PG&E Corp (PCG) 2009 Q3 法說會逐字稿

Good morning and welcome to the PG&E third quarter earnings conference call.

At this time, I would like to introduce your host, Gabe Togneri with PG&E.

Thank you and have a good conference.

You may proceed, Mr. Togneri.

Thank you, Monique.

Good morning, everyone.

We issued our earnings release earlier this morning along with the usual supplemental tables and including the Reg G reconciliation.

The same information can be found in the 8-K report we furnished to the SEC this morning and we'll also file our joint Form 10-Q for the Corporation and for Pacific Gas and Electric today.

I will remind you that our prepared remarks and the Q&A session to follow will include forward-looking statements based on assumptions and expectations that reflect information currently available to management.

Actual results may differ materially from those forward-looking statements.

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

Those factors include the risk factors and other factors described in our annual report on Form 10-K for the year-ended December 31, 2008 and our Form 10-Q reports.

Leading the discussion today will be Peter Darbee, the Chairman, CEO and President of PG&E Corporation; Chris Johns, President of Pacific Gas and Electric Company; and Kent Harvey, CFO for the Corporation.

Other key members of the team are here and they will participate in the Q&A session.

With that, I will turn things over to Peter.

Thanks, Gabe.

And good morning.

Thank you all for joining us today.

In this challenging economic environment we have another solid quarter to report.

Earnings from operations came in at $0.93 per share.

Today, we are reaffirming guidance for earnings from operations for 2009, 2010, and 2011.

Our primary business is and will remain the regulated utility.

As a result, we have a total commitment to running that business and running it well.

We continue to feel positive about the Company's progress on operational excellence, efficiency and work priorities.

As the context for our comments today, I would like to start by reiterating the main elements of our investment case.

A primary focus is our plans for substantial rate base investment.

This investment is driven by our customers' needs for safe, clean and reliable energy.

It is also shaped by our regulators' and legislators' policy objectives.

These include promoting energy efficiency, expanding renewable resources, and adopting new technologies that are critical for a low carbon economy.

Our goal of environmental leadership not only aligns us with all of these important issues and constituencies, it also positions us well in a changing world.

Stability and transparency are also a part of our value equation.

Our cost of capital adjustment mechanism was recently extended by the CPUC.

It now runs through 2012 with an authorized ROE of 11.35% and an equity ratio of 52%.

This provides more visibility and stability for our investors.

Revenue decoupling adds to that stability by keeping our revenues steady despite a challenging state economy.

It also motivates us to pursue customer energy efficiency programs.

This helps build closer relationships with our customers as we encourage them to use energy more efficiently.

Additionally we've also had a mechanism in place for a number of years to ensure the pass through of our procurement costs.

This has been tested by the volatility of gas prices in recent years and has proven to be dependable.

All of this allows us to focus on running our business to the benefit of our customers and shareholders.

Chris will now provide you with some of the details on the Company's operations and ongoing projects, then Kent will take you through the financials and discuss recent regulatory events.

Chris?

Thank you, Peter.

I will cover operations and provide an update on state legislative activity.

Our two power plants under constructions, Colusa and Humboldt, continue to progress on time and on budget.

They are both scheduled to come on line in 2010.

We also recently announced the result of our 2008 long term request for offers for conventional resources which targets resource needs by 2015.

There are four natural gas powered projects that we've recommended to the CPUC.

Of the four, one is the combined cycle facility that was bid into the RFO as a turnkey project that we would own and operate upon completion.

It is a 580-megawatt project located in our service area that, if approved, should be completed in 2014.

This is when our investment would occur.

Capital costs are confidential at this point but we will be able to share more information with you as the project progresses through the approval process.

We also recently opened our grid control center, a new state of the art facility focused on improving the operations of our transmission network.

It will eventually consolidate 15 transmission dispatch centers throughout our territory and allow us to modernize and get better information with what is happening with our transmission grid.

It will also make us more efficient and effective in planning for maintenance and repairs and responding to transmission interruptions and outages.

The center is housed in a LEED Silver certified building which is 10% more energy efficient than the already aggressive California standards.

