PG&E Corp (PCG) 2007 Q4 法說會逐字稿

Good morning an welcome to the PG&E Corporation fourth quarter 2007 earnings conference call.

At this time, I would like to pass the conference over to your host, Mr.

Gabriel Togneri, Vice President of Investor Relations.

Thank you and have a good conference.

Go ahead, Mr.

Tongneri.

Good morning.

I'd like to welcome everyone to our year-end earnings conference call, and before we get to the results let's go through the usual formalities.

This is a simultaneous Webcast and conference call.

A replay of which including the question an answer session will be available from our website afterwards.

Our earnings press release went out earlier today an it's posted on our website along with the supplemental tables including Regulation G, reconciliations.

We'll refer to some of the information in the tables, so you'll want to have them available.

We provided these materials in an 8-K report furnished to the SEC this morning and we plan to file our joint Form 10-K report for PG&E Corporation and Pacific Gas and Electric Company with the SEC today.

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

As we discuss in more detail in the press release and the SEC reports, actual results can differ materially from those forward-looking statements.

Important factors that can affect our actual results are described in the reports we file from time to time with the SEC.

Those factors include the risk factors and other factors described in or referenced in the annual report on Form 10-K for the year-ended December 31, 2007.

Taking us through the results in the operational highlights today, we have Peter Darbee, Chairman, CEO and President of PG&E Corporation, Bill Morrow, President and CEO of Pacific Gas and Electric Company and Chris Johns, Senior Vice President and CFO of the Corporation.

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

With that I'll turn the call over to Peter Darbee.

Thanks, Gabe and good morning to everyone.

I'd like to start with a few comments on our 2007 performance, 2007 was a year of opportunity, challenges, and successes.

We came out at the top of our guidance range.

We delivered $2.78 in EPS, from earnings-- from operations, and that was 8% growth over the year 2006.

As a result of our performance in our outlook for the future , this morning we announced an increase in our dividend which will now be $1.56 per share on an annual basis.

Let's also look at our performance on the other priorities we shared with you earlier last year.

The first is procuring energy supplies.

Insuring that the new resources come on line to meet our customers future needs is critical, it's also critical that those resources be clean and cost effective, and we're pleased with the progress on all of these fronts.

We signed a number of contracts including significant increases in renewable supply to put us on track to meet the states RPS goals, and we broken ground on the Gateway Generating Station which is the first new plant to be constructed by PG&E in nearly 20 years.

Our employees are energized to be back in the business of owning and operating new generation and of course, this also represents an earnings opportunity for you, our shareholders.

Another of our priorities was investing in our system.

With aging infrastructure and higher loads this is the key to long-term reliability and customer satisfaction, so we're pleased to have undertaken a number of major new projects last year.

For example, we announced plans for the 130-mile Central California Clean Energy transmission line from Bakersfield to Fresno, and on the gas side we significantly expanded the pipeline capacity at our largest gas storage field.

All told, capital investments in our systems were $2.8 billion in 2007.

Two priorities, which were in addition were continuing to build our reputation and continuing to evaluate growth opportunities in the industry.

With regard to the former, we have made substantial progress in much of that is a result of our leadership on the environment, the work of our communications team, and the involvement of our 20,000 employees and their communities.

And as we've discussed with you before, we continue to evaluate a number of opportunities in both the electric transmission and gas pipeline arenas.

Having highlighted these accomplishments, one area where we would like to make more progress is in delivering service better, faster, and more cost effectively.

The focus is on being better tomorrow than we were yesterday.

We're going to build on the areas where we have done this well and we are going to redouble our efforts in those areas where we still have more work to do.

Before turning it over to Bill, I want to welcome Jack Keenan, in his new role as Chief Operating Officer of the Utility.

Jack has been our Chief Nuclear Officer for the past two years and he has more than 30 years of experience in the utility industry.

He's done a brilliant job in sharpening our execution and improving results at Diablo Canyon and we're delighted he's now extending this leadership across all of our operations and with that I'd like to turn it over to

Thank you, Peter and good morning, everyone.

2007 was overall a good year for us operationally and I'll cover some of the performance highlights as they relate to our customer, environment, generation, energy delivery and then finally, our expansion in modernization projects.

