||Robert D. Glynn, Jr.
||April 20, 2005
PG&E Corporation and
Pacific Gas and Electric Company
Peter A. Darbee
President and Chief Executive Officer
Gordon R. Smith
Senior Vice President, PG&E Corporation
President and Chief Executive Officer
Pacific Gas and Electric Company
Christopher P. Johns
Senior Vice President, Chief Financial Officer and Controller
|| Annual Shareholders Meeting
|| San Ramon, California
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These remarks and related materials may contain forward-looking
statements. Actual results could differ materially from
those expressed or implied by the forward-looking statements.
Remarks Before the 2005 Annual Shareholders Meeting
ROBERT D. GLYNN, JR.
Welcome to the annual shareholders meeting for PG&E
Corporation and Pacific Gas and Electric Company. Thank
you for joining us here this morning.
I'm Bob Glynn, Chairman of both companies.
Joining me for our presentation today are:
- Peter Darbee. Peter became PG&E Corporation's
President and CEO on January 1, 2005. Let's all congratulate
- Gordon Smith, Pacific Gas and Electric Company's
President and CEO
- Chris Johns, PG&E Corporation's Senior Vice
President, Chief Financial Officer, and Controller
- Tom King, Pacific Gas and Electric Company's Executive
Vice President and Chief of Utility Operations
- Bruce Worthington, PG&E Corporation's Senior
Vice President and General Counsel
- And Linda Cheng, Vice President and Corporate Secretary
of both companies.
Also, Joseph Thatcher from Mellon Investor Services,
the independent Inspector of Election, is present.
In the audience are members of our Boards of Directors.
We'll introduce them now and ask them to stand and remain
standing until they are all introduced.
- David Andrews
- Les Biller
- David Coulter
- Lee Cox
- Mary Metz
- Barbara Rambo
- And Barry Williams.
We welcome them all here this morning.
Our director, David Lawrence has chosen to leave our
Boards at the end of this meeting, after 10 years of
service. David couldn't be with us this morning, but
we're grateful for his counsel and contributions during
the past decade. And on behalf of all shareholders, we
thank him and wish him well in the future. Thank you,
We also thank the officers of PG&E Corporation
and Pacific Gas and Electric Company for being with us
And now, the meeting is turned over to Peter Darbee,
PG&E Corporation's President and CEO, who will chair
the remainder of the meeting.
PETER A. DARBEE
Thank you, Bob.
Good morning. And welcome. It's an honor to be here
addressing this audience for the first time as President
and Chief Executive Officer of PG&E Corporation.
Four months ago, I had the privilege of speaking to
our 20,000 employees, the morning after being named to
I shared a vision with them for PG&E's future--
to be the leading utility in the United States.
In the months since then, I've had the chance to speak
with thousands of our employees about the future of our
company and the direction we've chosen.
Their enthusiasm, their pride.and their commitment
to our company and our customers make me more confident
than ever that we will reach our goal.
Ladies and gentlemen, the future of this company looks
every bit as bright as its proud history.
Today, we're going to talk about that vision and why
we're in a strong position to take this journey. We'll
talk about what we're doing to reach that goal, and why
it's important for our employees, our customers and for
you, our shareholders.
First, let's look at PG&E's strong position today.
PG&E is stronger now than at any time in the past
Our core business-- Pacific Gas and Electric Company--
is financially revitalized.
The balance sheet is solid. Cash flows are healthy.
And our credit is sound.
These major achievements represent the success, of
a three-year mission to put Pacific Gas and Electric
Company back on firm financial footing.
The energy crisis presented our company with an extraordinary
We responded by creating an extraordinary solution
through a long-term settlement agreement with the California
Public Utilities Commission.
This provides a series of unprecedented financial and
I want to recognize Bob Glynn for achieving this result.
It took skill, perseverance, and above all, leadership.
Very few people could have accomplished this.
The legacy, is more than just a company that's financially
healthy today in 2005. It is also a clear and stable
outlook for many years to come.
We have the opportunity to earn a solid return on our
investments through the year 2012.
Our base utility rates are set through the end of 2006.
And we have a labor contract in place through 2007.
So as we look at the business, we know what our revenues
will be, and we know what a major component of our cost
That puts us in a unique position relative to nearly
every other company.
