PG&E Corp (PCG) 2007 Q2 法說會逐字稿

Good morning, and welcome to the PG&E Corporation second quarter 2007 conference call.

At this time, I would like to pass the conference over to your host, Gabe Togneri, Vice President of Investor Relations.

Thank you and have a (inaudible), Mr.

Togneri.

Hello, everyone, and thanks for joining us this morning for our second quarter earnings call.

This is a simultaneous webcast and conference call and all participants are in listen-only mode.

A replay of the webcast will be available from our home page after the call.

Our earnings press release was issued earlier today and it's posted on our website along with the supplemental tables, including the Reg G reconciliations.

We've also provided these materials in an 8-K filing with the SEC and we do plan on filing our Form 10-Q reports for both the Corporation and Pacific Gas and Electric Company today.

Before we begin our discussion, I remind you that our prepared remarks and the Q&A session contain forward-looking statements based on assumptions and expectations that reflect information currently available to management.

As we discuss in more detail in our 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 to better understand the myriad of factors that could influence these future results.

On today's call to take us through the results and the highlights, we have Peter Darbee, Chairman and CEO of PG&E Corporation; Bill Morrow, CEO and President of Pacific Gas and Electric Company; and Chris Johns, Senior Vice President and CFO of the Corporation.

Other key members of our team are here to participate in the Q&A.

And with that, I'll turn the call over to Peter Darbee.

Thanks, Gable.

We're happy to report a strong second quarter.

Total net income was $269 million or $0.74 per share and that puts us on track with our targets for 2007.

Before we jump into the presentation in detail, what we wanted to do was talk about two noteworthy accomplishments during the quarter.

The first has to do with our ClimateSmart program, which was launched in June.

This program provides our customers with the ability to make their homes or business carbon neutral if they pay a small monthly bill -- fee on their bill.

The cost of the fee is approximately 3% of the typical residential bill, and these proceeds go to fund environmental projects to offset greenhouse gas emissions.

Thus far, 1,500 businesses and residential customers, including PG&E employees, have signed up for this program.

I want you to know that all of PG&E's facilities were the first customer in the program.

This program is consistent with our position on global climate change.

And as you know, we're involved in a dialogue on this topic at the national level as well as in our own service territory here in California.

The second accomplishment that we wanted to talk about is our progress with respect to renewable resources.

During the quarter, we signed a contract for 500 megawatts of solar power from [Solel] solar systems, and this facility would be based in the Mojave Desert.

The Solel solar systems works off of a proven solar thermal design and there are already facilities in California generating more than 350 megawatts annually.

Now it's important to recognize that this technology is twice as efficient as residential photovoltaic panels, and we think that's very important because as we and others face the challenge of climate change, it's important that we find the most efficient and cost effective solutions to the problem and this technology clearly goes to that point.

The facility will be the world's largest concentrating solar facility built to date and it's scheduled to deliver power in 2011.

The effect of this will be to increase the diversity and flexibility of our energy portfolio and very importantly, provide renewable power during peak power use need times.

Now in addition to this, we have two smaller wind and geothermal contracts that we entered into during the quarter.

One was the western geothermal facility in Sonoma County and this is a 25 megawatt contract and the project is targeted to come online in 2010.

In addition to this, we brought on board a contract with Klondike Wind Facility, which is based in Sherman, Oregon, and this is scheduled to produce 85 megawatts of power which will come online later this year.

These different projects will help us achieve our 20% RPS requirement.

However, there are a number of factors that impact on the ability to meet the RPS target.

The first is it's critical that we have adequate transmission for delivery of this renewable power so that will have to be put in place first.

And secondly, many of these projects are developmental and start-up in nature and therefore our forecasts are based on the completion of these projects.

These product -- or project developers will be faced with, of course, challenges with respect to equipment shortages potentially and higher costs and these will be issues that the developers will have to face.

Nevertheless, we remain committed to meeting our RPS targets and goals as outlined in Senate Bill 1078, the existing climate change of renewable legislation here in California.

But not only are we committed to meeting the targets that are legislatively required, but this is consistent with our long-term values at PG&E to provide renewable and secure and clean power over time.

We want to point out that we've made considerable progress in this respect.

In fact, since the oil crisis in the late 1970s, demand in PG&E service territory has grown by 30,000 gigawatt hours.