Starting on the customer side, we saw a 1.1% year-over-year growth in our customer base, adding 52,000 electric customers, and 36,000 on the gas side.

Electricity consumed overall, grew 2% year-over-year and the gas consumed by our customers grew 1.7%.

Our customer perception scores improved significantly meeting or beating our targets and performed better in each of the four segments as measured by J.D.

Powers.

On the residential side our Electric customer satisfaction improved from the low-end of the third quartile to the high-end.

Our gas rankings moved from the second quartile to first, and when we look at the business segment we saw our gas rankings improve from second to first quartile, and then finally our business Electric customer satisfaction saw the largest improvement with a huge jump to first quartile up from the fourth quartile in 2006, and this week in fact we received a 2008 Business Electric rankings and PG&E has maintained its position in the first quartile.

Now these customer results are a strong signal to us that despite the challenges that we've discussed previously, and taken on the whole, our customer related initiatives are in fact delivering good results.

Looking at the environment, we perform very well here, [Inavest], third-party Company did an assessment of our environmental performance against other utilities and they rated us in the end Best-In-Class.

Our energy efficiency efforts drew a great response from customers.

In fact together we saved enough energy to power over 280,000 homes for a given year.

On renewable energy, we beat our contract target, in fact, we doubled it with an increase of 1540 gigawatt hours.

On Climate Smart, we exceeded our target signing up over 14,000 customers and, in fact, now year-to-date we're over 16,000 on record.

One of the few areas we did fall short in was with Demand Response, and we know the reasons for this and we're working on a new approach for this year.

Moving on to generation.

Our Diablo Canyon nuclear facility set a PG&E record last year for operating efficiency producing the facility highest ever energy output, achieving a 95% capacity factor.

The refueling outage of Unit 1 was held to just 30 days.

Our most efficient performance yet, in fact, this is 25% faster than the industry average.

Despite our Hydro System out [inaudible] being about 70% of normal through last year, as it was related to the lower precipitation levels we still managed procurement in a way that this resulted in only slightly higher cost to our customers.

On the energy delivery side, we met our reliability targets for the year but we will admit we did have some help from the mild weather in November and December.

And during the year we discovered a number of processes that the we need to improve with regard to gas leak detection and transformer maintenance.

Looking at our expansion and modernization projects we can report first that at our Diablo steam generator replacement is under way as part of the refueling outage at Unit Number 2.

In November, we told you that we're taking over the construction and accelerating our ownership of the Colusa generating plant.

We closed on the acquisition of the assets last month and we expect to begin construction in the second half of this year , and we're on target for an in service date of 2010.

Other similar good news to report about the other two Power Plants that we're constructing, that being Gateway and Humboldt, and Gateway is currently installing turbines that will be completed as scheduled during the first half of 2009 and Humboldt is currently awaiting final permits and is scheduled for completion now in early 2010 which was a slight push back from late 2009.

On the transmission side, we are on schedule for the 1.2 billion California Clean Energy transmission line that Peter mentioned and we expect it to be operational in 2012.

And finally we met our objectives for the year around the the SmartMeter program.

We installed over a 0.25 million meters and we're now electronically reading and billing over 200,000 of these.

By the end of this year we expect to add another 1 million meters for a a total of over 1.25 million.

As you are likely aware we put forward a proposal to improve the value of this program to our customers by upgrading the capabilities of the meters and including enabling two way communication with home appliances.

And in December, we asked the California Public Utility Commissions to approve an additional $565 million in capital for this and other related upgrades and the Commission is scheduled to reach a decision late this year.

So just to reiterate, it is the long list of accomplishments and a positive year overall when it comes to our operational performance and with that I'd like to turn it over to Chris to cover the financial and regulatory

Thanks, Bill.

I'll begin by discussing our year-end results and guidance, and then update some key regulatory developments.

For the year, we earned $2.78 per diluted share a GAAP and non-GAAP Earnings from operations basis.

This compares to 2006 earnings of $2.76 per diluted share on a GAAP basis, and $2.57 per diluted share on a non-GAAP earnings from operations basis.

