PG&E Corp (PCG) 2008 Q3 法說會逐字稿

Good morning, and welcome to the PG&E Corporation third quarter earnings 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.

Good morning, everyone.

We appreciate your interest at this busy time, and so we'll get right down to business.

We issued our earnings press release earlier today, and it is posted on our website along with the supplemental tables, including Reg G reconciliations to which we will refer during the discussion of results.

The same information can also be found in an 8-K report furnished to the SEC, and we will also file our joint Form 10-Q report for PG&E Corporation and Pacific Gas & Electric Company today.

A replay of this conference call will be available from our website afterwards.

And our prepared remarks and the Q-and-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 SEC reports, actual results may differ materially from those forward-looking statements.

Important factors that can 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 the annual report on Form 10-K for the year ended December 31, 2007, and our Form 10-Q reports.

Leading the discussion today will be Peter Darbee, Chairman, CEO, and President of PG&E Corporation, and Chris Johns, Senior Vice President and CFO.

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

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

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

As you can see from the results we released this morning, we're showing solid performance despite the economy and the difficult conditions in the capital markets.

We're pleased to report that earnings for the quarter came in at $0.83 per share compared with $0.77 a year ago.

Our year to date earnings from operations are $2.24 per share.

And as Chris will discuss in more detail later, we are reaffirming our 2008 and 2009 EPS guidance, as well as our 8% compound annual growth rate through 2011.

Let me start off with some thoughts on the capital markets and the economy.

Current conditions remind us why we are glad to be a regulated utility in California.

Because of California's decoupling mechanism, lower customer usage does not result in lower revenue.

This provides protection from revenue volatility that would otherwise result from economic factors, weather or lower customer usage.

In the financial markets, PG&E has had ongoing access to capital despite the current challenges many are currently facing.

Over the past few weeks, we have placed over $900 million of long-term debt to fund capital expenditures.

Nothing can be taken for granted in this market, and we're pleased to be able to close these financings.

Our team has worked diligently to ensure that PG&E has continued access to capital during what may be a prolonged period of market volatility.

Within our own service territory, we have started to see more signs that the economy is indeed weakening.

We see that most clearly when we look at the downward trends in the housing market.

And while we have also seen an increase in our uncollectible expense, it's manageable.

We're still projecting sales growth in our service territory in 2009.

However, our forecasts are at the lower end of our normal growth range.

We remain focused on executing in line with our business priorities, and the capital investment plans we've shared with you throughout this year.

We continue to believe that these investments are vital to provide the level of service our customers expect.

Two days ago the administrative law judge in the energy efficiency incentives case, issued a proposed decision.

The proposed decision would delay a resolution until 2009, and would result in the use of the CPUC staff's current evaluation studies to assess results.

However, Commissioner Peavy has issued an alternate decision consistent with our filing.

It recognizes the importance of granting interim payments without delay.

This is a positive and timely step.

It is consistent with California's goal of creating a model for other states, and it recognizes the success of our energy efficiency programs.

We believe that the alternate decision is the right decision to be approved in December.

As we look to 2009 and beyond, we see plenty of opportunities ahead.

We are streamlining our business and targeting operational efficiencies.

We continue to pursue critical projects like our smart meter upgrade and the cornerstone improvement project.

And while the proposed dismissal of our application to build the tesla power plant was a setback, there are other opportunities in generation.

We have opportunities to invest in renewables, and this is now enhanced by having even more access to vital tax credits.

We're exploring investment in response to state policy and regulatory encouragement, and more importantly, it's what our customers consistently tell us what they want.

We're grateful that the action by Congress to renew tax credits, and in particular the leadership of Speaker Pelosi, enhances our ability to provide renewable power for our customers.

So, in order to manage the challenges and maximize ongoing opportunities, the officer team and I are focusing on the following key priorities right now.

Maintaining sufficient liquidity despite the upheaval in the capital markets, managing towards constructive regulatory outcomes, and finally, strengthening and improving our operations.

With that, I'd like to turn it back over to Chris Johns to continue our report.

Thank you, Peter.

I will begin by discussing our third quarter results, and then address liquidity, guidance, and key regulatory developments.

For the third quarter, PG&E Corporation earned $304 million, or $0.83 per diluted common share, on both a GAAP and non-GAAP basis.

This compares to $278 million, or $0.77 per diluted share for the third quarter of 2007, also on both a GAAP and a non-GAAP basis.

For the quarter, earnings reflect an increase of $0.06 per share relative to 2007, as a result of revenues associated with higher authorized rate based investment.

We had a $0.01 increase due to increased gas transmission revenues, and we're also up $0.02 quarter over quarter because last year we had a $0.02 charge for customer refunds related to the installation of a new billing system, with no like costs this year.

These positive variances are partially offset by improvements in the operations and maintenance of our natural gas system, which accounted for a $0.02 decrease.

We also had $0.03 of expense associated with ballot initiatives, primarily our opposition to prop 7, the statewide renewable energy initiative, in the city of San Francisco municipalization efforts.

We had a $0.01 of dilution related to a larger number of shares outstanding, and finally, miscellaneous items accounted for a positive $0.03 per share.

