PG&E Corp (PCG) 2008 Q2 法說會逐字稿

Good afternoon, and welcome to the PG&E second quarter earnings conference call.

At this time, I would like to introduce your host, Gabe Togneri.

Thank you, and have a good conference.

You may proceed, Mr.

Togneri.

Welcome, everyone.

We issued our earnings release earlier today, as I'm sure you all saw.

It's posted on our website, along with the supplemental tables, including the Regulation G reconciliations.

We'll be referring to some of the information in the tables, so you'll want to have them handy.

We also provided these materials in an 8-K report furnished to the SEC this morning, and as usual, we plan to file our joint Form 10-Q report for the corporation and for Pacific Gas and Electric Company with the SEC a little bit later.

A replay of today's conference call, including the Q&A session, will be available from our website after the call.

Our prepared remarks and the Q&A to follow contain forward-looking statements based on assumptions and expectations reflecting information currently available to management.

And as we discuss in more detail in our press release and the SEC reports, actual results may differ materially from those forward-looking statements.

Important factors that may affect actual results are described in the reports that we file with the SEC.

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

Today, you'll be hearing from Peter Darbee, Chairman, CEO, and President of PG&E Corporation; and Chris Johns, Senior Vice President and CFO of the corporation.

Jack Keenan, our Chief Operating Officer at the utility and other key members of the team are here to participate in the Q&A session as needed.

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

Thanks, Gabe, and thank you all for joining us.

Second quarter earnings came in at $0.80 per share compared with $0.74 a year ago.

At the midpoint of the year, we are on course to meet our guidance for 2008.

Additionally, we continue to be confident that we will achieve our 8% compound annual growth rate through 2011.

As we shared at our May investor conference, a number of factors support this outlook.

These include $13 billion of planned CapEx for the period 2008 through 2011, a blended 11.45% ROE on a 52% equity ratio, a high performing low carbon generation portfolio, decoupled revenues which provide stability amid broader economic challenges, and a sustainable dividend increasing in line with EPS growth.

As we underscored at the time, PG&E continues to offer competitive earnings growth in a constructive regulatory environment with an attractive valuation profile.

Now what I would like to do is turn to the highlights for the quarter.

We're making good progress on investments to improve reliability for our customers.

I would like to focus on three items in this regard.

The first is our Smart Meter Program.

Through the second quarter, we have installed over 740,000 meters.

Our goal is 1.3 million meters installed by the end of the year.

This week, the CPUC is holding hearings on our smart meter upgrade program and a decision for this is scheduled for December.

The second item is our Cornerstone Improvement Program.

We're seeking CPUC approval to invest $2.3 billion over the next six years.

Cornerstone is designed to improve service by reducing the duration, frequency, and extent of power outages.

And Cornerstone, together with Smart Meter, will help us evolve towards the smart grid of the future to provide new energy services to our customers.

The third item is the Tesla Generating Station.

A few weeks ago, we acquired the rights for the Tesla Power Project and applied to the CPUC for authorization to build the plant.

Tesla will help ensure system reliability and adequate energy supply for customers in the Bay Area.

The Tesla site is permitted as an 1120-megawatt combined cycle plant with two units.

Our plan is to develop and construct only one unit at this time, which is 560-megawatts.

The facility will be almost identical for our gateway-inclusive plants.

Our goal is to begin commercial operations by the end of 2011.

The Smart Meter initiative, Cornerstone and Tesla projects demonstrate our commitment to invest in the infrastructure necessary to meet customer needs and reliability expectations.

We're looking forward to working constructively with the California Public Utilities Commission to advance these efforts.

On a different note, rising energy prices have been in the news throughout the summer, and while news coverage has mostly focused on prices at the gas pump, utility customer rates are projected to increase substantially nationwide.

Principal drivers fuel cost -- in our case, natural gas.

A sampling of some of the proposed or adopted increases for other electric utilities ranges from 20% to 30%.

In contrast to other parts of the country, our customers are benefiting from our low cost rate-base nuclear generation and hydroelectric assets, which reduce our exposure to natural gas.

Two months ago, we filed at the CPUC for a 4.4% rate increase in October, reflecting a $9.50 per million cubic feet price.

Later this year, we intend to file an updated rate request for 2009.

This could result in an additional rate increase of 6% to 11%, depending on what gas prices are at the time.

As always, we're working to mitigate the impacts of gas price fluctuations on customers.

This includes hedging activities, as well as efforts to expand natural gas storage capacity.

It also includes helping customers manage their bills.

To help offset the impact of higher rates, we have been working with the CPUC on proposals to increase the availability of energy efficiency programs to low income households, significantly increase funding for our reach program, and for the fourth consecutive year, offer our highly successful 10/20 gas savings program.

