Feb 22, 2008
Executives
Gabriel B. Togneri - VP, IR Peter A.
Darbee - Chairman, CEO and President William (Bill) T. Morrow - President and CEO, Pacific Gas and Electric Company Christopher P.
Johns - Sr. VP, CFO and Treasurer
Analysts
Jonathan Arnold - Merrill Lynch Daniel Eggers - Credit Suisse Lasan Johong - RBC Capital Markets Ashar Khan - SAC Capital Paul Paterson - Glenrock Associates Rudy Tolentino - Morgan Stanley Michael Lapides - Goldman Sachs
Operator
Good morning, and welcome to the PG&E Corporation Fourth Quarter 2007 Earnings Conference Call. At this time, I'd like to pass the conference over to your host, Mr.
Gabe Togneri, Vice President of Investor Relations. Thank you, and have a good conference.
Go ahead, Mr. Togneri.
Gabriel B. Togneri - Vice President, Investor Relations
Good morning. I'd like to welcome everyone to our year-end earnings conference call.
And before we get to the results, let's go through the usual formalities. This is a simultaneous webcast and conference call, a replay of which, including the question-and-answer session will be available from our website afterwards.
Our earnings press release went out earlier today, and it's posted on our website along with the supplemental tables including Regulation G reconciliations. We'll refer to some of the information in the tables, so you want to have them available.
We provided these materials in an 8-K report furnished to the SEC this morning, and we plan to file our joint Form 10-K report for PG&E Corporation and Pacific Gas and Electric Company with the SEC today. Before we begin our discussion, I'll remind you that the prepared remarks and the Q&A session to follow contain forward-looking statements, based on assumptions and expectations reflecting information currently available to management.
As we discuss in more detail in the press release and the SEC reports, actual results can differ materially from those forward-looking statements. Important factors that can affect our actual results are described in the reports we file from time to time with the SEC.
Those factors include the risk factors and other factors described in or referenced in the annual report on form 10-K for the year ended December 31, 2007. Taking us through the results and the operational highlights today, we have Peter Darbee, Chairman, CEO and President of PG&E Corporation; Bill Morrow, President and Chief Executive Officer of Pacific Gas and Electric Company; and Chris Johns, Senior Vice President and CFO of the Corporation.
Other key members of the team are here to participate in the Q&A session. And with that, I will turn the call over to Peter Darbee.
Peter A. Darbee - Chairman, Chief Executive Officer and President
Thanks Gabe, and good morning to everyone. I would like to start with a few comments on our 2007 performance.
2007 was a year of opportunity, challenges and successes. We came out at the top of our guidance range.
We delivered $2.78 in EPS from earnings... from operations, and that was 8% growth over year 2006.
As a result of our performance and our outlook for the future, this morning we announced an increase in our dividend, which will now be $1.56 per share on an annual basis. Let's also look at our performance on the other priorities we shared with you earlier last year.
The first is procuring energy supplies. Ensuring that new resources come on line to meet our customers' future needs is critical.
It's also critical that those resources be clean and cost effective, and we are pleased with the progress on all of these fronts. We signed a number of contracts including significant increases in renewable supply to put us on track to meet the States RPS goals, and we've broken ground on the Gateway Generating Station which is the first new plant to be constructed by PG&E in nearly 20 years.
Our employees are energized to be back in the business of owning and operating new generation, and of course, this also represents an earnings opportunity for you, our shareholders. Another of our priorities was investing in our system.
With aging infrastructure and higher loads, this is the key to long-term reliability and customer satisfaction. So, we are pleased to have undertaken a number of major new projects last year.
For example, we announced plans for the 130 miles Central California Clean Energy Transmission line from Bakersfield to Frenso, and on the gas side, we significantly expanded the pipeline capacity at our largest gas storage field. All told, capital investments in our systems were $2.8 billion in 2007.
Two priorities which were in addition, we're continuing to build a reputation and continuing to evaluate growth opportunities in the industry. With regard to the former, we have made substantial progress in much of that as a result of our leadership on the environment, the work of our communications team, and the involvement of our 20,000 employees in their communities.
