic Program, and we had shown a 2010 CapEx range at our Investor Conference of between $0 million and $160 million for this item. However, given the timing of the decision, which was a bit later than we had hoped, but also, 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're still awaiting regulatory decision from 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 401(k) and DRIP programs in March, and we continue to expect that will issue between $100 million in $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 GRCs. 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. Loss of individual items make up each one of these categories, and we're still digging into their testimony so that we can understand their logic for each recommendation.

But I'll 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, 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 cost should not be included in utility rates.

DRA's lower capital-related revenue requirements reflects proposed reduction in CapEx and rate base. The biggest differences in CapEx are in electric distribution, IT and other support areas like fleets 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 its 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's to come in the proceeding. Testimony from other interveners is due May 19. We'll 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 of roll called for the administrative law judge to issue a propose decision in November, with the CPUC final decision in December.

As Peter said, we continue to believe that our request is reasonable and well supported. And obviously, we'll keep you informed of our progress in the months ahead. Now I'll turn it back over to Peter.

Peter Darbee

Thanks, Kent. I'd like to wrap up with a brief but timely set of comments on climate and energy legislation. Policymakers 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 investments that will support a competitive, low carbon environment. And it's 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're ready to take your questions.

Question-and-Answer Session

Operator

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

Leslie Rich - Columbia Management

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.

Peter Darbee

We're going to start with Jack Keenan, our Chief Operating Executive Officer. He's going to address the first part of that question with respect to cooling towers.

Jack Keenan

As you're aware, the State Water Resources Board (sic) [State Water Resources Control 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 of the 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 plan. So it'll 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 consider. So that would be the first step. In addition to that, they will then look at whether it's feasible to permit the technology and 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 environment impact such as we built cooling towers. So ultimately, we believe that we will continue to operate at Diablo Canyon and provide clean electricity to our customers for a long time.

Peter Darbee

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

Fong Wan

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 our 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 6, the CPUC voted to stay its earlier decision that allowed the utilities who use RECs. In addition, the CPUC issued a temporary moratorium on any additional use of RECs while it is concerning this issue. And we expect the commission to further consider this issue into two meets. At the current time, the inability to use RECs will reduce our ability to use out-of-state renewable energy.

Peter Darbee

Leslie, I heard you try to come in...

Leslie Rich - Columbia Management

Well, does that impact your ability to meet your renewable target, if you're not able to use those out-of-state RECs?

Fong Wan

It would diminish our ability to meet our target. And as you know, we have 14% in 2009 of renewable energy, and what we have mentioned earlier in the year, that we expect to have 17% to 19% in 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 to 20% throughout the year 2013. So the 20% is very challenging, and we're certainly working very hard at it. And we are hopeful we can get to the 20%.

Leslie Rich - Columbia Management

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 nuke? How are they sort of going through that process?

Jack Keenan

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

Operator

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

Michael Lapides - Goldman Sachs Group Inc.

I have two question. 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 for out-of-state renewable facility? So I'm thinking of, I don't know, maybe solar plants in Nevada that could serve you something like that?

Peter Darbee

Fong?

Fong Wan

The contracts we have signed and also have been approved by PUC, it's my understanding that these will qualify and continue to count as renewable energy. And we have a few contract in front of the PUC pending their approval, that also falls in this category, and we're certainly hopeful that the condition will improve them and count them toward renewable energy.

Michael Lapides - Goldman Sachs Group Inc.

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

Peter Darbee

That's my expectation.

Michael Lapides - Goldman Sachs Group Inc.

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?

Peter Darbee

We're going to have Tom Bottorff, the Head of our Regulatory Relations, address that question. Tom?

Thomas Bottorff

There's a couple of ways the two 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 the 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 can have a full commission vote or maybe just one. so anywhere from three to five commissioners, could be in place. But as long as the majority who are there are available to vote, that's all that's necessary to get a decision.

Operator

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

Lasan Johong - RBC Capital Markets Corporation

Just following up on Michael's question. What happens if there's four commissioners, and it's a 2-2 tie?

Peter Darbee

Tom?

