PCG: A Value Opportunity€¦ · Morgan Stanley 12th Annual Global Electricity and Energy Conference The Westin New York at Times Square ... • Other factors discussed in PG&E Corporation's

PCG: A Value OpportunityPeter A. DarbeePresident and CEO

Morgan Stanley 12th Annual Global Electricity and Energy ConferenceThe Westin New York at Times SquareMarch 10, 2005

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Cautionary Statement Regarding Forward-Looking Information

This presentation contains forward-looking statements regarding projected earnings, cash flows, capital expenditures, rate base and rate base growth, stock repurchases, and dividends for the 2005 - 2009 period based on assumptions, including that the Utility earns an authorized return on equity of 11.22 percent, the timely implementation of an $1.05 billion accelerated share repurchase program, and the issuance of the second series of energy recovery bonds in late 2005. These statements and assumptions are based on current expectations which management believes are reasonable and on information currently available to management but are necessarily subject to various risks and uncertainties. Actual results may differ materially. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements and assumptions include:

• The timing and resolution of the pending appeals of the CPUC’s approval of the Settlement Agreement and the bankruptcy court confirmation of the Utility’s plan of reorganization,• Unanticipated changes in operating expenses or capital expenditures, which may affect the Utility’s ability to earn its authorized rate of return;• The level and volatility of wholesale electricity and natural gas prices and supplies, the Utility’s ability to manage and respond to the levels and volatility successfully and the extent

to which the Utility is able to timely recover increased costs related to such volatility;• The operation of the Utility’s Diablo Canyon nuclear power plant which exposes the Utility to potentially significant environmental costs and capital expenditure outlays, and, to the

extent the Utility is unable to increase its spent fuel storage capacity by 2007 or find an alternative depository, the risk that the Utility may be required to close Diablo Canyon and purchase electricity from more expensive sources;

• The impact of current and future ratemaking actions of the CPUC, including the risk of material differences between forecasted costs used to determine rates and actual costs incurred;

• Whether the assumptions and forecasts underlying the Utility’s CPUC-approved long-term electricity procurement plan prove to be accurate, the terms and conditions of the generation or procurement commitments the Utility enters into in connection with its plan, the extent to which the Utility is able to recover the costs it incurs in connection with these commitments, and the extent to which a failure to perform by any of the counterparties to the Utility’s electricity purchase contracts or the Department of Water Resources’ contracts allocated to the Utility’s customers affects the Utility’s ability to meet its obligations or to recover its costs;

• The extent to which the CPUC or the FERC delays or denies recovery of the Utility’s costs, including electricity purchase costs, from customers due to a regulatory determination that such costs were not reasonable or prudent or for other reasons resulting in write-offs of regulatory balancing accounts ;

• How the CPUC administers the capital structure, stand-alone dividend and first priority conditions of the CPUC’s decisions permitting the establishment of holding companies for the California investor-owned electric utilities;

• The impact of future legislative or regulatory actions or policies;• Increased competition;• The outcome of pending litigation; and • Other factors discussed in PG&E Corporation's SEC reports.

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PG&E Corporation: A Value Opportunity

• A pure-play utility offering a stable platform and regulated growthStability: • minimum equity ratio and ROE

• predictable revenue through 2006• union agreements through 2007• pass-through for procurement costs• balancing account for sales variability

Regulated growth: • solid rate base growth• strong cash flow• repurchases and/or additional

rate base investments

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Regulatory Stability

• Chapter 11 settlement through 2012

• 2003 GRC settlement sets base revenue through 2006

• Gas Accord III settlement through 2007

• Pass through for procurement costs and trigger mechanism on Energy Resource Recovery Account (ERRA)

• Balancing account for sales variability

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2005 Priorities

1. Complete financial restoration

2. Transform the way we do business

3. Address electric procurement and owned generation

4. Enhance communications

5. Invest in utility infrastructure

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Priority 1:Financial Restoration• Authorized utility equity ratio of 52% achieved

• Restored common dividend

• $1.9B of energy recovery bonds (ERBs) issued February 10, up to $1.1B of additional ERBs targeted for November 2005