There are a number of positive items such as settlement of tax audits and lower casualty losses, that on a net helped make up that $0.03 total.

Now let me address liquidity and long-term financing needs.

The utility has a $2 billion credit facility, which supports its short-term borrowing needs and letters of credit.

Use of this facility fluctuates based on working capital needs, commodity related payments, and funding of our capital expenditures until long-term debt is issued.

On October 31, we had available liquidity at the utility of approximately $1.4 billion, which consisted of $1.1 billion available under our bank lines, and $230 million of unrestricted cash.

Through our commercial paper program, we've had access to the short-term market throughout the crisis, although at higher prices and shorter durations.

Recently, we have seen a reduction in costs of commercial paper from the peak of several weeks ago, and we have been able to extend durations beyond what we encountered for most of October.

We are also very pleased to have recently executed two long-term financings.

Last week we received $309 million from the issuance of tax exempt debt.

This places most of the debt back in circulation that was originally in the auction rate market, in which we took into treasury earlier this year.

It was issued at an initial rate of 1.75%.

It resets each week and it is backed by a dedicated multi-year letter of credit facility.

The other financing was our $600 million senior notes issuance.

We typically would not have done this financing until the late November, early December time frame.

In light of our needs to finance capital expenditures through year end, we were prepared to access the market when it became available.

We anticipate we will need to issue approximately $1 billion of additional long-term debt by March of 2009, to fund capital expenditures and refinance $600 million of maturing debt.

As we continue to monitor the market to gauge whether it is stabilizing, we will consider issuing additional debt in advance of ultimate need.

I would like to add to our good news on the financing front with good news of another sort.

After much hard work, we have reached a settlement with the IRS regarding multiple issues involving prior tax periods.

This will result in us receiving more than $300 million of cash within the next few months, an amount that is larger and earlier than we had originally forecasted.

As a result, external holding company funding needs required to maintain the 52% equity ratio at the utility in the next six months, may be as little as $100 million.

All of our financing plans are consistent with current construction schedules.

We'll continue to review and adjust our plans to reflect economic and market realities, but right now we don't anticipate significant deferrals or reduction of capital spending.

Regarding guidance, we are sticking with our range for 2008 earnings from operations of $2.90 to $3 per share.

Our guidance for 2009 remains at $3.15 to $3.25 per share.

While we are not immune to market uncertainty, we have several mechanisms in place that provide some insulation that others may not have.

First, because of the decoupling mechanism, lower customer usage does not result in lower revenue.

Second, we have a pass-through of all of our procurement costs.

Gas costs are passed through on a monthly basis, and electricity costs are passed through at least annually and can be adjusted more frequently if they vary by more than 5% from annual spend.

Finally, because of our sizable portfolio of nuclear and hydrogeneration assets, our customers' rates have not seen the same level of high increases, proposed or actual, as in other parts of the United States.

As Peter has already shared with you, we have reaffirmed our guidance for 2008.

This assumes that we receive a final order on energy efficiency incentive revenues prior to year end, consistent with Commissioner Peavy's alternate proposal.

Our supplemental earnings materials include a reconciliation of guidance with projected GAAP EPS for 2008 and 2009.

You will note for 2008 that we are projecting a positive item impacting comparability in the range of $0.66 to $0.69 per share.

This represents the settlement reached with the IRS regarding prior tax periods that I previously mentioned.

In addition to the receipt of more than $300 million of cash, it increases earnings because more than 200 million was reflected in tax reserves accumulated in prior financial periods.

We are also reaffirming our targeted 8% compound annual growth rate in EPS from 2007 through 2011.

Internal cash generation and drip in 401(k) programs will contribute a substantial amount of what's needed to fund this growth.

Additional equity funding needs will be met through a combination of holding company debt and additional stock.

This growth rate assumes capital market conditions are consistent with what we have seen historically, as opposed to what we have seen over the past couple of months.

If they were to persist, current prices of equity and debt would have a material impact on the cost of capital.

Our current guidance for 2008 and 2009, and our target growth rate, are also based on a number of other key assumptions, which we have outlined in detail in the press release issued this morning.

On the regulatory front, we are still awaiting a final decision on our smart meter upgrade proceeding.

We now expect to see a proposed decision within the next month, and a final decision around year end.

On Cornerstone, a motion by intervenors is still pending at the CPUC.

We are still actively pursuing this program for our customers and we think it makes sense.

Finally, we have reached a settlement agreement for recovery of $10 million spent earlier this year on winter storms, and have filed it with the CPUC for approval.

We could receive a final decision by the end of this year.

With that I will turn it back to Peter.

Thanks, Chris.

This week there were two significant voter issues that PG&E has taken a clear stance on.

The first was the statewide initiative, proposition 7, which would have set a dramatically higher renewable energy requirement for the state.

PG&E joined with a broad range of other businesses, renewable developers and environmental groups, to oppose this initiative.

We believe it actually would have jeopardized the state's ability to achieve the long-term goals we all share.

Fortunately, voters defeated this initiative.

This allows us to continue working with the state and our customers to increase renewable energy supplies in a way that will allow for continued good progress.

