PG&E Corp. Q2 2008 Earnings Call Transcript

Aug. 6.08 | About: PG&E Corporation (PCG)

PG&E Corporation (NYSE:PCG)

Q2 FY08 Earnings Call

August 6, 2008, 01:30 PM ET

Executives

Gabriel B. Togneri - VP, IR

Peter A. Darbee - Chairman, CEO and President

Christopher P. Johns - Sr. VP, CFO and Treasurer

John (Jack) S. Keenan - COO

Bradley E. Whitcomb - VP, Products and Services

Analysts

Lasan Johong - RBC Capital Markets

Jonathan Arnold - Merrill Lynch

Gregory H. Gordon - Citigroup

Daniel Eggers - Credit Suisse

Hugh Wynne - Stanford Bernstein

Paul Patterson - Glenrock Associates

Michael Lapides - Goldman Sachs

Operator

Good afternoon and welcome to the PG&E Second Quarter Earnings Conference Call. At this time, I would like to introduce your host, Gabe Togneri. Thank you and have a good conference. You may proceed, Mr. Togneri.

Gabriel B. Togneri - Vice President, Investor Relations

Welcome everyone. We issued our earnings release earlier today, as I am sure you all saw. It's posted on our website along with the supplemental tables including the Regulation G reconciliations. We'll be referring to some of the information in the tables. So you'll want to have them handy. We also provided these materials in an 8-K report furnished to the SEC this morning. And as usual we plan to file our joint form 10-Q report for Corporation and for Pacific Gas and Electric Company with the SEC a little bit later.

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

Our prepared remarks and the Q&A session to follow contains forward-looking statements based on assumptions and expectations reflecting information currently available to management. And as we discussed in more detail in our press release and the SEC reports, actual results may differ materially from those forward-looking statements. Important factors that may affect actual results are described in the reports that we filed with the SEC. Those factors include the risk factors and other factors described in or referenced in our Annual Report of Form 10-K for the year ended December 31, 2007 and our Form 10-Q reports.

Today, you will be hearing from Peter Darbee, Chairman, CEO and President of PG&E Corporation, and Chris Johns, Senior Vice President and CFO of the Corporation. Jack Keenan, our Chief Operating Officer at the Utility and other key members of the team are here to participate in the Q&A session, if needed.

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

Peter A. Darbee - Chairman, Chief Executive Officer and President

Thanks Gabe and thank you all for joining us. Second quarter earnings came in at $0.80 per share, compared with $0.74 a year-ago. At the mid-point of the year, we're on course to meet our guidance for 2008.

Additionally, we continue to be confident that we will achieve our 8% compound annual growth rate through 2011. As we shared at our May Investor conference, a number of factors support this outlook. These include $13 billion of planned CapEx for the period 2008 through 2011, a blended 11.4% ROE on a 52% equity ratio, a high performing low carbon generation portfolio, decoupled revenues which provide stability to meet broader economic challenges and a sustainable dividend increasing in line with the EPS growth. As we underscored at that time, PG&E continues to offer competitive earnings growth in a constructive regulatory environment with an attractive valuation profile.

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

We're making good progress on investments to improve reliability for our customers. I'd like to focus on three items in this regard. The first is our SmartMeter program. Through the second quarter, we have installed over 740,000 meters. Our goal is 1.3 million meters installed by the end of the year.

This week the CPUC is holding hearings on our SmartMeter upgrade program and the decision for this is scheduled for December. The second item is our cornerstone improvement program. We are seeking CPUC approval to invest $2.3 billion over the next six years. Cornerstone is designed to improve service by reducing the duration frequency and extent of power outages and Cornerstone, together with SmartMeter will help us evolve towards the smart grid of the future to provide new energy services to our customers.

The third item is the Tesla Generating Station. A few weeks ago, we acquired the development rights for the Tesla power project and applied to the CPUC for authorization to build the plant. Tesla will help ensure our system reliability and adequate energy supply for customers in the Bay Area. The Tesla site is permitted as an 1,120 megawatt combined cycle plant with two units. Our plan is to develop and construct only one unit at this time which is 560 megawatts. The facility will be almost identical to our Gateway inclusive plants. Our goal is to begin commercial operations by the end of 2011.

The SmartMeter initiative, Cornerstone and Tesla projects demonstrate our commitment to invest in the infrastructure necessary to meet customer needs and reliability expectations. We are looking forward to working constructively with the California Public Utilities Commission to advance these efforts.

On a different note, rising energy prices have been in the news throughout the summer. And while news coverage is mostly focused on prices at the gas pump, utility customer rates are projected to increase substantially nationwide, principal drivers fuel costs in our case, natural gas.

The sampling of some of the proposed or adopted increases for other electric utilities ranges from 20% to 30%. In contrast to other parts of the country, our customers are benefiting from our low cost rate based nuclear generation and hydroelectric assets which reduce our exposure to natural gas.

Two months ago, we filed at the CPUC for a 4.4% rate increase in October, reflecting a $9.50 per million cubic feet price. Later this year, we intend to file an updated rate request for 2009. This could result in an additional rate increase of 6% to 11%, depending on what gas prices are at the time.

