Aug 7, 2007
TRANSCRIPT SPONSOR
Executives
Peter A. Darbee - Chairman of the Board, Chief Executive Officer Christopher P.
Johns - Chief Financial Officer, Senior Vice President, Treasurer William Morrow – Chief Operating Officer, President Gabriel Togneri – Vice President, Investor Relations
Analysts
Greg Gordon – Citigroup Annie Tsao - AllianceBernstein Michael Lapides – Goldman Sachs Jonathan Arnold – Merrill Lynch Dan Eggers – Credit Suisse John Kiani – Deutsche Bank Ben Clark – Invesco Lasan Johong – RBC Capital Markets Patrick Forkin – Tejas Securities Group
Operator
Good morning and welcome to the PG&E second quarter 2007 conference call. At this time, I would like to pass the conference over to your host Gabe Togneri, Vice President of investor relations.
Thank you, have a good conference. Go ahead Mr.
Togneri.
Gabe Togneri
Hello everyone and thanks for joining us this morning for our second quarter earnings conference call. This is a simultaneous web cast and conference call and all participants are in listen-only mode.
A replay of the web cast will be available from our homepage after the call. Our earnings press release was issued earlier today and is posted on our website along with the supplemental tables including the Reg G reconciliation’s.
We’ve also provided these materials in an AK filing with the SEC and we do plan on filing our Form 10-Q reports for both the corporation and Pacific Gas and Electric Company today. Before we begin our discussion, I remind you that our prepared remarks and the Q&A session contain forward-looking statements based on assumptions and expectations that reflect information currently available to management.
As we discuss in more detail in our press release, actual results may differ materially from those forward-looking statements. We encourage you to review our SEC filings to obtain additional information and to better understand the myriad of factors that can influence these future results.
On today’s call to take us through the results and the highlights, we have; Peter Darbee, Chairman and CEO of PG&E corporation, Bill Morrow, CEO and President of Pacific Gas and Electric company and Chris Johns, Senior Vice President and CFO of the corporation. Other key members of our team are here to participate in the Q&A and with that I’ll turn the call over to Peter Darbee.
Peter Darbee
Thanks Gabe. We’re happy today to report a strong second quarter.
Total net income was $269 million or $.074 per share. And that puts us on track with our targets for 2007.
Before we jump into the presentation in detail, what we wanted to do was talk about two noteworthy accomplishments during the quarter. The first has to do with our Climate Smart program, which was launched in June.
This program provides our customers with the ability to make their homes or businesses carbon neutral if they pay a small monthly fee on their bill. The cost of the fee is approximately 3% of the typical residential bill.
These proceeds go to fund environmental projects to help offset greenhouse gas emissions. Thus far, 1,500 business and residential customers including PG&E employees have signed up for this program I want you to know that all of PG&E’s facilities were the first customer in the program.
This program is consistent with our position on global climate change and as you know we’re involved in a dialogue on this topic at the national level as well as in our own service territory here in California. The second accomplishment that we wanted to talk about is our progress with respect to renewable resources.
During the quarter we signed a contract for 500 mega watts of solar power from Solel Solar Systems and this facility would be based in the Mojave Desert. Solel Solar Systems works off of a proven solar thermal design and there are already facilities in California generating more than 350 mega watts annually.
Now, it’s important to recognize that this technology is twice as efficient as residential photovoltaic panels. And we think that’s very important because as we and others face the challenge of climate change it’s important that we find the most efficient and cost-effective solutions for the problem and this technology clearly goes to that point.
The facility will be the world’s largest concentrating solar facility built to dater and it’s scheduled to deliver power in 2011. The effect of this will be to increase the diversity and flexibility of our energy portfolio.
And very importantly, provide renewable power during peak power use times. Now in addition to this, we have two smaller wind and geothermal contracts that we entered into during the quarter.
One was the Western Geothermal facility in Sonoma County. And this is a 35-mega watt contract and the project is targeted to come online in 2010.
In addition to this, we brought on board a contract with Klondike Wind facility, which is based, in Sherman, Oregon. This is scheduled to produce 85 megawatts of power, which will come online later this year.
These different projects will help us achieve our 20% RPS requirement. However, there are a number of factors that impact on the ability to meet the RPS target.
The first is its critical that we have adequate transmission for delivery of this renewable power and so that will have to be put in place first. And secondly, many of these projects are developmental and start-up in nature and therefore our forecasts are based on the completion of these projects.
These project developers will, of course, be faced with challenges with respect to equipment shortages potentially and higher costs and these will be issues that the developers will have to face. Nevertheless, we remain committed to meeting our RPS targets and goals as outlines in Senate bill 1078 of the existing climate change and renewable legislation here in California.