Turning now to San Francisco, voters resoundingly defeated a measure that would have allowed the local board of supervisors at any time in the future to attempt a takeover of PG&E's system in the city.

We vigorously defended our right to serve our customers and we will continue to do so at any time we face these threats.

We are grateful for the vote of confidence from our customers in San Francisco.

We share the city's commitment to clean energy, and will continue to help make San Francisco a showcase for solar power energy efficiency and other green programs.

And with that, we would like to open it up for questions.

Certainly.

We will now have the question-and-answer session.

(OPERATOR INSTRUCTIONS).

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

You may proceed.

Hi, good morning.

Can you remind us all how the ROE adjustment mechanism works with the movement in bond yields recently, and what we should be watching for in case there needs to be a reset, and I guess when is the date when that would be effective?

Sure, Dan.

This is Chris.

The way the mechanism works is it sets a benchmark based on the Moody's AA or AAA bond yield, or BBB bond yield and A bond yield marketplace.

And basically the way it works is that, if there is a 100 basis point movement up or down over the 12 month period that starts in October, through the end of September, then we would have two things that would occur if it moves by more than 100 basis points.

The first thing that would occur is that we would be allowed to adjust our authorized return by half of whatever that movement was.

So if it went up by 120 basis points, we would get a 60 basis point adjustment in our authorized return.

In addition, it would also automatically adjust our actual cost of debt to be equal to what the actual is.

So there would be a true-up of that at that point in time.

So the original benchmark was set for the period of October '06 through September '07.

When we look back at the period ending September of '08, we saw less than a 50 basis point move in that market mechanism.

And so there won't be any adjustments for 2009.

Okay, got it.

Then on the tesla decision, that was originally part of the long-term resource plan for your service territory, and obviously the original winner couldn't get it done.

What are the alternatives, and do you guys see enough resource adequacy over the next few years, if you to have wait longer before final resolution on that capacity coming into market?

Dan, just a point of correction, tesla was not in the original plan in terms of resource adequacy.

There were three plants, two of which have been canceled that were on the smaller side, and then the Russell City plant that's owned by Calpine had been delayed.

And so in light of this, we came up with the tesla proposal to fill the gap, and the response of the commission was, as you will recall, you haven't followed the procedures that we feel are necessary.

The commission, together with the ISO, has looked at the resource adequacy question, and concluded that just the addition of one plant, Russell City, would be adequate to both meet the needs of the people of California, as well as the surplus that should be carried in reserve.

Okay.

And I guess just one last question.

The $0.03 of ballot advocacy in the quarter, was that originally in your guidance plans or would that be something that wasn't in the original guidance number for 2008?

Dan, Chris again.

I would tell you that, it wouldn't have been in the original guidance back in January time frame, but when we reaffirmed the guidance in the end of the second quarter, we knew that we would to have do some spending there, so it's all included in where we're at today.

And that was all spent in Q3?

There was nothing before Q3?

The majority of it, yes, it was in Q3, and then there will be a little bit in the month of October.

About $0.01.

Okay.

Thank you very much.

Thank you, Mr.

Eggers.

Our next question comes from the line of [Humanahu Sugandi] with Credit Suisse.

You may proceed.

First, on behalf of (inaudible), I have three questions for you.

Regarding the sun power contract that you had announced a few months ago, has the project been approved by the (inaudible).

And then given the state of the credit markets, do you foresee any of this to the completion of those projects?

And finally, who is responsible for the financing related to the projects?

Do you expect the suppliers to finance the projects or you'll just be buying the energy from sun power?

Thanks.

Okay.

On sun power, it's my understanding that we signed the contract.

I'm not aware that that has been approved by the commission, so it's under consideration by the commission.

So that is where the sun power contract stands.

Now, the second question that you had was, if I understand it correctly, was what will be the impact of the capital markets on the development of renewable projects.

And the answer to that question is mixed, in that we have spoken to some investment bankers who believe that it is certainly going to be more difficult for renewal projects to be completed and to get financing for them.

There have been other bankers that have been constructive and felt that maybe not right now but in the future those projects should be able to get the financing.

We have talked to some renewables providers, and they feel that the current capital markets will create a very difficult time for renewables producers to get financing.

And then we've talked to, for example, the independent energy producer organization who said that, they should be able to raise the capital.

So, I think there are mixed opinions out there, and it's probably difficult to make a blanket statement, but I think the one comment that can be made is it's clearly a much more difficult environment than it was previously.

So that's the case.

Now, what PG&E is doing is engaging in discussions with people, trying to understand exactly where they're at.

But also, we are working very intensively on our own strategy to become involved and be helpful to either provide financing or own generation, so that we can help move our overall portfolio in the direction that both the state wants us to, as well as the regulators, and that is more renewable energy generation.

So that's the second question.

Then you hit a third that related to--.

This is Chris.

I think the third piece was, who is responsible for the financing of these projects, and each one of them is responsible themselves for obtaining the financing.

Obviously they like to utilize the fact that there's a long-term contract to assist in that.

Okay.

Next question.

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

You may proceed.