But during this time, the percentage of fossil in the mix has declined from more than 65% in 1977 to 41% in 2006 so we've made significant progress in terms of providing a cleaner portfolio and you can be assured that we will continue to work in this direction as we move forward towards our objective and vision of providing clean and secure energy for our customers.

And with that, I'd like to turn it over to Bill Morrow for the operating update.

Thank you, Peter, and hello, everyone.

So what I'd like to do is break down the operational highlights into three areas.

The first will be customer satisfaction, the second, reliability, and the third will be an update on some of our improvement initiatives.

So on customer satisfaction, as many of you know, there's an annual survey conducted by JD Powers that measures and compares all 76 utilities across the United States.

And earlier this year, we reported that on the business segment, we moved from the fourth quartile to the first quartile in just a single year's time, and our monthly surveys and our leading indicators show us now holding steady in most areas and improving in others for this particular segment.

Now on the residential side, we just received the results for 2007 and we're quite pleased to report that we've increased our overall satisfaction index by ten points and this is against the overall market dropping by seven points.

Now what this means is the 2007 score represents a 20% improvement over last year in our relative position, taking us from third quartile in 2006 to slightly above the industry average.

Now this is significant because this is an issue about moving the mass market.

This is over 5 million customers that we're talking about and to have this kind of change is significant and it's something that is ahead of the schedule where we thought tha we would be.

Now we know that we cannot rest on our laurels, particularly when it comes to the residential customers because they're so influential over the image that they cast on the Company.

We're going to continue to push the trend upward and the goal is to meet and/or exceed the customer expectation.

Moving into the second category of reliability.

Starting on the generation side, our Diablo Canyon power plant did the Unit 1 refueling this last May and this was done in the shortest ever time frame for this unit.

It was about 30 days done, and this is in line with the best operating benchmarks across the industry.

It was done on budget and it exceeded the safety targets.

This supports our overall objective of keeping a clean, low-cost energy resource available for the California customers.

Now looking at another generation source, which is new, is our Gateway plant.

As you know, this is a 530 megawatt plant located in Antioch, California.

It is now on schedule to be online in the 2009 time frame.

We are on the budget, which was originally scheduled to be $370 million, and the thing that we're excited about the most for us here is that this is using a dry cooling method, which uses 97% less water than the conventional cooling system, and this also avoids the use of the river water, which has an issue around the local fish habitat there, so we're excited about the progress we're making here.

Now, when you look at our transmission and distribution, we're doing an awful lot here to be able to improve the reliability statistics and we've seen some improvements overall but we're not happy here.

We really need to push the envelope hard to be able to recover from the past in the way that this was managed.

We're making investments across the plant which is usually designed to be able to address when something is ending its life cycle and we've taken a whole new measure of initiatives looking at condition-based maintenance so we don't overinvest too early.

But still, when you look as an example of some of the investments, San Francisco, over the last three years we've invested $650 million, and when you look over the next three years, we're going to add another $450 million to that.

We have our full replacement program that's underway.

We have a pipeline redundancy plan that we're making great progress on and of course a number of our substation retrofits.

Now it doesn't stop here.

There's some things beyond just replacing with capital the plant that's in the ground.

Our operational improvements, and I'm quite excited about a team that was put together to look at reducing the accidental dig-in caused by faulty procedures.

And we've now seen year-over-year of 45% reduction in these accidental dig-ins giving our customers again greater availability as we move forward.

Now moving into the last category around some of our improvements initiatives, I really just want to highlight two here.

The first one is around Smart Meter.

Now as you know, we have taken the lead in California and, of course, one of the largest scale when you look across the United States, and we feel very strong about staying on the leading edge here and we've always expected these technologies to evolve and to advance, and we've been monitoring the market to see just that.

And we believe now is the time to actually look to see what else we can do to upgrade some of the functionality that we have within this platform.

So last month, we issued an RFP to be able to look primarily at three areas.

The first one is around solid state meters that have an integrated disconnect capability that will again be kind of a higher reliable lower cost and a more efficient realtime service to our customers.

The second will be looking at devices within the meter that can communicate data realtime both back to us and to our customers that enables a whole new suite of services that we're just now starting to think through.

And then the third category is around the communications network that not only serves the purpose here, but also supports the rest of the grid functionality as we think forward about smart rig capability.