Thomas Bottorff

In that event, there would be no decision. So we would have to wait for a subsequent action by the commission. We need at least the majority of those present to rule in favor to receive a decision.

Lasan Johong - RBC Capital Markets Corporation

It has 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're kind of speculating on their own without any kind of real confirmation?

Peter Darbee

Gabe?

Gabriel Togneri

Lasan, this is Gabe. As to the operation date of Pacific Connector, it's really going to be dependent 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.

Lasan Johong - RBC Capital Markets Corporation

Has it even been approved?

Gabriel Togneri

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, that project is still going after.

Lasan Johong - RBC Capital Markets Corporation

This issue of PG&E being sued by, I think, it's the Consumer Ratepayer Advocacy Department (sic) [Division of Ratepayer Advocates] again about Community Aggregations (sic) [Community Choice Aggregation] that PG&E is interfering with this process for a particular community. Do you have any kind of thoughts or comments on that?

Peter Darbee

Tom, do you want to address that?

Thomas Bottorff

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, a 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 in prior with customers, with respect to what kinds of options they would prefer but were guided by the rules in letter that the Executive Director issued.

Lasan Johong - RBC Capital Markets Corporation

So no real big deal?

Thomas Bottorff

I don't see it as a big deal.

Lasan Johong - RBC Capital Markets Corporation

This is for Wong (sic) [Fong 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?

Fong Wan

We're going to stay at the course not try to speculate on market prices. We have an improved hedging program for both gas and electricity. And we're going to keep implementation of these programs.

Lasan Johong - RBC Capital Markets Corporation

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

Fong Wan

That's correct.

Operator

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

Kevin Cole - Crédit Suisse First Boston, Inc.

This is actually Kevin. With regards to the rate at which the CapEx was deployed to the first quarter, what was the weather event that, that's all to spend? And should we think that the last $0.01 was in one specific area like SmartMeter?

Operator

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

Operator

Ladies and gentlemen, please remain holding.

[Audio Gap]

Operator

We now have Gabe Togneri rejoining.

Gabriel Togneri

Everybody, I apologize for the inconvenience. I'm not quite sure what happened but our phones got hung up. We're told that everybody is still online with us. So we're going to go ahead and answer the question that Kevin asked regarding CapEx.

Kent Harvey

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 workforce was focused on service restoration instead of planned capital expenditure program. 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'll keep you posted, obviously, as the year progresses.

Gabriel Togneri

Next question?

Operator

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.

Kevin Cole - Crédit Suisse First Boston, Inc.

This is Kevin again. So how is the service restoration cost getting booked?

Kent Harvey

Well, that was one of the factors, Kevin, that I talked about in the Q1 results was 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 a quarter, the first quarter of last year, but that was one of the mitigating factors, was the higher storm response.

Peter Darbee

That was the $0.03 charge, Kevin.

Kevin Cole - Crédit Suisse First Boston, Inc.

And so, we should expect the catch-up to be equally spread out between the three remaining quarters?

Kent Harvey

Yes.

Kevin Cole - Crédit Suisse First Boston, Inc.

And then, do we have any clarity on the use of bonus appreciation to offset equity in '10?

Kent Harvey

Kevin, this is Kent also again. We don't at this point. It's still pending in Washington, so we hope we're going to get some clarity on the next month or two. But we don't have any further clarity than we did at the beginning of March.

Kevin Cole - Crédit Suisse First Boston, Inc.

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

Kent Harvey

No, we've not yet received the proposed decision for Cornerstone.

Kevin Cole - Crédit Suisse First Boston, Inc.

And when are we expecting that?

Kent Harvey

Anytime.

Kevin Cole - Crédit Suisse First Boston, Inc.

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

Kent Harvey

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

Thomas Bottorff

Yes, we're expecting a proposed decision this month, and it could be on the commission's agenda 30 days following that. So we're expecting a final decision probably in June or July.

Operator

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

Gabriel Togneri

Well, in that case, I'll 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'll see me and Chris Johns there. Have a great weekend, everybody.

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Source: PG & E Q1 2010 Earnings Call Transcript

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