A common theme of ours over the past few quarters has been a focus on operational excellence and productivity and some belt tightening to mitigate some of the impacts of the economic slow down.

We have improved processes and productivity in several areas.

We have trimmed employee related expenditures, reduced vendor and consultant costs, and lowered fleet related expenses.

As part of this broad company wide effort, we have also reduced our workforce by a little over 2%.

Kent will go through the financial implications of the reductions in just a couple minutes.

The last thing I'll mention on the operations side is that two weeks ago we were hit by the strongest October storm on record in over 40 years.

It's very rare to experience this so early in the storm season.

Over 200 poles were damaged, as were over 300 transformers.

And we had 900,000 customers lose power.

Our crews responded very well and had over 95% of the affected customers back online in less than 24 hours, and the vast majority of those in substantially less time.

On the legislative front, Senate Bill 695 was signed into law earlier this month with support from various parties including PG&E.

This law lifts the rate cap on the residential customers who consume the least amount of electricity.

You will recall that since 2001 residential rates at the Tier I and 2 levels of our 5 tier rate structure have been frozen.

As a result, all increases in cost since then have been borne by the higher tiers.

This legislation addresses that imbalance and allows the CPUC to reallocate some costs across the different usage levels.

It partially reinstates direct access with limitations for industrial and commercial customers while creating a more level playing field by holding all providers to the same standards for resource adequacy, renewable generation and compliance with AB32 greenhouse gas legislation.

In this same vein, we want to share some information about a potential ballot initiative in June of 2010 in which we are actively involved.

It is called the Taxpayer Right to Vote act.

If passed, it would require two-thirds approval from local voters before public funding could be used to take over a utility's assets.

This measure, if we proceed forward, would guarantee that voters have a voice in cases where local officials are spending scarce resources in an effort to take over parts of a utility's operations.

We believe taxpayers should have a say before the local government spends millions of dollars to get into the power business.

We've faced potential takeovers multiple times over the last several years, and we have had to expend significant resources to oppose these efforts.

The success of this initiative, if placed on the ballot, could significantly reduce the need for taxpayers and utilities to oppose these local government takeover attempts.

Right now, the initiative is still being considered and we will keep you updated as the initiative progresses.

With that, I will turn it over to Kent.

Thanks, Chris.

Hello everybody.

As we announced earlier this morning, PG&E Corporation earned $358 million or $0.93 per diluted common share and earnings from operations in the third quarter.

On a GAAP basis we earned $318 million or $0.83 per diluted common share.

This compares to $304 million or $0.83 per diluted share for the third quarter of 2008.

And that's on both a GAAP and non-GAAP basis.

As Peter indicated we are reaffirming our guidance for earnings from operations for 2009, 2010 and 2011.

Table four in our supplemental earnings package shows the primary drivers of earnings from operations in the third quarter.

These include an increase of $0.06 per share relative to 2008 as a result of revenues associated with higher authorized rate base investment.

An increase of $0.03 as a result of expenses incurred last year to defend our positions on local and statewide ballot issues with no similar expenses this year.

An increase of $0.03 due to three smaller items, about $0.01 each: that's an incentive award for our core gas procurement program, lower uncollectibles, and lower environmental accruals.

And then an increase of $0.02 made up of miscellaneous items.

Partially offsetting these increases was a reduction of $0.04 associated with higher shares outstanding compared to the third quarter of last year.

As you know, due to higher equity issuance in the first half of the year from our 401k and DRIPP programs, in August we shifted these programs to open market purchases.

Up until that time, the programs had provided $228 million of cash.

We will continue to monitor our equity needs going forward but I currently expect we will resume new issuance for our 401k and DRIPP programs in early 2010.

We don't expect to need to issue any new blocks of equity until 2011.

I want to take a moment to go through the items impact in comparability and I'll refer you to the Reg G reconciliation table.

The first item is our tax settlements.

And they have provided a positive impact to GAAP earnings of $0.18 during 2009.

This amount has actually increased by $0.03 from last quarter as a result of recording the state benefit associated with the tax settlement.

The second item is the recovery of costs associated with valuing our hydro facilities and that was fully reflected in the second positive quarter and had a positive impact on GAAP results of about $0.07 a share.