And as we've discussed with you before, we continue to evaluate the number of opportunities in both the electric transmission and gas pipeline arenas. Having highlighted these accomplishments, one area where we would like to make more progresses in delivering service better, faster and more cost effectively.
The focus is on being better tomorrow than we were yesterday. We are going to build on the areas where we have done this well and we are going to redouble our efforts in those areas where we still have more work to do.
Before turning it over to Bill, I want to welcome Jack Keenan in his new role as Chief Operating Officer of the Utility. Jack has been our Chief Nuclear Officer for the past two years.
He has more than 30 years of experience in the utility industry. He has done a brilliant job in sharpening our execution and improving results at the outlook canyon and we are delighted, he is now extending this leadership across all of our operations.
And with that, I would like to turn it over to Bill.
William (Bill) T. Morrow - President and Chief Executive Officer, Pacific Gas and Electric Company
Thank you, Peter, and good morning everyone. 2007 was overall a good year for us operationally, and I'll cover some of the performance highlights as they relate to our customer, environment, generation, energy delivery and then finally our expansion and modernization projects.
Starting on the customer side, we saw a 1.1% year-over-year growth in our customer base, adding 52,000 electric customers and 36,000 on the gas side. The electricity consumed overall grew 2% year-over-year, and the gas consumed by our customers grew 1.7%.
Our customer perception scores improved significantly, meeting or beating our targets, and performed better in each of the four segments as measured by JD Powers. On the residential side, our customer satisfaction improved from the low end of the third quartile to the high end.
Our gas rankings moved from the second quartile to first and when we look at the business segment we saw our gas rankings improved from second to first quartile, and then finally, our business Electric customer satisfaction saw the largest improvement with a huge jump, the first quartile up from the fourth quartile in 2006. In this week, in fact, we received a 2008 Business Electric rankings and PG&E has maintained its position in the first quartile.
Now these customer results are a strong signal to us that despite the challenges that we have discussed previously and taken on the whole our customer related initiatives are in fact delivering good results. Looking at the environment, we performed very well here.
Inivest [ph], a third-party company did an assessment of our environmental performance against other utilities and they rated us in the end 'Best in Class.' Our energy efficiency efforts drew a great response from customers.
In fact, together we saved enough energy to power over 280,000 homes for a given year. On renewable energy, we beat our contract target.
In fact, we doubled that with an increase of 1,540 gigawatt hours. On ClimateSmart, we exceeded our targets signing up over 14,000 customers, and in fact now year-to-date we are over 16,000 on record.
One of the few areas that we did fall short in was with demand response and we know the reasons for this, and we are working on a new approach for this year. Moving on to generation.
A Diablo Canyon nuclear facility set a PG&E record last year for operating efficiency, producing the facility's highest ever energy output, achieving a 95% capacity factor. The refueling outage at unit 1 was held at just 30 days, our most efficient performance yet.
In fact, this is 25% faster than the industry average. And despite our hydro system outfit being about 70% of normal through last year, as it was related to the lower precipitation levels, we still managed to...
managed procurement in a way that this resulted in only slightly higher cost to our customers. On the energy delivery side, we met our reliability targets for the year, but we will admit, we did have some help from the mild weather in November and December.
And during the year, we discovered a number of processes that we need to improve with regard to gas leak detection and transformer maintenance. Looking at our expansion and modernization projects, we can report first that our Diablo steam generator replacement is underway as a part of the refueling outage at unit number 2.
In November, we told that we were taking over the construction and accelerating our ownership at the Colusa generating plant. We closed on the acquisition of the assets last month, and we expect to begin construction in the second half of this year, and we are on target for an in-service date of 2010.
I have similar good news to report about the other two power plants that we are constructing that being Gateway and Humboldt, and Gateway is currently installing turbines and will be completed as scheduled during the first half of 2009. And Humboldt is currently awaiting final permits and is scheduled for completion now in early 2010, which was a slight pushback from late 2009.
On the transmission side, we are on schedule for the 1.2 billion California Clean Energy Transmission line that Peter mentioned and we expect it to be operational in 2012. And finally, we met our objectives for the year around the SmartMeter program.
We installed over 0.25 million meters and we are now electronically reading and billing over 200,000 of these. By the end of this year we expect to add another 1 million meters for a total of over 1.25 million.