Bottom line, we're working to prepare customers for the onset of higher energy costs and to provide them with the tools to help them achieve lower bills.

And with that, I would like to turn it over to Chris Johns.

Thank you, Peter.

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

For the second quarter, PG&E earned $293 million or $0.80 per diluted common share on both a GAAP and non-GAAP earnings from operations basis.

This compares to $269 million or $0.74 per diluted share for the second quarter of 2007, also on both a GAAP and an earnings from operations basis.

During the quarter, earnings increased by $0.06 per share relative to 2007 as a result of revenues associated with higher authorized rate-base investment.

In addition, this year we had the tail end of a refueling outage at Diablo Canyon Power Plant during the first part of the quarter.

In the same quarter last year, we had a full nuclear refueling outage.

The difference between the two results in an increase of $0.06 year-over-year.

These positive changes were partially offset by a number of smaller negative items.

First, there's $0.01 dilution associated with increased shares outstanding.

Next, our gas transmission revenues were lower as a result of lower park and lend activity this year compared to last year, resulting in a decrease of $0.01.

Improvement in the operation and maintenance of our natural gas system accounted for $0.02 decrease over last year and miscellaneous items accounted for the final negative $0.02 per share.

Considering these year to date results and our expectation for the remainder of the year, our guidance range for earnings from operations remains at $2.90 to $3 per share for 2008 and $3.15 to $3.25 per share for 2009.

Our supplemental earnings materials include a reconciliation of guidance with projected GAAP earnings per share.

We are also reaffirming our target of an 8% compound annual growth rate in earnings per share from operations from 2007 through 2011.

Our current guidance and our target growth rate are based on several key assumptions.

First is an 11.35% authorized return on equity for the CPUC-regulated business.

For the FERC jurisdictional business, we assume that we earn at least a 12% return.

We also assume that we achieve our projected rate base of approximately $18.3 billion for 2008 and $20.4 billion for 2009, while maintaining our rate-making capital structure at 52% equity.

In our May investor conference, we mentioned that some additional capital projects would be necessary for us to achieve our 8% long-term growth rate.

The three projects that Peter mentioned earlier, the Smart Meter upgrade, the Cornerstone Improvement Program, and the Tesla generating station, are examples of our continued focus on identifying and developing prudent investments that we believe will benefit customers and reliability, and will also provide us with additional rate base that creates value for our shareholders.

In addition, our guidance also assumes that we will augment rate-based earnings with customer energy efficiency incentive revenues and realize operational efficiencies sufficient to achieve our earnings targets.

On the regulatory front, we received a final decision in the second phase of our cost of capital proceeding at the end of May.

The final decision improved the three-year mechanism for determining our return on equity, one that we believe is fair and reasonable.

Starting in 2008, our authorized ROE will be 11.35% and our capital structure will remain at 52% equity.

There is an automatic adjustment mechanism for the ROE going forward that will be tied to the Moody's Utility Bond Yield Index.

An adjustment to the ROE would be triggered by a change in the index up or down of more than 100 basis points.

The adjustment would be half of the entire change in the index.

So for example, if the index moved up 120 basis points after a year, our authorized ROE would be increased by 60 basis points.

In addition, if an adjustment is triggered, we would also move our authorized cost of debt to be equal to our then actual cost of debt.

On the federal side, last week we filed our transmission owner [11] case with FERC.

We are requesting to recover an incremental $88 million in total revenues.

This rate filing at FERC is mostly driven by PG&E's ongoing capital expenditures for electric transmission facilities.

This includes our projects to increase electric transmission capacity to accommodate load growth and customer demand, as well as planned replacement of certain substation equipment, such as transformers and switches.

All of these ongoing capital expenditures have been previously included in our base capital expenditure program.

Finally, in July, we filed an application with the CPUC for approval of our 2009 to 2011 energy efficiency programs.

Our plan will continue the programs that have been successful for PG&E, such as our Compact Fluorescent Light Bulb Campaign, as well as introduce some new innovations like our Zero Net Energy Homes Program.

The process for the resolution of our 2006 to 2007 incentive revenues is still ongoing.

Although the process is taking a little longer than expected, we still anticipate a decision by the end of this year.

Our primary interest is the timely and fair resolution of the incentives.

We are committed to working collaboratively with the CPUC to achieve this objective.

With that, I'll turn it back over it to Peter.

Thanks, Chris.

I'll close with a few comments on increasing our supplies of renewable energy.

As you know, we've been very aggressive about pursuing the current 20% target.

In fact, since 2000, we've added more than 3000 megawatts of Clean Energy, renewable energy to our delivered and contracted mix.