But not only are we committed to meeting the target that are legislatively required, but this is consistent with our long-term values at PG&E to provide renewable and secure and clean power over time. We want to plain out that we’ve made considerable progress in this respect.
I fact, since the oil crisis in the late 1970’s, the demand in PG&E’s service territory has grown by 30,000 giga watt hours. But during this time, the percentage of fossil in the mix has declined from more than 65% in 1977 to 41% in 2006.
So we’ve made significant progress in terms of providing a cleaner portfolio and you can be assured that we will continue to work in this direction as we move forward towards our objective and vision of providing clean and secure energy for our customers. And with that, I’d like to turn it over to Bill Morrow for the operating update.
Bill Morrow
Thank you Peter and hello everyone. What I would like to do is break down the operational highlights in to three areas; the first will be customer satisfaction, the second, reliability and the third will be an update on some of our improvement initiatives.
So on customer satisfaction, as many of you know, there is an annual survey conducted by JD Powers that measures and compares all 76 utilities across the United States. And earlier this year, we reported that on the business segment, we moved from the fourth quartile to the first quartile in just a single year’s time.
Our monthly surveys and our leading indicators show us holding steady in most areas and improving in others for this particular segment. On the residential side, we just received the results for 2007 and we’re quite pleased to report that we’ve increased our overall satisfaction index by 10 points and this is against the overall market dropping by seven points.
What this means is that the 2007 score represents a 20% improvement over last year in our relative position, taking us from third quartile in 2006 to slightly above the industry average. Now this is significant because this is an issue about moving the mass market.
This is over five million customers that we’re talking about and to have this kind of change is significant and is something that is ahead of the schedule where we thought that we would be. Now we know that we cannot rest on our laurels, particularly when it comes to the residential customer because they’re so influential over the image that they cast on the company.
We’re going to continue to push the trend upward and the goal is to meet and/or exceed the customer expectation. Moving in to the second category of reliability, starting on the generations side, our Diablo Canyon power plant did the unit one refueling this last May.
And this was done in the shortest ever time frame for this unit. It was about 30 days done.
And this is in line with best operating benchmarks across the industry. It was done on budget, and it exceeded the safety targets.
This supports our overall objective of keeping a clean, low cost energy resource available for the California customers. Looking at another generation source, which is new, is our Gateway plant.
As you noticed, there is a 500-megawatt plant located in Antioch, California. It is now on schedule to be online in the 2009 time frame.
We’re on the budget, which was originally scheduled to be $370 million and the thing that we’re excited about most for us here, is that this is using a dry cooling method, which uses 97% less water than the conventional cooling system. This also avoids the use of the river water, which has an issue around the local fish habitat there.
So we’re excited about the progress we’re making here. Now, when you look at our transmission and distribution, we’re doing an awful lot here to be able to improve the reliability statistics.
And we’ve seen some improvements overall, but we’re not happy here. We really need to push the envelope hard to be able to recover from the past and the way that this was managed.
We’re making investments across the plant, which is easily designed to be able to address when something is ending its lifecycle. We’ve taken a whole new measure of initiatives looking at condition-based maintenance so we don’t over-invest too early.
But, still when you look at as an example some of the investments, San Francisco over the last three years, we’ve invested over $650 million. And when you look over the next three years, we’re going to add another $450 million to that.
We have our pole-replacement program that’s underway. We have a pipeline redundancy plan that we’re making great progress on and of course a number of our substation retrofits.
Now it doesn’t stop here. There are some things beyond just replacing with capital the plant that’s in the ground, our operational improvements.
I’m quite excited about a team that was put together to look at reducing the accidental dig-ins caused by faulty procedures. And we’ve now seen year-over-year 45% reduction in these accidental dig-ins, giving our customers, again, greater availability as we move forward.
Now, moving in to the last category around some of our improvement initiatives, I really just want to highlight two here. The first is around Smart Meter.
Now, as you know, we have taken the lead in California, and one of the largest scale ones when you look across the United States. And feel very strong about staying on the leading edge here, and we’ve always expected these technologies to evolve and advance and we’ve been monitoring the market to see just that.
And we believe now is the time to actually look to see what else we can do to upgrade some of the functionality that we have within this platform. So last months, we issued an RFP to be able to look primarily at three areas.
The first one is around solid-state meters that have an integrated disconnect capability that will again be kind of a higher reliable, lower cost and more efficient real-time service to our customers. The second will be looking at devices within the meter that can communicate data real-time back to us and to our customers that enable s a whole new suite of services that we’re just now starting to think through.