As always, we are working to mitigate the impacts of gas price fluctuations on customers. This includes hedging activities as well as efforts to expand natural gas storage capacity. It also includes helping customers manage their bills. To help offset the impact of higher rates, we've been working with the CPUC on proposals to increase the availability of energy efficient... efficiency programs to low income households. Significantly, increase funding for our REACH program and for the fourth consecutive year offer our highly successful 10/20 Gas Savings Program.

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

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

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

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

For the second quarter PG&E Corporation earned $293 million or $0.80 per diluted common share, on both a GAAP and non-GAAP earnings from operations basis. This compares to $269 million or $0.74 per diluted share for the second quarter 2007, also on both a GAAP and an earnings from operations basis.

During the quarter, earnings increased by $0.06 per share, relative to 2007, as a result of revenues associated with higher authorized rate based investment. In addition, this year we had the tail end of our refueling outage at Diablo Canyon power plant during the first part of the quarter.

In the same quarter last year, we had a full nuclear refueling outage. The difference between the two results in an increase of $0.06 year-over-year. These positive changes were partially offset by a number of smaller negative items. First, there is a $0.01 dilution associated with increased shares outstanding. Next, our gas transmission revenues were lower as a result of lower park and lend activity this year, compared to last year resulting in a decrease of a $0.01.

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

Considering these year-to-date results and our expectations for the remainder of the year, our guidance range for our earnings from operations remains at $2.90 to $3.00 per share for 2008 and $3.15 to $3.25 per share for 2009. Our supplemental earnings materials include a reconciliation of guidance with projected GAAP earnings per share.

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

Our current guidance and our target growth rate are based on several key assumptions. First, is an 11.35% authorized return on equity for the CPUC regulated business. For the FERC jurisdictional business, we assume that we earn at least the 12% return. We also assume that we achieve our projective rate base of approximately $18.3 billion for 2008 and $20.4 billion for 2009 while maintaining our rate making capital structure at 52% equity.

At our May Investor conference, we mentioned that some additional capital projects would be necessary for us to achieve our 8% long-term growth rate. The three projects that Peter mentioned earlier, the SmartMeter Upgrade, the Cornerstone Improvement Program and the Tesla Generating Station, are examples of our continued focus on identifying and developing prudent investments that we believe, will benefit customers and reliability and will also provide us with additional rate base that creates value for our shareholders.

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

On the regulatory front, we received the final decision in the second phase of our cost of capital proceeding at the end of May. The final decision approved the three-year mechanism for determining our return on equity, one that we believe is fair and reasonable.

Starting in 2008, our authorized ROE will be 11.35% and our capital structure will remain at 52% equity. There is an automatic adjustment mechanism for the ROE going forward that will be tied to the Moody's Utility Bond yield index. An adjustment to the ROE will be triggered by a change in the index up or down of more than 100 basis points. The adjustment would be half of the entire change in the index. So, for example, if the index moves up 120 basis points after a year, our authorized ROE would be increased by 60 basis points.

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

On the Federal side, last week we filed our transmission owner 11Ks with FERC. We are requesting to recover an incremental $88 million in total revenues. This rate filing at FERC is mostly driven by PG&E's ongoing capital expenditures for electric transmission facilities. This includes our projects to increase electric transmission capacity to accommodate load growth and customer demand as well as planned replacement of certain substation equipment such as transformers and switches.

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

Finally, in July we filed an application with the CPUC for approval of our 2009 to 2011 energy efficiency programs. Our plan will continue the programs that have been successful for PG&E, such as our compact fluorescent light bulbs campaign as well as introduce some new innovations like our zero net energy homes program. The process for the resolution of our 2006 to 2007 incentive revenues is still ongoing. Although, the process is taking a little longer than expected, we still anticipate a decision by the end of this year.

Our primary interest is the timely and fair resolution of the incentives and we are committed to working collaboratively with the CPUC to achieve this objective.

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

Peter A. Darbee - Chairman, Chief Executive Officer and President

Thanks, Chris. I'll close with a few comments on increasing our supplies of renewal energy. As you know we've been aggressive about pursuing the current 20% target and back since 2000, that we've added more than 3,000 megawatts of clean energy renewable energy to our delivered and contracted mix.

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

What we are seeing now in California is substantial interest in how to increase renewable supplies beyond the existing target. But we also face significant challenges. For example, the investment and production tax credits that have helped the development of renewable energy will expire the end of this year, unless extended. Developers are depending on these credits for their project debt economics. We want you to know that that we are making the case for extensions before Congress, the State Legislature and energy policy makers and opinion leaders.

Transmission is another challenge. New transmission takes years to plan, approve, finance and construct because of the extensive regulatory and legal complications. We are working with the California ISO to help plan and develop the needed interconnection with the new renewable resources. If we can address tax incentives, transmission, permitting and other issues the chances of planning to higher RPS target increase substantially.