Currently renewable deliveries are at more than 13%, and we've contracted for up to 24% for delivery by 2013 in order to meet the 20% target under the Flexible Compliance Provisions.

What we are seeing now in California is substantial interest in how to increase renewable supplies beyond the existing target.

But we also face significant challenges.

For example, the investment and production tax credits that have helped the development of renewable energy will expire at the end of this year unless extended.

Developers are depending on these credits for their project economics.

We want you to know that we're making the case for extensions before Congress, the state legislature, and energy policy-makers and opinion leaders.

Transmission is another challenge.

New transmission takes years to plan, approve, finance, and construct, because of the extensive regulatory and legal complications.

We're working with the California ISO to help plan and develop the needed interconnection with the new renewable resources.

If we can address tax incentives, transmission, permitting, and other issues, the chances of climbing to a higher RPS target increase substantially.

On a related but different note, there's currently a poorly drafted initiative on the California November ballot that would set a 50% RPS requirement in 2025.

We've joined with the coalition of renewable developers, environmental groups, and others to let voters know that this proposal could set back the state's progress.

Environmental organizations believe that the measure has a number of unresolvable drafting flaws.

For example, it would exclude power from renewable plants smaller than 30-megawatts from counting towards the new targets.

The fact is that nearly 60% of the current contracts under California's RPS are with these small plants.

The initiative would also arbitrarily shift renewables regulation from the CPUC to the State Energy Commission, which could add regulatory uncertainty and delay projects.

If the challenges I have described earlier can be overcome, we believe we do have an opportunity to consider an RPS goal as high as 33% by 2020.

The goal is currently being discussed by California energy policy makers.

I want to emphasize that we are fully aligned with our customers and policy makers and thrive to continue expanding renewable supplies.

We're committed to working with them to resolve the challenges and we fully intend to remain a national leader in energy efficiency and renewable energy.

Before we take your questions, I'm pleased to note that we have been recognized for our leadership on environmental and corporate governance issues.

The Innovest Research Firm last week awarded PG&E a AAA rating for our focus on renewable energy, energy efficiency, and distributed generation.

PG&E was one of two companies among a peer group of 25 to receive the AAA rating.

This is the highest rating the Innovest Utility Sector Evaluation or [Innovest] evaluation and we're honored by the recognition.

With that, I would like to open it up to questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Lasan Johong with RBC Capital Markets.

Please proceed.

Thank you.

Nice quarter, everybody.

Quick question on demand destruction.

Is there any evidence of that taking place in California?

We haven't really seen that much in the way of demand destruction to date, but we are monitoring that.

Excellent.

Peter, why not build both generators at Tesla?

Why only one?

We think that this is a measured approach.

There's a question about how much new generation the state is interested and the CPUC is taking on.

And so we think this measured approach is an appropriate manner.

There are other generation opportunities that we're working on, on a contractual basis.

And I believe what the Commission wants to see is this hybrid model, the continuation of the hybrid model.

And so as we go forward, I think they want to see a mix of both contracted generation, as well as built generation.

And to go for both units right now might look like, we're being a little aggressive on the build front.

I see.

The guidance for next year, I'm assuming, will not -- does not include a new rate case that you're applying for?

The rate case will be effective in 2011, so for the rest of this year, next year, and 2010 is under the rate case that was settled a year and a half ago.

I see, okay.

I was wondering what that was about.

All right.

Thank you very much.

Thank you.

Thank you, Mr.

Johong.

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

Please proceed.

Good afternoon.

Hi, Jonathan.

I have a question on the analyst meeting -- you had -- you divided up the additional earnings drivers into things that were currently included in your operating plan and then these additional opportunities of which the rate base investment was a piece of it.

But it was also other operational changes.

Have you had any improved line of sight on moving some of those additional operational opportunities into the middle column, as it were?

Yes, Jonathan, this is Chris.

As you recall, at that meeting we discussed that we had already implemented about $100 million or $140 million, or incorporated $100 million or $140 million of those into our current operating plans and we are continuing to reap those changes and make those changes.

And then we had identified a potential of another $50 million to $110 million.

And we are continuing to look at those.

There's nothing new to update on that piece of it at this point in time.

We're looking at beginning the operating planning process for the next three years, and so we're going to go through the scrub process.

We've identified some of those items, but they haven't gone through the formal scrub process at this point.

Okay, thank you.

And then I wanted to just probe a little more on the -- you talked about having made good progress on the reliability investments and obviously the Smart Meter upgrade, we're waiting on a decision and then you have -- you made the progress on Tesla.

On Cornerstone, what's the -- how have things been going at the Commission?

Where exactly are we on that?