The third item is the accelerated gas system integrity survey and associated maintenance work.

This one is a big undertaking and we have been ramping up our effort during the year.

We spent about $23 million on this during the third quarter and that brings us to a total of $54 million for the first three quarters of the year.

When all is said and done on this one, we expect that we will utilize the upper end of our range of up to $100 million, but a portion of this may spill over into the first part of next year.

We have added an additional item impacting comparability associated with the cost of the workforce reduction that Chris mentioned.

The employees who are affected qualify for severance and the overall cost is estimated to be $57 million to $70 million pretax which is about $0.09 to $0.11 per share of a range.

We have reflected $0.09 in the third quarter results.

We expect that some adjustments from implementation will be included in the fourth quarter.

A few quick updates on the regulatory front.

First, as Peter mentioned, we received a positive decision in our cost of capital case two weeks ago.

The PUC approved the settlement we filed with the Division of Ratepayer Advocates and that extends the adjustment mechanism for our ROE and maintains our current capital structure both through 2012.

In September, we filed our gas transmission and storage rate case which covers 2011 through 2014.

And we requested a first year revenue increase of about $67 million.

Then finally, we continue to expect to file our 2011 general rate case late this year.

We hope to have both the GRC and the gas transmission case resolved near the end of next year.

With that, I will turn it back over to Peter.

Thanks, Kent.

Over the past couple of years, many of you have heard me outline the elements of our strategy.

This strategy has helped us to sharpen our focus and has led to positive results like the solid earnings that we reported today.

The five key elements are the following: One, understanding our customer needs better than ever before.

Two, delivering on operational excellence.

Three, working constructively with regulators and policymakers.

Four, being an environmental leader.

Five, supporting our communities.

Today I will elaborate on one of these elements: Understanding our customers and their needs.

We recognize that our customers are not all the same.

In other words, they are a heterogeneous group.

They have different needs and expectations and that means they value different services from PG&E.

We have made a significant commitment to understanding exactly what those preferences are so we can use this information to better target and customize our offerings.

For instance, through our research we've learned that there is a segment of our residential customer base that wants to hear more from us through email and text messaging.

These customers are particularly interested in energy efficient appliances and the internet is their first source of information.

For them, we've provided tailored online programs that can analyze their usage and help provide concrete suggestions for reducing their bills.

Another segment of residential customers prefers to learn about our services through television commercials or in-store promotions.

They benefit from our in-store rebates on products like home appliances.

They are also interested in programs that will help them manage their bills, like our balanced payment plan.

By understanding our customers individual needs and preferences, we can more successfully develop and market all of our programs and services.

We look forward to continuing to apply this kind of customer insight as we move ahead with the next three year push on energy efficiency.

Last month we received a final decision from the CPUC setting a budget of $1.3 billion for our 2010, 2011 and 2012 energy efficiency programs.

We are excited to begin their implementation.

No other state in the country has committed as much to energy efficiency and demand response as California.

This decision allows us to take energy efficiency to an even higher level.

And we see opportunities as we investigate new programs.

We continue to work on efficiency codes and standards, to make new construction, appliances and equipment as efficient as possible.

As in the past, incentives are a critical component of keeping California the leader in energy efficiency.

On the demand response side, smart meters will enable time of use pricing for more of our customers.

Once again, understanding customer needs in the design phase is critical to the success of these programs.

Over the longer term, developments like plug in electric cars will change the shape of our load, making time of use pricing even more important.

Last week, I was in Detroit at a major gathering of key players in the development of electric cars.

My estimate was that there were more than 500 people at this conference.

The group was made up of auto manufacturers, supporting vendors, engineering firms, utilities, investors and of course potential customers.

I sensed an excitement that tells me that the wider use of electric cars is soon going to be a reality.

These innovations are going to be adopted first in places like San Francisco, Berkeley, Marin, and the South Bay, and that of course is PG&E territory.

So we'll continue to spend a lot of time working with our customers, industry and technology specialists, and our regulators, so that we can plan to be ready for that future.

This will help us invest wisely to benefit our customers and shareholders alike.