On a related, but different note there is currently a poorly drafted initiative on the Californian November Ballot that would set a 50% RPS requirement in 2025. We've joined with the coalition of renewable developers, environmental groups and others to let voters that this proposal could setback the state's progress.

Environmental organizations believe that the measure has a number of fund resolvable drafting flaws. For example, it would exclude power from renewable plants, smaller than 30 megawatts from accounting towards the new targets. The fact is that nearly 60% of the current contracts under California's RPS are with these small plants. The initiative would also arbitrarily shift renewables regulations from the CPUC to the State Energy Commission which could add regulatory uncertainties and delay projects.

If the challenges I've described earlier can be overcome, we believe we do have an opportunity, to consider an RPS goal as high as 33% by 2020. The goal is currently being discussed by California energy policy makers. I want to emphasize that we are fully aligned with our customers and policy makers in the thrive to continue expanding renewable supplies. We are committed to working with them to resolve the challenges and we fully intend to remain a national leader in energy efficiency and renewable energy.

Before we take your questions, I am pleased to note that we have been recognized for our leadership on an environmental and corporate governance issues. The Innovest research firm last week awarded PG&E a AAA rating for our focus on renewable energy, energy efficiency and distributed generation. PG&E was one of two companies among a peer group of 25 to receive AAA rating. This is the highest rating the Innovest, the utility sector evaluation or Innovest evaluation and we're honored by the recognition.

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

Question And Answer

Operator

Certainly. We will now have the question and answer session. [Operator Instructions]. Our first question comes from the line of Lasan Johong with RBC Capital Markets. Please proceed.

Lasan Johong - RBC Capital Markets

Thank you. Nice quarter, everybody. Quick question on demand destruction, is there any evidence of that taking place in California?

Peter A. Darbee - Chairman, Chief Executive Officer and President

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

Lasan Johong - RBC Capital Markets

Excellent. Peter, why not build both generators at Tesla, why only one?

Peter A. Darbee - Chairman, Chief Executive Officer and President

We think that this is a measured approach. There is a question about how much new generation the state is in interested and the CPUC is taking on. And so we think this measured approach is an appropriate manner. There are other generation opportunities that we're working on, on a contractual basis. And I believe what the commission wants to see is this hybrid model, the continuation of the hybrid model. And so, as we go forward I think they want to see a mix of both contractive generation as well as build generation. And to go for both units right now might look like we're being a little aggressive on the build front, building front.

Lasan Johong - RBC Capital Markets

Right, I see the guidance for next-gen seems to... it does not include the new rate case that you are applying for?

Peter A. Darbee - Chairman, Chief Executive Officer and President

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

Lasan Johong - RBC Capital Markets

I see. Okay, I was wondering what that was about. All right, thanks very much.

Peter A. Darbee - Chairman, Chief Executive Officer and President

Thank you.

Operator

Thank you Mr. Johong. Our next question comes from the line of Jonathan Arnold with Merrill Lynch. Please proceed.

Jonathan Arnold - Merrill Lynch

Hey, good afternoon.

Peter A. Darbee - Chairman, Chief Executive Officer and President

Hey, Jonathan.

Jonathan Arnold - Merrill Lynch

I have a question on the analyst meeting you had, you sort of divided up the additional earnings drivers into things that were included in your operating plan and then these additional opportunities of which the rate based investment was a piece of it, but those also... are other operational changes. Have you had any improved line of sight on moving some of those additional operational opportunities kind of into the middle column as they were?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Yes, Jonathan. This is Chris. As you recall at that meeting, we discussed that we had already implemented about $100 million to $140 million or incorporated $100 million to $140 million of those into our current operating plans and we're continuing to reap those changes and make those changes. And then we have identified a potential in another 50 to 110 and we are continuing to look at those. There is nothing due to update on that piece of that at this point in time. We're looking at it, beginning the operating planning process for the next three years. And so we are going to go through this scrub process. We've identified some of those items, but they haven't gone through the formal scrub process at this point.

Jonathan Arnold - Merrill Lynch

Okay thanks and then I wanted you to just probe a little more on the... you talked about having made good progress on the reliability investments and obviously the SmartMeter upgrade, we're waiting on a decision. And then you have... you made the progress on Tesla. And on Cornerstone what's the... how have things been going at the commission, where exactly are we on that? I think you talked about having a January 1 target for a decision. Just some color on how the parties are staking out positions on this.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Sure and it's still very early in that, but we have received intervenor testimony and they have petitioned the item withdrawn. Their point of view is that there should be something that's handled on a normal general rate case, and not outside the rate case process. And so we're filing our replies to that. The commission has not yet set a schedule. We had asked for the January timeframe in 2009, but they have yet to set a formal schedule and we anticipate that happening here relatively soon.

Jonathan Arnold - Merrill Lynch

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

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

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

Jonathan Arnold - Merrill Lynch

Okay. Thank you.

Peter A. Darbee - Chairman, Chief Executive Officer and President

Thank you Jonathan.

Operator

Thank you Mr. Arnold. Our next question comes from the line of Greg Gordon with Citigroup. Please proceed.