You talked about having a January 1 target for a decision and just some color on how the parties are staking out positions on this?

Sure, and it's still very early in that, but we have received intervener testimony and they have petitioned to have the item withdrawn.

Their point of view is that this should be something that's handled in a normal general rate case and not outside the rate case process.

And so we are filing our replies to that.

The Commission has not yet set a schedule.

We had asked for the January timeframe in 2009, but they have yet to set a formal schedule and we anticipate that happening here relatively soon.

So that will be a decision on whether to, whether to reject or to set a schedule, I guess?

Yes, technically.

We, we are optimistic that they will, that they will go ahead and take on the hearings and that they will set a schedule at this point.

Okay, thank you.

Thank you, Jonathan.

Thank you, Mr.

Arnold.

Our next question comes from the line of Greg Gordon with CitiGroup.

Please proceed.

Thanks.

On your financing plan, now that we're halfway, a little more than halfway through the year, are you still looking at a cash flow profile that allows you to get through '08 without issuing equity?

And refresh my memory on what the financing plan is for 2009 and '10?

Sure, Greg.

We are still in -- for 2008 believe that we won't have to issue any additional equity.

And when we say additional equity, don't forget we generate about $100 million to $200 million worth of equity annually through the dividend reinvestment program, the 401(k) program, and stock option exercises.

And we are seeing -- you've seen that little bit of dilution for the first half of the year and that will continue through the rest of this year.

But as far as any large external equity issuances, we don't have any plans for 2008.

As you saw when we had our analyst conference, we were projecting about a need for equity over the period of 2008 through 2011 of about $1.1 billion to $1.7 billion, with the majority of the pressure really being in the 2010 timeframe.

There could be some need in 2009, but a lot of that will depend on where we are with holding company debt and with the amount of equity that's generated through the 401(k) and stock option exercises in [drip] programs.

Okay, so we take that number, we reduce that by however much you are successful in getting through -- 401(k), et cetera, we reduce that number by any marginal amount of incremental holding company debt you feel comfortable taking on?

That's correct.

And then that net number that's left can be met through either equity or hybrids, right?

That's true.

Okay, great.

Can I ask a question about the renewable RPS?

We're hearing that there's been a massive number of solar projects bid into the RPS, and we've gone past the initial bidding stage to the point where there's been short lists put together and negotiations between the different utilities, including your own.

And the bidders are underway.

Can you comment on what type of response you've gotten on the RPS, whether it's true that it's been dominated by solar, what type of technologies are you being asked to contract for by the counterparties?

Greg, in response to your question, we are seeing a lot more on the solar side than we've seen historically.

And that -- we're seeing a lot more on the solar thermal side, both the trough and the tower, as well as other technologies.

So we are continuing to contract for that, and as we reported today, the -- we're well over the 20% level with respect to contracts, which is consistent with where we think the state wants to go, as well as meeting the requirements of the 20% RPS through the Flex Provision, which we said we would.

I think that that's about as far as we can go, because it is a solicitation process that we've gone through and we're in the midst of going through and negotiations -- in continuing our procurement.

But I think the trend is similar to what you described, yes.

At what point do we get past negotiations and contracting and get to a public filing at the Commission so we can see the portfolios you are requesting?

Greg, this is Gabe.

I know that what we will do on the RPS side is once we get to a point where we've negotiated a contract that we're ready to take to the Commission -- with these, they tend to go to the Commission one at a time or a small group of them.

And we anticipate that we'll be starting to file some of those before the end of this year and ask for CPUC approval.

Given that you're seeing a large number of solar thermal offers, and I think you actually commented on this earlier in the call -- there's going to be a need for more transmission, too, if you contract for solar thermal rather than TV, because I'm assuming that those sites tend to be outside the load centers.

Is that fair?

Yes.

And would that be -- would you participate in that transmission build and would that then be another rate base growth opportunity that wasn't sort of explicit in your presentation earlier this year?

Well, the principal transmission that would enable that is the [C3ET] transmission line that we identified before.

And what we did mention is that's been held up a little bit in delay.

So that would be a prime factor for the transmission.

A fair amount of the transmission also occurs in the Edison territory.

So I'm not sure we're prepared to communicate to you a whole new opportunity around transmission that's tied into those solar thermal projects.

But jump starting that one transmission line could be a fallout of the solicitation process?

Yes, you're focused on something that I'm recently focused on, which is how can we expedite that process, which has been delayed because of permitting.

So I think you raise a good point there.

The last trend had been one of delay.

The question will be whether we can change that.

I think the big transmission opportunity on the horizon is the British Columbia renewables line that we've mentioned before.

Thank you, guys.

All right, Greg.