Last year, these agreements enabled us to do the following:
- restore Pacific Gas and Electric Company's investment-grade
- refinance its balance sheet at historically low
- resolve all creditor claims in full, and
- lower customer rates by about $800 million in
the year 2004 alone.
Going forward, these agreements mean the company can
generate substantial cash flow.
We intend to use that cash to pay dividends, repurchase
common shares and make new investments in the business
to better serve our customers.
In 2004, shareholders benefited from a 20 percent increase
in the value of PG&E's shares.
That's a solid total return on your investment.
Last fall, we announced our plan to increase your total
return, by once again paying a regular common stock dividend.
And we have now delivered on that promise. We are paying
a quarterly common stock dividend of 30 cents per share,
which on an annual basis is $1.20 per share.
We know how important dividends are to you. And I know
I can speak for the entire company when I say that we're
delighted to be paying you a dividend again.
We intend to maintain a dividend payout ratio between
50 percent and 70 percent. So as operating earnings per
share go up, you can expect generally that our dividends
will go up as well--not in lock step--but somewhat proportionately.
It's important to emphasize that financial health,
clarity and stability also have important benefits for
It assures customers that PG&E has the financial
wherewithal to access the capital and credit markets.
That means they can count on us to buy power, and fund
critical infrastructure investments.
So, after a time of extraordinary challenges, we're
now operating from a platform of extraordinary stability
Thank you, Bob Glynn. And thanks to all of our PG&E
team members who worked tirelessly to create this outstanding
platform for the company.
This strength and stability represents a tremendous
It has allowed us to focus our resources and attention
on an ambitious vision-- to be the leading utility in
the United States.
We also face the competitive need to meet this goal.
The bar for providing customers with value and good
service has never been higher. And, looking forward,
it will continue to be raised.
Customers and regulators are measuring our performance
against others in the industry, and they're expecting
us to stay ahead of the curve.
We've made the decision that not only do we want to
be ahead of the curve, but we in fact want to be an industry
Over the past year, our team has become energized around
We've launched an intensive, multi-year effort to transform
our operations and our culture to achieve it.
Our goal is to use our strong platform to identify
and implement changes in order to deliver better, faster
and more cost-effective service.
In real terms, this is what customers will see from
- We will simplify our work processes, from the way
we hook up new service, to the way we manage our
- We're going to embrace new information technologies
that will allow us to provide faster and more responsive
- We will give our employees new tools and knowledge
to solve problems more quickly.
- We will invest in our infrastructure to improve
- And last, we will hire and train the best people
to ensure that the next generation of our employees
is even stronger and more customer focused.
To drive these efforts, we're looking at the best practices
in the industry. We're looking at the way we deliver
service so we can improve it. We're involving thousands
of our employees who know what works, what doesn't work,
and what needs to be changed.
Also, we're backing this effort with a strong, enthusiastic
commitment from senior leaders within the company, who
are rolling up their sleeves to participate.
In February, I helped lead nine all-day transformation
meetings for front-line managers, supervisors and superintendents.
I met with thousands of employees from San Francisco,
to Stockton, Fresno, Sacramento, San Luis Obispo and
points in between. They all are excited about the future.
They're excited because they understand that this is
about doing the best job we can to serve our customers.
And if there's one thing I've come to understand better
through my conversations with employees, it's how deeply
ingrained and how strong their desire is to provide the
best service to our customers.
In some areas this undertaking will be about building
on our strengths. For example, customers rate the service
at PG&E's call centers to be among the best in the
business. In other areas, it will mean acknowledging
that we can do better.
By taking this on, we've assigned ourselves a major
task for the next three to five years. In fact, it's
among the hardest tasks a company can tackle. But it's
also a critical one. And now is the right time to begin
When we succeed--and let me assure you, we will succeed--the
result for our employees will be a fulfilling environment
that allows them to do their jobs and serve customers
to their fullest potential.
The result for our customers will be better, faster
and more cost effective service--which translates into
strong customer satisfaction.
And for our shareholders, the result will be a solid
return on your investment. Regulators will look at our
performance, see our satisfied customers, and recognize
that we are running the business as a leader in the industry.
As we are undertaking transformation, we also must
ensure that our financial and operational performance
Now, PG&E Corporation's Chief Financial Officer,
Chris Johns, will provide an overview of the company's
financial performance and outlook.