Now, the responses are due later this month from this RFP and the testing could begin as early as the end of the year.

We have been working with the CPUC somewhat, but we intend to seek approval from the Commission for any and all expansions of the AMI business case.

The additional funding, if any comes about, is too early to speculate, but we will share this information as soon as it becomes available.

Now when it comes to the rollout and the integration of what we think is this new functionality, it could occur as early as 2008 but we will keep you apprised of this as this unfolds.

Now, the second area I would like to mention around our improvements initiatives is around our business transformation foundation release and this is something that actually touches and connects a number of business activities that brings together end to end processes, kind of the soup to nuts type of approach that we're taking.

This will result in improved work cycle time, quicker response to our customers, and a more satisfied employee base because they're going to be able to see the breadth of their skills be used in a real time and more expansive matter.

So overall, we feel with the foundation release and the AMI upgrades that we're going to have a good year relative to our intentions with business transformation and continuing to pursue the leading utility across the United States.

And so with that, I'll turn this over to Chris who will cover some of our numbers.

Thank you, Bill.

I'll begin by discussing our second quarter results and guidance and then update some key regulatory developments.

For the second quarter, PG&E Corporation earned $269 million or $0.74 per diluted common share on both a GAAP and non-GAAP basis.

This compares to $232 million or $0.65 per diluted share on a GAAP basis and $228 million or $0.64 per diluted share on a non-GAAP basis for the second quarter of 2006.

As you can see from the Table 4 of our supplemental earnings material, $0.09 of the quarter-over-quarter earnings per share increase is a result of earning a return on a higher capital investment fee.

This reflects current year regulatory approvals of our general rate case and FERC transmission case and is in line with our expectations we shared with you in our first quarter disclosures.

This quarter's earnings also reflect higher gas transmission revenues due to higher gas throughput on our system.

Now these positive impacts were partially offset by about $0.01 of environmental remediation costs.

As we look toward the second half of 2007, we expect the run rate on business unit expenses to be roughly about $60 million higher on a pretax basis compared to the first half of the year.

This is primarily due to planned higher spending on operational improvement, like the business transformation foundational relief that Bill just mentioned, which is being rolled out before the end of the year.

We will also see the impact of planned work, associated with hydro relicensing and spending on our dry cast storage project at Diablo Canyon.

In going forward, we expect the quarter-over-quarter results to reflect a modest growth in shares outstanding as we increase equity through internal programs to fund future rate-based growth.

Internal programs have provided around $90 million of new equity capital through June of this year.

Based on our expectations for operations in the second half of the year, we are reaffirming our 2007 guidance of $2.70 to $2.80 per share from operations.

Our 2008 guidance remains at $2.90 $3.00 per share.

The primary assumptions supporting our guidance are that we earn at least the CPUC authorized return on equity of 11.35% and at least 12% on our FERC jurisdictional business while growing our asset base and controlling our costs in line with regulatory approval and maintaining our rate making capital structure at 52% equity.

We continue to target an 8% average annual growth in EPS from operations over the 2007 to 2011 period.

As always, a reconciliation of our guidance for 2007 and 2008 earnings per share from operation to projected GAAP EPS can be found in our supplemental material.

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

We received final approval from the FERC for our all-party settlement agreement for our transmission owner case, effective March 1st.

I touched on this earlier as one of the drivers in the quarter-over-quarter results.

As we stated before, approval of this settlement was previously contemplated in our 2007 earnings guidance.

Finally, with respect to the energy efficiency proceedings, hearings to determine the level and structure of energy efficiency incentives were completed at the end of May.

Briefs and reply briefs were submitted in June and we are now awaiting a proposed decision from the administrative law judge.

We remain hopeful for the adoption of an incentive structure as early as the third quarter of this year.

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

Thanks, Chris.

Before concluding, what I'd like to do is share a couple of thoughts with you about the industry.

And that is that the only thing that will remain constant and certain is that our future will be uncertain and that we'll be faced with more change than this industry has faced in the past.

When one looks at construction programs in front of us, changing legislation, new technologies, I think this industry is becoming more dynamic all the time.

Certainly we see that with respect to legislation.

We have Assembly Bill 32 that has provided climate change legislation here in California.

That is certain in terms of its structure.

