Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Horizon Logo

PG&E Corporation (NYSE:PCG)

Q1 2007 Earnings Call

May 10, 2007 11:00 am ET

Executives:

Gabriel B. Togneri - Vice President, Investor Relations

Peter A. Darbee - Chairman of the Board, President, Chief Executive Officer

Thomas B. King - President and Chief Executive Officer of PG&E

Bill Morrow - President, Chief Operating Officer, Pacific Gas and Electric Company

Christopher P. Johns - Chief Financial Officer, Senior Vice President, Treasurer

Chris Warner – Lawyer

Analysts:

Gregory H. Gordon – Citigroup

Lasan Johong - RBC Capital Markets

Tom O’Neil - Highbridge Capital Management

Daniel Eggers – Credit Suisse

Presentation

Operator

Welcome to the PG&E Corporation first quarter 2007 conference call. At this time I would like to pass the conference over to your host, Gabriel Togneri Vice President of Investor Relations. Thank you and have a good conference. Go ahead Mr. Togneri.

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Gabriel B. Togneri

Good morning everyone and welcome to our first quarter earnings call. As always this is a simultaneous web cast and conference call and all participants are in listen only mode. A replay of the web cast will be available from the PG&E Corporation website after the call.

Our first quarter earnings press release was issued earlier today and it is posted on our website along with supplemental tables including regulation to reconciliations. We've also provided these materials through an AK filing with the SEC and we will file our form 10Q reports for both the corporation and Pacific Gas and Electric Company today.

I'll remind you before we begin that our prepared remarks and the Q&A session contain forward looking statements based on assumptions and expectations reflecting information currently available to management. As we discussed in more detail in the earnings press release, actual results may differ materially from those forward looking statements. We encourage you to review our SEC filings to obtain additional information and better understand the many factors that can influence future results.

Given that we hosted our 2007 investor day in April, our prepared remarks today will be relatively brief. Peter Darbee, Chairman and CEO of PG &E Corporations, Tom King, CEO of Pacific Gas & Electric Company, and Chris Johns, Senior Vice President and CFO will take us through the quarterly results and recap some highlights. Bill Morrow, the President of the Utility and other members of our team are here and they'll participate in the Q&A. And now I'll turn the call over to Peter Darbee.

Peter A. Darbee

Thanks Gabe and thank you all for being with us. We certainly enjoyed recently having the opportunity to meet with you in New York during our investor day conference. And I hope what came across in the course of that day was the conclusion that PG&E is well on its way in the journey to become the leading utility in the United States.

By focusing on our customers we've been able to move the customer satisfaction ratings from the fourth court tile to the first court tile and second highest in the United States as measured by JD Power and Associates. In our whole sale gas business we've also been able to obtain a position of number one in the western region and we're committed to doing the same thing in our residential business, but obviously there are a lot more customers in the residential business and it takes longer and its a harder job to move those numbers. But we continue to be convinced that the virtuous circle is an appropriate way to look at our business and that is if we really do a great job for our customers, our regulators will be very satisfied with the results and that gives us the best opportunity to earn a good return for our share holders. And in fact, in 2006 we did that by providing a total return to share holders of over 31%.

In addition to delivering for our customers and also for our share holders, we think it's really important to step out and be a leader with respect to key issues that are confronting our industry and we've done that with respect to global warming and we will continue to do that. The feedback that we've gotten from policy makers is that through our efforts and the efforts of US CAP, we've really been able to shift the dialog on greenhouse gas abatement and also on the topics of energy efficiency and conservation. Now through these actions and others that we're taking, we believe that the momentum with respect to becoming the leading utility in the United States is increasing day by day.

Now what I wanted to do was turn to the first quarter of 2007 and in particular we delivered total net income of $256 million where $0.71 per share and as a result of that good performance, we are reaffirming our 2007 and 2008 guidance as well as our EPS growth target of 8%. With that I'd like to turn it over to Tom King for discussion, more specifically of recent accomplishments.