Gregory H. Gordon - Citigroup

Thanks. On your financing. Now that we're half way, a little more than a half way through the year, are you still looking at a cash flow profile that allows you to get through '08, without distributing equity and refresh my memory what the financing plan is for 2009 and 2010.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

So, Greg we are still in for 2008 believe that we won't have to issue any additional equity and when we say additional equity don't forget we generate about $100 million to $200 million worth of equity annually through the dividend reinvestment program, the 401(k) program and stock option exercises. And we're seeing, and you've seen that little bit of dilution for the first half of this year and that will continue through the rest of this year. But as far as any large external equity issuances, we don't have any plans for 2008.

As you saw when we had our analyst conference we were projecting about a need for equity over the period of 2008 through 2011 of about $1.1 billion to $1.7 billion with the meet... the majority of the pressure really being in the 2010 timeframe. There could be some need in 2009 that a lot of that will depend on where we are with holding company debt and with the amount of equity that's generated through the 401(k) and stock option exercises and DRIP programs.

Gregory H. Gordon - Citigroup

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

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

That's correct.

Gregory H. Gordon - Citigroup

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

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

That's true.

Gregory H. Gordon - Citigroup

Okay, great, can I ask the question about renewable RPS --

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Go ahead.

Gregory H. Gordon - Citigroup

We'rehearing that there's been a massive number of solar projects bid into the RPS. And we've gone past the initial bidding stage to the point where there's been shortlists put together and negotiations between the different utilities and putting their own and the bidders are underway. Can you comment on what type of response you've gotten on the RPS whether it's true that it's been dominated by solar? What type of technologies are you being asked to contract for on the parties?

Peter A. Darbee - Chairman, Chief Executive Officer and President

Greg, in response to your question, we are seeing a lot more the solar side than we've seeing historically, and that we're seeing a lot more on the solar thermal side both the trough and tower as well as other technologies. So we are continuing to contract with that. As we reported today, we are well over the 20% level with respect to contracts, which is consistent with where we think the state wants to go as well as meeting the requirements of the 20% RPS through the FLEX provision, which we said we would. I think that that's about as far as we can go because it is a solicitation process that we've gone through. And we are in the midst of going through with negotiations in continuing our procurement. But I think the trend is similar to what you've described, yes.

Gregory H. Gordon - Citigroup

And what point will we get passed... passed the point of sort of negotiations and contracting and get to a public filing with the commission so we can see how the portfolios that you are requesting for approval?

Gabriel B. Togneri - Vice President, Investor Relations

Greg, this is Gab. I know that... what we will do on the RPS side is, once we get to a point where we've negotiated a contract, that we are ready to take to the commission. With these they tend to go to the commission sort of one at a time or a small group of them and we anticipate that we'll be starting to file some of those before the end of this year and as per CPUC approval.

Gregory H. Gordon - Citigroup

Given that you're seeing a large number of solar thermal offers, I think this you actually commented on this, in your... earlier in the call. There is going to be need for lot more transmission to get that. So, if you contract the solar thermal rather than PV because I'm assuming that those sites tend to be outside the load centers.

Gabriel B. Togneri - Vice President, Investor Relations

Right.

Gregory H. Gordon - Citigroup

Is that fair?.

Gabriel B. Togneri - Vice President, Investor Relations

Yes.

Gregory H. Gordon - Citigroup

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

Peter A. Darbee - Chairman, Chief Executive Officer and President

Well the principal on transmission that would enable that would that is the C3ET transmission line that we've identified before. And what we did mention was that's been held up a little bit and delayed. So that would be a prime factor for the transmission. A fair amount of transmission also occurs in the Edison territory. So I'm not sure, we're prepared to communicate to you a whole new opportunity around transmission that's tied into those solar thermal projects.

Gregory H. Gordon - Citigroup

But jumpstarting that one transmission line could be a fall-out of solicitation process.

Peter A. Darbee - Chairman, Chief Executive Officer and President

You are focused on something that I am recently focused on which is how can we expedite that process which has been delayed because of permitting. So I think you raised a good point there, the last trend had been one of delay. The question will be whether we can change that. I think the big transmission opportunity on the horizon on is the British Columbia Renewables line that we have mentioned before.

Gregory H. Gordon - Citigroup

Thank you guys

Peter A. Darbee - Chairman, Chief Executive Officer and President

All right Greg

Operator

Thank you Mr. Gordon. Our next question comes from the line of Dan Eggers with Credit Suisse. Please proceed

Daniel Eggers - Credit Suisse

Hi good morning. Peter just kind of following on what Greg was asking about, timing for the move to 33%. It seems like it's fairly involved in the AB 32 planning from our last meetings in California. Do you guys see the 33% coming up in the legislature this fall or when do we expect to get a good visual on that actually happening?

Peter A. Darbee - Chairman, Chief Executive Officer and President

Yes I think until recently there had been a fair amount of momentum on the 33% and I think that policy makers are oriented in that direction. And of course, the position that we've had is you really need to help the utilities with these obstacles that I enumerated in my initial presentation.