However, it's being interpreted and as we move forward, each day there'll be more developments as to exactly how that's going to be implemented.

What we see in Washington is there's new legislation and there are a variety of different pieces of legislation that's coming forward.

So as we look ahead, we see the future for our industry to be much more dynamic in changing than it has been in the past, not unlike transitions that the banking industry went through or the telecommunications industry went through during the last 20 years.

And therefore, we feel the management team that is on board and prepared to deal with these challenges needs to be different than in the past.

Where you had a stable environment that was reasonably the same, having the same management that had answered the questions and challenges in the last 20 years was the right management team for the future.

We believe, as I've mentioned, that the future's going to be very different and therefore what we've done is we put together a very diverse team.

We have members of our officer team who come from banking, telecommunications, public accounting, and consulting.

And what we tried to do is put together a team that has a high level of expertise in the energy business and that constitutes maybe half of our officer team and the other half is a team that comes from a variety of backgrounds and will help us deal with the dramatically changing environment.

So we would point you to our annual report that shows the mix of those officers, and we'd suggest you look at other management teams and ask the question how diverse are they and how prepared are they relative to deal with -- how prepared are they to deal with these challenges that we have coming up in front of us and the changes in the industry?

So that -- with that, we'd like to turn it over to questions and answers.

Gabe?

Certainly.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Greg Gordon with Citigroup.

Please proceed.

Thanks.

Good afternoon, gentlemen.

Afternoon, Greg.

I think you tried to answer or basically answered my first question in your comments, but I just wanted to make sure I understood.

The trailing 12-month earnings are already at the high end of the range.

Obviously rate base is higher this year than it was last year.

I know share count's modestly higher.

But the reason that you're maintaining the guidance is because of the roughly $0.10 of higher costs associated with setting up the transformation savings, the $60 million.

Were there other items we should also take into account?

Hi, Greg, this is Chris, and you're correct.

As I mentioned, we've got the rollout of our business transformation foundational relief later this year and there are costs associated with doing that.

Also in addition, we've been working through some regulatory and political issues with our dry cast storage facility down in Diablo Canyon and so that -- those costs, in putting that facility together are really scheduled for the latter half of this year, and then a lot of our hydro relicensing is scheduled to occur later this year.

So as I'll remind people, on a revenue requirement basis, we generally collect our revenues pretty ratably throughout the year, but that doesn't mean our spending patterns are that way.

And so all of these events were planned and we're just trying to highlight to the investment community that we do expect to see some increases in the spending levels in the second half of the year.

But those wouldn't be repeated again in second half of '08, correct?

Not necessarily, but we have other business transformation types of costs that we anticipate incurring in '08 and I'm not sure right now right off the top of my head what the timing of that would be.

Fair enough.

The second question I had was I had a recent conversation with someone at the CPUC, who indicated that the first half of September, you might get a decision on the energy efficiency incentive program?

Is that your understanding?

What they have communicated to us is that their objective was to have a decision and that issue finalized by the end of the third quarters so September 30th so it wouldn't be inconsistent to have a result like that which you described, Greg.

Great.

Now you talked about AMI on the call.

And I guess the influence here is that the potential capital spending could be in excess of the currently approved four-year plan?

And if that is, in fact, the inference, how would we go about getting sort of a scope of what the increase might be?

And then when would you file and what would be the process for filing for the approval of that?

Greg, this is Bill Morrow.

I mean you're correct, first of all, that it will not be a decrease.

It'll either be the same or an increase.

I think it's a little bit premature or too early to tell or to give you some range as to what that will be.

I can tell you that the Commission has encouraged us to look at this.

There is an increase in functionality that they think merits a potential increase.

But as I said, we haven't even yet to receive the responses back to look at this to ascertain that.

There's a timing issue and then a full scale-related issue on it so we'll keep you apprised and let you know as soon as we have some more concrete data.

And then my final question is there's been sort of a qualitative checklist of non-PG&E-related potential capital projects related to transmission, infrastructure, and gas pipeline and/or LNG-related infrastructure that you guys have indicated you were looking at.

Can we get an update on whether you're any closer to thinking about deploying capital in one of those non-PG&E centric type projects?

So, Greg, I'll start.

This is Bill Morrow again.

As you look at kind of the British Columbia renewables project that we've had, we have had a number of discussions and I think we're making good progress here.