Thomas B. King

Thank you Peter and good morning everyone. I'm going to provide a brief update on our progress toward ensuring a clean and secure energy future. So I'll be focusing on three areas: renewable resources to meet our 2010 RPS goal, electric transmission to ensure we access the future generation opportunities, and emerging technologies to serve future energy needs.

So as to renewables, we continually move forward to aggressively contract for renewable energy. By the end of the second quarter, we expect to file with the CPUC the remaining contracts from our 2006 renewable solicitation. In addition, just this past December we issued a new 2007 renewable solicitation and bids on the 2007 process are due May 31st.

Now turning to electric transmission, we have CPUC approval for a $14 million transmission feasibility study to assess bringing the wind resources from British Columbia here into California. So over the next few years, we'll asses the feasibility of importing the Canadian sourced wind of roughly 8,000–10,000 megawatts of potential wind generation. This study will also look at the large supplies of wind, biomass, and hydro power in Pacific Northwest.

Let's move to the third area that I'd like to discuss with you which is our work to go beyond our traditional core investments to explore emerging growth investments. We have filed with the CPUC for approval to fund $30 million to advance our work on emerging technology. This allows us to press forward on new technologies such as wave, concentrating solar, energy storage, and some of which we discussed with you on our investor day back in April and we are making progress.

We made an important tangible step toward our vision of plug in hybrids and a smart energy grid. Just a few weeks ago PG&E showcased the first ever utility vehicle-to-grid or V2G technology demonstration. This project also helps our governor's efforts to establish a low carbon fuel standard right here in California.

V2G would let our electric customers charge their vehicles with offbeat energy from the utility grid at night and sell that electricity back to the utility during peak periods of the day turning our customers' vehicles into mobile power storage units. We're really excited about this demonstration and its winning proposition with the PG&E and our customers. This technology will increase system reliability and the overall capacity factor for generation resources and at the same time it will drive to lower rates for our customers and higher level in renewables in our energy mix during peak energy periods.

Finally we are moving forward with innovators to discuss this technology such as battery, grid communication, automotive technology just to name a few. And as we proceed we'll get a better view on the timetable to bring these investment opportunities to a wider commercial application and we'll keep you posted on that progress.

Before I turn it over to Chris let me give you a quick example of a technology advancement that reflects some of our recent work with IBM. As PG&E has been working with IBM, we are looking at moving forward for server replacement incentives and new server software technology. This new technology delivers the same level of computing power but with fewer machines. We call it server virtualization and the server virtualization has already resulted in significant energy savings for some of our high tech customers. In fact, we expect to reduce our energy use at PG&E's own data center by roughly 80%. This is a significant energy saving. We'll then take this success and deploy it throughout our own service area.

The work on our emerging growth opportunities is being done in parallel with our activity to improve operational performance and customer service much of which we discussed of our transformation efforts in detail with you at the analyst's day. With that, I'll turn it over to Chris to review the financial highlights of the quarter. Chris?

Christopher P. Johns

Thank you Tom. This morning I'm going to cover our quarterly results, our forward guidance and I'll provide an update on some of our regulatory filings. On both the GAAP and non-GAAP basis for the first quarter PG&E corporation earned $256 million or $0.71 per diluted common share. This compares favorably to $214 million or $0.60 per diluted share GAAP and non-GAAP for the same period in 2006.

As you can see from the table four of our supplemental earnings tables, our quarter-over-quarter changes in earnings per share from operations include earning a return on a higher rate base consistent with our recently approved general rate case. This accounted for approximately $0.07 of the change.

In addition, the current year absence of the level of storm expenses we experienced in the first quarter of 2006 accounts for $0.02 per share. Now these positive impacts were partially offset by about a penny of environmental remediation costs.

A couple of things to remember as we look at our results for this year. First, as a result of decoupling, revenues are spread evenly over the year while expenses can vary from quarter to quarter. And second, since we concluded our last share repurchase in November of 2005, share variance is not a significant driver in explaining quarter-over-quarter results.

Moving to our guidance, we are re-infirming our 2007 guidance of $2.70 to $2.80 from our operations, and our 2008 guidance of $2.90 to $3 per share.