In 2007, there were no items impacting comparability, so that earnings from operations and GAAP earnings were the same.

In 2006, items impacting comparability added $0.19 per share to GAAP earnings.

Our 2007 results represent a solid 8% growth in earnings per share from operations over the prior year.

The primary driver for the increased earnings was higher rate base as we continue to invest in the core infrastructure of the utility in order to meet the growing demands and needs of our customers and provide them with better, faster, more cost effective service.

The full year earnings walk is provided in Table 4 of our earnings package.

This includes all explanatory factors from previous quarters.

For the fourth quarter, PG&E Corporation earned $203 million or $0.56 per diluted common share, on both GAAP and non-GAAP basis.

This compares to $152 million or $0.43 per diluted share on a GAAP basis and $170 million or $0.48 per diluted share on a non-GAAP earnings from operations basis for the fourth quarter of 2006.

Looking again at Table 4, you can see again that the primary driver of the quarter-over-quarter EPS difference is rate based revenue, which reflects the return on higher capital investment as authorized by our regulators.

This accounts for $0.09 per share over fourth quarter 2006.

I'd like to take a moment to talk about the economic activity in our service territory.

We know other companies have been asked about this recently and it is important to highlight some factors that are different for PG&E.

The effect on PG&E of the changing national economy is slight compared to other companies in the sector.

As a reminder, the coupling insulates our revenues from both increases and decreases in sales which reduces our risk in earnings volatility.

As Bill noted, sales growth was lower in 2007 relative to the prior year.

For 2008, we anticipate another slight decline in sales growth to around 1%, but thereafter, a return to more normal levels of around 1.5%.

Consistent with these forecasts, we expect a continued decline in new customer connections.

For 2007, single family new customer connections were down about 40%, and we anticipate an additional decline in 2008.

Again, because of revenue de coupling, we do not experience earnings volatility from these changing trends.

On balance, fewer customer connections, freeze up capital dollars to offset some of the effects of rising material costs on our capital investment program.

However, overall, we do not expect to see any material changes in the size of our Capital Expenditures program in 2008.

In addition, we have continued to see a couple of other impacts of the changing economy on our business.

As we discussed previously, material costs for capital projects continue to remain high.

In addition, we've seen an increase in uncollectible accounts from customers and interest rates have increased sharply on the small portion of our bonds that are variably priced as a result of the volatility in the credit markets.

We've considered all of these impacts on our 2008 and 2009 guidance.

We are reaffirming today our guidance range of $2.90 to $3 per share for 2008, and $3.15 to $3.25 per share for 2009.

We are also reaffirming our target of 8% compound average annual growth in EPS from operations from 2007 through 2011.

As always, a reconciliation of our guidance for 2008 and 2009 earnings per share from operations to projected GAAP earnings per share can be found in our supplemental earnings materials.

Our guidance for 2008 and 2009 EPS from operations and our target growth rate assume that we have an 11.35% authorized return on equity for the CPUC regulated business, and earn at least 12% on our FERC jurisdictional business.

And that we achieve our projected rate base of approximately 18.4 billion for 2008 and 20.8 billion for 2009, while maintaining our rate making capital structure at 52% equity.

It assumes that the utility issues on average, $1.4 billion annually of long-term debt including refinancing through 2011 and that the holding Company infuses between 2 to $2.5 billion of equity into the utility over that same period in order to maintain the 52% equity structure.

We will be filing shelf registration statements with the SEC shortly to facilitate these financings.

Our guidance also assumes that the we will earn customer energy efficiency incentive revenues, identify additional investment opportunities, and realize operational efficiencies consistent with the ranges we discussed on our last call.

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

We received a favorable decision from the Commission relating to energy efficiency at the end of January.

This decision allows us to recognize interim earnings of 65% of the annual earned energy efficiency revenues.

We are pleased with the performance on energy efficiency.

Ultimately, the incentive revenues we receive are dependent on the results of the CPUC's evaluation, measurement and verification process.

We expect the CPUC's's evaluation and verification process will be completed in the third quarter after which we will file our incentive, for our incentive payments.

We anticipate that we will receive final authorization of the 2006 and 2007 amount of energy efficiency earnings in the fourth quarter of this year, subject to timely Commission action.