It looks as thought the Canadian authorities are supporting this.

The companies that we're dealing with in Canada are encouraged by the relationship we can establish.

We did have the Commission with us, in fact, on a recent visit that we had up there.

We're now examining kind of the transmission path and the partnerships that we would put together to be able to build that transmission link up into Canada and we're encouraged by it so it's still -- nothing else has changed from what we had told you before.

But we're a little more confident that this could come together.

And Greg, this is Chris again.

I would add to that that we continue to move forward on looking at the Pacific interconnector gas pipeline project and we're working through some pre-filing processes at FERC.

But in all of these, we don't have anything that would be an update to any of our previously discussed or disclosed capital expenditures at this point in time.

Thanks, gentlemen.

Thank you, Greg.

Thank you, Mr.

Gordon.

Our next question comes from the line of Annie Tsao, AllianceBernstein.

Please proceed.

Good morning, everyone, or good afternoon.

Anyway, I just want you to comment on the most recent explosion, the transformer explosion downtown San Francisco.

Did it have any financial impact?

Annie, this is Bill Morrow.

There was no financial impact on this but let me just say that we take this issue very serious, especially when it comes to the safety of the customers and the environment and the communities that we have.

This is under investigation today.

We're still not exactly certain.

We have the manufacturer involved with this as to what happened behind it.

We've worked very closely with the local customers and the local communities.

We've been in the mayor's office on this.

And we think that they're pleased with the progress that we're making, the precautions that we're taking and the evaluation that we're doing to deal with this.

So it's something, again we take serious, but we do not see any financial impact.

Thank you.

Thank you Ms.

Tsao.

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

Please proceed.

Hey, guys.

Question for you.

Just wanted to check in regarding your long-term procurement plan.

Can you talk about just kind of the time line, key milestones investors should monitor, and when RFPs related to that plan would eventually go out?

Perhaps I can start, Michael, thank you very much.

This is Bill Morrow again.

So again we have submitted the ten-year plan on this that does have the incremental 2,300 megawatts of capacity that we would need.

I think when we look at the type of breakdown of generation and what comes from energy efficiency and demand response, these are issues that we're still working with with the Commission and the various interest groups that are out there.

On the timing, I'll ask Chris to actually participate in the timing of this to give us more of an idea of how this will be approved.

Yes, this is [Chris Warner.] We still expect the Commission's decision on our long term procurement plan by the end of the year.

And what that would mean, this is Chris Johns, what that would mean is that we would then go through the formal RFP process and expect that we would go through that process in 2008.

And how long of a -- is there a mandated time line for that process or is it an open-ended time line?

There's not a mandated time line for it, but we can tell you it took approximately about 12 months to get through that process the last time we went through it.

Got it.

And finally just in terms of thinking about what the cost of a new combined cycle would be in northern California, just kind of roughly on a dollar per KW basis.

So, if, this is Bill Morrow again.

If you look at kind of the average with the commodity prices the way they are today, it actually is in the $95 to $97 megawatt range.

Got it.

In other words, that would be still consistent with the thousand dollars per KW construction costs that we've been using for the past year or so.

That's fine.

I just wanted to check and see if there's been additional inflation in just kind of average cost of construction.

Those are the two drivers, Michael.

Materials shortage that seems to be out there, the commodity prices, and then the resources and the construction costs.

But that's kind of the lesser of the three.

Okay.

Thank you, guys.

Much appreciated.

Thank you, Mr.

Lapides.

Our next question comes from the line of Jonathan Arnold with Merrill Lynch.

Please proceed.

Good morning.

Just --

Hi, Jonathan.

Just a quick question on the cost of capital proceeding where I understand the Commission took your proposal to add the four-year, maybe five-year, I don't recall, mechanism as a second phase and make a decision on the actual 2008 piece during this year.

Do you have any initial read on the receptivity to the concept of this going forward mechanism or has that really just been shelved and pushed out into the future?

Hey, Jonathan, this is Chris.

I think that actually the reason for going through this or splitting it apart is to make sure that we get through the actual cost of capital this year and make sure that it does get spent so that we can move that forward.

I think everybody realizes that putting a mechanism in place is going to be a little bit more on the controversial side because there will be a lot of interveners that will want to have their participation in that process.