Hi, good morning.

Good morning, Jonathan.

I have one question.

Chris, I believe you said that with the combination of the tax item that you had settled, and a couple of other things, that you hoped to be able to limit your need for new financing at the parent level to 100 million in the next six months, which would likely come out of dividend plans and the like.

Did I hear that correctly?

What we said is that it would limit the need for holding company funding of about $100 million.

That would be in excess of the normal drip programs and 401(k).

So if you recall back to when you looked at our previous disclosures around equity needs in 2009, we had a range there, I believe, of somewhere around 225 to 375 million.

And we've said historically we get anywhere from 1 to $200 million from our internal programs, our drip programs and 401(k) programs, and we've constantly said that when we'll look to anything needed over and above that, we would look to the equity markets and or look at the holding company leverage.

And so when we look at that number for 2009, like I said, right now it looks like it's down to less than $100 million.

When you said it, it was around six months, but that actually applies to the whole of 2009?

Is that what you are saying now?

The biggest need would be in the first quarter, because when you think about what we try to target is maintaining our equity structure at 52%.

And so to the extent that we have to look at that, one of the ways to minimize the amount of equity needs is to try to manage that from the beginning of the year throughout the year, as opposed to if you wait to the very end of the year, then any kind of needs to balance that equity structure is raised, if you wait until the end of the year.

Okay.

And then if I could just revisit what you said about the cost of financing, did you mention that in the context of the near term guidance or the 8% growth rate target, because as you--?

Jonathan, that was in the context of the overall three year, the remaining growth rate through 2011, basically saying, we base that growth rate on a more normal historic level of stock price and cost of debt versus what we're experiencing right now.

But wouldn't you sort of get made whole for that with the mechanism if you went above this 100 basis points trigger?

I guess if things do continue as they are, that would happen next year.

That is a potential to occur.

All we're saying is is that if these were to persist for periods of time, and if we wouldn't hit some of those triggering mechanisms in there, that they could have a negative impact.

But otherwise, they would have to persist for two or more years.

And then also, don't forget that adjustment mechanism only relates to the utility, and we have plans for refinancing the holding company debt, and obviously, whatever the current market rates are when we need to go out and do that, would have an impact.

And the share price.

And the share price is also something that obviously doesn't get reset through any kind of mechanisms.

What's the timing on the holding company debt refinancing?

Well, it doesn't -- the conversion is mid 2010, but that doesn't mean we wouldn't consider doing something before that.

And what we need to point out is, we also have cash at the holding company currently, and we have $200 million of lines of credit that aren't currently utilized.

And we'll look at all those things.

If I may just ask one other thing, the analyst meeting, you had laid out these savings that you were hoping to push beyond what you had baked in.

Is there any progress to report around trying to push those numbers to some greater level of efficiency that you've got some visibility on now?

Jonathan, absolutely.

We have continued to look at where are areas for improvement in the Company.

We have previously talked about areas such as sourcing, real estate consolidation, fleet management and payroll time collection.

Since then we have also introduced and we're piloting a project on productivity enhancements in the field, which is around performance management tools designed to reduce overtime and our use of contractors.

Initially we've seen 17 to 18% efficiency gains in those pilots.

In addition, we've got a project on our meter to cash, which measures the number of days it takes to convert cash from our meter installation to our receipts of cash, with focuses on reducing those days.

And then we've got some more on inventory reduction, reducing the processing time, storage needs, and the amount put back into inventory.

And especially in this kind of an economic environment, we've got a lot of focus on our accounts receivable collection activities, reducing the number of days outstanding and the amount of write-offs and looking at the cost of hookups and disconnects.

And so all of those things continue to be areas where we're seeing and making progress, and balancing that with our capital expenditures to still feel comfortable with the growth rate that we just reiterated.

Do you feel you have narrowed the gap that needs to be filled in with the new CapEx somewhat?

Yes, we believe that we're on target with the growth plan, and like I said, the combination of the things that we have outstanding, whether it's Cornerstone, or some of the renewables or smart meter upgrades, plus these projects that I've just mentioned, I think it all makes us continue to feel comfortable with that growth rate.

On the capital front, we anticipate that within the next quarter or two quarters, that we'll make a filing with the commission about renewables, and this filing will be broader in its scope than those previously filed by Edison and San Diego.

So that will be sort of the solution as to how to add capital, which would be what our customers want.

This would be for renewables.

It's what our customers want, the state wants, and we've been encouraged to do by the Public Utilities Commission.

Thank you.

Thanks, Jonathan.

Thank you, Mr.

Arnold.

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

You may proceed.

Good morning, guys.

Morning, Paul.

Jonathan sort of asked a good part of my question.

To sort of follow up on that, when we're talking about normal, not to get philosophical here, but before the current credit crisis, one could say it was sort of abnormal, in terms of cost of debt, just the capital markets themselves seemed very easy.

How should we think about what is normal when you're saying stock price and all these things--.

Is there sort of a range, can you quantify it or just elaborate a little more in terms of the thought process there?

Is it getting back to the way things were in 2006 or, I'm just trying to get a little bit more of a flavor for that.