And with that, we're now ready to take your questions.

Ladies and gentlemen on the phones, we will now have the question-and-answer session.

(Operator Instructions) Our first question comes from the line of Paul Patterson at Glenrock Associates.

You may proceed.

Good morning, can you hear me?

We can.

My interest was piqued by this initiative you are doing.

For years I have been reading about these initiatives to takeover, to municipalize parts of your system and they always seem to have not worked.

Am I right about that?

Has there ever been a successful attempt to municipalize in the last 10 to 15 years?

Not in the recent past.

We have clearly taken a position that we value our customers very much and we are going to stand up and resist efforts to take over our customers by municipal government.

Now, it was $0.03 that you were impacted by in 2008 but you're not getting any impact this year, is that correct?

Nominal impact this year.

I don't remember this kind of legislative or initiative effort that you are making.

What spurred you guys to come up with this, anything in particular?

Is there anything we should be thinking about?

What occurred to us was we were repeatedly faced with this and we were spending significant amounts of money year after year.

And so we asked ourselves, what would be something that could discourage this over the longer term.

And we also asked ourselves, if government wants to raise taxes it requires a 66%-2/3 vote.

If government were to use taxpayer money to take over private enterprises, we thought there ought to be first a vote of the people and secondly it ought to be a reasonably high hurdle.

That makes a lot of sense.

The severance expense, what kind of benefit to you expect to see from the severance plan in 2010?

Paul, this is Kent.

I will briefly cover the factors that are affecting this.

First of all, the economy has reduced our new business hookups.

So as a result, there's parts of our business where we have lower volume than before.

So that is a driver.

And then, as we've talked about for some time, we have been looking at ways to reduce lower priority work and to find efficiencies in our processes.

And so I think this reflects all of those factors really.

The reductions we expect will give us efficiencies, say, next year roughly in the $30 million range when you look at the expense component of it.

$30 million pretax, right?

That's correct.

Thanks a lot.

Thank you, Mr. Patterson.

Our next question comes from the line of Jonathan Arnold with Deutsche Bank.

You may proceed.

Good morning.

Can I just pick up on that last question first.

The $30 million pretax of benefit in 2010, is that something you are just thinking about within the context of the range that you have on 2010 guidance, or is this something that is helping to push you up within the range as you look at your expectations for next year, or keep you in the range?

This is Kent again.

We do view it as consistent with our guidance range for 2010.

If you remember back to our analyst conference earlier in the year, we laid out a number of assumptions in ranges that would be consistent with the overall guidance range we were providing.

And one of those that we would seek out and obtain efficiencies in future years.

And so for 2,010, I think our range was $50 million to $60 million of efficiencies, and this is a big step in that direction.

Thank you.

Then on a different topic, there seems to have been some noise in the state around out of the political arena pushing back on the smart grid cost.

and effectiveness of the meters being put in.

Can you comment at all on that whole area, and how concerning you find that area of focus from the politicians.

Jonathan, this is Chris Johns.

What we really saw there, and this was in the Central Valley part of our service territory, so down around Bakersfield and the Fresno areas.

And what the concern was that arose was really around customers and their bills.

They had some concern about some of their bills they were seeing in the summer time.

And when we went down and investigated that what we really found was a couple of things.

One is that there were a couple of rate changes that occurred late last year and early this year.

If you recall, within our state, we have a tiered system, five different tiers.

And the first two tiers are frozen so most of the rate changes affect the third, fourth and fifth tiers, which are the higher end users.

The second thing we found is that this summer, at least in one or two of the months, was a little bit hotter than we've seen in the past summers.

So we saw, for instance, down in Bakersfield, I think we had 17 days of temperatures over 100 degrees versus about half of that number last year.

When you combine those, you saw some pretty good increases in our customers' electric billls for one or two of the months during the summer time.

So we went through the process of explaining that.

Now, a couple of people thought that maybe that was because of their meters, because maybe they had a new meter in there.

But what we pointed out is the meters we had down in Bakersfield are the same meters that have been there for about two, two and a half years.

So we have really done a lot of reachout to our customers to help them get a better understanding of the factors around the rate changes and around the temperatures and their impacts on their bills.