We also received a final decision in our CPUC cost of capital case at the end of 2007.

Our capital structure remains at 52% equity and our authorized return remains at 11.35%.

This decision covers our cost of capital for 2008.

Phase II of the cost of capital proceeding to consider replacing the annual cost of capital proceeding with a more formulated multi-year framework is under way and scheduled for a final decision by the end of April.

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

Thanks, Chris.

I'd like to close by underscoring our priorities for 2008 and beyond.

Our over arching objective is to provide energy to customers safely, cost effectively, reliably and sustainably.

Our actions, investments and the way we measure our own performance will reflect this.

We'll continue to manage costs aggressively and to look to capture operational efficiencies.

We're committed to strengthening our system including capital spending on replacement, redesign, and automation, and to that end, we will maintain and build on the relationships we have established with our regulators, elected officials and other stakeholders.

And with regard to sustainability, we'll continue to be an environmental leader.

We see global warming as a game changing development for the industry.

The Lieberman Warner Bill is just the start.

Regardless of the outcome of the November elections we expect more legislative and regulatory attention to this issue.

PG&E will continue to be a constructive voice in the development of carbon legislation at the State and Federal levels.

We're committed to making our generation mix even cleaner, as we continue to add to renewables.

We believe that our leadership in this area is the right thing to do, and it is what our customers, regulators an policy makers want us to do.

For shareholders this translates into lower risk and better returns.

All of this supports our long-term financial outlook including the achievement of our EPS goals and our targeted growth rate.

Our team is committed to success.

We understand the opportunities and the challenges, and we're tenacious about results and confident we're going to execute and deliver and now I'd like to open it up for questions.

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Jonathan Arnold with Merrill Lynch Please proceed.

Good morning.

Good morning, Jonathan.

A quick question, you say that you expect the energy efficiency incentives to be the evaluation to be completed in the third quarter and then you would file, I think I heard you right that you would then get the 06 and '07 payments or recognize them in the fourth quarter.

How do you intend to book?

Would they be booked as part of 2008 operating income or one year be treated as a comparability item and how have you thought about energy efficiency within the construct of your guidance that is I guess the same now that it was third quarter stage?

Jonathan, we have included our estimates of the energy efficiency in our guidance for 2008 that we reiterated this morning, and we would anticipate getting whatever we receive in that order this year, we would include in our operating earnings this year, and then as we move forward each year, being able to recognize the amounts we would continue to include those in our operating earnings.

And can you just remind me, that those were not in the guidance before or we never, they are now?

I believe in the third quarter that we had said that we took them into consideration and I think we reiterated that in December, in our December phone call, we said that they were included as part of our 8% growth within our annual earnings guidance.

Thank you.

If I may, just one follow-up.

Are you still referencing the risk factors the need to find additional savings, and implement them to meet the growth targets.

Can you update a little on the progress towards that goal since you last updated us, and at what point have we identified the savings and now it's a question of realizing them or are we still looking for that?

Jonathan, this is Bill.

We have identified categories for that.

We are going to be able to get the savings into meet our estimates that the we have given you, actually laying out the details behind that is the work under way right now.

And you anticipate doing that --

This is an ongoing issue, again in the spirit of continuous improvement, every rock we turnover we see three other smaller ones we want the to turnover to identify further opportunities.

But we have a plan now that looks at those sorts of savings that the we expect to get, to be able to come in line with the guidance that we have.

Great.

Thank you very much.

Thank you, Mr.

Arnold.

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

Please proceed.

Good morning.

Good morning, Dan.

On the dividend, on the increase today, can you just remind us the thought process as far as what you guys are looking for from a long-term policy perspective and thought process behind that ratio?

Yes.

Dan, we have a large capital expenditure program as you are well aware of, and so our belief is that we have a targeted pay out ratio range of 50 to 70% and we anticipate being at the low end of that range throughout this capital expenditure program, so we expect dividends to rise generally in line with our earnings expectations, so around that 8% range, maybe not lock step in any one given year, but generally consistent with that range of growth.

Okay, and then I guess looking at one of the attachments you guys sent around this morning with Table 6 about short-term incentive it looked like think was about a 92% success rate versus plan on the transformation achievement this year.