Paul, let me take a crack at it, and then if Chris Johns says something to add, I want to encourage him to do so.

Think about when we originally came up with our guidance.

So let's say for the period through 2011.

Think of what capital markets were like at that time.

So we had as assumptions, the baseline of where the capital markets were then, okay.

Now the question is, the markets have changed, and the question that everybody is posing is, how long and what is the magnitude of the change in markets, how long will that persist.

And I think you all are in even better position than us to think about, well, what's going to happen to long-term corporate borrowing rates as we go forward, and what is our view about what's going to happen to the equity markets?

So the point that we're making is, you have your models, and you are in a position to plug in your own estimates of debt and equity, but we thought, since we wanted to be fulsome and complete in our guidance to say that we prepared the guidance based on a point in time when the capital markets were, what we would call them normal.

We went through a period which we've just gone through, which most people would say was abnormal, and that in order to get to the guidance for 2011, we would assume some return to normalcy.

And I think you are in the best position to make those judgments, because they're judgments about the capital markets.

Peter, the only things I would add is that what we're also seeing is that the fundamental growth projects and things that are underlying our plans, are still there.

The $13 billion of investment, the additional opportunities, efficiencies, they're all still there.

And obviously we can weather some of the turmoil that's out there and we have.

We have shown the ability to get into the capital markets, and we're still hitting our guidance for this year and reaffirming for next year.

So we can weather that.

But if you want to assume that market rates stay, stock prices stay as low as they are, and interest rates stay high or go higher, or access to capital continues to be limited for the next three years or so, then that could have an impact, obviously, on what the total cost of financing these plans are.

What was the date that you guys had initiated guidance again?

Could you just remind me of the specifics, at least the month that you guys and the year that you guys are referring to?

I'm not -- Paul this is Gabe.

I'm not going to be able to remember the specific month without referring to my files, but roughly two years ago is when we launched the 8% target through 2011.

Okay.

So that was -- sort of the conditions during that period of time is what you guys mean by normal, and although you are able to navigate that, the current situation, obviously looks pretty good in terms of what you are reporting today.

You're saying if it were to persist or if the situation were to be materially different than it was two years ago, then that number might be impacted.

Is that the right way to think about?

The number for 2011, yes.

Okay.

And I want to be clear here.

We noticed that some other companies haven't sort of made that point, but we think, frankly, if they were fully conscientious about this, they would make that point, and it's something -- we're not trying to say something more than all of you know.

Right.

I'm just wondering whether or not there was some conservatism in terms of, two years ago we were talking about a pretty favorable capital market situation.

And I guess that's sort of the question that sort of comes up, because turning back to that level, I don't know, I mean, like you said, it's something that we all to have think about, how we actually get there, if you know what I mean.

Yes, Paul, and again, I think we're probably over-emphasizing this, but if you see a $15 decrease in stock price from one period to another, or a $10 stock price decrease, that obviously impacts then the number of shares you are going to sell, and we're going to manage through that as best we can.

We're just saying that we've seen a lot of turmoil, and we're going to manage through that but if it stays this way for the next three years, then it's going to have an impact.

Fair enough.

I appreciate it.

Thank you, Mr.

Patterson.

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

You may proceed.

Good morning, I just wanted to follow up on some of these issues around cost of capital.

Your bond issuance at the utility in October, I think went out at about an 8.5% yield, or something like 450 basis points over treasuries, where as previously when you had gone to market in February, I think you were able to tap the market at about 150 basis points over treasury.

So 300-basis-point spread increase.

Given that you don't anticipate an adjustment in your cost of capital for '09, and you may not get one until 2011, why would you borrow at 8.5% for 10 years under those circumstances, as opposed to try and fund yourself with, say, a prepayable bank term loan that you could take out at a time when capital market conditions have stabilized?

This is Chris.

We learned a lot as we went through the energy crisis.

Obviously the importance of maintaining liquidity and having cash available.

And so one of the things that we looked at is, what is going to be the current state of the market and who has access.

And we noticed throughout that period of time that people were not getting access to the market, and we didn't know how long the market was going to stay closed, and so we wanted to be prepared to tap the market at any point in time.

There was limits on what kind of financing was available and in what formats it was available, and we thought that the most prudent thing to do for us was to get the cash in the door so that we could continue to maintain our liquidity, continue to continue on with our capital programs.

And we looked at all the ranges of alternatives out there, including whether it was five-year debt, whether it was recallable debt, whether it was 30-year debt, and the deepest market at the time was the 10-year range.

And again, you are right, it is a higher price to pay, but when we look back at everything else that was going on at that time, we think it was a very prudent decision.

And it's going to increase the cost a little bit for 2009 from an interest expense standpoint, but for the next two years we can cover that, and, as you said, worst case scenario is that it gets trued back up in 2011.

The point I would add, Hugh, is certainly at that time, and I think generally now, banks are not increasing their exposure to credit to a particular company, and so to transform some of our revolver into like a 5-year funded loan, would diminish our bank line flexibility.

And I think that what was clear during that period and probably will continue forward, is that flexibility and liquidity are at a maximum premium right now.