And then the third category is around the communications network that not only serves the purpose here, but also supports the rest of the grid functionality as we think forward about smart-grid capability. Now, the responses are due later this month from this RFP and the testing could begin as early as the end of the year.
We have been working with the CPUC somewhat, but we intend to seek approval from the commission for any and all expansions of the (inaudible) business cage. Additional funding, if any comes about, it’s too early to speculate, but we will share this consideration as soon as it becomes available.
And when it comes to the rollout and integration of what we think is this new functionality, it could occur as early as 2008. But we will keep you apprise to this as this unfolds.
The secondary I would like to mention around our improvement initiative is around our business transformation foundation releases. And this is something that actually touches and connects a number of business activities and brings together end-to-end processes.
Kind of the soup to nuts type of approach that we’re taking. This will result in improved work cycle time, quicker response to our customers and a more satisfied employee base because they will be able to see the breadth of their skills being used in a real-time and more expansive manner.
Overall, we feel with the foundation release and the AMI upgrades that we’re going to have a good year relative to our intentions with business transformation and continuing to pursue the leading utility across the United States. And so with that, I’ll turn it over to Chris, who will cover some of our numbers.
Chris Johns
Thank you, Bill. I’ll begin by discussing our second quarter results and guidance and then update some key regulatory developments.
For the second quarter, PG&E Corporation earned $269 million or $0.74 per diluted common share on both a GAAP and non-GAAP basis. This compares to $232 million or $0.65 per diluted share on a GAAP basis and $228 million or $0.64 per diluted share on non-GAAP basis for the second quarter of 2006.
As you can see from the table four of our supplemental earnings material, $0.09 of the quarter-over-quarter earnings per share increase is the result of earning a return on a higher capital investment base. This reflects current year regulatory approvals of our general rate case and for transmission case and is in line with expectations we shared with you in our first quarter disclosures.
This quarter’s earnings also reflect higher gas transmission revenue due to higher gas throughput on our system. These positive impacts were partially offset by about a penny of environmental remediation costs.
As we look towards the second half of 2007 we expect a run rate on business unit expenses to be roughly about $60 million higher on a pretax basis compared to the first half of the year. This is primarily due to planned higher spending on operational improvement, like the business transformation foundation over lease that Bill just mentioned, which is being rolled out before the end of the year.
We also see the impact of plant work associated with hydro re-licensing and spending on our dry-cast storage project at Diablo Canyon. In going forward, we expect a quarter-over-quarter result to reflect a modest growth in shares outstanding as we increase equity through internal programs to fund future rate based growth.
Internal programs have provided around $90 million in new equity capital through June of this year. Based on our expectations for operations in the second half of the year we are reaffirming our 2007 guidance of $2.70 to $2.80 per share from operations.
Our 2008 guidance remains at $2.90 to $3.00 per share. The provisions supporting our guidance are that we earn at least the CPUC authorized return on equity of 11.35% and at least 12% on our FERC jurisdictional business, while growing our asset base and controlling our costs in line with regulatory approval, and maintaining our rate making capital structure at 52% equity.
We continue to target an 8% average annual growth in EPS from operations over the 2007 to 2011 period. As always, a reconciliation of our guidance for 2007 and 2008 earnings per share from operations to project a gap EPS can be found in our supplemental materials.
I’ll now move onto a few regulatory items of interest. We received final approval from the FERC for our all party settlement agreement for our transmission odor case effective March 1st.
I touched on this earlier as one of the drivers in the quarter-over-quarter results. As we stated before, approval of this settlement was previously contemplated in our 2007 earnings guidance.
Finally, with respect to the energy efficiency proceedings, hearings to determine the level and structure of energy efficiency incentives were completed at the end of May. Briefs and reply briefs were submitted in June and we are now awaiting a proposed decision from the administrative law judge.
We remain hopeful for the adoption of an incentives structure as early as the third quarter this year. With that I’d like to turn it back to Peter.
Peter Darbee
Thanks Chris. Before concluding, what I’d like to do is share a couple of thoughts with you about the industry and that is that the only thing that will remain constant and certain is that our future will be uncertain and it will be faced with more change than this industry has faced in the past.
When one looks at construction programs in front of us changing legislation, new technologies, I think that this industry is becoming more dynamic all the time. Certainly we see that with respect to legislation.
We have Assembly Bill 32 that has provided climate change legislation here in California. That is certain in terms of its structure, however, its being interpreted as we move forward each day there’ll be more developments as to exactly how that’s going to be implemented.