Then, Pacific Gas and Electric Company President and
CEO Gordon Smith will discuss our operational performance
and some of the areas where we're working to strengthen
and grow operations.
First, Chris Johns...
CHRISTOPHER P. JOHNS
Thank you, Peter.
This morning I'll discuss our results for 2004, our
outlook for 2005 through 2009, and the implications for
PG&E Corporation delivered excellent financial
performance last year.
Our 2004 earnings--as reported in accordance with generally
accepted accounting principles, or GAAP--were $10.57
per share. This included two significant one-time, non-cash
items that totaled $8.52 per share.
The first item was related to the regulatory assets
recorded as part of the successful resolution of Pacific
Gas and Electric Company's Chapter 11 case. The second
was related to the Corporation's exit from its national
Absent these and other items that aren't part of our
on-going operations, our non-GAAP earnings per share
from operations were a solid $2.12 per share.
This represented a 43 percent increase over 2003 earnings
Our Annual Report provides a detailed explanation of
the difference between our non-GAAP earnings from operations
and our GAAP earnings.
We expect this excellent performance to continue.
When we look forward for the next five years, we see
solid and stable earnings growth in the range of 4 to
6 percent per year. Our specific earnings guidance for
2005 is $2.15 to $2.25 per share. And our guidance for
2006 is $2.30 to $2.40 per share. (Click
here for Reg G
These earnings guidance forecasts are based on important
assumptions, including 1) that the utility earns its
authorized rate of return during that period of time,
2) that we complete two regulatory asset refinancings
and related accelerated share repurchase programs in
2005, and 3) that we pay three dividends in 2005 and
four dividends in 2006.
The cash from the regulatory asset refinancings that
I just mentioned, combined with solid utility operations
provide us with a strong cash position. We plan on utilizing
that cash to pay our dividends, fund our base capital
investments, and repurchase PG&E Corporation common
One important way for us to deliver value to shareholders
is through dividends and share repurchases. In total,
we expect to utilize $2 billion of cash in 2005 to pay
dividends and repurchase stock. That's value we are returning
directly to you, our shareholders.
Another important way for us to deliver value to our
customers and shareholders is through reinvestment of
cash in the capital infrastructure of the Utility.
Our total base capital investments are expected to
average $2 billion per year for the next five years,
about half of which is related to our distribution business.
These investments in Utility infrastructure will increase
the effectiveness of our service to our customers.
In addition we have opportunities to make incremental
investments above and beyond those base investments.
These incremental projects offer considerable benefits
to our customers in terms of better, faster and more
cost-effective service. As a result, we believe they
should be attractive to our regulators, whose approval
we need in order to move forward.
The potential incremental investments total up to $2
billion over the next five years.
Gordon Smith will discuss these opportunities in a
little bit more detail in just a minute.
These investments grow our rate base, which is the
amount on which our authorized rate of return is calculated.
We are currently authorized to earn 11.22 percent on
the equity portion of our rate base, which is 52 percent
of the total.
We expect our rate base will grow at a very solid 4.5
percent to 6.5 percent from 2005 to 2009.
The result of all these factors is that we expect to
grow earnings per share from operations by 4 percent
to 6 percent per year over that same period.
As Peter mentioned, we are thrilled to be paying a
dividend again, and we're excited about the opportunity
to grow those dividends in the future.
Last fall, we adopted a dividend policy that has three
First, is to provide the flexibility to balance our
dividend payments with the incremental investment opportunities
I just mentioned.
Second, is to keep the dividend sustainable as earnings
And third, is to make sure that the dividend yield
and pay out ratio range are comparable to what other
companies in our sector are delivering.
Our policy has resulted in a target payout ratio range
of 50 percent to 70 percent of earnings per share from
Our current dividend level--$0.30 a share for the quarter
and $1.20 on an annual basis--puts us in that range,
with room to grow.
Although we do not have a targeted dividend growth
rate at this time, we do intend to stay within our payout
ratio as earnings increase over the next five years.
In summary, you can see that the events and results
of 2004 provide a sound basis for the value opportunity
that PG&E offers its shareholders.
We see solid growth in earnings.
We have substantial cash flows available for dividends
and share repurchases in order to deliver value back
to our shareholders.