So we don't think it's sending us any indication that would say there's not a openness to having such a mechanism and in fact, the commissioners were the ones that asked for us to put that out as a proposal.

I think that there's just a realization that that piece of it will take a little bit longer to get through so we still anticipate that we'll get through that process early next year.

Yes, and, in fact, Jonathan, this is Gabe, they put out a schedule for the second phase that would call for a decision on that five-year proposal in the April time frame and that would be in time to prevent us from needing to file a 2009 cost of capital case if, in fact, they adopt something like that mechanism.

Thank you.

And then just one other issue, could I ask you to give a little more color on some of the specific targets in transformation and your level of confidence in achieving that and what kind of issues you've run into as you move towards implementing some of this program?

Jonathan, this is Chris.

We've been pretty consistent in that we -- because there's so many different parts of the business transformation and so many different projects, we don't supply on a quarterly basis updates on levels of spending or levels of benefits associated with those.

We put out a targeted range in the April time frame.

And we don't anticipate -- well, we aren't updating that now and we didn't update that in the first quarter.

And so we're going to stay with that range until we go through our next process of updates.

Does that mean not until, say, similar time next year or could you see yourself doing that sooner?

Don't really know at this point in time.

It really depends on when we get through the updating and planning process during this year what that time frame will look like.

Thank you.

Thank you, Mr.

Arnold.

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

Please proceed.

Hi, good morning.

Good morning, Dan.

On the RPS issue, without the transmission additions or if they are delayed, how far off the 20% target are you guys going to be in 2010?

Do you have a handle on that yet?

So, Dan, thank you, this is Bill again.

So if you look at kind of the compliance, what the bill actually says is that we have to have it contracted by 2010 and it has to be in service and delivered by 2013, and we're quite comfortable that we're going to be compliant with that bill.

If you look at the dependencies around this, we're reliant on new technology that's out there that we trust.

We do a lot of research in and we trust in it, but it's really dependent on some of this technology maturing.

The second side of it is exactly what you're saying is that to get to that location to wherever they built it.

And if you look, some of the big type of projects that people are talking about are beyond where the transmission links go today.

And that, depending on where they select, could have an impact on the 2013 deliverable day.

If you look within our RPS portfolio and the options that we have available, we do feel that we'll be able to meet that timeline because we have options.

And I just would remind you there are different options depending on which IOU or territory that you're at within California.

And so we have a few more to choose from, for example, than what perhaps San Diego might, as an example.

So I think we're comfortable that we'll have multiple options to choose.

Whether we get to the big ones or not, that is really going to be more dependent on getting a transmission link in time.

If I can add to that two thoughts.

The first is that our intention is to contract for more than 20%.

So if there is some erosion, we'll still be on a delivered basis more than 20%.

That's our strategy.

Secondly, we've spoken to different members of the Commission, President, PB and other Commissioners, and they understand the transmission issue and they're very focussed on it and working on a continuous basis with the different IOUs to do everything they can to ensure that the transmission will be available.

Are you guys seeing new or expanded transmission investment opportunities as some of these new renewable projects are being proposed, i.e., the solar, some of these other newer technologies that are opening up new investment windows for you guys?

Dan, this is Bill again.

The answer's yes, but we've told you about some of those.

For example, the transmission link getting up into British Columbia.

We talked before about what we called the Midway Grade that actually gives us greater capacity down to head towards the Mojave Desert.

A large part of that is in the Edison territory of this that we would kind of just use their facility.

However, they have yet to build that.

But we still have some expansion that we need to do to be able to kind of tap into all of that.

Now, there are some other installations that people are talking about where they could put some of these sites.

And while we have small conductors, I'll say to go out there, a certain amount of capacity, we probably have to reconductor some of those links to be able to increase depending of what the size and how much we would contract for.

I just wanted to clarify my earlier statement and that is that we are contracting for more than 20% so that it increases the certainty that we'll at least meet the 20% threshold level on a delivered basis.

How has adoption been for the solar initiatives in California?

What has been subscription rates within your customer base and the feasibility of hitting the greater state targets?

This is Bill again.

So on the California solar initiative, Dan, is that what you're referring to?

Yes.

No, it's behind schedule, quite frankly.

And as you can imagine, the issue is the economics for a lot of consumers that are out there.