What we see in Washington is there’s new legislation and a variety of different pieces of legislation that’s coming forward. So, as we look ahead, we see the future for our industry being much more dynamic and changing than it has been in the past, not unlike transitions that the banking industry went through or the telecommunications industry went through during the last 20 years.
And therefore, we feel the management team that is on board and prepared to deal with these challenges needs to be different than in the past. Where you had a stable environment that was reasonably the same, having the same management that had answered the questions and challenges the last 20 years was the right management team for the future.
We believe as I’ve mentioned that the future is going to be very different and therefore what we’ve done is we’ve put together a very diverse team. We have members of our officer team who’ve come from banking, telecommunications, public accounting, and consulting.
And what we’ve tried to do is put together a team that has a high level of expertise in the energy business and that constitutes maybe a half of our officer team. And the other half is a team that comes from a variety of backgrounds and will help us deal with the dramatically changing environment.
So we would point you to our annual report that shows the mix of those officers and we’d suggest you look at other management teams and ask the question, how diverse are they? And how prepared are they to deal with these challenges that we have coming up in front of us, the changes in the industry?
So with that we’d like to turn it over to questions-and-answers.
Operator
We will now have the question-and-answer session. (Operator instructions) Our first question comes from the line of Greg Gordon with Citigroup.
Please proceed.
Greg Gordon – Citigroup
Thanks, good afternoon gentlemen. I think you tried to answer, or basically answered my first question in your comments but I just wanted to make sure I understood.
The trailing 12 month earnings are already at the high end of the range, obviously rate base is higher this year than it was last year, I know share count’s modestly higher but the reason that you’re maintaining the guidance is because of the roughly $0.10 of higher costs associated with setting up the transformation savings, the $60 million. Were there other items that we should also take into account?
Chris Johns
Hi Greg, this is Chris and you are correct. As you mentioned we’ve got the role out of our business transformation foundational release later this year and there are costs associated with doing that.
Also in addition we’ve been working through some regulatory and political issues with our dry-cast storage facility down in Diablo Canyon and so those costs in putting that facility together are really scheduled for the latter half of this year and then a lot of our hydro re-licensing is scheduled to occur later this year. So, as I’ll remind people, on a revenue requirement basis, we generally collect our revenues pretty radically throughout the year but that doesn’t mean our spending patterns are that way.
So all of these events were planned and we’re just trying to highlight to the investment community that we do expect to see some increases in the spending levels in the second half of the year.
Greg Gordon – Citigroup
But those wouldn’t be repeated again in the second half of ’08 correct?
Chris Johns
Not necessarily but we have other business transformation types of costs that we anticipate incurring in ’08 and I’m not sure right now, right off the top of my head what the timing of that would be in a year
Greg Gordon – Citigroup
Fair enough. The second question I had was I had a recent conversation with someone at the CPUC who indicated that the first half of September we might get a decision on the energy efficiency incentive program.
Is that your understanding?
Chris Johns
What they have communicated to us is that their objective was to have a decision and that issue finalized by the end of the third quarter, so September 30th. So it wouldn’t be inconsistent to have a result like that which you described Greg.
Greg Gordon – Citigroup
Right. You talked about AMI on the call.
I guess the influence here is that the potential capital spending could be in excess of the currently approved four year plan and if that is in fact the inference how would we go about getting a scope of what the increase might be and when would you file and what would be the process for filing for the approval of that?
Bill Morrow
Greg, this is Bill Morrow. You are correct first of all that it will not be a decrease and it will either be the same or an increase.
I think it’s a little bit premature or too early to tell or to give you some range as to what that will be. I can tell you that the commission has encouraged us to look at this.
There is an increase in functionality that they think merits a potential increase but as I said, we haven’t even yet begun to receive the responses back to look at this, to ascertain that. There’s a timing issue and then a full scope related issue on it but we’ll keep you apprised and let you know as soon as we have some more concrete data.
Greg Gordon – Citigroup
Then my final question is there’s been sort of a qualitative checklist of non PG&E related potential capital projects related transmission infrastructure and gas pipeline and or ONG related infrastructure that you guys have indicated you were looking at. Can we get an update on whether you are any closer to thinking about deploying capital in one of those non PG&E centric type projects?
Bill Morrow
Greg, this is Bill Morrow again. As you look at the British Columbia Renewables project that we’ve had, we have had a number of discussions and I think we’re making good progress here.
It looks as though the Canadian authorities are supporting us. The companies that we’re dealing with in Canada are encouraged by the relationship we can establish.