The issuing that would be offsetting that, that has become more apparent in the last month or so is the budget issues, that face the state as well as... and of a whole parade of legislative items bills for consideration. And so a big factor will be RPS initiative be crowded out in that. And we really have to see how things go but that would be a countervailing factor.

Daniel Eggers - Credit Suisse

Then I guess when we were at the Commission last date we were talking about the RETI, the renewable energy transmission initiative. When do you guys get a feel the opportunities as far as incremental spend would come from that program.

Peter A. Darbee - Chairman, Chief Executive Officer and President

You are talking about the British Columbia line.

Daniel Eggers - Credit Suisse

Well I just... the biggest state projects going on in parallel on a couple of other places, just base on that [ph], an improved facilitation process to get to 33%

Peter A. Darbee - Chairman, Chief Executive Officer and President

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

Daniel Eggers - Credit Suisse

Okay.

Peter A. Darbee - Chairman, Chief Executive Officer and President

Now, we would certainly hope... major new transmission to support the renewables. We would certainly hope we've had discussions with late as yesterday with various policy makers on the need to really knock down these barriers. And we just want to say we fully support that effort and want to keep pressing that point both at the federal level and at state level.

Daniel Eggers - Credit Suisse

Is your thought that the 24% under contract to 2013 is that... are you guys going to run into some infrastructural limitations based on what you have available until there is a next wave of transmission to get that next step up in resource?

Peter A. Darbee - Chairman, Chief Executive Officer and President

Well, I think we do see that and it's something else that needs to be sort of reemphasized as ITC and PTC. The fact is a not insignificant number of our contracts are dependent upon the renewal of ITC and PTC. So I'd say transmissions are factored, but those being renewal of that legislation is very, very important at the federal level.

Daniel Eggers - Credit Suisse

Okay. Thank you.

Operator

Thank you Mr. Eggers. Our next question comes from the line of Hugh Wynne with Stanford Bernstein. Please proceed.

Hugh Wynne - Stanford Bernstein

Hi I had a question regarding the revised forecast of rate based growth. I see that relative to the forecast published with the first quarter of earnings release, your estimate of 2009 average rate base is now $20.4 billion down about $400 million or 2% from your previous estimate. And then in the sensitivity analysis that you provided since we can or plan the sensitivity analysis you provided, since we can translate that into potential $0.07 per share reduction in earnings power in 2009.

And it appears then that in your statement as to the conditions on which your 2009 earnings guidance is based, you guided another condition and that is the CPUC approval of additional capital investment projects that you will propose, presumably to offset this shortfall in rate base. So my question was one, is that analysis correct so far? And then if it is what are the additional projects that you would expect to see approved in order to achieve your 2009 earnings guidance?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Hugh, this is Chris. I'll let Gabe go through sort of the reconciliation for you. But I do want to make sure on one thing that we are clear. When you say that we added additional conditions or additional rate based on our guidance, that's not new, that condition has been there for our five year growth or a four year growth plan from '07 through 2011. Consistently over the last year or the last several quarters we've said that we incorporate all that in there.

Hugh Wynne - Stanford Bernstein

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

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

For our growth rate... for the 8% growth rate, yes it's in there. And it has been in there. What we are... what the difference is that you are talking about is specifically for '09 and we haven't added any additional conditions for '09 that are different than the first quarter. Not likely.

Hugh Wynne - Stanford Bernstein

It's not upon your website of course.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

All right, well we'll go back and make sure of that.

Hugh Wynne - Stanford Bernstein

Then in case, what are the projects that you are hoping to have approved, let's put it that way, for the earnings target to be met?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Okay, for the 8% what we've talked about today was that we have the Tesla project, the Cornerstone project and the Automated Meter Upgrade. And that is again... those are the things that are incorporated... is potential for helping us get to the 8% from 2007 through 2011. I wanted to make sure that just for the 2009 item that Gabe reconciles that one for you.

Hugh Wynne - Stanford Bernstein

All right.

Gabriel B. Togneri - Vice President, Investor Relations

And before I get to the 2009 item, Hugh I'll also say that we talked in terms of needing revenues in the neighborhood of $200 million to $250 million in the 2008 through 2011 period, corresponding to projects incremental, capital projects incremental to our base forecast. And we had quite a bit of discussion at our Investor conference in May around that number and the fact that you don't necessarily meet all of the incremental capital expenditures that we show here with the addition of Tesla with the SmartMeter Upgrade and with Cornerstone to achieve that level of incremental revenue. So I just meant with that comment as well.

Hugh Wynne - Stanford Bernstein

Right.

Gabriel B. Togneri - Vice President, Investor Relations

Now specific to your 2009 comment and rate base, it's not necessarily appropriate to take the sensitivity page and say well, if rate base is lower, then that's exactly the amount of revenues that will lower and here's why. Capital expenditures become rate based when the project goes to used and useful as you know. At the point that it's construction work in progress, but not yet rate base. It is still accruing AFUDC. And so it can add to earnings through AFUDC.