Can you just give us some feel about what lead you guys not to quite hit the target this year and then what is the flex as we look out over the next few years, how much of a disappointment or how much of a variance from target could you guys be to still stay in that 8% growth target?

Dan, this is Bill.

I'll take that the too.

The reason we didn't hit 100% to the 1.0 on the index was related to what we talked about on the last call.

It was a number of initiatives we had that were operational in nature that has been three years kind of in the running and the design did not deliver as what we had originally thought.

And so we're trying to refine that to be sure that we can leverage the investment that was made on it but that was basically the number one issue, when we break down the components that was associated with that pay outside of it, it included things like the expense reduction and the control of the capital, and of course the SmartMeter and actually implementing a number of the initiatives on time and within scope, and so a lot of those were done correctly and as we had hoped, however this one big one about really not getting that operational efficiency like we had ratcheted us down from the 1.0.

And Dan, the thing I would add to that is that the we did take that into consideration, when we had the phone call in December, and again, when we reiterated our guidance today.

Okay, and I guess just one last one, taking too much time , but can you give us a little update on the Ruby project and when you think you'll have a more formalized go forward decision on that

What we would say in that respect is that it is in process and I don't think we're ready to take any projections as to when we would announce more results.

Okay, fair enough, thank you.

Thank you, Mr..

Eggers.

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

Thank you.

Chris?

If I understood you correctly, you said that the CPUC approved taking credit for 65% of the energy efficiency gains in any given year and booking it as income; is that right?

That is correct.

Is that subject to change or alteration or review going forward and could it be taken away?

That was one of the issues debated whether it can or should not be subject to change or negation.

This is Chris Warner.

Yes, of course the CPUC can reconsider its policies going forward but as you may know, the CPUC also wants to provide long-term stable and predictable incentives for our customer energy efficiency and this 65% determination was part of a long-term policy by the Commission to encourage energy efficiency so we would expect that the they would seek to keep it in place for that longer-term.

But what I'm referring to is let's say you achieve 100 units of energy savings, you get to book 65 of it but then the Commission later finds out that well you didn't actually achieve 100, you only achieved 60.

Is the 5 subject to take away?

The idea of the 65 is that there would not be a call back on that based on any (subsequent) (events.)

Okay, that's good.

And then Chris, just quickly on your projections going forward for your CapEx.

What kind of cost escalation are you assuming for both capital and operating costs?

We are, when we put together the projects we look at them a little individually and the reason I hesitate is I don't have a one percentage that is assumed throughout all of those.

We do break down all of the capital by project and some of the larger projects around things like SmartMeter, the generating stations that we're building, the steam generator projects and some of the larger transmission projects, we've done a good job of securing some contracts that fix the prices of those and then other ones we built in some cost escalation.

Generally, how we handle it is that on each project, we built in some kind of a contingency and that can range anywhere from 5 to 15% of the project and we allow that to be what's built into help offset any kind of rising costs.

What about in the operating side?

On an operating basis, we do our projections of what we think inflation is going to be, and generally, that will cover most of the overall cost, including we know what our labor contracts are.

Okay, and then one last question, Peter, theoretically, if one of the major pipelines that are being proposed go to (inaudible) from the Rockies, whichever it might succeed, does that not either A, negate or render somewhat obsolete the Pacific connector?

This is Chris.

One of the objectives that we have is to look for as many opportunities to bring gas into the State as we can from as many different resources as we can, because as you know, the gas is the major form of generating electricity in this State, and so when we look at those various projects that are out there, it's hard to speculate as to which ones may or may not proceed totally through the end process but we look at one, bringing gas from the Rockies side and the other one having opportunities to bring gas from an LNG facility and so we don't know that they would absolutely negate each other.

Okay, thank you.

Thank you, Mr.

Johong, Our next question comes from the line of Ashar Khan, SAC Capital.

Please proceed.

Good morning.