We did have the condition with this in fact on a recent visit that we had up there. We’re now examining the transmission paths and the partnerships that we would put together to be able to build that transmission link up into Canada and we’re encourage by it so nothing else has changed from what we have told you before but we are a little more confident that this could come together.
Chris Johns
Greg, this is Chris again. I would add to that that we continue to move forward on looking at the Pacific connecter gas pipeline project and we’re working through some pre-filing processes at FERC.
But in all of these we don’t have anything that would be an update to any of our previously discussed or disclosed capital expenditures at this point in time.
Greg Gordon – Citigroup
Thanks Gentlemen.
Operator
Thank you Mr. Gordon.
Our next question comes from the line of Annie Tsao, AllianceBernstein.
Annie Tsao - AllianceBernstein
I just wanted to comment on the most recent explosion downtown in San Francisco. Did it have any financial impact?
Bill Morrow
Annie, this is Bill Morrow and there was no financial impact on this but let me just say that we take this issue very seriously especially when it comes to the safety of the customers and the environment in the communities that we have. This is under investigation and today we’re still not exactly certain.
We have the manufacturer involved with this as to what happened behind it. We worked very closely with the local customers and the local communities.
We’ve been in the Mayor’s office on this and we think that they’re pleased with the progress that we’re making, the precautions that we’re taking and the evaluation that we’re doing to deal with this. Its something we take seriously but we do not see any financial impact.
Operator
Our next question comes from the line of Michael Lapides from Goldman Sachs. Please proceed.
Michael Lapides – Goldman Sachs
Hey guys. A question for you; I just wanted to check in regarding your long term procurement plan.
Can you talk about the time line, key milestones, investors should monitor and when the RFPs related to that plan should eventually go out.
Bill Morrow
Perhaps I can start. Michael thank you very much, this is Bill Morrow again.
Again we have submitted a ten-year plan on this that does have the incremental 2300 megawatts of capacity that we would need. I think that when we look at the type of breakdown of generation and what comes from energy efficiency and demand response.
These are issues that we’re still working with, with the commission in various interest groups that are out there. On the timing, I’ll ask Chris actually to participate in the timing of this to give us more of an idea of how this will be approved.
Chris Johns
Yes this is Chris. We still expect the commission decision on our long term procurement plan by the end of the year…and what that would mean is, this is Chris Johns, we would then go through the formal RFP process as expected, we would go through that process in 2008.
Michael Lapides – Goldman Sachs
And how long, is that a mandated timeline for that process or is that an open ended timeline?
Chris Johns
There’s not a mandated timeline, for it but we can tell you it took approximately about 12 months to get through that process the last time we went through it.
Michael Lapides – Goldman Sachs
And finally, just in terms of thinking about what the cost of a new combined cycle would be in Northern California, just kind of rough say on a dollar per KW basis.
Bill Morrow
This is Bill Morrow again, If you look a t the average with the commodity prices as the way they are today it actually is in the $95-$97 megawatt range.
Chris Johns
That would still be consistent with the $1000 per KW construction cost that we’ve been using for the past year or so
Michael Lapides – Goldman Sachs
I just wanted to check and see if there’s been additional inflation in average cost of construction.
Bill Morrow
Those are the two drivers Michael, materials sure in itself seems to be out there, the commodity prices, the resources and the construction costs but that’s kind of a lesser of the three.
Operator
Thank you Mr Lapides. Our next question comes from the line of Jonathan Arnold, Merrill Lynch.
Please proceed.
Jonathan Arnold – Merrill Lynch
Good morning. Quick question on the cost of capital proceeding; I understand the commission took your proposal to at the four-year, maybe five year; I don’t recall, mechanism tiers a second phase and make a decision on the actual 2008 piece during this year.
Do you have any initial read on their receptivity to the concept of this going forward mechanism or is that really just been shelved and pushed out into the future?
Christopher Johns
I think that actually the reason for going through this, or for splitting apart, is for me, to make sure that we get through the actual cost capital this year and make sure that it does get set so we can move that forward. I think everybody realizes that putting a mechanism in place is going to be a little more on the controversial side because there will be a lot of interveners who will want to have their participation in the process.
So we don’t think that it’s sending us any indication that would say that there’s not an openness to having such a mechanism, and in fact that the commissioners were the ones that asked for us to put that out as a proposal. I think that there’s just a realization that that piece of it will take a little bit longer to get through.
So we still anticipate that we’ll get through that process early next year.
Gabe Togneri
And in fact Jonathan, this is Gabe, they put out a schedule for the second phase that would call for a decision on that five-year proposal in the April timeframe. And that would be in time to prevent us from needing to file a 2009 cost of capital case if in fact they adopt something like that mechanism.