So that is really what the issue has been.

We've done a lot of testing on our meters to provide people the facts around the circumstances down there and so we feel pretty confident about the performance of those meters in our area.

One final thing, if I may.

You mentioned the rate tiering issue.

What is the timing for this to actually be implemented?

Would it be as part of the 2011 GRC rate implementation or could this happen sooner than that?

As you are alluding to, there was a law that got passed, just recently signed by the governor, that allows for the gradual increasing of the tiers one and two, so it took the freeze off of that.

We have gone ahead and made a filing with the CPUC to implement the first part of that gradual change and we've done that filing.

It will have to go through the process.

We would like it to take impact in the first quarter of next year, the beginning of next year is what we would be targeting.

But it is a separate track from the rate case basically.

Yes.

Thank you, Mr. Arnold.

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

You may proceed.

Thank you.

Just following up on that last question, I'm assuming that the tier one and tier two unfreezing of the rates means that you're going to basically redistribute the revenue within the five tiers as opposed to, I suppose, increasing tier one and tier two, which would give a benefit to PG&E.

This is Chris Johns again.

Yes, absolutely.

When we are talking about this it is really rate design and the revenues in total stay the same.

It is just a matter of distribution around who pays at what levels of usage.

Second question, in your 8% compound annual growth rate estimates going forward, what RPS standard are you assuming?

Is it the old 20% by 2010 or is it the 33% by 2020?

Our guidance ranges that we have done for 2009, 2010 and 2011, I don't believe we've really identified the renewables standard as a key underlying assumption in that respect for our earnings from operations.

Through the current time for most of the compliance we have been doing, most of that has been contract and that's a pass through cost with customers.

As you know, we have proposed a photovoltaic program that would include investments by the company.

And those investments are reflected in the 2011 number but only to a small extent and because the majority of that investment would be after that guidance period.

But I want to add, we have been working for a number of years toward 20% by 2010.

And indicated that it would require the utilization of the flex provisions for PG&E to get there.

But, really, pretty much the state, the legislature, the governor, the Commission have been operating under the view that California energy policy supports 33% by 2020.

So, as we lay out our plans, we are focused on that next hurdle that needs to be met by 2020.

That is the assumption underlying our business.

I don't want to put words in your mouth, but can I summarize what you just said, or let me summarize what I just heard.

It sounds like there is upside to your earnings potential.

No, I think Lasan, you should listen to what we said and you can draw your conclusions.

But I don't want you to announce conclusions that you reached and say they are the company's conclusions.

What I just want to reaffirm, what we've said is we have been operating under 20% by 2010 and then we have been focused on 33% by 2020.

That's what we have said.

Fair enough.

One last question for me.

You mentioned potential equity issue in 2011.

Are we talking about just a continuation of the DRIPP program or are we talking about a secondary non-deal (inaudible) type big chunk of equity?

At this point our focus has been on the DRIPP and the 401k programs.

We have turned them off for this year, as I said earlier, because our issuance exceeded our expectations for the first part of the year.

I indicated that we would expect you to resume those next year.

I also, when I was talking about block equity, that was in addition to the 401k and DRIPP programs and we do have the ability to need that as early as 2011.

And I'm assuming that would be going towards funding your cap growth program.

That's correct.

Fantastic.

Thank you very much.

Thank you, Mr. Johong.

Our next question comes from the line of Michael Goldenberg with Luminus Management.

You may proceed.

Good morning.

I just had a quick question on diluted shares outstanding.

I understand your basic share count is roughly 370 basic and fully diluted would be 390.

However, for year to date, I thought the way you are supposed to calculate is take, since you have about 50% payout ratio, roughly half the income, $600 million for the year, you have to divide it over 370, and the other roughly another $600 million gets divided by 390 over the course of the year.

And you would get somewhere about 380 diluted shares outstanding.

So while I understand why the Q3 shares fully dilutive were 387, I don't understand why the nine months were also 387, especially if in the previous reports it was closer to 370.

Michael, this is Kent.

You have raised an incredibly arcane calculation that is very complex to follow, so let me acknowledge that up front.