And, as you are likely aware, we put forward a proposal to improve the value of this program to our customers by upgrading the capabilities of the meters, including enabling two-way communication with home appliances. In December, we asked the California Public Utility Commissions to approve an additional $565 million in capital from this and other related upgrades, and the Commission is scheduled to reach a decision late this year.
So, just to reiterate, it is a long list of accomplishments, and a positive year overall, when it comes to our operational performance. And with that, I would like to turn it over to Chris to cover the financial and regulatory highlights.
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
Thanks Bill. I will begin by discussing our year-end results and guidance, and then update some key regulatory developments.
For the year, we are in $2.78 per diluted share on a GAAP and non-GAAP earnings from operations basis. This compares to 2006 earnings of $2.76 per diluted share on a GAAP basis, and $2.57 per diluted share on a non-GAAP earnings from operations basis.
In 2007, there were no items impacting comparability, so that earnings from operations and GAAP earnings were the same. In 2006, items impacting comparability added $0.19 per share to GAAP earnings.
Our 2007 results represent a solid 8% growth in earnings per share from operations over the prior year. The primary driver for the increased earnings was higher rate base as we continue to invest in the core infrastructure of the utility in order to meet the growing demands and needs of our customers, and provide them with better, faster, more cost effective service.
A full year earnings walk is provided in table 4 of our earnings package. This includes all explanatory factors from previous quarters.
For the fourth quarter, PG&E Corporation earned $203 million or $0.56 per diluted common share, on both a GAAP and non-GAAP basis. This compares to $152 million or $0.43 per diluted share on a GAAP basis, and $170 million or $0.48 per diluted share on a non-GAAP earnings from operations basis for the fourth quarter of 2006.
Looking again at table 4, you can see again that the primary driver of the quarter-over-quarter EPS difference is rate based revenue, which reflects the return on higher capital investment as authorized by our regulators. This accounts for $0.09 per share over fourth quarter 2006.
I would like to take a moment to talk about the economic activity in our service territory. We know other companies have been asked about this recently and is important to highlight some factors that are different for PG&E.
The effect on PG&E of the changing national economy is slight compared to other companies in the sector. As a reminder, the coupling insulates our revenues from both increases and decreases in sales, which reduces our risk in earnings volatility.
As Bill noted, sales growth was lower in 2007 relative to the prior year. For 2008, we anticipate another slight decline in sales growth to around 1%, but thereafter a return to more normal levels of around 1.5%.
Consistent with these forecasts, we expect a continued decline in new customer connections. For 2007, single family new customer connections were down about 40%, and we anticipate an additional decline in 2008.
Again because of revenue decoupling, we do not experience earnings volatility from these changing trends. On balance, fewer customer connections freeze up capital dollars to offset some of the effects of rising material costs on our capital investment program.
However overall, we do not expect to see any material changes in the size of our capital expenditures program in 2008. In addition, we have continued to see a couple of other impacts of the changing economy on our business.
As we discussed previously, material cost for capital projects continue to remain high. In addition, we have seen an increase in uncollectible accounts from customers and interest rates have increased sharply on the small portion of our bonds that are variably priced as a result of the volatility in the credit markets.
We have considered all of these impacts on our 2008 from 2009 guidance. We are reaffirming today our guidance range of $2.90 to $3 per share for 2008, and $3.15 to $3.25 per share for 2009.
We are also reaffirming our target of 8% compound average annual growth in EPS from operations from 2007 through 2011. As always, a reconciliation of our guidance for 2008 and 2009 earnings per share from operations to project the GAAP earnings per share can be found in our supplemental earnings materials.
Our guidance for 2008 and 2009 EPS from operations and our target growth rate assume that we have an 11.35% authorized return on equity for the CPUC regulated business, and earn at least 12% on our FERC jurisdictional business. And that we achieve our projected rate base of approximately $18.4 billion for 2008 and $20.8 billion for 2009, while maintaining our rate making capital structure at 52% equity.
It assumes that utility issues on average $1.4 billion annually of long-term debt including refinancing through 2011 and that the holding company infuses between $2 billion to $2.5 billion of equity into the utility over that same period in order to maintain the 52% equity structure. We will be filing shelf registration statements with the SEC shortly to facilitate these financings.