So if you have got a project that's accruing AFUDC, even if it's not rate based, it doesn't necessarily lower your earnings and that's exactly what's going on here. From time to time, you have seen us change our rate base forecast by $100 million, $200 million or more and it's associated with the timing issues around what is construction work in progress, versus when does it become rate base. And if we see that the project is somewhat delayed in terms of getting worked on and being completed then it won't be rate base, until several months or more later.

Hugh Wynne - Stanford Bernstein

Right, so the net effect of that comment is we should not be concerned about the average rate base, because what's really happening here is that there is a delay in completion. The construction work in progress will nonetheless be allowed to return and, therefore, the lower level of rate base need not be reflected in the $6 million per $100 million change in rate base impact that you have in the following page.

Gabriel B. Togneri - Vice President, Investor Relations

That's correct.

Hugh Wynne - Stanford Bernstein

Okay, what are the dates approximately that you expect the approval of these three projects, if you could remind me the upgraded meters at Cornerstone and the Tesla?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Yes, it's Chris, again. On the upgraded meters, we are anticipating a final order by the end of this year, as we talked about on Cornerstone there hasn't been a schedule set yet, but we did request that the commission give us an order at the 1st of next year and then on Tesla, we are looking for an interim order here in the next 60 to 90 days and then a final order, third quarter of next year.

Hugh Wynne - Stanford Bernstein

Great, all right. Thank you very much.

Operator

Thank you Mr. Wynne. Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed.

Paul Patterson - Glenrock Associates

Hi, can you hear me?

Peter A. Darbee - Chairman, Chief Executive Officer and President

Hey, Paul

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Hi, Paul

Paul Patterson - Glenrock Associates

I am sorry, if I missed this, what was the weather... was there any weather impact, I was just looking at retail sales, they seemed a little bit lower I think than last quarter?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Well when you look at for us don't forget it's, decoupled we're not impacted on an income basis based on weather. And so if there is less usage or more usage we collect that in balancing accounts and so you won't see an impact on our bottom line during any one period based on weather or any other factor.

Paul Patterson - Glenrock Associates

Sure.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

I just want to make a reminder of that.

Paul Patterson - Glenrock Associates

Right I guess I was just wondering if there was a decrease in the usage I think what Johong was asking about demand destruction, you guys said no. I was wondering are you seeing any conservation efforts or anything like that that's going on? Or of course you guys are all initiatives, is that having any impact on from the retail sales?

Peter A. Darbee - Chairman, Chief Executive Officer and President

Paul what I can tell you is that every quarter we ask our folks to do exactly that analysis and as best they can to tell us what are the factors that are affecting earnings. So, overall for the quarter, quarter-over-quarter we saw electric usage increase about 0.6%.

Paul Patterson - Glenrock Associates

Right.

Peter A. Darbee - Chairman, Chief Executive Officer and President

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

Paul Patterson - Glenrock Associates

Okay. And then the reliability goals that you guys have. It looks like at least year date-to-date that they fall a little bit short of the actual versus the goals that you guys mentioned. And I was just wondering was that, because of the storms, or was there any particular reason for that?

John (Jack) S. Keenan - Chief Operating Officer

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

Paul Patterson - Glenrock Associates

Okay.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

And that was our COO Jack Keenan.

Paul Patterson - Glenrock Associates

Okay and then the ROE bond yield metrics mechanism that you talked about?

Peter A. Darbee - Chairman, Chief Executive Officer and President

Yes.

Paul Patterson - Glenrock Associates

What...I am sorry if I missed this,...what was the... where did it start. Where's the starting point for the bond yield?

Gabriel B. Togneri - Vice President, Investor Relations

Paul this is Gab again. The benchmark level is 5.87. That was the average of the 12 months form October of '06, to September of '07. Now the next thing you're going to ask me is where is it currently?

Paul Patterson - Glenrock Associates

Yes where is it currently?

Gabriel B. Togneri - Vice President, Investor Relations

It's currently at 6.19. So, its well within the 100 basis point up or down debt band.

Paul Patterson - Glenrock Associates

Okay, great. Thank you.

Operator

Thank you Mr. Patterson. Your next question comes from the line of Leslie Rich [ph] with Columbia Management Group. Please proceed.

Unidentified Analyst

Hi, most of my questions have been answered, but I did have a question on the energy efficiency incentives and the operational efficiencies. I your slide from the Analyst meeting you list what those are over the 2008 to 2011 timeframe. And I was just wondering have you broken that out by year and sort of how are you tracking according to that plan?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Leslie it's Chris, we have broken it our by year other than we have previously stated that we anticipate a range in 2008 of $30 million to $60 million and then we have made sure that people understand in 2008 there would be collections for 2006 and 2007. Then in 2009 we would get collections for 2008 year. In 2010, you would get the 35% clawback fees. And then as you get into 2011 you would start to get the first two years of the next program. But we haven't otherwise given dollar range as for each of the individual years.

Unidentified Analyst

So that's the energy incentive fees.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Yes that is the energy efficient fess.

Unidentified Analyst

Energy efficient fees. So what about the operational changes in efficiency fees, that $100 million and $140 million

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

We haven't given any individual years.