And so one would not want to diminish your banking flexibility by funding out a portion but rather one wants to transform that liquidity, fill it with a long-term placement.

Okay, understood.

Now, you all mentioned that, whereas there's the eventual true-up for the embedded cost of your debt, there is no true-up for the cost at which or the price of which you issue equity.

If you proceed with an equity issuance in the first quarter under conditions similar to today, issuing equity at PE multiples that are reminiscent of the early '80s, are there alternatives to that?

Yes, there are.

And one is the utilization of cash at the holding company.

Secondly is, we have $200 million of lines at the holding company.

And third would be a debt placement at the holding company to bridge to another point in time when the equity markets are more favorable, and then fund that out with equity at that point.

Great, okay.

Then just a final question.

As we monitor the impact of the increase in bond yields, corporate bond yields on your cost of capital and ROE, we obviously need to make reference to the AA and BBB Moody's utility bond indexes.

But what is the benchmark level against which the movement in those indexes will be measured before you're allowed to have a reset of your cost of capital?

I know we're looking for a 100-basis point move, but a 100-basis point move with reference to what level?

Hugh, you're asking what's the historic benchmark?

Correct.

The B AA Moody's bond yield benchmark, this is the average for October of '06 to September of '07, is 6.26.

And the AA?

I have the single A, I don't have the AA in front of me.

The single A, same benchmark, same period, 6.02.

Okay.

And then do we use an average of the two, or is it just one or the other that will be the benchmark applicable to you.

No, it's one or the other.

And southern California Edison right now has an advice filing in front of the commission where, because they are split rated, as we are, they have asserted that the B AA benchmark is appropriate.

And if that is approved by the commission, since we're in the same situation, then we will assert the same thing and use the same way.

Great.

Thank you very much.

And Hugh, one last thing I would add, when you were talking about the cost of debt, I do want to remind you that we did issue the $300 million of tax exempt at 1.75, and, in fact, it resets this week at 1%.

That absolutely helps offset some of that 8.5.

I like that a lot better.

Thank you very much.

Thank you, Mr.

Wynn.

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

You may proceed.

Hi, guys.

When you discuss guidance and kind of the long-term 8% target EPS growth rate, you have been pretty consistent mentioning that you need some of the CapEx or projects that have not been approved yet to kind of make that.

If I go down that list, and I'm just going back to the presentation you gave at a conference in September.

Tesla has been denied, the pacific connector LNG pipeline, meaning unless this is not depending on it, it seems that the LNG facilities in Oregon are set up to wind up facing a lot of litigation up there.

The BC electric transmission line, would love if you could give an update on that.

And I guess the question really is, how much incremental CapEx would you have to get in terms of dollars to be able to meet that 8% target?

Right.

So let me give you an update on some of the projects that were not included in our forecast but are out there, and then Chris might address a little bit the second part of the question.

The first one is smart meter, and that's about 500 million, and we're expecting a decision either -- probably by the end of the year on that one.

Might go a little over.

So that's one increment to add to it.

Second one is Cornerstone.

So we have that filing before the commission.

So that's there.

Tesla, as you said is, the commission has ruled on that, and at least so long as Russell City looks like it's going to be built, then I think tesla is off.

If there's a problem with Russell City, who knows what will happen with tesla.

Then on BC renewables, which is the heart of your question, we continue to make good progress there.

Where we currently stand is, we have been working together with utilities in Oregon and Washington, and they are supportive of it, and we are working with them on the specific location of the line and the specific location of the substations.

We have the directional support of the PUC, strong support of the Governor, and the FERC has ruled that we can recover our expenses that we're spending during this period of time if the project were abandoned.

So it is still early in the process, but I just want to say that this project is very consistent with where many states are going, and this region is going, which is more renewable power.

And as we've discussed in the past, it would provide for firm power that was clean, renewals backed by hydro.

And this is -- it will be renewable generation and substantial amounts of it.

So it's early, but the progress has actually been very good to date.

Chris?

Okay.

Michael, as Peter mentioned previously, we also are looking at our own investment in renewable generation that would be part of that opportunity also.

And the way that we're sort of looking at is, we didn't proceed ahead on tesla, then we see renewables as an alternative to that, and the preferred alternative by the commission for equity investment.

Okay.

If the only -- of these five projects outlined in some of your prior presentations, if the only one you get is the smart meter upgrade, do you meet your 8% target over the next four or five years?

Michael, what we've said is it's a combination of investment in new capital expenditure programs, it's a combination of that with energy efficiency incentives and cost reductions in driving costs out of the business.

So, to pick on any one thing or two things like those programs, it would be more difficult to say.

We feel like, when we've looked at all the opportunities around all those things, and the things that we've got built into our long-term plans, that we're still on target.

Okay.

Thank you, guys.

I'll see you guys in Arizona.

Okay.

And I think the one thing I would add is, the base level of investment and rate base that's already been approved, provides for, Chris, correct me, but I think between 6.5 and 7.5% growth through the period through 2011.

So that provides sort of the floor type of number, then the capital expenditure programs and efficiency savings go from that number up to 8%.

Okay.

Thank you.