Jonathan Arnold – Merrill Lynch
Thank you. And then just one other issue; Could I ask you to give a little more color on some of the specific targets in transformation and your level of confidence in achieving that and what kind of issues you’ve run into as you’ve moved towards implementing some of this program?
Chris Johns
And Jonathan, this is Chris, and we’ve been pretty consistent because there are so many different parts of business transformation and so many different projects we don’t supply on a quarterly basis updates on levels of spending or levels of benefits associated with those. We put out our targeted range in the April timeframe and we don’t anticipate—well we aren’t updating that now and we didn’t update that in the first quarter and so we’re going to stay with that range until we go through our next process of updates.
Jonathan Arnold – Merrill Lynch
Does that mean not until similar times next year? Or could you see yourselves doing that sooner?
Chris Johns
Don’t really know at this point in time. It really depends on when we get through the updating and planning process during this year and what that timeframe will look like.
Jonathan Arnold – Merrill Lynch
Thank you.
Operator
Thank you, Mr. Arnold.
Our next question comes from the line of Dan Eggers with Credit Suisse. Please proceed.
Dan Eggers – Credit Suisse
Good morning. On the RPS issue, without the transmission additions there delayed, how far off of the 20% are you guys going to be in 2010?
Do you have a handle on that now?
Bill Morrow
Dan, thank you, this is Bill. Again, if you look at the compliance, what the bill actually says is that we have to have it contracted by 2010 and it has to be in service and delivered by 2013.
Now we’re quite comfortable that we’re going to be compliant with that bill. If you look at the dependencies around us, we’re relying on new technologies that are out there, that we trust, we do a lot of research and we trust, but it’s really dependent on some of this technology maturing.
The second side of it is that it is exactly what you’re saying is to get to the location to wherever they built it. And if you look, some of the big type of projects that people are talking about are beyond works of transmission links go today.
And that, depending on where they select, could have an impact on the 2013 deliverable date. If you look within our RPS portfolio, at the options we have available, we do feel that we’ll be able to meet that timeline because we have all options.
And I just would remind you that there are different options depending on which IOU or territory that you’re at within California. So we have a few more to choose from for example than what perhaps San Diego might as an example.
So I think we’re comfortable that we’ll have multiple options to choose whether we get to the big ones or not, that is really going to be more dependent on getting the transmission link in on time.
Unidentified Company Representative
If I could answer that, two thoughts; The first is that our intention is to contract for more than 20% so if there is some erosion we’ll still be on a delivered basis more than 20%--that’s our strategy. Secondly, we’ve spoken to different members of the commission, president, PD and other commissioners, and they understand the transmission issue and they’re very focused on it and working on a continuous basis with the different IOUs to do everything they can to insure that the transmission will be available.
Dan Eggers – Credit Suisse
Are you guys seeing new or expanded transmission investment opportunities as some of these new or [available] projects are being proposed, i.e. the solars and these other, newer technologies are opening new investment windows for you guys?
Bill Morrow
Yes—this is Bill again—the answer is yes. But we’ve told you about some of those, for example, the transmission link getting up into British Columbia.
We’ve talked before about what we call midway great, that actually does us greater capacity down to head toward the Mohave Desert, at the [hatchaby] side of it. A large part of that is in the Edison Territory of this that we would just use their facility.
However they have yet to built that. But we still have some expansion that we need to do to be able to tap in to all of that.
Now, there are some other installations that people are talking about, or where they could put some of these sites, and while we have small conductors all say to go out there, a certain amount of capacity, we probably have to re-conductor some of those links to be able to increase it, depending on what the slides and how much we would contract for.
Unidentified Company Representative
I just want to clarify my earlier statement and that is that we are contracting for more than 20% so it increases the certainty that will at least meet the 20% threshold level on a delivered basis.
Dan Eggers – Credit Suisse
How is this option been for the solar initiatives in California? What have been subscription rates in your customer basin, the feasibility of hitting the greater state targets?
Bill Morrow
This is Bill again. On the California solar initiatives; Dan, is that what you’re referring to?
Dan Eggers – Credit Suisse
Yes.
Bill Morrow
It’s behind schedule, quite frankly. And as you can imagine, the issue is the economics for a lot of the consumers that are out there, and we’re really pushing the program, we do believe in the whole green notion and we support the governor and his bulk to be able to get one million homes loaded up here.
But it is a very difficult proposition for a lot of customers that are out there. So we’re behind schedule and we’re looking at other ways and we’re working with both Sacramento and San Francisco to see what we can do to tweak this to make sure that it is a success.