Our guidance also assumes that we will earn customer energy efficiency incentive revenues, identify additional investment opportunities and realize operational efficiencies, consistent with the ranges we discussed on our last call. Now, I'll move on to a few regulatory items of interest.
We received a favorable decision from the Commission relating to energy efficiency at the end of January. This decision allows us to recognize interim earnings of 65% of the annual earned energy efficiency revenues.
We are pleased with the performance on energy efficiency. Ultimately, the incentive revenues we received are dependent on the result of the CPUC's evaluation, measurement, and verification process.
We expect the CPUC's evaluation and verification process will be completed in the third quarter, after which we will file our incentive... for our incentive payments.
We anticipate that we will receive final authorization of the 2006 and 2007 amount of energy efficiency earnings in the fourth quarter of this year, subject to timely Commission action. We also received a final decision in our CPUC cost of capital case at the end of 2007.
Our capital structure remains at 52% equity and our authorized remains at 11.35%. This decision covers our cost of capital for 2008.
Phase II of the cost of capital proceeding to consider replacing the annual cost of capital proceeding with a more formulated multi-year framework is underway and scheduled for a final decision by the end of April. With that, I'd like to hand it back to Peter.
Peter A. Darbee - Chairman, Chief Executive Officer and President
Thanks Chris. I'd like to close by underscoring our priorities for 2008 and beyond.
Our overarching objective is to provide energy to customers safely, cost effectively, reliably and sustainably. Our actions, investments in the way we measure our own performance will reflect this.
We will continue to manage cost aggressively and to look to capture operational efficiencies. We're committed to strengthening our system including capital spending on replacement, redesign, and automation.
And to that end, we will maintain and build on the relationships we have established with our regulators, elected officials, and other stakeholders. And with regard to sustainability, we'll continue to be an environmental leader.
We see global warming as a game changing development for the industry. The Lieberman Warner Bill is just the start.
Regardless of the outcome of the November elections, we expect more legislative and regulatory attention to this issue. PG&E will continue to be a constructive voice in the development of carbon legislation at the state and federal levels.
We are committed to making our generation mix even cleaner as we continue to add to renewables. We believe that our leadership in this area is the right thing to do.
This is what our customers, regulators and policy makers want us to do. For shareholders, this translates into lower risk and better returns.
All of this supports our long-term financial outlook, including the achievement of our EPS goals and our targeted growth rate. Our team is committed to success.
We understand the opportunities and the challenges, we are tenacious about results, and we are confident we are going to execute and deliver. And now, I would like to open it up for 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 Jonathan Arnold with Merrill Lynch.
Please proceed.
Jonathan Arnold - Merrill Lynch
Good morning.
Peter A. Darbee - Chairman, Chief Executive Officer and President
Good morning Jonathan.
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
Good morning Jonathan.
Jonathan Arnold - Merrill Lynch
Had aquick question on the... you say that you expect the energy efficiency incentives to be...
the evaluation to be completed in the third quarter and then you would file. I think I heard you right that you would then get the '06 and '07 payments and recognize them in the fourth quarter.
How would you tend to book? Would they be booked as part of 2008 operating income or will one year will be treated as a comparability item?
And how are they... how have you thought energy efficiency within the construct of your guidance that is I guess the same now that it was at the third quarter stage?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
Jonathan, we have included our estimates of the energy efficiency in our guidance for 2008 that we reiterated this morning. And we would anticipate getting...
whatever we receive in that order this year, we would include in our operating earnings this year. And then as we move forward each year being able to recognize the amounts, we would continue to include those in our operating earnings.
Jonathan Arnold - Merrill Lynch
Can you just remind me... I think that those were not in the guidance before or we never...
and they are now?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
I believe in the third quarter that we had said that we took them into consideration and I think we have reiterated that in December. In our December phone call, we said that they were included as part of our 8% growth within our annual earnings guidance.
Jonathan Arnold - Merrill Lynch
Thank you. If I may, just one follow-up.
The... you are still referencing in the risk factors that the need to find additional savings and increment them to meet the growth targets.