Thank you, Mr.

Lapides.

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

You may proceed.

Hi.

In answering Jonathan's questions about some of the cost cuts and efficiency actions that you are taking, I wondered if that incorporates projected declines in materials, and I don't know if labor--.

Going back a year, as you looked at your capital spending program, inflationary pressures were negatively impacting you.

And I just wondered if you had seen any sort of easement in that, or if that's wrapped up in your overall cost cutting efficiency numbers.

We have seen some easing in those costs.

Some of them have just stopped progressing upward, and some of them we have seen some cost declines.

Generally that will really have the biggest impact on our capital side of the business.

Those are the costs that go into the capital.

And so what that has enabled us to do is, make sure that as we are addressing the needs that we have for improving our system and hooking up customers and building the generating facilities and stuff, that it gives us more flexibility on allocating capital dollars around those things.

Let me see if I can add here.

A real area of pressure for us was in the new connect area.

And, in fact, we were spending more capital than we had in our plan in our GRC.

And not only were we spending more, but the cost of that capital was larger than we expected because of the run-up in the commodities costs.

And now what we are seeing is new connects have plummeted, and so we're sort of under-running on a real-time basis, and we're certainly seeing an easing, if not some reductions in commodity costs, to support the business.

Okay.

And then separately, bad debt expense, uncollectibles, you talked about being on top of the accounts receivable collection.

Do you have any sort of regulatory recovery mechanism for bad debt expense, and have you seen that increasing?

We have a regulatory mechanism in the fact that when we go through our GRC process every three or four years, we build in a certain level of uncollectible accounts, along those lines, and then we have to manage within that.

So there's not a real time kind of an adjustment mechanism.

But when we look at 2008 compared to 2007, we're looking at maybe a 10 to $15 million increase in uncollectible expense, so it is something that, as Peter said in his prepared remarks, it's manageable.

Okay, great, thank you.

Thank you, Ms.

Rich.

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

You may proceed.

My question has been answered, thanks.

Thank you, Mr.

Khan.

Our next question comes from the line of Ella Vuernick with RBC Capital Markets.

You may proceed.

Thank you.

Good morning.

I have two questions.

One is, I was wondering if you are feeling any effects of the DWR curtailment of water supply, and if so what you kind of foresee what that impact would look like through 2009 for prices and power plant operations.

This is Jack Keenan.

I'm not aware that we're seeing anything in that area at this point in time.

The hydro this year was not a good year, but other than that we are on target.

Okay.

And my second question is, and I know you touched on this earlier in your discussion on decoupling, I was wondering if you could give us a little more color into what you are seeing in terms of demand destruction, what customer segments, how much, when it might bottom out.

What we've seen to date is, actually in the early part of the year the reasonably normal levels of demand.

October has been down a little bit.

I'm speaking to the question of power, electric side.

But Octobers tend to be down, so what people are expecting is that we may see growth of about 1% or less, but we want to emphasize that we're in the point of flux and change right now.

So certainly our economists' views could be revised downward, but thus far we have not seen a substantial level of reduction and demand relating to what would appear to be the economic downturn, and that's demand for electricity, but we did note what was happening to new connects.

I'm sorry, could you expand a little bit on the new connects?

What I've seed is new connects have dropped precipitously and are going down very significantly.

But I also mentioned that we had previously been over-spending on new connects.

But new connects clearly have gone down very substantially.

Ella, this is Gabe.

If you look at one of the tables in our supplemental package, it actually shows you the new connects, and I believe the numbers indicate that, compared to last year, we have, for example, about 35,000 additional electric customers now than we did a year ago, and that's probably a half to a third of what we would consider normal for us.

Okay.

Thank you very much.

I think that covers my questions.

You are welcome.

Thank you, Ms.

Vuernick.

Our next question comes from the line of John Cohen with Citi.

You may proceed.

Just had a question about the energy efficiency incentive payments, and what the differences are between the petition for modification and also the ALJ and the alternative decision from PB.

Sure.

If you look at that time ALJ's proposed decision, what it communicates is that they were supposed to get their evaluations done by August.

That was delayed to November.

And now they would like to delay decision making on this proceeding into January or maybe the first quarter.

And so basically, the message is, we can't make any decisions until we've completed our work and we're delayed in doing our work and need to wait into the new year to do that.

What Commissioner Peavey, the points he makes are the following.

Energy efficiency is a very important item for California, and the state has has been looking to create a model for the rest of the United States, and therefore the efficacy of the mechanism together with the timeliness of the mechanism is very important.

And so his feeling is that there needs to be certainty around calculations, and incentives need to be calculated and given in a timely basis to ensure dependability and certainty that the capital markets can look at and see a mechanism similar to power plant construction and investment.

And on the basis of that, he has concluded that we ought to go ahead and award to the utilities, payments in PG&E's case, 59 million, for the years 2006 and 2007.

Because of the uncertainty of not having completed all the staff work, what he's concluded is the hold-back, rather than being 35%, should be 50%.

And that then in the year 2009, there should be a proceeding with respect to the calendar year 2008, but that if the staff can't make up its mind, complete its work for 2008 during 2009, then the same approach would apply there.