And this is probably one where we could spend some time off line walking through the complexities of this calculation.

There is a seasonal impact that adds to what would already be complex.

So the impact that we show in the walk that we have here for the third quarter, for example, shows that we had additional shares that were issued between the third quarter of '08 and the third quarter of '09.

And then also, because the third quarter earnings are higher than other quarters, the two class calculation allocates a higher proportional weight to the diluted plus participating securities share count in the calculation.

And it creates a lot of complexity when you look at each quarter.

Let's simplify that.

For full 2009, do you expect fully diluted to be around 380 or 390?

We haven't provided a specific forecast of our share count for full year, Michael.

Okay.

All right.

I guess I am still confused but maybe we can take it off line.

That would be great because, frankly, I couldn't follow all your numbers too.

It is hard on the phone.

We would be happy to do that off line, Michael.

Thank you, Mr. Goldenberg.

Our next question comes from the line of Annie Tsao with Alliance Bernstein.

You may proceed.

Good morning.

Can you comment on the quarter how is your uncollectible going forward?

Can I expect your O&M is sustainable and then it can offset some of the uncollectibles you were talking about?

Annie, I did comment that in the third quarter our uncollectibles were actually slightly better than the third quarter of last year when we had begun seeing some of the impacts, obviously, from the economy in the state.

We are very encouraged by that.

You may remember earlier in the year we had a significant negative year-over-year impact and we worked really hard to mitigate it., both by helping customers into the assistance programs that we have as well as trying to get them earlier in the process so that we could better manage the bad debt.

We believe that our efforts have been paying off.

And our objective is to try to continue to mitigate that impact for the remainder of the year and into next year.

Can you also talk about your renewable RPS and how far, you are talking about 20% by 2010, how far are you down on the path right now?

Annie, this is Chris Johns.

We have right now 14% of our energy is being delivered from renewables.

But in addition to that, we have contracted for over 20% to come on line.

And as Peter said, the law requires us to have 20% by 2010 but it has flexible compliance provisions that allow it by 2013.

The real issue for us is that we have got the contracts out there, like I said, in excess of 20%, but because of the economy and some of the other impacts of getting permits and transmission, we are not positive that all of those contracts will come on line.

That's why you continue to see us doing more contracting and look for opportunities like our PV program to own it.

And, quite frankly, we also know that we have to do the 33% and so those will all be parts of getting us to that next level.

Thank you.

Thank you, Ms. Tsao.

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

You may proceed.

Hi, I just wanted to ask a question regarding the legislation that you mentioned that would partially reinstate direct access for industrial and commercial customers.

Do you see any economic consequences of that legislative change on your earnings outlook, or do you feel you are completely protected by the decoupling of revenues from megawatt hour sales?

This is Kent.

Let me take a crack at that one.

With direct access, what we are talking about is our customers would continue to be our customers for the distribution of the energy.

That really wouldn't change.

In this case, customers would rely on third parties in order to provide the commodity component of their service.

And for us the commodity component is not what we really earn our money on.

We earn our allowed return on our net investment in our rate base.

Most of our commodity activity, the purchased part of our commodity activity, really is a pass through of costs without any profit component.

So, in that respect, we wouldn't expect any significant impact on our ongoing earnings capability.

Is there any impact on potential investment in generation plant for reliability requirements?

I think that gets into the magnitude of the direct access that we are talking about here.

Maybe I can ask Chris Warner in our law department to talk a little bit about the specifics of the legislation.

Yes, this is Chris Warner.

I think what is important to note is that this reopening of direct access is limited to the non residential customers and it is also limited by a cap that's at a fairly low level.

And I think also, the fact that is important here is that existing direct access customers, who you may know were grandfathered effectively from the suspension of direct access, are only about half or even less than half of the peak that we had during the pre energy crisis period.

In addition, as you may know, any customers who leave, who have obligations to pay any fixed costs they still owe PG&E, and direct access providers, will have to comply with all existing resource adequacy, greenhouse gas emission, and other procurement standards that apply across the board to all electric service providers in the state.