Dan Eggers – Credit Suisse
And Chris, just one last thing on the ‘08 guidance; What are you guys assuming, either actual or ballpark, for the transmission case you’ve filed in July and the ‘O8 numbers?
Chris Jones
For the new filing for the transmission case? We’re expecting that we would be targeting the 12% return just as we did this year, that’ll be part of it.
Dan Eggers – Credit Suisse
Thank you, guys.
Operator
Thank you, Mr. Eggers.
Our next question comes from the line of John Kiani, with Deutsche Bank. Please proceed.
John Kiani – Deutsche Bank
Good morning. How should we think about the incremental capital projects that you’ve highlighted in the past, and you’ve talked about again today, transmission, the inter-connector, and some of the other potential capital investments, in addition to your refining and continuing to look at the transformation savings in the context of your stated 8% growth rate?
Chris Jones
John, this is Chris, the way that we like to put it out there, that we’re provided you with an estimate based, a projection based, on what we think we’ve got now in our rates, and/or have a high likelihood of getting recovery in our rates. And that we’ve also acknowledged that there are things we are working on that would be upside to that case.
So when you think about these transmission projects of the gas transportation projects or the potential, additional generation ownership, either in renewable form or in the long-term procurement form, all those things become upside potential that you would have to add as additional rate base for the company. We try to project out as best we can and give you updates as to where we are on each one of those, but right now, all of those are still in the planning and negotiation and evaluation stages.
And so we leave it to you to make your estimate as to what you think we might be able to put in or might not be able to put into place.
Unidentified Company Representative
Let me just say, this is a little bit of a foreshadowing, so for example, our guidance used to be at one time at 7.5% a year and then we were able to sweep some of the planned investments into the baseline forecast, we increased to 8%. And if additional savings were material enough and certain enough in terms of happening and the timing, then we would probably sweep those into a revised estimate with respect to EPS [roam].
John Kiani – Deutsche Bank
Great. That’s helpful.
And as far as timing is concerned, I know there are a lot of moving pieces, but is it possible to provide a general idea of when you might be refining some of those expectations?
Christopher Johns
We go through a continual planning processes and as we feed things that become more certain or something, then we provide the updates with them. But there’s not really a set schedule of time; we try to give you each and every quarter the latest information that we have.
Unidentified Company Representative
But certainly, typically what we’ve done in the last couple years is have a once a year large analyst presentation, and we certainly revisit that number in preparing for that presentation and consider whether we’ll stick with the same number or revise it at that time.
John Kiani – Deutsche Bank
Great. Thank you very much.
Operator
Thank you, Mr. Kiani.
Our next question comes from the line of Ben Clark with Invesco. Please proceed.
Ben Clark – Invesco
Hi, how are you doing? You mentioned that you’d funded $90 million of internal equity this year for cutbacks.
Can you give an update of your external equity needs for 2008 and beyond? I guess earlier in the year you had mentioned 750-950, if I’m correct.
Christopher Johns
That is what we put out in the end of the first quarter and we haven’t provided any update to that number. And we’re not planning on providing any of these at this point in time.
Ben Clark – Invesco
Okay, thanks.
Operator
Thank you, Mr. Clark.
Our next question comes from the line of Lasan Johong, RBC Capital Markets. Please proceed.
Lasan Johong – RBC Capital Markets
Thank you. Good afternoon.
I have a question, John, I mean, Chris. Is there concern or thoughts on how the current credit environment in affecting future financing plans?
Chris Johns
No. We don’t have any significant concerns about it right now.
You know you saw that F&P upgraded us to triple B plus, and we successfully went through and issued $700 million worth to debt in the first quarter and we found it to be very competitive rate. And so we still believe it when folks look at us, they can see the credit quality that we have, and regulatory environment that we have and we believe that there is adequate resources out there for us to meet any of our future financing needs.
Peter Darbee
I’d just add that a 52% equity ratio looks pretty solid in this credit environment, and I think most people feel that the regulatory trend has been consistent or strengthening over time, that’s one of the reasons whether you’re looking at our credit from a debt or fixed income orientation, or from an equity orientation, people feel that we’re a good, solid investment opportunity.
Lasan Johong – RBC Capital Markets
That’s great. Peter, [south pressures] come down from the highs at about 14%, 15%.
Any thoughts on new [Chevy] purchase program?
Peter Darbee
The short answer to that question is no. And that is what we’ve seen is this whole sector get hit pretty hard.