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

We continue to target at an 8% average annual target growth in EPS from the operations over the 2007-2011 period. As always, a reconciliation of our guidance for 2007 and 2008 earnings per share from operations, to project a gap EPS can be found in our supplemental materials.

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

We expect to receive approval with the perk of the old party settlement of our transmission owner case this month. This will result in a $68 million annual transmission revenue increase, which will be effective retroactive to March 1st and was previously contemplated in our earnings guidance.

On May 8th, we filed our annual costs and capital application at the CPUC. The final request on return on equity was 11.7%. We are also requesting a 52% equity ratio consistent with the provisions of our bankruptcy settlement agreement.

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

This feature would provide for an annual return on equity adjustment based on changes on the double A utility bond index. No ROE adjustment would be made for index movements of less than 75 basis points.

The cost of debt and preferred stock would be reset to actual once a year and the adjustment mechanism would not entirely be authorized capital structure.

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

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

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

We filed testimonies supporting our proposed level of shareholder incentives and performance thresholds on May 3rd. Under our proposal, the cumulative amount of potential pre-tax incentive earnings over the three year period, could range from zero to approximately $280 million once we've achieved savings at or above 80% of the CPUC target. If our performance is less than 40% of the target, PG&E could be subject to a penalty.

Now the range of incentives and penalties is more fully described in our AK dated May 8th. Hearings of the case are scheduled to begin at the end of this month, and given the importance of this mechanism, the continued success of California's energy efficiency and conservation efforts, we hope that the commission will expedite the schedule to act well before the end of this year.

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

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

Peter A. Darbee

Thanks Chris.

(Inaudible) leading utility delivers first quarter performance for both customers of shareholders, by helping our customers use energy more efficiently and more wisely.

A leading utility looks for attractive, low risk growth opportunities related to its core business, and a leading utility also creates new and innovative opportunities which represent a logical extension of its core business.

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

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

Question-and-Answer Session

Operator

Certainly. Ladies and Gentlemen if you would like to ask a question press star followed by one, if you would like remove a question, press star followed by two.

The first question comes from Greg Gordon, with Citigroup. Please proceed.

Gregory H. Gordon – Citigroup

Thanks. Two quick questions. First, can you explain a little bit more why the commission decided to re-open the proceedings on the incentive mechanism for the management?

Chris Warner

Yes, this is Chris Warner. The commission wanted the whole evidentiary experience on the benchmarks for performance under the customer interview efficiency program, so that was the reason the schedule was evidentiary hearings

Gregory H. Gordon – Citigroup

Why had there been a prior bias to not holding hearings?

Chris Warner

We had another party expected that hearings would not be necessary on those issues, but the commission decided otherwise. We do expect a decision by the end of the year in any case.

Gregory H. Gordon – Citigroup

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

Peter A. Darbee

Greg, the way the mechanism in the proposal would be, is it would start at the 11.7 that we proposed in our recent filing. And it would be adjusted based upon whatever the AA bond ratings did moving forward.

Gregory H. Gordon – Citigroup

So it would base line at 11.7 and then adjust incrementally based upon changes in the rating, in those related bonds for that rating?

Peter A. Darbee

Yes, that’s correct.

Chris Warner

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

Gregory H. Gordon – Citigroup

And what’s the time line for hearings on this and the final decision?

Chris Warner

We expect a final decision by the end of the year.

Gregory H. Gordon – Citigroup

Thank you gentlemen.

Chris Warner

Thank you, Greg.

Operator

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

Lasan Johong - RBC Capital Markets

Chris, hypothetically, let me kind of put a scenario out there for you. Let’s say the AA bond yield goes to 74 basis points above where it is today, and assuming you get the 11.7% rate of return. Does that mean you guys could actually earn 12.4% on your ROE and not have an adjustment made to your base line?

Christopher P. Johns

Well, the way the proposal would work, if we use your hypothetical. If it went up 74 points, then there would be no adjustment to our authorized return. Obviously, we are able to earn either above or below whatever the authorized is based on our ability to control our costs on an annual basis.