So basically, since the distribution, megawatt hour sales will be unaffected, no impact, in your view, on revenues and any impact on the potential construction of new generation plant you feel are limited by the provisions of the law.

Is that more or less right?

The way it works you would think of as a second order or maybe third order impact.

What you would do is you would plot out what do you expect future generation to be over the 10 or 15 years.

Then you identify what would be your erosion due to direct access, or what would be the level of direct access.

And then that would reduce the total generation load that PG&E would have to provide for.

And then you'd have to make an assumption about, of that load, how much do you expect would be provided by third parties as contracting and how much provided by generation that the Company would own.

And then you would look at the capital investment associated with that.

That's how you ought to think about it.

To date I think we've provided about a third, maybe a little bit more than a third, of the incremental new generation that has been provided in, let's say, the last five or eight years.

That's very helpful, thank you very much.

Thank you, Mr. Wynne.

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

Hi guys, quick question.

Over the years you've had projects where you had signed a PPA with a third party who was going to build it and sell the power back to you, whether conventional or new.

Over the last few years, several of those projects have run into stumbling blocks.

Just would love if you could give an indication of where some of those projects are and whether you actually need that capacity and if you are not going to get it from the original contract winner, where you are likely to get that supply.

That is Jack Keenan, I will be glad to answer that one.

In our submittal for 2004, we did have two contracts fail to produce power plants, totaling approximately 300 megawatts.

And you may remember in our 2008 long term RFO, which was 800 to 1200 megawatts, we were allowed to make up that additional approximately 300 megawatts.

We actually have submitted applications to the PUC for just over 1500 megawatts.

We've had one approved so far and we're waiting for approval on the other three plants to be built in the future.

That's how we are making up for that.

We still have one of the plants from our 2004, the Russell City plant, that was delayed but that we expect to come on line in 2012.

Okay.

Thank you.

Thank you, Mr. Lapides.

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

You may proceed.

Good morning.

Could you just remind us, earning incentive revenues, how much are expected to be booked in the fourth quarter, how much were booked last year and for next year?

Could you just update us on that please?

Yes.

Last year, we ended up receiving an incentive, a little over $40 million.

This year we have filed a settlement that would result in an incentive of approximately $77 million.

The PUC staff issued recommendations for what ranges they thought were reasonable.

It was initially issued at zero to $20 million.

However, they broadened their ranges later on in a subsequent filing and their range ended up being quite broad, zero to $90 million So this is one we hope to get it resolved by the end of the year.

It's really going to depend on how that comes out at the PUC at this point.

Kent, what could we expect next year?

Our guidance ranges for both this year and next year that we provided earlier in the year actually assume a range for CEE incentives of between zero and $30 million for both 2009 and 2010.

Is that going to be the final resolution?

Is that going to be an earmark of where the earnings end up, so the earnings, if they come up higher than $30 million, towards the $70 million, then you're at the higher end of the range?

Is that going to be the big variance?

Not in front of our fourth quarter factors, that is an uncertainty at this point in our results for the fourth quarter.

You are expecting what we should hear about this now in December or next month?

We are hopeful that we will see a proposed decision in the near future and we are hopeful that we could resolve it before the end of the year.

Thank you very much.

The State of California has really indicated energy efficiency is very important and they want to be a leader in California on that.

And so, I think certainly members of the CPUC understand if we're to be a leader, we need to create a dependable and understandable energy efficient incentive program.

So we've certainly been encouraging them in that direction, and I think certainly Wall Street would support that point of view.

Peter, I was only trying to get a sense as to with three quarters of the year done where you are expecting to come in the range of the earnings guidance, so I guess this could be one big chunk where it could move you really to the top end or you could come to the mid-point or something.

I think what we laid out at the beginning of the year, it is zero to $30 million.

So where we come out relative to zero to $30 million will impact on where we come out in the range.

And if we were to come about above that, I think you can draw the conclusions that would follow.

Thank you.

Thank you, Mr. Khan.

(Operator Instructions) There are currently no additional questions waiting from the phone lines.

In that case, I will thank you all for taking your time to join us this morning.

And I know in a few days we will probably see many of you at the EEI finance conference.

So please travel safely and we will see you there.