Thank you, Mr.

Gordon.

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

Please proceed.

Good morning.

Peter, just following on what Greg was asking about, timing for the move to 33%, it seems like it's fairly involved in the AB 32 planning from our last meetings out in California.

Do you guys see the 33% coming up in the legislature this fall, or when do we expect to get a good visual on that actually happening?

I think until recently, there had been a fair amount of momentum on the 33%, and I think that policy makers are oriented in that direction.

And, of course, the position that we've had is you really need to help the utilities with these obstacles that I enumerated in my initial presentation.

The issue that would be offsetting that that has become more apparent in the last month or so is the budget issues that face the state, as well as a whole parade of legislative items bills for consideration.

And so the -- a big factor will be will the RPS initiative be crowded out in that.

And we really have to see how things go, but that would be a counter availing factor.

And I guess when we were at the Commission last, they were talking about the RET, the Renewable Energy Transmission initiative.

When do you guys get a feel for the opportunities as far as incremental spend would come from that program?

You're talking about the British Columbia line?

Or just the bigger state, the bigger state projects, going down [Imperial] and couple other places, just based on an improved facilitation process to get to 33%.

Right.

You know, these transmission lines take a long time, longer than generation to really move through, and so you think of generations three and four years, so I think you're talking about four to six years on new transmission.

Okay.

Now, we would certainly hope -- major new transmission to support the renewables, we would certainly hope.

We've had discussions as late as yesterday with various policy makers on the need to really knock down these barriers and we just want to say we fully support that effort and want to keep pressing that point both at the federal level and the state level.

Is your thought that the 24% under contract by 2013, are you guys going to run into some infrastructure limitations based on what you have available until there's a next wave transmission to get that next step-up in resource?

Well, I think we do see that and something else that needs to be reemphasized is ITC and PTC.

The fact is a not insignificant number of our contracts are dependent upon the renewal of ITC and PTC.

So I would say transmission's a factor, but those -- the renewal of that legislation's very, very important at the federal level.

Okay.

Thank you.

Thank you.

Thank you, Mr.

Eggers.

Our next question comes from the line of Hugh Wynne with with Sanford Bernstein.

Please proceed.

Hi.

I had a question regarding the revised forecast of rate-based growth.

I see that relative to the forecast published with the first quarter earnings release, your estimate of 2009 average rate base is now $20.4 billion, down about $400 million or 2% from your previous estimate.

And then in the sensitivity analysis that you provided, since we can -- or applying the sensitivity analysis you provided, seems we can translate that into a potential $0.07 per share reduction in earnings power in 2009.

And it appears, then, that in your statement as to the conditions on which your 2009 earnings guidance is based that you've added another condition, and that is the CPUC approval of additional capital investment projects that you will propose, presumably to offset this shortfall in rate base.

So my question was, one, is that analysis correct so far?

And then if it is, what are the additional projects that you would expect to see approved in order to achieve your 2009 earnings guidance?

Hugh, this is Chris.

I'll let Gabe go through the reconciliation for you.

But I do want to make sure on one thing that we're clear.

When we -- when you say that we added additional conditions of additional rate base on our guidance, that's not new.

That condition has been there for our five-year growth, or our four-year growth plan from '07 to 2011 consistently over the last year, or the last several quarters -- we've said that we incorporate all of that in there.

But it was not in your Q1 earnings guidance, right?

It -- for our growth rate, for the 8% growth rate, yes, it's in there and has been in there.

What we are -- what the difference is that you're talking about is it's specifically for '09, and we haven't added any additional conditions for '09 that are different than the first quarter.

That's not what's on your website, Chris.

All right.

Well, we'll go back and make sure of that.

In any case, what are the projects that you're hoping to have approved?

Let's put it that way.

For the earnings target to be, to be met.

Okay.

For the 8%, what we've talked about today was that we have the Tesla project, the Cornerstone project, and the automated meter upgrade.

And that is, again, those are the things that are incorporated in, as potential for helping us get to the 8% from 2007 through 2011.

I wanted to make sure that, just for the 2009 item, that Gabe reconciles that one for you differently.

All right.

And before I get to the 2009 item, Hugh, I'll also say that we talked in terms of needing revenues in the neighborhood of $200 million to $250 million in the 2008 through 2011 period, corresponding to projects incremental, capital projects incremental to our base forecast.

And we had quite a bit of discussion at our investor conference in May around that number, and the fact that you don't necessarily need all of the incremental capital expenditures that we show here with the addition of Tesla, with the Smart Meter upgrade, and with Cornerstone to achieve that level of incremental revenue.

So I just wanted to make that comment as well.

Right.