Unidentified Analyst

Okay, is it more front end loaded since you have done a lot of the work already?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

I wouldn't say that there is any particular front end or back end loading of it. It really depends on the program and what the timing is within each one of those programs. We basically just said those are the numbers we need to over the four year period time.

Unidentified Analyst

And what's in the additional opportunities bucket?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

What types of items?

Unidentified Analyst

Yes.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

There were two things that were in the additional opportunities. One was additional rate based investment and we've talked about some of those types of times being the automated meter upgrades, Cornerstone that kind of thing.

Unidentified Analyst

Right.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

And there is additional operating efficiencies and that's where we continue to look throughout the company, looking in areas in such as customer contact and payroll processing and how we do the time keeping, those kind of things.

Unidentified Analyst

Okay, great. Thank you.

Operator

Thank you Ms. Rich. Our next question comes from the line of Asher Khan [ph] with SAC Capital Advisors. Please proceed.

Unidentified Analyst

Good afternoon.

Peter A. Darbee - Chairman, Chief Executive Officer and President

Hi Asher.

Unidentified Analyst

I was just trying to track based on first-half results how do you feel about the remaining second half. I guess one of the big things Chris which we're just discussing is we're going to get this order on efficiency in the fourth quarter. Is that correct from the commission and we will recognize those earnings in the fourth quarter?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Expectation.

Unidentified Analyst

Okay and is there any other nuclear outage gain or loss from a comparative purpose from the second-half of the year versus the last second-half?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

There shouldn't be. Our next outage is scheduled to be in the first or second quarter of next year of 2009.

Unidentified Analyst

Okay. Okay, so as you look at it you're not saying whether you feel you could achieve the upper end or the middle of the range or something around that as you sit over here.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

We haven't provided any sense of where in the range we've just committed to the range in this point in time.

Unidentified Analyst

Thank you sir.

Operator

Thank you Mr. Khan. Our next question comes from the line of Lasan Johong with RBC Capital Markets. Please proceed.

Lasan Johong - RBC Capital Markets

Thank you. A quick question on the renewal area, there is a lot of discussion of infidelity of both solar and wind and having an effect on the grid. So there is two basic parts of this question. One, is there an opportunity for PG&E to both build backup generation and supplement transmission work that would add to the 8% potential or go above and beyond the 8% potential? And second if not, then how do you propose managing that fluctuation or the potential fluctuation in the voltage and deliverability of electricity in California?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Lasan, you raised a very good point. The wind of course in our territory tends to blow when we don't need it at night. And of course when it gets hottest, it is when the wind isn't blowing because our natural air conditioning system isn't working. Solar though fortunately tends to be, there is a good coincidence between peak periods and solar generation. Nevertheless both we and the Commission are looking at the question of what is the dependability of those sources when we need them and what is the amount of backup power that we need. And that goes into the aggregate calculation of how much power we need if generation we need going forward.

So the answer to your question is, that is the consideration on both the commission's part and ours, it will result in additional generation being required and it's been factored in already and will continue to be factored in more as those renewable sources grow. And that will be a investment opportunity for both us as well as independent power producers. In addition to that there is technology that people are looking at on storage, for example. And that also represents in addition to let's say transmission and new generation that would represent another potential opportunity. So I think these will really come into play longer term as well any transmission opportunities that we mentioned earlier, this won't be in the next couple of years but it will be more longer term that they will appear on the planning horizon.

Lasan Johong - RBC Capital Markets

Great thank you.

Operator

Thank you Mr. Johong. Our next question comes from the line of Jonathan Arnold with Merrill Lynch. Please proceed.

Jonathan Arnold - Merrill Lynch

Yes, hello again. I just have a quick follow-up and thank you. I was just hoping to just ask a little more about the energy efficiency proceeding in front of the CPUC. You mentioned it's taking a little longer than you thought. Can you give us a bit more insight into what the issues are, whether this has more to do with the next period of... over the three years of the program or whether it's more... the decision on the actually savings realized in the first two years? And then I noticed in the analyst meeting I think say you are going to file that application on '06 to '07 in fact in September with the decision late this year. I just want to check is that still correct.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Yes Jonathan this is Christ, and I'll start off just at the high level but then we also have Brad Whitcomb who is our Vice President of Marketing and customer innovation and responsible for our customer energy efficiency program with us and he can add a little bit more breadth to it. And as I said in my opening remarks that there has been a slight delay in it, and if you recall back in May we had anticipated that the commission staff would come out with some of their conclusions around the mechanisms in place for measurement in the July timeframe. And that... and they have not come out with those final items yet. And that that's caused a little delay.

And so we are still a little uncertain as to whether we will be able to get that information and do the filing by September. Now all our communications with the commission and the processes that they are looking at, still gives us an indication that we anticipate getting it in... by the end of this year. And but they are taking a little longer than we anticipated. But I'll let Brad provide a little bit more color around that.