Chris, I was just going back to the December presentation Slide 3, I don't know if you have it, but it was basically that the projected transmission savings for '07 were going to be negative 117 to a negative 40 and as of December, they were going to be 0 to 5 so '07 was a year where they came in better among all of the four or five years, and so I was trying to see as earnings came in according to what you projected and we didn't get the benefit of that $0.15, what was the offset in '07 that wiped out the better year, the one better year out of the five that was presented in the December presentation?

I remember you were asking this question earlier, and as we said before, what the we showed on that slide was related just to the 70 projects that we originally had shared with you and we didn't go beyond other projects or other items that we had there, and so there were costs that we incurred associated with doing other kind of efficiency projects.

There were also costs that were incurred from the results of implementing some of these things, that continue to rise and then as we talked about there were costs that we incurred from operations from rising cost environment that we had, and so there were a lot of different things not any one thing that offset this in particular, but again one of the problems with looking at that slide by itself is it was only focused on that one set of programs.

Okay, and then if I can just, and I don't know whether you mentioned it or not, I'm like estimating like $0.10 of efficiency savings in '08.

Is that around the ballpark that we can assume?

When we look out at our projections for the energy efficiency for '08, we've included in our guidance a range of 30 to $60 million on a pre-tax basis, and as I said earlier, we will go through the process with the CPUC of their validation and verification of the amount of the awards and that will be filed for in the third quarter and then hopefully we'll get a final order in the fourth quarter.

Thank you very much, sir.

Thank you Mr.

Khan.

Our next question comes from the line of Paul Patterson with Glenrock Associates.

Good morning, guys.

Good morning, Paul.

Just could you go over again I'm sorry I missed it, just the amount of equity that you're planning on putting down into the Holding Company and where that's coming from the 2.2 to 2.5 billion I believe?

Yes, Paul.

I want to make sure people are clear.

We said that the amount of equity through 2011 that we would anticipate putting from the Holding Company into the utility is 2 to $2.5 billion.

That doesn't necessarily translate into how much equity we would have to issue at the Holding Company, but that is the amount of equity that we anticipate we'll have to in fuse into the utility.

Now, the sources of that as we've talked about previously are that the we have anywhere from 100 to $200 million a year that we generate from our 401 (k) plans, our stock option exercises, and our dividend reinvestment program, and then we'll look at the amount of leverage that we would want or are comfortable with at the Holding Company, we'll explore whether there's other kinds of securities that we would want to invest in, or have issue with the Holding Company, and then as we said previously, we would anticipate issuing equity in some form at the Holding Company, at some point in time.

Right.

Any sense as to where you guys feel comfortable with leverage at the Holding Company?

One way that the we've looked at it is that we've at a minimum, we know that we have the $280 million that will convert in 2010.

We feel comfortable with maintaining that level of debt at the Holding Company, and so we would anticipate that at a minimum issuing something in that same size when that one converts.

Okay, but anything beyond that?

We would have to look at it at the time.

We know that we try to minimize the amount of equity that the we have to issue through this program, but we also want to balance that on how comfortable we are and what kind of flexibility we want to maintain at the Holding Company, so I really don't have any kind of range of dollars to provide you.

Okay, fair enough.

Any idea as to when we might actually see an actual equity offering, common equity offering that might be done at the Holding Company?

Not at this point in time.

Again, what I try to do and what I charge my team with is to do everything we can to reduce the amount of equity that we need, and so right now, all I can do is give you that range over the four year period.

Great, thanks a lot, guys.

Thank you, Mr.

Patterson.

Our next question comes from the line of Rudy Tolentino with Morgan Stanley.

Hi.

You mentioned that in Phase I of the CPUC cost of capital decision that the equity ratio at 52%, and is that just for 2008 or is that just 2008 and beyond and is that equity ratio subject to change?

They said it is just for 2008.

We have an annual cost of capital proceeding with the CPUC, so it's subject to change each and every year.

That's why the CPUC asked us to propose a longer-term methodology that might be formulate based so we wouldn't actually have to go through an annual proceeding but until that's changed, it is subject to change every year.

Okay, but in Phase II, and your Phase II discussions, there's no talk about changing the equity ratio, is there?

Right now, it's just focused on whether or not there would be a formulate approach.

For the ROE?

Or just for the cost capital in general?

That's correct for the ROE.

Okay, thank you very much.