So that is sort of the broad brush description of the mechanism.

Okay.

And in the petition, the original request was 70 million or 75 million?

77 million, which would have related to a 35% hold-back, so the full amount that we feel we're entitled to is two times 59 million.

Okay, thanks.

Thank you, Mr.

Cohen.

Our next question comes from the line of Mehdi Hosseini with Friedman, Billings, Ramsey Group.

You may proceed.

Thanks for taking my question.

I want to go back to your earlier comment about the possibilities of taking on the ownership of some of the solar projects, especially now that utilities could use investment tax credit.

I want to get your opinion on, what are the key metrics that you are looking at, what would it take for the ownership to actually take place?

The first thought I want to raise is, the ownership could be along several different lines.

For example, we have current land and facilities in our region, and we might put solar or solar and wind on those facilities, so that would be one prospect.

The other is similar to what's been filed by Edison and San Diego, which is that there might be large solar panels that are put in place on other people's premises and roofs.

So that's another one.

Then the third category of potential investment would be existing producers that are having difficulty financing themselves.

And, for example, the equity component of their, particularly tax equity component, might be something where the original providers that had previously existed don't have the tax capacity because they don't have the earnings to make investments in the renewables generators.

And because we are profitable, we do have tax appetite, so we might be such an equity investor.

So those are the arenas in which we might play.

As we look at the question of investing in the renewables, we envision doing that within our regulated business, so this would be owned by the utility.

And we would look at the question of what is the technology?

Is it wind and solar, which is what we're looking at principally first, and then what is the location of the renewable?

Is that -- would that be helpful where it's located and easily connected to the grid?

And then overall, what is the level of risk associated with that.

But the belief is then that we would make a proposal to the commission, and if they approved it, we would take that ownership stake and we would get a return on that as rate based investment.

But the commission has also raised the prospect of whether we might get a premium over the 11.35% equity on renewables to encourage the California utilities to move ahead as equity investors in renewables.

Just as a follow-up, two things, going back to the reference to southern Cal Edison, as they are this week debating in San Francisco in front of CPUC, what I have realized that there may not be the expert for the distributed part, and it seems like subcontracting that to some of the people who have more expertise could be the most prudent thing.

Is that something you agree or disagree?

Then as a follow-up, what you said about the return, would the ROE dictate some of the negotiation that you would eventually have with turnkey system providers as you start this solar projects?

Okay, so the first question is, what about the expertise of Edison and might subcontractors be more capable than the people at Edison.

I will decline respectfully to comment on Edison's capabilities or strengths in this area.

That's not our business.

What I have communicated is that we will evaluate what work we will do versus subcontractors, based on what we feel is -- who has the right expertise and what is the most cost effective solution.

With respect to the ROE for any prospective investment, our plan would be, there are two sides of it.

One is, what kind of deal do we negotiate with a renewable producer, what is the right price, based on where the market is at that time, and we'll look at that question and buy into it.

But the point to be made is that the return that we would make on that would be a rate based type of return, which would either be the 11.35 or, let's say a higher number that the commission would deem appropriate.

And the point to be made is, to the extent that that investment did better than anticipated, and we purchased at a good price, that benefit would go to our customers, the rate payers, so both the opportunities and the risks associated with that investment would be for the benefit of our rate payers.

Great.

Thank you very much.

Lynn, if there is one more question, we'll take that question, and then we're going to have to end the call because we're beyond our one-hour time limit.

Absolutely.

Your final question comes from the line of Adam Wiseman with Luminous Management.

Good morning, guys, this is actually Michael Goldenberg.

Hello, Michael.

Hi, how are you?

Just had a quick question as to how these varying energy efficiency decisions will be played out.

If I'm not mistaken, December 4 is the first time we can be brought to vote.

I just wanted to understand exactly how it all works out, what the barriers are in the process.

Sure.

Chris, would you handle that question.

Yes.

This is Chris Warner in the law department.

The commission will have a chance to consider the proposed decision and the alternate proposed decision on December 4.

They also can consider it in another meeting before the end of the year on December 18, and then I think, as you know, in the PB alternate proposed decision there will be further proceedings on the 2008 award that will play out over the next year, and then a true up proceeding for the three years of awards in 2010.

I just want to come back on that point and say, as energy efficiency was initiated and put forward by the commission and the state, the intent was to create a model for the rest of the United States, to have a very good model for the state of California, but to encourage the rest of the country to look at energy efficiency, not as the fifth fuel, but as the first fuel, which we fully support.

We support that view, and the fact that we need a great model here in the state of California.

And so, what I want to emphasize from that is, it's so important for companies, as well as the street, to have a certain model, and one that decisions are made on in a timely basis.

And so we fully support the direction that Commissioner Peavey is taking in this decision, and feel it's very important for the state as well as the country.

With that, thank you.

Gotcha, thank you.

Alright, and I'd just like to thank you again, everyone on the call, and for those who weren't able to ask your questions, I'm sure that we'll see you at the EEI in Phoenix in just a few days, and we'll look forward to more discussion then.

Thanks very much, and have a great day.