Now, specific to your 2009 comment and rate base, it's not necessarily appropriate to take the sensitivity page and say, well, if rate base is lower, than that's exactly the amount of revenues that we'll lower, and here's why.

Capital expenditures become rate base when the project goes used and useful, as you know.

At the point that it's construction work in progress, but not yet rate base, it is still accruing AFUDC.

And so it can add to earnings through AFUDC.

So if you've got a project that's accruing AFUDC, even if it's not rate base, it doesn't necessarily lower your earnings and that's exactly what's going on here.

From time to time, you have seen us change our rate base forecast by $100 million to $200 million or more, and it's associated with the timing issues around what is construction work in progress versus when does it become rate base.

And if we see that a project is somewhat delayed in terms of getting worked on and being completed, then it won't be rate base until several months or more later.

Right, so the net effect of that comment is that we should not be concerned about the average rate base?

Because what's really happening here is that there is a delay in completion, the construction work in progress will nonetheless be allowed to return and therefore the lower level of rate base need not be reflected and the $6 million per $100 million change in rate base impact that you have on the following page?

That's correct.

Okay.

What are the dates approximately that you expect approval of these three projects, if you could remind me?

The upgraded meters, the Cornerstone and the Tesla?

Yes, this is Chris again.

On the upgraded meters, we're anticipating a final order by the end of this year.

As we talked about on Cornerstone, there hasn't been a schedule set yet, but we did request that the Commission give us an order at the first of next year.

And then on Tesla, we're looking for an interim order here in the next 60 to 90 days and then a final order first quarter of next year.

Great, all right.

Thank you very much.

Thank you, Mr.

Wynne.

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

Please proceed.

Hi.

Can you hear me?

Hi, Paul.

Hi, Paul.

I'm sorry if I missed this.

What was the weather -- was there any weather impact?

I was looking at retail sales and they seem a little bit lower I think than last quarter.

Well, when you look at for us, don't forget, since we're decoupled, we're not impacted on an income basis based on weather.

And so if there is less usage or more usage, we collect that in balancing accounts.

And so you won't see an impact on our bottom line during any one period based on weather or any other factor.

I just want to make a reminder of that.

Right.

I guess I was wondering if there was a -- if there was a decrease in usage.

I know that -- I think Lasan was asking about demand destruction.

You guys said no.

Are you seeing any conservation efforts or anything like that that's going on, or of course you guys have your own initiatives.

Is that having any impact on retail sales?

Paul, what I can tell you is every quarter we ask our folks to do exactly that analysis and as best they can to tell us what are the factors that are affecting earnings.

So overall for the quarter, quarter over quarter we saw electric usage increase about 0.6%.

Right.

Almost all of that is due to customer growth, and the offsetting factors is we see a slight decrease in average usage, but a slight increase due to temperature and weather effects for this period compared to the prior period.

Okay, and then the reliability goals that you guys have, it looked like at least year to date that they have fallen a little bit short, the actual versus the goals that you guys mentioned.

And I'm just wondering, was that because of the storms, or was there any particular reason for that?

Yes, the major storms, January, were the major reason for that and actually we've been on target with our goals the last few months moving forward.

Okay.

And that was our COO, Jack Keenan.

The ROE bond yield matrix -- mechanism that you talked about -- ?

Yes.

-- I'm sorry if I missed this, where does it start?

Where is the starting point for the bond yield?

The -- Paul, this is Gabe again.

The benchmark level is 5.87%.

That was the average of the 12 months from October of '06 to September of '07.

Now, the next thing you're going ask me is where is it currently.

Yes, where is it currently?

It's currently at 6.19%.

So it's well within the 100-basis point up or down [dead band].

Okay, great.

Thank you.

Thank you, Mr.

Patterson.

Our next question comes from the line of Leslie Rich with Columbia Management Group.

Please proceed.

Hi.

Most of my questions have been answered, but I did have a question on the energy efficiency incentives and the operational efficiencies.

In your slide from the analyst meeting, you list what those are over the 2008 to 2011 timeframe.

And I was just wondering, have you broken that out by year and how are you tracking according to that plan?

Leslie, this is Chris.

We haven't broken it out by year, other than we have previously stated that we anticipate a range in 2008 of $30 million to $60 million.

And then we have made sure that people understand in 2008, that would be collections for 2006 and 2007.

Then in 2009, we would get collections for 2008 year.

In 2010, you would get the 35% clawback [keeps] and then as you got into 2011, you would start to get the first or second -- first two years of the next program.

But we haven't otherwise given dollar ranges for each of the individual years.

So that's the energy incentive piece?

Yes, that's the energy--

Energy efficiency piece.

Yes.