Thank you, Mr.

Tolentino.

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

Hi, guys.

Quick question, following up on Rudy's when we think about the equity component, can you talk about when the next time you think the ratings agencies are going to take a look at your credit rating, when you think your viable for a potential upgrade in the credit rating and what the that would mean, how that impacts the potential equity component allowed by the CPUC?

Sure, Michael.

If you'll recall, Moody's just recently, well I guess a month and a half ago, upgraded at that point in time.

We do visit with the rating agencies on an annual basis and we've already done that in 2008, both S&P and Moody's up graded us during 2007 so it's hard to predict whether or not they would be taking action again, and especially in Moody's case, so recent, it's recently after their latest upgrade.

It is acknowledged that when Moody's gave us their upgrade, that did remove the floor of 52% equity and 11.22% ROE that we had established with the CPUC in our bankruptcy agreement.

Should the investment community, I mean when we look out at seeing San Diego Gas and Electric and some in CalEd's equity components, which are a couple hundred basis points lower thatn yours, should the investment community assume that eventually you migrate to them or they migrate to you, how does this play out over the next three or five years?

Well, a point we would make in that respect is if you look at the combination of Edison's equity ratio and ROE, the overall result of that is very close to our overall weighted average cost of capital.

They have a lower equity ratio at about 48%, I believe and a higher ROE, but when you put that all together and consider the debt it's about the same.

So, what we would say is we're really on an overall basis, in equilibrium with Edison.

Okay, and last question, and this is just in terms of thinking about the cost savings that you can undertake during 2008.

How much of that can can you talk about right now is tied to employee reduction versus other cost savings for things like materials or other items?

Michael, The majority of it is around labor savings, and so if you look this year, we're expecting just under 300 positions that will eliminate, roughly 200 are associated with with Management and severance which we've already taken into account, and then there's about 75 or 80 that are what we call "Hiring Hall" that aren't necessarily employees that come from the Union base and so that will address the majority of the savings that we're expecting.

Will you be able to realize the bulk of those labor savings in '08 or will you not see the benefit from that for a full year until 2009?

We will see a portion of the benefits within '08 and full year in '09.

Those are all included in our guidance.

Got it.

Thank you, guys.

Much appreciated.

You're welcome.

Thank you, Mr.

Lapides.

Our next question comes from the line of Doug Fischer with Wachovia.

Please proceed.

Thank you, good morning.

I notice it looks like the estimated average rate base for '08 is down about 200 million from I guess December.

Can you elaborate on what is causing that decrease, though I guess '09 is tell up at the same level?

Yes, Doug, this is Gabe.

It's the usual process that as we update, what the we looked at is we looked at the some of the projects and the spending being pushed out slightly later in the year, so while we think the CapEx is still going to be around 3.4 billion, not all of it is going to go into rate base as early in the year as we thought, so with some of it coming in later, the weighted average rate base for the year is slightly lower and yes you did notice a $200 million difference.

We think that will all go into rate base later into '08 and so not affect the '09 estimate.

And then with regard to the energy efficiency incentives, when they're booked, so there's two interim in a three year period, and you so for this but for this next one for '08, you'll be filing just something that's both the interim and the true up for '08 when you file for that in '09?

So in '09, we will be filing for '08, and then I believe the final trip, so the rest of the non-65%, the top 35% we probably won't see that until 2010.

So you would, under normal expectation, you would book the '08 in '09?

That's right.

And book the balance, the final in '10?

That would be right, but the amount in '10 would be for all three years during that period.

Correct, and then one last question.

You mentioned In talking about the 8% additional investment projects.

Would those be beyond the numbers you laid out in December or are those in the CapEx numbers you mentioned in December and maybe you could elaborate on just a little bit as to how much is a little bit shall we say undetermined as of yet in the latter years?

Well, as we said previously, there's energy efficiencies we plan over the next three years.

There's additional planned operating initiatives over the next several years and when we think about capital investment opportunities, we want to look at those in line with those, with all of our pieces in getting to our 8%, but we gave a capital expenditure chart in the December time frame, and there are a few things that are not in there and that includes the Ruby Pipeline, Pacific Correct or Pipeline , transmission line up to British Columbia, and it doesn't include any renewable generation that we might have an opportunity to get into and it doesn't include any new generation conventional generation beyond that that we've already disclosed to

So is some portion of some of those projects needed to achieve the 8%?