So if the AA bond in your example went up by 74 points. That’s below the threshold, so we would still have a maintained authorized at the 11.7%. The authorized would only change based upon changes greater than the 75% in the AA bonds.

Lasan Johong - RBC Capital Markets

I understand, so that does not necessarily mean that you can earn up to 12.4%

Christopher P. Johns

There are no restrictions on how much or how little we could earn. That is based on our ability to run the company efficiently.

Lasan Johong - RBC Capital Markets

I understand now.

In terms of the Guidance, I’m a little puzzled. Why not increase the Guidance? It seems like the numbers were very good.

Christopher P. Johns

Definitely pleased with the results. Our guidance was based on expectations around the settlement agreement and our Gas to Court settlement agreement and our expectations for the rest of this year. With that said, our guidance range will still be the appropriate guidance range.

I remind you that we do have a re-fueling coming up at Diablo and it will have a big impact in the second quarter and as we’ve talked about before with our transformation efforts there’s a large amount of those that are scheduled to be completed in the third and fourth quarter of this year that will have a lot of significant investment in them over the rest of this year.

Lasan Johong - RBC Capital Markets

OK. Thank you.

Chris Warner

Thank you.

Operator

The next question comes from the line of Tom O’Neil with Highbridge Capital Management. Please proceed.

Tom O’Neil - Highbridge Capital Management

Good morning, I had a question for Peter. Just wanted to hear any updated thoughts on M&A opportunities and how they compare to your own bevy of organic growth opportunities in California on a risk adjusted basis?

Peter A. Darbee

A couple of thoughts we have in that respect. First, obviously the industry took a step back after the FPL Constellation deal and the Exxon deal fell apart. What we are hearing from investment bankers in the industry is that people continue to look at opportunities and that one shouldn’t conclude that there will be no more M&A activity or there will be significantly less M&A activity in the utility industry in the United States.

The second thing is we've seen significant activity in Europe so that is going on as we speak and some people feel that it's quite possible that after the European players wrap up in Europe that they'll turn their sights to the United States and so that's just a back draw.

With respect to our activities I think we continue to see the fact that we're scanning the different opportunities and we have not found one that we thought was appropriate to do and to announce. And so I think we continue to feel that the lowest risk opportunities and the greatest growth opportunities are extensions of our core business and so as we look at our priorities they are the following: grow the core business as rapidly as we can, consistent with what is appropriate and meets the needs of our customers so you've seen that ramp up from $1.8 billion to $3 billion over the next couple of years. And secondly, we've been focused very much on hybrid cause and logical extensions and then the third priority that we look to but recognize that there's not a material risk associated with it is M&A.

Tom O’Neil - Highbridge Capital Management

Great. Thank you.

Operator

The next question comes from the line of Dan Eggers from Credit Suisse. Please proceed.

Daniel Eggers – Credit Suisse

Hi good morning. Question for you related just to make sure I understand this antennae ROE mechanism. The ROE that would be implied or set off this structure it would be a carve out from benefits from conservations so the incremental savings would be up to $280 million would be on top of say an 11-7 adjusted ROE. Is that right?

Christopher P. Johns

Yeah that's correct.

Daniel Eggers – Credit Suisse

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

Christopher P. Johns

Yes. There's obviously a proceeding going on so some of this is going to be subject to that outcome but the earnings are tied to the achievement of energy efficiency savings and as you may know energy efficiency savings tend to accrue and ramp up as you go along so the earnings would generally ramp up over the three year period as the savings are achieved.

Daniel Eggers – Credit Suisse

And are you guys hashing out the mechanism for how you determine what is conservation to get credit for it versus other things? That's a pretty tricky calculation to get your hands on.

Christopher P. Johns

Well actually we've had a long history as you know of achieving these energy efficiency savings so that the actual programs and the success of the programs are already out there. What we are working with CPUC and other parties on as how to actually benchmark and set the particular incentive mechanism. That is what will be in decision by the end of the year.

Daniel Eggers – Credit Suisse

OK and I guess one last question. Any update on the long term procurement plan for new generation and how that's progressing and any changes in that role as far as what parties will be involved?