We're really pushing the program.

We do believe in of course the whole green initiative.

We support the Governor in his bill to be able to get 1 million homes loaded up here.

But it is a very difficult proposition for a lot of customers that are out there.

So we're behind schedule and we're looking at other ways and we're working with both Sacramento and San Francisco to see what we can do to tweak this to make sure that it is a success.

Okay, and Chris, just one last thing on the '08 guidance.

What are you guys assuming either actual or ballpark for the transmission case you filed at the end of July in the '08 numbers?

For the new filing of the transmission case?

Yes.

We're expecting that with that, we would be targeting the 12% return just as we did this year.

That'll be part of it.

Okay.

Thank you, guys.

Thank you, Mr.

Eggers.

Our next question comes from the line of John Kiani with Deutsche Bank.

Please proceed.

Good morning.

Good morning.

Good morning.

How should we think about the incremental capital projects that you've highlighted in the past and you've talked about again today, transmission, the interconnector and some of the other potential capital investments, in addition to your sort of refining and continuing to look at the transformation savings in the context of your stated 8% growth rate?

Yes, John, this is Chris.

The way that we like to put it out there is that we've provided you with an estimate based -- a projection based on what we think we've got now in our rates and/or have a high likelihood of getting recovery of in our rates, and that we've also acknowledged that there are things we are working on that would be upside to that case.

And so when you think about these transmission projects or the gas transportation projects or the potential additional generation ownership either in renewable form or in the long-term procurement form, all of those things become upside potential that you would have to add as additional rate base for the Company.

We try to project out as best we can and give you updates as to where we are on each one of those, but right now, all of those are still in the planning and negotiation and evaluation stages.

And so you have to make -- we leave it to you to make your estimate as to what you think we might be able to put in or might not be able to put into place.

And let me just add, this is a little bit of a foreshadowing and so for example, our guidance used to be at one time 7.5% per year.

And then we were able to sweep some of the planned investments into the baseline forecast and we increased to 8%.

And if additional savings were material enough and certain enough in terms of happening and the timing, then we would probably sweep those into a revised estimate with respect to EPS growth.

Great, and -- that's helpful.

And as far as timing is concerned, I know there are a lot of moving pieces.

But is it possible to provide a general idea of when you might be refining some of those expectations?

We go through continual planning processes and as we see things that become more certain or something, then we provide the updates with them, but there's not really a set schedule of time.

We try to give you each and every quarter the latest information that we have.

But certainly, typically what we've done in the last couple of years is had a once a year large analyst presentation, and we certainly revisit that number in preparing for that presentation and consider whether we'll stick with the same number or revise it at that time.

Great.

Thank you very much.

Thank you, Mr.

Kiani.

Our next question comes from the line of Ben Clark with Invesco.

Please proceed.

Hi, how are you doing?

You had mentioned that you had funded, I guess, $90 million of internal equity this year for CapEx.

Can you give an update on your external equity needs for 2008 and beyond?

I guess earlier in the year, you had mentioned 750 to 950, if I'm correct.

That is what we put out in the end of the first quarter and we haven't provided any update to that number and we're not planning on providing any update at this point in time.

Okay.

Thanks.

Thank you, Mr.

Clark.

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

Please proceed.

Thank you, good afternoon.

Couple of questions.

John, or Chris I mean, is there concern or thoughts on how the current credit environment is affecting future financing plans?

No, we don't have any significant concerns about it right now.

You saw that S&P recently upgraded us to BBB+.

And we've been able to -- we successfully went through and issued $700 million worth of debt in the first quarter and we found that to be very competitive, at a very competitive rate.

And so we still believe that when folks look at us, they can see the credit quality that we have and the regulatory environment that we have, and we believe that there's adequate resources out there for us to meet any of our future financing needs.

I'd just add that a 52% equity ratio looks pretty solid in this credit environment.

And I think most people feel that the regulatory trend has been consistent for strengthening over time so that's one of the reasons.

Whether you're looking at our credit from a debt or fixed income orientation or from an equity orientation, people feel that we're a good solid investment opportunity.

That's great.

Peter, stock prices come down from the highs of about 14%, 15%, any thoughts on new share repurchase program?

The short answer to that question is no, and that is that what we've seen is this whole sector get hit pretty hard.