Can you update a little on how progress towards that goal since you last updated us and on what point have we identified the savings? And now it's a question of realizing them or are we still looking for that?
William (Bill) T. Morrow - President and Chief Executive Officer, Pacific Gas and Electric Company
Jonathan, this is Bill. We have identified a categories that we are going to get the savings in to be able to meet our estimates that we've given you.
Actually laying out the details behind that is the work underway right now.
Jonathan Arnold - Merrill Lynch
And you'd anticipate doing that --?
William (Bill) T. Morrow - President and Chief Executive Officer, Pacific Gas and Electric Company
This is an ongoing issue. Again, in the spirit continuous improvement, we are always...
every rock we turn over, we see three other smaller ones that we want to turn over to identify further opportunities. But we have a plan now that looks at those sorts of savings that we expect to get to be able to come in line with the guidance that we have.
Jonathan Arnold - Merrill Lynch
Great. Thank you very much.
Operator
Thank you Mr. Arnold.
Our next question comes from the line of Dan Eggers with Credit Suisse. Please proceed.
Daniel Eggers - Credit Suisse
Good morning.
Peter A. Darbee - Chairman, Chief Executive Officer and President
Good morning Dan.
Daniel Eggers - Credit Suisse
On the dividend... on the increase today, can you just remind us the thought process as far as what you guys are looking for from a long-term policy perspective and thought process behind that ratio?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
Yes. Dan, we have a large capital expenditure program as you're well aware of.
And so, our belief is that we have a targeted payout ratio range of 50% to 70% and we anticipate being at the low end of that range throughout this capital expenditure program. So, we expect dividends to rise generally in line with our earnings expectation.
So around that 8% range, maybe not lock step in any one given year, but generally consistent with that range of growth.
Daniel Eggers - Credit Suisse
Okay. And then I guess looking at one of the attachments you guys sent around this morning with table 6 about short-term incentive.
It looked like there was about a 92% success rate versus plan on the transformation achievement this year. Can you just give us some feel about what led you guys not to quite hit the target this year, and then what is the flex as we look at over the next few years, how much of a disappointment or how much of a variance from target could you guys be at to still stay in that 8% growth target?
William (Bill) T. Morrow - President and Chief Executive Officer, Pacific Gas and Electric Company
Dan this is Bill. I will take that too.
The reason we didn't hit a 100% from the 1.01 in the index was related to what we have thought about on our last call. It was a number of initiatives that we had that were operational in nature, that has been three years kind of in the running and the design did not deliver as what we had originally had thought.
And so we are trying to refine that to be sure that we can leverage the investment that was made on, but that was basically the number one issue when you... We breakdown the components that was associated with that pay outside of it that included things like the expense reduction, the control of the capital, of course the SmartMeter and then actually implementing the number of the initiatives on time and within scope.
And so a lot of those work done correctly and as we had hope, however this one is big one about really not getting that operational efficiency like we had ratcheted us down from 1.0.
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
And Dan the thing I would add to that is that we did take that into consideration when we had the phone call in December and again when we reiterated our guidance today.
Daniel Eggers - Credit Suisse
Okay and I guess this one, last one too much time, but can you give us a little update on the Ruby project and when you think you will have a more formalized go-forward decision on that project?
Unidentified Company Representative
What we would say in that respect is that, it is in process and I don't think we are ready to make any projections as to when we would announce more results.
Daniel Eggers - Credit Suisse
Okay, fair enough. Thank you.
Operator
Thank you, Mr. Eggers.
Our next question comes from the line of Lasan Johong with RBC Capital Markets. Please proceed
Lasan Johong - RBC Capital Markets
Thank you. Chris, if I understood you correctly, you said that the CPUC approved taking credit for 65% of the energy efficiency gains in any given year in booking it was income is that right?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
That is correct.
Lasan Johong - RBC Capital Markets
Is that subject to change or alteration or review going forward and could it be taken away, because I know that was one of the issues that was debated whether it can or it should not be subject to change, or negation?
Unidentified Company Representative
This is Chris Warner. Yes, of course CPUC can reconsider its policies going forward, but as you may know the CPUC also wants to provide long-term stable and predictable incentives for our customer energy efficiency, and this 65% termination is part of our long-term policy by the commission to encourage energy efficiencies.