The market obviously has been hit pretty hard in recent weeks and months and those companies that look like more pure play utilities have been hit a little harder than maybe the mainstream of utilities. But I think on the question of share repurchase, the principle hiding factor has to be what cash do we need to fund our capital expenditure program going forward and that of course, the capital expenditure program, is the prime driver of net income per share.
So as we have looked at the priorities in our company, what we say is that we will grow earnings where it is consistent with the interest of our customers and shareholders. That’s the first priority.
We’ll pay a solid dividend at a competitive dividend within that context. And then lastly, we’ll look to see if have surpluses or deficits of cash.
And what I think Chris has been communicating, is that we’ve been very successful in creating an aggressive CapEx program to serve our customers better, and that means that there isn’t cash available for share repurchase.
Lasan Johong – RBC Capital Markets
Great, and lastly, I [just want to ask] to clarify a question; my understanding is that on the 8% guidance there is several things bearing on it. One is potential [upside] from projects that are so-called contemplated, but not yet in the budget officially.
And then the transformation projects could continue to ratchet that EPS growth up, so the question becomes two fold. Am I correct in my assumption that there is potential upside to the 8%, and second, if there is a significant amount of transformation savings, do you anticipate any pressure to share some of that savings with customers?
Christopher Johns
Lasan, I’d answer with a couple things. First of all, what we’ve consistently said is the 8% does not include many of the large CapEx projects that we’ve talked about as far as transmission and gas transportation, and additional generation that we’ve talked about in this call.
We’ve also said that in the past we gave a range of potential benefits from business transformation, and there are some of those benefits baked into the 8%, but not all of them, and so there is some upside if we are able to maximize those benefits. And then, finally, something else that’s not included in the 8% is any of the incentives that would come of the energy efficiency proceedings that are going on right now at the Commission, so all of those things are items that could potentially allow us to earn at a better rate than that.
But right now, those are still uncertain. And we’re continuing to push hard to work towards maximizing those.
Peter Darbee
And one thing I would add is, you’ll recall from our earlier presentations that, in effect, we made a down payment on transformation benefits in our general rate case. And we included, I think, 41 or 40-some odd million for one year, and 97 million for another year of our transformation benefits that we said we would provide to our customers.
And then, during this general rate case period, the rest of the benefits that we’re able to harvest would be for the benefit of shareholders.
Lasan Johong – RBC Capital Markets
I remember there was a range at which, beyond a certain point, there was an automatic 50-50 sharing, was there not?
Peter Darbee
That was in our proposal, but the Commission did not accept that proposal, and so we just went with the two numbers that I just described.
Lasan Johong – RBC Capital Markets
Gotcha. Thank you very much.
Operator
Thank you, Mr. Johong.
Our next question comes from the line of Patrick Forkin with Tejas Securities Group. Please proceed.
Patrick Forkin – Tejas Securities Group
Thank you and good morning. With respect to your comments about your Smart Meter-ing program, you mentioned that the CPUC is encouraging the fresh look at the new technology.
Have you guys seen commercially available technology that will meet the enhanced requirements that you’re looking for?
Bill Morrow
This is Bill and we have done some research and we’ve spoken to certain firms out there that do have the promise of delivering and some applications that are probably further along, they’re just the alpha stage. So, commercially available, I wouldn’t go that far.
Patrick Forkin – Tejas Securities Group
Okay. And if you choose a new technology platform that gives you enhanced capabilities, what might that do to the deployment schedule and the CapEx planned for AMI from a timing perspective?
Bill Morrow
Right, so the deployment schedule will not slow down. And let me describe a little bit about why we’re so confident with this.
It’s that the approach we are taking is to be somewhat geographical in our approach. So as we deploy current state meters, we’ll do that, for example, in the Bakersfield area.
As new technology upgrades come on, then we’ll actually shift that into the next area that is on our priority list. And the idea here is that the people doing the maintenance can have one set of stairs, depending on the technology, and the base functionality that we have today, we feel is the most appropriate to spread through out our service territory.
As new functionality comes on this, they will be upgraded, and there’ll be more services for those consumers in that geographical area that we’re deploying it. And then what we’ll do is we’ll come back and retrofit things over the course of time.
But we won’t necessarily be in any big pressure, unless there’s just this loud factor of a new product or service that’s enabled by this technology. So we’re able to control the rollout of this without having to go back and redo or replace, and also still benefit from the technology evolution.
Patrick Forkin – Tejas Securities Group
Okay that’s very helpful, thank you.
Operator
Thank you, Mr. Forkin.
(Operator instructions) There are currently no further questions from the phone.
Gabriel Togneri
Alright, well I’d like to thank everybody for their interest. We wish you all a great day.
Thanks again.