And we see opportunities to make continued capital
investments that will deliver value to both customers
and shareholders alike.
And now I'd like to turn it over to Gordon Smith.
GORDON R. SMITH
Thank you, Chris, and good morning to you all.
Pacific Gas and Electric Company's financial health
is tied directly to its operational health.
I'd like to cover some of the areas we're investing
in to keep operational performance strong, and support
the platform for transformation.
Our first priority is making sure our customers have
a sufficient energy supply.
During the last couple of years, we've had healthy
power reserves in Northern California, and we expect
that will be the case this summer as well.
However--longer term--our customers' power needs are
growing, and we're preparing to meet that challenge through
a number of ways.
First, we try to help our customers save energy, through
Energy Efficiency Programs. PG&E is a national leader
in this area, and we've helped Californians become the
nation's most efficient consumers of electricity. Our
goal is to save almost 10,000 gigawatt hours, over the
next 10 years. That's a reduction of about 50 percent
from what our load growth would otherwise be over this
The second approach is programs that encourage big
customers to reduce their energy use at peak times. Here,
the goal is to lower peak energy usage by about 5 percent
Third is, Renewable Resources, like wind power and
solar energy. California requires that we meet 20 percent
of our retail sales with power from renewable resources
by the year 2017. We think we can actually get there
faster, maybe by 2010. Right now, we are at 13 percent,
and we're actively looking for additional renewable resources.
The last way we meet growing needs is through new electric
generation--either new contracts to buy power, or new
power plants that we would own.
PG&E customers are going to need about 2200 megawatts
of new generation in the 2008 to 2010 timeframe--that's
equal to the power generated by two large power plants.
We've requested bids for both power contracts, as well
as utility-owned generation developed by third parties.
We believe the best outcome for California customers
would be a hybrid, in which both utilities and merchant
generators have the opportunity to invest in plants.
What's most important, however, is that both we and
the California Public Utilities Commission monitor the
progress in building new generation, and make adjustments
if necessary, to ensure that we have ample supplies and
One project that will help us with that is right here
in Contra Costa County. We now have a settlement with
Mirant, an independent power producer, resolving claims
related to their actions during the energy crisis. One
result is that they've agreed to give us ownership of
a partially built, 530-megawatt power plant, which is
enough power for about half a million homes. Assuming
that we get approval from the California PUC, our plan
is to complete it and start operation in the late 2010
In addition to having enough power, it's critical for
power to be able to flow efficiently and reliably, so
we're also investing in our Electric Transmission System.
For example, we are making a major investment to enhance
the flow of power on the San Francisco peninsula, and
we'll be looking at additional investments like those
we made recently in a major transmission corridor between
Northern and Southern California to reduce bottlenecks
and improve the flow of power.
We're also investing in our Gas Transmission Business
to enhance safety and reliability, and accommodate new
Now let's focus on the Distribution Business.
We connect about 80,000 new electric customers on an
annual basis, and an additional 70,000 new gas customers.
This represents a very significant part of our investment
each year together with our maintenance programs.
However, we're nearing a time when replacing infrastructure
will become a larger part of our overall investments,
and here are two examples of steps we're taking to manage
First, in the next 5 to 10 years we are going to more
than double our spending to replace transformers at our
Second, we're going to dramatically increase our investment
to replace underground electric cable. A significant
amount of our 20 thousand miles of underground electric
cable will be due for replacement in the next 10 years.
We intend to increase our spending on this program
by three or four times, from about $25 million per year
to between 75 and $100 million.
As Peter said earlier, we're also investing in new
technology, in order to improve both operations, and
The biggest example is a $1 billion investment in AMI--our
Advanced Metering Initiative.
We expect to install about 9 million new high-tech
gas and electric meters over the next five years.
These meters send data back and forth between PG&E
and the customer, so we can read meters remotely, gather
information, or send data to customers that helps them
manage their energy use.
We think this technology is important--and tremendously
valuable to customers, because it gives us the ability
to provide better, faster and more cost-effective service,
and to provide higher reliability.
For example, it lets us know more quickly when there's
an outage and the extent of that outage--which means
we can get trucks rolling more rapidly and we can get
the right equipment on location to repair the damage
and restore power as quickly as possible.
AMI also enables us to manage customer demand more
rapidly and more effectively.
