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CFOs speak out: Growth Strategy for the 21st Century

For The 21st Century
Fortnightly Magazine - October 2004

reduction has been from having the plants off line to do some maintenance work that is costly in the near term and fruitful and beneficial in the long term. As for the other items you mentioned, the Mercer outage was a result of problems with new pollution control equipment being installed there. Those problems have been tackled, and Mercer is now operating well. The transmission constraints were the result of a down-rating of a transformer that will take us until the middle of 2005 to replace.

Peter A. Darbee , Senior Vice President and Chief Financial Officer, PG&E Corp.

"We are pro-choice. But there are three requirements that are essential that we really feel the state has to embrace if it were to move forward with choice."

What are PG&E's future growth strategies?

Peter Darbee: We will be throwing off a very substantial amount of cash … because we anticipate a securitization of our regulatory assets, the first tranche of which would occur in the early part of 2005.

We expect that, for the period through the end of 2005, we will generate about $1.55 billion of cash. Then, looking through 2008, we will probably total about $3.3 billion. So, we have a lot of cash going forward, which is the source of what we would use to invest in growth. We are in a unique situation given our regulatory assets and the immense restructuring that the company went through coming out of the California energy crisis.

The first tranche of cash will be utilized for retiring debt and then retiring equity. We have about $1.2 billion that will be paid up from the utility to the holding company, and that could be combined with cash. For the first round, that is going to be used for share repurchase. That will grow earnings per share, but it isn't growth in the classic sense of creating new businesses going forward. We recognize that. We anticipate a second securitization within 12 months that will provide dollars we might use for either share repurchase, or in the alternative, generation opportunities and electric transmission opportunities, as well as advanced metering opportunities and other systems improvements in our business.

Do you plan to build more generation into rate base?

PD: Yes. Our current focus would be to deploy the capital in rate base in our core business. There are a number of factors that are drivers behind that. We see a need for the addition of about 2,000 MW of capacity in California up to the period of 2010, and about half of that we perceive a need for before 2008. It is very important that we ensure adequate generation capacity in California so that we avoid another California energy crisis.

So, your growth strategy focuses on your regulated operations?

PD: Over the next one to two years, it is focused on the regulated utility. Once we get down the road, we'll look [whether we] should put more investment into the regulated utility. After having spent 10 years on Wall Street, I think it is important that