• Approximately $1B of customer savings over the life of the regulatory asset from both series

• Executed accelerated share repurchase program for $1.05B • Total repurchases in 2005 targeted at approximately $1.6B

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Priority 2:Transforming the Way We Do Business• A reinvention of how we deliver energy

• Enterprise-wide effort to focus on the customer– Meeting customers’ increasing expectations– Providing employees with the right tools and business processes– Capturing cost efficiencies for customers

• Alignment of culture and values with a vision to lead the industry

Targeting better, faster, more cost-effective service

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Transforming Service and Operations

• Areas of immediate focus– Electric and Gas Delivery (T&D assets)

– Customer Management (e.g., call centers, field services, metering, billing)

– Supply Chain (materials, procurement, logistics)

– Information Technology

– Performance Culture

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Transformation Timeline

We Are Here

2004

Strategize

Plan, Designand

Implement

Accelerate Implementation

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2005

• Implement design• Realize immediate opportunities

• Mission & Vision• Current State• Benchmarking/Field Visits• End state of vision• Opportunities defined• Initiative setting & prioritization

Achieve and Deliver

2007 Forward

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Stakeholder Benefits

Improved service &customer satisfaction

Better tools & processesfor employees

Constructive relationshipswith policymakers

Full ROE earnedfor shareholders

New infrastructurewith less

rate pressure

• Revenue requirement expense vs. capital trade-off = $1 : $5

• Funds “recovery of and return on” capital• Financing of investment still required

Additional process

improvements

Additional Infrastructureinvestments

OperationalExcellence

Revenue requirement expense dollar for dollar trade-off

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Priority 3:Electric Procurement and Owned Generation• Priority is to meet customer demand cost effectively• Near-term stability

– Adequate resources to meet forecast demand – Cost recovery in place

• Long-term focus– Implementation of procurement plan– Mirant settlement provides additional capacity and investment

opportunity in Contra Costa 8 project

Ensuring adequate supply and making needed investments

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Priority 4:Communications

• Strengthening communications with our stakeholders:

– Employees

– Customers

– Policymakers

– Investors

Effective communications are key to achieving our priorities

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Priority 5:Investment in Utility Infrastructure• Base capital expenditures average $2.0B through 2009• Assessing additional investment opportunities driven by

regulatory mandates and utility needs for:– New generation– Electric transmission– Advanced metering– Reliability enhancements

Average annual rate base growth of 4.5%-6.5% through 2009 depending on infrastructure needs

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Investment Drivers

• Load growth– 2,200 MW of new generation in 2008-2010– Contra Costa 8 project in 2009– Diablo Canyon steam generator replacement– Electric transmission expansion and new generation interconnection

• Reliability and technology-driven enhancements– Advanced metering

• Nine million meters• Potential $1B system-wide deployment 2006-2010

• Replacement of aging infrastructure

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Capital Expenditure Outlook

• Base capital expenditure plan averages $2.0B from 2005-2009

Total Base Capital Expenditure Outlook ($MM)

$500

$1,000

$1,500

$2,000

$2,500

Generation $300 $340 $300 $380 $700

Gas Transmission $140 $130 $135 $110 $125

Elec Transmission $525 $425 $350 $300 $300

Distribution $900 $1,050 $1,100 $1,100 $1,100

2005 2006 2007 2008 2009

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EPS Guidance

• EPS from operations*: 2005 guidance of $2.15-$2.25 per share2006 guidance of $2.30-$2.40 per share

$1.90

$2.10

$2.30

$2.50

2004A 2005E 2006E

EPS from Operations

2005 2006Rate base $15,350 $16,000Equity ratio 52% 52%Auth. ROE 11.22% 11.22%Carrying cost credits ($20) ($70)HC interest ($16) ($16)

Operating EPS Assumptions($ in millions)

* Reg G reconciliation to GAAP for 2004 EPS from Operations and 2005 and 2006 EPS Guidance available in appendix and at www.pge-corp.com

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Additional Investment Opportunities