During peak usage times, we can send real-time price
signals to customers who want them, and they can curtail
their peak demand if they so choose.
By doing this, we could potentially eliminate the need
for at least one generating plant, if not more, over
Governor Schwarzenegger and California PUC President
Peevey have indicated their strong support for this technology,
and in mid-2005, we'll ask the PUC to approve this program,
and we hope to begin installing the meters in early 2006.
So, to summarize:
In parallel with our transformation, we're keeping
a sharp focus on our operations.
We're making substantial investments in new resources.
We're upgrading and modernizing equipment.
And we're leveraging new technologies to deliver better
Thank you and let me now turn it back over to Peter
PETER A. DARBEE
Thank you, Gordon.
You've heard now about the substantial plans we have
for growing financial performance and investing in our
There's one more component that's critical to our success,
and that's our culture.
As part of the transformation effort we're looking
deeper than just the work processes and the systems we
We're taking stock of our culture.
We're asking what aspects of our culture do we want
to preserve or change. Preserve or change in order to
deliver better, faster and more cost-effective service.
I'll give you a small but meaningful example. Regulated
companies often refer to people who buy their services
as "rate payers". At PG&E I've asked that
we stop using that term, but instead use the term customers.
A "rate payer" is the captive of a regulated
monopoly. A "customer" is someone whose admiration
and business we have to go out every day and win, by
delivering great service.
Now, there's much about our culture that is good, and
we want to retain. Our goal now, is to strengthen the
areas where we want to be better, while still preserving
the elements that are fundamental to our success.
Rather than telling you what we believe these elements
are, we want you to hear about them from the people who
live them. Here are a few:
When you hear from PG&E employees like the ones
you just met, you recognize that although we're embarking
on a major transformation effort, there's a tremendous
foundation already in place.
It's fitting that this undertaking coincides with the
celebration of PG&E's 100th anniversary.
PG&E has accomplished phenomenal feats in the past
From historic engineering and construction marvels
to overcoming natural disasters, our 100th anniversary
is an inspiring reminder that our employees have the
grit and dedication to set ambitious goals and achieve
We're going to prove that again in the next three to
We're energized about our vision. We're focused on
doing what it takes to achieve it. And we're looking
forward to sharing our successes with you as we continue
on this journey.
I want to thank our entire employee team for their
enthusiasm and their dedication.
This morning we've invited the presidents of our Employee
Associations to be here to represent our large and diverse
Will you all please stand to be recognized. Let's hold
our applause until they've all been introduced.
With us are:
- Dan Barber--Dan is President of the Pride Network,
- Bryan Bowers-- Bryan is the Director of the Pacific
Service Employees Association,
- Wayland Chan--Wayland is the President of the Asian
- Tony Estrada--Tony is President of the Filipino
- Kathy Hart--Kathy is President of the Women's Network
- Claudia Mendoza--Claudia is President of the Hispanic
- and Al Thomas--Al is President of the Black Employees
I've had the pleasure of meeting these folks personally.
They're a great group of leaders.
On behalf of the thousands of employees you represent,
thank you for your enthusiasm and commitment to PG&E.
You've heard a lot about service today, and how much
that's ingrained in the people of PG&E. But, there's
one group of our team members who take service to a whole
different level--they're our team members who also serve
in the National Guard and Reserve. Forty-four men and
women from the PG&E team have been deployed on active
duty in the service of our country. Twenty-seven of them
have returned from active duty, and 17 are serving currently.
All of them, and more, are subject to being activated
in the future.
With us are a group of PG&E reservists. We would
like to recognize them and their colleagues who could
not be here today. Will those here please stand and be
recognized as your names are called. Please hold your
applause until after they are all introduced.
- Commander Mary Adamson, U.S. Naval Reserve
- Information System Technician, 3rd Class Alex Chan,
U.S. Naval Reserve
- Colonel Phil Donnelly, U.S. Army Reserve
- Commander Frank Eich, U.S. Naval Reserve
- Staff Sergeant Jesse Jennings, Nevada Air National
- Petty Officer 1st Class Steven Palesch, U.S. Naval
- and Technical Sergeant Brian Rutherford, U.S. Air
Let's all stand and express our gratitude to them now.
Thank you, and thanks to all of our reservists.
And thank you all for joining us today. This meeting