So what about the operational changes and efficiencies piece, that $100 million to 140 million?

Right, we haven't given any individual years.

Okay.

Is it more front-end loaded, since you've done a lot of the work already?

I wouldn't say that there's any particular front end or back end loading of it.

It really depends on the program and what the timing is within each one of those programs.

We've basically just said those are the numbers we need over the four-year period of time.

And what's in the additional opportunities bucket?

What types of items?

There were two things that were in the additional opportunities.

One was additional rate-based investment and we've talked about some of those types of items being the automated meter upgrade, the Cornerstone.

That kind of thing.

Right.

And then there's additional operating efficiencies.

And that's where we continue to look throughout the company, looking in areas such as customer contact and in payroll processing and how we do the timekeeping -- those kind of things.

Okay, great.

Thank you.

Thank you, Ms.

Rich.

Our next question comes from the line of Ashar Khan with SAC Capital Advisors.

Please proceed.

Good afternoon.

Hi, Ashar.

I was just trying to track based on first half results how you feel about the remaining second half.

I guess one of the big things, Chris, which we were just discussing is we're going to get this order on efficiency in the fourth quarter, is that correct, from the Commission?

And we will recognize those earnings in the fourth quarter?

That's the expectation.

Okay, and is there another nuclear outage gain or loss from a comparative purposes from the second half of the year versus the last second half?

There shouldn't be.

Our next outage is scheduled to be in the first or second quarter of next year in 2009.

Okay, okay.

So as you look at it, you're not saying whether you are -- feel you can achieve the upper end or the middle of the range or something around that as you sit over here?

We haven't provided any sense of where in the range.

We've just committed to the range at this point in time.

Okay, okay.

Thank you, sir.

Thank you, Mr.

Khan.

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

Please proceed.

Thank you.

Quick question on the wind and renewables area.

There's a lot of discussion of the instability of both solar and wind and having an effect on the grid.

So there's two basic parts of this question.

One, is there an opportunity for PG&E to both build backup generation and supplement transmission work that would add to the 8% potential, or go above and beyond the 8% potential?

And second, if not, then how do you propose managing that fluctuation or the potential fluctuation in the voltage and deliverability of electricity in California?

Lasan, you raised a very good point.

The wind, of course, in our territory tends to blow wind when we don't need it at night.

And of course when it gets hottest, the wind isn't blowing because our natural air conditioning system isn't working.

Solar, fortunately tends to be -- there is a good coincidence between peak periods and solar generation.

Nevertheless, both we and the Commission are looking at the question of what is the dependability of those sources when we need them and what is the amount of backup power that we need.

And that goes into the aggregate calculation of how much power we need -- and new generation we need going forward.

So the answer to your question is that is a consideration on both the Commission's part and ours.

It will result in additional generation being required and it's been factored in already and will continue to be factored in more as those renewable sources grow.

And that will be an investment opportunity for both us as well as independent power producers.

In addition to that, there is technology that people are looking at on storage, for example, and that also represents in addition to let's say transmission and new generation, that would represent another potential opportunity.

So I think these will really come into play longer-term, as will any transmission opportunities that we mentioned earlier.

They won't be in the next couple of years, but it will be longer term that they will appear on the planning horizon.

Great, thank you.

Thank you, Mr.

Johong.

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

Please proceed.

Hello, again.

Quick follow-up, and thank you.

I was just hoping to ask a little more about the energy efficiency proceeding in front of the CPUC.

You mentioned it's taking a little longer than you thought.

Can you give us a bit more insight into what the issues are, whether this is more to do with the next period of -- the next three years of the program?

Or whether it's more the decision on the actual savings realized in the first two years?

And then my notes from the analyst meeting say you were going to file that application on '06 to '07.

In fact, in September with a decision late this year.

I just want to check, if that's still correct.

Yes, Jonathan, this is Chris, and I'll start off just at the high level.

But then we also have Brad Whitcomb, who is our Vice President of Marketing and Customer Innovation and responsible for our Customer Energy Efficiency program with us, and he can add a little bit more breadth to it.

And as I said in my opening remarks, there's been a slight delay and if you recall back in May, we had anticipated that the Commission staff would come out with some of their conclusions around the mechanisms in place for measurement in the July timeframe.

And they have not come out with those final items yet, and that's caused a little delay.

And so we're still a little uncertain as to whether we'll be able to get that information and do the filing by September.

Now, all our communications with the Commission and the process that they are looking at still gives us an indication that we anticipate getting it in by the end of this year and -- but they are taking a little longer than we anticipated.

But I'll let Brad provide a little bit more color around that.

Yes, the only thing I would add to that is in July, the NRDC did approach the Commission and request that we go to a mediated settlement process to expedite this and we are engaged in that process.