The market obviously has been hit pretty hard in recent weeks and months.

And those companies that look like more pure play utilities have been hit a little harder than maybe the mainstream of utilities.

But I think on the question of share repurchase, the principal guiding factor has to be what cash do we need to fund our capital expenditure program going forward and that, of course, capital expenditure program is the prime driver of net income per share.

So as we have looked at the priorities in our Company, what we say is we will grow earnings where it is consistent with the interest of our customers and shareholders.

That's the first priority.

We'll pay a solid dividend and a competitive dividend within that context.

And then lastly, we'll look to see if we have surpluses or deficits of cash.

And what I think Chris has been communicating is we've been very successful in creating an aggressive CapEx program to serve our customers better and that means that there isn't cash available for repurchase.

Great.

And lastly, sort of a clarification question, my understanding is that on the 8% guidance, there is several things bearing on it.

One, there's potential upside from projects that are so-called contemplated, but not yet in the budget officially and then the transformation projects could continue to ratchet that EPS growth up.

So the question becomes, I guess, twofold.

Am I correct in my assumption there's some potential upside to that 8%?

And second, if there is a significant amount of transformation savings, do you anticipate any pressure to share some of that savings with customers?

Lasan, I'd answer with a couple things.

First of all, the 8%, what we've consistently said is the 8% does not include many of these large capital expenditure projects that we've talked about as far as transmission and gas transportation and the additional generation that we've talked about in this call.

We've also said that in the past, we gave a range of potential benefits from business transformation and there are some of those benefits baked into the 8%, but not all of them and so there is some upside if we are able to maximize with those benefits.

And then finally, something else that's not included in the 8% is any of the incentives that would come out of the energy efficiency proceedings that are going on right now at the Commission.

So all of those things are items that could potentially allow us to earn at a better rate than that, but right now those are still uncertain and we're continuing to push hard to work towards maximizing those.

And one thing I would add is you'll recall from our earlier presentations that in effect, we made a down payment on transformation benefits in our general rate case.

And we included, I think it was like $41million or $40 some odd million for one year and $97 million for another year, our transformation benefits that we said we would provide to our customers.

And then during this general rate case period, the rest of the benefits that we're able to harvest would be for the benefit of shareholders.

I remember there was a range at which beyond a certain point, there was an automatic 50/50 sharing, was there not?

That was in our proposal, but the Commission did not accept that proposal and so we just went with the two numbers that I just described.

Got you.

Thank you very much.

Thank you, Mr.

Johong.

Our next question comes from the line of Patrick Forkin with Tejas Securities Group.

Please proceed.

Thank you and good morning.

Morning.

With respect to your comments about your smart metering program, you mentioned that the CPUC is encouraging, I guess, the fresh look at the new technology.

Have you guys seen commercially available technology that will meet the enhanced requirements that you're looking for?

This is Bill, and we have done some research and we've spoken to certain firms out there that do have the promise of delivering and some applications that are probably further along than just the alpha stage of this so commercially available, I wouldn't go that far.

Okay, and if you choose a new technology platform that gives you enhanced capabilities, what might that do to the deployment schedule and the CapEx plan for AMI from a timing perspective?

Right, so the deployment schedule will not slow down.

And let me describe a little bit about why we're so confident with this is that the approach we're taking has to be somewhat geographical in our approach.

So as we deploy current state meters, we'll do that, for example, in the Bakersfield area.

As new technology upgrades come on, then we'll actually shift that into a subsequent or the next area that is on our priority list.

And the idea here is that the people doing the maintenance can have one set of spares depending on the technology, and the base functionality that we have today, we feel is the most appropriate to kind of spread throughout our service territory.

As new functionality comes on on this, there will be upgrade and there'll be more services for those consumers in that geographical area that we're deploying it, and then what we'll do is we'll come back and retrofit things over the course of time.

But we won't necessarily be under any big pressure unless there's just this wow factor of a new product or a service that's enabled by this technology.

So we're able to kind of control the rollout of this without having to go back and redo or replace and also still benefit from the technology evolution.

Okay.

That's very helpful.

Thank you.

Thank you, Mr.

Forkin.

(OPERATOR INSTRUCTIONS) There are currently no further questions from the phone.

All right.

Well, I'd like to thank everybody for their interest.

We wish you all a great day.

Thanks again.