So we would expect that they would seek to keep it in place for that longer-term.
Lasan Johong - RBC Capital Markets
But what I am referring to as I say you achieve 100 units of energy savings, you get to book 65 of it, but then the Commission later finds out that well you didn't actually achieve 100, you only achieved 60. Is this five subject to takeaway?
Unidentified Company Representative
The idea of the 65 is that there would not be a call back on that, based on any subsequent events.
Lasan Johong - RBC Capital Markets
Okay, that's good. And then Chris just quickly on your projections going forward for our CapEx, what kind of cost escalations are you assuming for both capital and operating costs?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
We are... when we put together the projects, we look at them a little individually and the reason I hesitate is that I don't have a 1 percentage that is assumed throughout all of those.
I mean we do breakdown all the capital by project and some of the larger projects around things like SmartMeter the generating stations that we are building, the steam generator projects and some of the larger transmission projects. We have done a good job of securing some contracts that fixed the prices of those, and then the other ones we build in some cost escalations.
Generally how we handle this is that on each project we build in some kind of a contingency, and that can range anywhere from 5% to 15% of the project and we allow that to be which build into help offset any kind of rising costs.
Lasan Johong - RBC Capital Markets
What about in the operating side?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
On an operating basis, we do our projections of what we think inflation is going to be and generally that will cover most of the overall cost including we know what our labor contracts are.
Lasan Johong - RBC Capital Markets
Okay, and then one last question up here, periodically if one of the major pipeline that are being proposed that go to Main Land Oregon [ph] to Rockies, whichever it might succeed does that not either a negate or render somewhat obsolete the Pacific Connector?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
This is Chris, we -- one of the objectives that we have is to look for many... as many opportunities to bring gas into the state as we can from as many different resources as we can.
Because as you know the gas is the major form of generating electricity in this state, and so when we look at those various projects that are out there it's hard to speculate as to which ones may or may not proceed totally through the end process, but we look at one bringing gas from the Rocky side, the other one having opportunities to bring gas from an LNG facility. And so we don't know that they would absolutely negate each other.
Lasan Johong - RBC Capital Markets
Okay, thank you.
Operator
Thank you, Mr. Johong.
Our next question comes from Ashar Khan with SAC Capital. Please proceed.
Ashar Khan - SAC Capital
Good morning. Chris, I was just going back to this was December presentation slide 3, I don't think you have it, but basically the projected transmission savings for '07 were going to be negative 117 to a negative 40, and as of December they were going to be 0 to 5.
So '07 was the year, where they came in better among all the four year or five years. And so I was trying to see as earnings came in according what you projected, and we didn't get the benefit of that $0.15, what was the offset in '07 that wiped out the better year...
the one better year out of the five that was presented in December presentation.
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
Ashar,I remember you were asking this question earlier. And as we said before, what we showed on that slide was related just to the 70 projects that we originally had shared with you, and we didn't go beyond other projects or other items that we had there.
And so, there were costs that we incurred associated with doing other kind of efficiency projects. There were also costs that were incurred from the result of implementing some of these things to continue to rise.
And then as we talked about there were costs that we incurred from operations, from rising cost environment that we had. And so, there were lot of different things, not any one thing that offset this in particular.
But again, one of the one of problems with looking at that slide by itself is that it was only focused on that one set of programs.
Ashar Khan - SAC Capital
Okay. And then if I can just...
I don't know whether you have mentioned it or not, unlike estimating like $0.10 of efficiency savings in '08, is that around the ballpark that we can assume?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
When we look out at our projections for the energy efficiency for '08, we've included in our guidance a range of about $30 to $60 on a pre-tax basis. And as I said earlier, we will go through the process with the CPUC of their validation and verification of the amount of the awards and that will be filed for in the third quarter, and then hopefully, we'll get a final order in the fourth quarter.
Ashar Khan - SAC Capital
Thank you very much, sir.
Operator
Thank you, Mr. Khan.
Our next question comes from the line of Paul Paterson with Glenrock Associates. Please proceed.