Well, I would hesitate to point to any one thing.

I mean, we need a combination of either capital investment opportunities or depending on the level of incentives that we get out of the energy efficiency or the benefits we realize from some of the initiatives that Bill talked about, it's really a combination of all of those things that the go into getting the 8% so we weigh them as we look at them and that's how we feel comfortable getting to the 8% based on the probability of those things occurring.

Okay so there's some portion related to these?

Thank you.

Thank you, Mr.

Fischer.

Our next question comes from the line of Mark Segall with Canaccord Adams, please proceed.

Yes, hi, I apologize if you already addressed this but just wondering if you could provide us with any status update on the SmartMeter program particularly on the Electric side?

Mark, as we reported out we're making really good progress in terms of the deployment of the meters, both on the Electric and the gas portion of it.

We are billing now 200,000 monitored and billing 200,000 meters out there.

Our systems are working well.

We do see the benefits.

We're starting to see further opportunities about how we can help our customers save money and deal with things like demand response going forward in the future, how we help in terms of the reliability and the prediction of actually work failures are and even actually leading indicators behind this so we're quite excited about what we're seeing.

With we are ramping up in terms of the deployment plan as I mentioned, we have about a million incremental meters we'll put in this year.

We have this upgrade issue that we're looking at that we're equally getting excited about.

We think it's a new platform for us to be able to grow and develop products and services even beyond what we're talking about today.

Okay, great.

That's helpful, thanks a lot.

Thank you, Mr.

Segall.

Our next question comes from the Reza Hatefi with Polygon Investment Partners.

Please proceed.

Thank you.

Chris, you mentioned there was an earlier question about the 2.2 to 2.5 equity infusion into the utility.

You guys generally speaking if I'm not mistaking dividend out 4 to 500 million from the utility to the Holding Company, so is it basically you dividend it out and then it comes back in for the most part?

Well, no.

The dividend out from the utility is generally then used as a large portion of what we pay as far as dividends out to our investors.

Okay, okay.

I got you.

Thank you very much.

Thank you, Ms.

Hatefi.

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

Please proceed.

My follow-up was already answered, thank you.

Thank you, Mr.

Arnold.

(OPERATOR INSTRUCTIONS.) Our next question comes from the line of Raymond Long with Goldman Sachs.

Hi, guys.

Just to elaborate a little bit more on the holding Company Injection equity, can you talk about what's the appropriate like consolidated metrics that would you look for to give us some parameters of how much debt you may be willing to take on there given that it's a pretty sizeable number over the four year period that you're talking about?

Well, we're in an unusual situation in that most companies look and establish a credit rating for themselves, and then out of that falls their equity ratios, but because of the arrangement we have coming out of the bankruptcy plan and also CPUC regulation, the way we approach it is we have a target which is very specific, 52%, that we must keep at a minimum but we don't earn any capital, any return on capital in excess of the 52%.

So what we're going to do in the utility is we're going to really focus on the 52% and what turns out to be the case is the rating then is a result of the 52%, it's an outcome rather than an objective so that's the way we approach it in the utility.

Now in the Holding Company, we ask ourselves what's the appropriate level of debt and the conclusion that we've come to historically is that $280 million that we raised in connection with the Energy Crisis, we've managed that and we've handled that well and so as Chris mentioned, if that, that will be retired and converted presumably in 2010, so we feel comfortable with about the same level of debt at the Holding Company $300 million.

We've taken that as a given.

Now, the answer to the question is what more might we do from that.

That's really a function of all of the alternatives available to us which Chris mentioned.

For example, how much equity we raised from internal sources , then external sources, that will be a function of the Capital Markets, the stock price, along the way, as well as maybe hybrid securities, and we'll also consider should there be more leverage or not, but that's the way we're looking at the

Okay, great.

Thank you.

Thank you Mr.

Long.

There are currently no further questions waiting from the phone lines.

All right, in that case I'd like to thank everybody for joining our call and wish you a good day.