• Potential incremental capital expenditures of up to $2.0B over 2005-2009 period depending on utility infrastructure needs

$0

$1,000

$2,000

$3,000

2005 2006 2007 2008 2009Distribution $35 $270 $425 $345 $410Transmission $5 $30 $45 $80 $45Generation - - - $300 -Total Potential Incremental $40 $300 $470 $725 $455Total Base $1,865 $1,945 $1,885 $1,890 $2,225

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Rate Base Growth

• Average annual rate base growth ranges from 4.5%-6.5% 2005-2009 depending on utility infrastructure needs

Average Annual Rate Base ($B)*

$12.5

$15.0

$17.5

$20.0

2005 2006 2007 2008 2009

Base Potential Incremental

* 2006-2009 rate base is not adjusted for the impact of the carrying cost credit that results from the second series of the Energy Recovery Bonds. Earnings will be reduced by an amount equal to the deferred tax balance associated with the regulatory asset, multiplied by the utility's equity ratio and by its equity return. The carrying cost credit declines to zero when the taxes are fully paid in 2012.

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EPS Growth

• Average EPS growth from operations of 4%-6% from 2005-2009 based on mid-point of 2005 guidance and depending on infrastructure needs

$2.00

$2.25

$2.50

$2.75

2005E 2006 2007 2008 2009

4%-6% growth

$2.15-$2.25

* Reg G reconciliation to GAAP for 2005 EPS Guidance from Operations available in appendix and at www.pge-corp.com

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Dividend Policy

• Objectives– Flexibility

– Sustainability

– Comparability

• Payout ratio range of 50%-70%

• Growth balanced with funding for additional investment opportunities

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Summary

• PG&E Corporation: A Value Opportunity

– A focus on the utility and operational excellence

– Average EPS growth of 4%-6% from 2005-2009

– Strong cash flow

– Share repurchases of approximately $1.6B in 2005

Appendix• Reg G Reconciliation• Carrying Cost Credit Impacts

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Reg G Reconciliation

2004

2004 EPS on an Earnings from Operations Basis $2.12

Items Impacting Comparability Gain resulting from prior year impact and recognition of reg. asset from 2003 GRC approval $0.28 Recovery of previously incurred costs related to electric industry restructuring implementation $0.07 Regulatory assets established by Chapter 11 settlement agreement $6.92 Settlement Agreement obligations related to clean energy and land conservation ($0.04) Incremental interest ($0.15) Utility and NEGT Chapter 11 external legal consulting fees, financial advisory fees and other costs ($0.03) Costs related to early redemption of PG&E Corporation's $600M 6 7/8% senior secured notes ($0.07) Estimated market value of non-cumulative dividend participation rights w/in 9.5% convertible notes ($0.13)

Non-cash gain on disposal of NEGT $1.60

2004 EPS on a GAAP Basis $10.57

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Reg G Reconciliation

2005 Low-end High-endYear 2005 Year 2005

EPS Guidance on an Earnings from Operations Basis $2.15 $2.25

Estimated Items Impacting Comparability * Incremental interest expense ($0.08) ($0.05)EPS Guidance on a GAAP Basis $2.07 $2.20

* The range of potential outcomes is developed using a range of dollar estimates and a range of estimated shares outstanding.

2006 Low-end High-endYear 2006 Year 2006

EPS Guidance on an Earnings from Operations Basis $2.30 $2.40

Estimated Items Impacting Comparability $0.00 $0.00EPS Guidance on a GAAP Basis $2.30 $2.40

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Carrying Cost Credit Impacts

2005 2006 2007 2008 2009 2010 2011 2012RRB & ERB AverageDeferred Tax Balances $295 $1,200 $945 $740 $590 $430 $265 $90

Est.Carrying Cost Credit $17 $70 $55 $43 $34 $25 $15 $5

Estimated Average Deferred Tax Balances and Carrying Cost Credit Impacts ($MM)

* Rate Reduction Bonds assumed to be fully retired at the end of 2007. * Energy Recovery Bond balances assume no generator refunds.* Estimated carrying cost credits assume a utility equity ratio of 52% and ROE at 11.22%.