It will be the first kickoff meeting this week, which is another opportunity to ensure that we were able to get the numbers to settle down by early September so we can submit our filings on schedule and get the earnings this year.

So if the decision doesn't come this year, you would look at a profile where you might book all three years in 2009.

Is that -- or three of the eight to 11-year -- is that accurate, or -- ?

Well, yes, obviously Jonathan, it's hypothetical as to whether we get it, but you're right.

It would be just a timing issue at that point, that if for some reason the process got delayed into the following year, then those earnings would be booked at that point in time.

Are there any particularly notable substantive issues that people are disagreeing about here that we should be aware of?

This is Brad.

I don't believe there are.

The system is incredibly complex, the number of variables that the energy division is looking at and number of studies that they are trying to finalize in this period of time, and I really think it's more of a logistical issue than a fundamental disagreement at this point.

Thanks.

Thank you, Jonathan.

Thank you, Mr.

Arnold.

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

Please proceed.

Hi, guys.

A while ago -- you all talked about this at the analyst day and the first quarter call.

You all were looking at the opportunity of investing in one of the pipelines coming west to east -- I mean east to west from the Rockies into Northern California.

I know you're not likely to be involved, but possibly a customer.

Can you give just an update on what you're seeing in terms of the general market for bringing gas into Northern California, whether it's via LNG coming into the Pacific Northwest or via pipeline coming from the Rockies?

Okay.

Let me take a crack at that and if there's anyone among the group who wants to add to that.

Of course with the very high prices, there's been a lot more interest in pursuing alternative supplies.

We were -- we have signed a contract with Ruby, with El Paso on the Ruby Pipeline.

Accessing the gas in the Rocky territory is very useful, given the diminution of gas supply from Canada that we've seen over a number of years now.

The -- as we communicated I think previously, we made the decision not to continue ahead on Ruby, but El Paso has confirmed that it is moving ahead.

And as a buyer of capacity, we're very interested in that access to the Rockies.

Also, there were a number of competing pipelines to the Ruby Pipeline, and I'm not fully aware of what the status is on those and whether they will move ahead in light of the affirmation that El Paso's continuing to move ahead on Ruby, and of course they have a head start and probably a lower cost basis there.

We continue to participate in the Pacific connector project and we're in the permitting process of -- or they are in the permitting process in Coos Bay for the LNG terminal there, and people expect that there will be movement on that in the next several months.

I think the big question is oil prices really went through the roof, as we saw a recoupling of gas to oil.

And so the challenge that people see is we could move ahead with these LNG terminals as a country, but will the LNG come to the country because of higher prices internationally, and will the LNG flow to Japan, for example, and other places.

So that's sort of an overview of what we're seeing on the gas front.

And, Peter, I would just add to that that when we look at it -- and we being the utility in this instance -- we're interested in trying to make sure that we can have access to any and all resources of gas, given the profile that we have in this state of reliance on gas.

And so that's why we're interested in doing the commitments on the Ruby Pipeline and look to any other opportunities to get access to gas into the state and hopefully keep some of the pressure down.

And then on the holding company side, we are interested in if there is an investment opportunity again to bring gas by investing in pipelines or such into the state for the benefit of our customers here in the state.

That's what we will pursue.

Okay, and a follow-up, what about from Northern to Southern California in terms of pipeline development?

Well, what we've seen from the north is a diminution in the volume of gas coming down from Canada.

And so I'm not aware that we've really done much in terms of additional volume and capacity development there.

To the south, the opportunity that might arise is because of [Sempra's Casa Azul] LNG project and how much additional gas will be available from the south.

And we're just monitoring what Sempra is able to do there in terms of lining up supply over the long period of time.

And I'm not sure we've seen great progress in recent months in that regard, and therefore, us moving forward with major capacity expansion to the south right now is not something we're actively focused on.

Okay, thank you, guys.

Much appreciate the update on that gas.

All right, Michael.

Thank you, Mr.

Lapides.

Our next question comes from the line of Ivana Ergovic with Jefferies & Company.

Please proceed.

Hi.

Could you provide an update on your Humboldt station and Colusa project?

Yes, this is Jack Keenan.

I'll be glad to do that.

The Humboldt plant is in its final approval stages and we're waiting for final CEC approval.

We expect to have that in September and start construction at the end of the year.

And on Colusa, we actually did the ground breaking in July and we are still waiting for one more final air permit from the EPA, but we expect to have that in the next month or so.

So both those projects are continuing to move along.

Thank you.

Thank you, Ms.

Ergovic.

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

All right, in that case, I will thank you all for your interest in PCG and wish you a wonderful day.