Thomas B. King

Yeah. Dan, this is Tom King. We did complete the 2005 solicitation which led to the current activity of 2,800 megawatts that are either under construction or are about to go under construction. And then just this past November – December time frame we followed the new long term plan which after energy efficiency demand management and other renewables we get to an additional 2,300 megawatts that we filed for commission for authorization to proceed and do an additional solicitation and that's targeted to come on line roughly 2011 – 2012 time frame.

Daniel Eggers – Credit Suisse

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

Thomas B. King

The process we'll go under will hopefully by the end of the year we've got commission authorization to move forward on the 2,300 megawatts. We'll do a public RFO and then out of that process is where we whittle down the best fit best price structure and that is what drives the ultimate decision on whether we have an investment opportunity or its contractor.

Daniel Eggers – Credit Suisse

OK thank you.

Thomas B. King

You're welcome Dan.

Operator

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

Gregory H. Gordon – Citigroup

Thanks. Just a follow up question for Peter. When you commented on the question regarding M&A it wasn't clear to me. It seemed like you were saying that M&A activity in general might take up, at least in your perspective, by a foreign buyers coming to the US. But you didn't really address the question directly as to whether you think buying another infrastructure utility gives you a better risk adjusted return than the projects that you have over the drawing board over the next three to five years.

Peter A. Darbee

I thought I did but maybe not as specifically as you would have liked. In terms of the, and that's the hierarchy, where we look we feel that the core business is the first place in lowest risk opportunity. The extensions of the core business are the next somewhat more risky but very manageable and then beyond that would be M&A in terms of risk. So there are really three tiers as we look at it in terms of risk.

Gregory H. Gordon – Citigroup

Well selling to a European buyer for a big premium would be lowest risk.

Peter A. Darbee

Uh...

Greg Gordon – Citigroup

I'm just joking. Thank you gentleman.

(laughter)

Operator

Once again ladies and gentlemen, if you would like to ask a question press "star" followed by "one". The next question comes from the line of Lasan Johong with RBC Capital Markets. Please proceed.

Lasan Johong – RBC Capital Markets

Yeah I just wanted to see if there were any updates on infrastructure projects including the various different transmission lines and gas pipelines that you guys are contemplating building up to the northwest and I guess the east as well.

Thomas B. King

Yeah this is Tom. Above and beyond what we've discussed at the analyst's meeting there isn't any significant update. It's just specifically to the things that you mentioned relative to the Pacific connector which is the pipeline that runs from the Oregon California state border over to Oregon. They have completed their open season and they're currently preparing an application to follow with the FBRC and hopefully by the second quarter of '07. And I'll give you a sense of the results of that capacity solicitation. They roughly designed that system as roughly about a BCF a day. They have precedent agreements signed of about 1.49 BCF a day. That will go in to the overall filing and evolve in second quarter of '07 and then the L&G terminal on the Oregon coast is moving through its permeating and applications somewhat similar relative to a time line. As to the transmission lines and our transmission project, midway gray etc. all that is continuing to move and it's on schedule based on the previous time lines and milestones that we've communicated.

Lasan Johong – RBC Capital Markets

OK does that mean on the Pacific connector pipeline that the capacity may be expanded to accommodate the increased volume or expectation?

Thomas B. King

It has the capability absolutely to be expanded up from the current target of about a BCF a day up to 1.5 that will all directly relate to the L&G terminal, its success in attracting supply and the ultimate buy in that closed to that facility.

Lasan Johong – RBC Capital Markets

So compression or bigger pipe?

Thomas B. King

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

Lasan Johong – RBC Capital Markets

OK thank you.

Thomas B. King

You bet.

Operator

Once again ladies and gentlemen if you would like to ask a question press star followed by one.

Gabriel B. Togneri

So, do we have any questions?

Operator

No sir. There are apparently no further questions.

Gabriel B. Togneri

Alright. Well we'd like to thank everybody for their interest in joining us on the call today. Have a good day.

Operator

Ladies and gentlemen this does conclude today’s call. You may now disconnect.

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PG&E Q1 2007 Earnings Call Transcript
This Transcript
All Transcripts