Bradley E. Whitcomb - Vice President, Products and Services

Yes, the only thing I'd add to that is that in July the NRDC did approach the commission and request that we go to a mediated settlement process to expedite this and we are engaged in that process. That will be the first kick off building this week, which is another opportunity to ensure that we are able to get the numbers to settle down by early September, so we can submit our filings on schedule and get the earnings this year.

Jonathan Arnold - Merrill Lynch

So if the decision doesn't come this year, you sort of look at the profile where you might book all three years in 2009, is that... three of the eight to eleven year, is that accurate or?

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

Well, yes, obviously Jonathan. It's hypothetical as to whether we get it, but you are right it would just be a timing issue at that point. If for some reason the process got delayed into the following year, then those earnings would be booked at that point in time.

Jonathan Arnold - Merrill Lynch

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

Bradley E. Whitcomb - Vice President, Products and Services

Again this is Brad. I don't believe there are, there's... the system is incredibly complex, the number of variables that the energy division is looking at, the number of studies that they are trying to finalize in this period of time. And I really think it's more of a logistical issue than a fundamental disagreement at this point.

Jonathan Arnold - Merrill Lynch

Okay, thanks.

Peter A. Darbee - Chairman, Chief Executive Officer and President

Thank you, Jonathan.

Operator

Thank you Mr. Arnold. Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed.

Michael Lapides - Goldman Sachs

Hey, guys. While ago you all talked about this at the Analyst Day in the first quarter call. You all were looking at the opportunity of investing in one of the pipelines coming west to east... I mean east to west from the Rockies into Northern California. I know you are not likely to be involved, but possibly a customer, can you get us an update on what you're seeing in terms of the general market for bringing gas in to Northern California whether it's be LNG coming into the Pacific Northwest, there'd be a pipeline coming from Rockies?

Peter A. Darbee - Chairman, Chief Executive Officer and President

Hey, let me take a crack at that. And if there is anyone among the group who wants to add to it. Of course, with the very high prices there has been a lot more interest in pursuing alternative supplies. We were... we have signed a contract with Ruby with El Paso on the Ruby Pipeline. Accessing the gas in the Rocky territory is very useful, given the diminution of gas supply from Canada that we've seen over a number of years now.

As we communicated, I think previously, we made the decision not to continue to go ahead on Ruby, but El Paso has confirmed that it is moving ahead. And as a buyer of capacity we're very interested in that access to the Rockies. Also they are varied [ph] number of competing pipelines to the Ruby Pipeline and I am not fully aware of what the status is on those and whether they will move ahead in light of the affirmation that El Paso's continuing to move ahead on Ruby and of course they have a head start and probably have lower cost basis there.

We continue to participate in Pacific Connector project and we are in permitting process or they're in the permitting process in Coos Bay for the LNG terminal there. And people expect that they will be moving on that in the next several months. I think the big question is oil prices really went through the roof, as we saw a re-coupling of gas to oil. And so the challenge the people see is we could move ahead with these LNG terminals in the country, but will the LNG come to the country because of higher prices internationally and will the LNG flow to Japan, for example, and other places. So that's sort of an overview of what we are seeing on gas front.

Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer

And Peter, I would just add to that, when we look at it and we being the utility in this instance we're interested in trying to make sure that we can have access to any and all resources of gas given the profile that we have in this state of reliance on gas. And so that's why we are interested in doing the commitments on the Ruby Pipeline and look to any other opportunities to get access to gas into the state and hopefully keep some of the pressure down. And then on the holding company side we are interested in if there is an investment opportunity again to bring gas by investing in pipelines as such into the state for the benefit of our customers here in the state that's what we pursue.

Michael Lapides - Goldman Sachs

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

Peter A. Darbee - Chairman, Chief Executive Officer and President

Well, what we've seen from the north is a diminution in the volume of gas coming down from Canada and so I am not aware that we've really done much in terms of additional volume and capacity develop there. To the south the opportunity that might arise is because of Samper's Colusa LNG project and how much additional gas will be available from the south. And we are just monitoring what Samper is able to do there in terms of winding up supply over the long period of time I am not sure we've seen great progress in recent months in that regard. And therefore as to moving forward with major capacity expansion to the south right now, it is not something we are actively focused on.

Michael Lapides - Goldman Sachs

Okay, thank you guys much appreciate the update on that gas.

Peter A. Darbee - Chairman, Chief Executive Officer and President

All right Michael.

Operator

Thank you Mr. Lapides. Our next question comes from the line of [indiscernible] with Jefferies & Company.

Unidentified Analyst

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

John (Jack) S. Keenan - Chief Operating Officer

Yes this is Jack Keenan and I would be glad to do that. The Humboldt plant is in its final approval stages and we are waiting for a final CEC approval. We expect to have that in September and start construction at the end of the year. And on Colusa we actually did the groundbreaking in July and we are still waiting for one more final air permit from the EPA, but we expect to have in the next month are so. So both those projects are continuing to move along.

Unidentified Analyst

Thank you.

Operator

Thank you Ms. Argobit [ph]. There are currently no additional questions waiting from the phone line.

Peter A. Darbee - Chairman, Chief Executive Officer and President

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

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