Paul Paterson - Glenrock Associates
Good morning guys.
Unidentified Company Representative
Good morning Paul.
Paul Paterson - Glenrock Associates
Just could you go over again just really... I am sorry that I missed it, just the amount of equity that you are planning on putting down into the holding company, and where that's coming from the $2.2 billion to $2.5 billion, I believe?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
Yes, Paul. And I want to make sure that people are clear.
We said that the amount of equity through 2011 that we would anticipate putting in from the holding company into the utility is $2 billion to $2.5 billion that doesn't necessarily translate into how much equity we would have to issue at the holding company. But that is the amount of the equity that we anticipate we will have to infuse into the utility.
Now, the sources of that as we've talked about previously are that we have anywhere from a $100 million to $200 million a year that we generate from our 401-K plans, our stock option exercises and our dividend reinvestment program. And then we'll look at the amount of leverage that we would want or are comfortable with that the holding company will explore whether there is other kinds of securities that we would want to invest in or have issue with the holding company.
And then as we said previously, we would anticipate issuing equity in some form at the holding company at some point in time.
Paul Paterson - Glenrock Associates
Right. Any sense as to where you guys feel comfortable with leverage at the holding company?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
One way that we've looked at it is that we... at a minimum, we know that we have the $280 million that will converge in 2010.
We feel comfortable with maintaining that level of debt at the holding company. And so, we would anticipate that at a minimum, issuing something in that same size when that one converts.
Paul Paterson - Glenrock Associates
Okay. But anything beyond that?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
We have to look at the time. I mean we know that we try to minimize the amount of equity that we have to issue through this program.
But we also want to balance that on how comfortable we are and what kind of flexibility we want to maintain at the holding company. So, I really don't have any kind of range of dollars to provide you.
Paul Paterson - Glenrock Associates
Okay, fair enough. Any idea as to when we might actually see a natural equity offering, common equity offering that might be done at the holding company?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
Not at this point in time. Again, what I try to do and what I charge team with is to do everything we can to reduce the amount of equity that we need.
And so, right now, all I cal do is give you that range over the four year period.
Paul Paterson - Glenrock Associates
Great. Thanks a lot guys.
Operator
Thank you, Mr. Paterson.
Our next question comes from the line of Rudy Tolentino with Morgan Stanley. Please proceed.
Rudy Tolentino - Morgan Stanley
Hi. You mentioned that in Phase I of the CPUC cost to capital decision that the equity ratio at 52%.
And is that just for 2008 or is that 2008 and beyond, and is that equity ratio subject to change?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
They said it, it is just for 2008. We have an annual cost of capital proceeding with the CPUC.
So, it's subject to change each and every year. That's why the CPUC assets to propose a longer-term methodology that might be formulaic base, so that we wouldn't actually have to go to an annual proceeding.
But until that's changed, it is subject to change every year.
Rudy Tolentino - Morgan Stanley
Okay. But in Phase II, in your Phase II discussions, there is no talk about change in the equity ratio; is there?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
Right now, it's just focused on whether or not there would be a formulaic approach.
Rudy Tolentino - Morgan Stanley
For the ROE or just for the cost in capital in general?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
That's correct, for the ROE.
Rudy Tolentino - Morgan Stanley
Okay. Thank you very much.
Operator
Thank you Mr. Tolentino.
Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed.
Michael Lapides - Goldman Sachs
Hey guys quick question, following-up on Rudy's; when we think about the equity component, can you talk about when the next time you think the rating agencies are going to take a look at your credit rating? When you think you are viable for a potential upgrade in the credit rating, and what that would mean, how that impacts the potential equity component allowed by the CPUC?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
Sure, Michael. If you recall Moody's just recently well I guess a month an half ago upgraded at that point in time we do visit with the rating agencies on an annual basis and we have already done that in 2008, both S&P and Moody's upgraded us during 2007.
So it's hard to predict whether or not they would be taking action again and especially in Moody's case so recently after their latest upgrade. It is acknowledged that when Moody's gave us their upgrade that did remove the floor of 52% acuity and 11.22% ROE that we had established with the CPUC in our bankruptcy agreement.
Michael Lapides - Goldman Sachs
Should the investment community I mean when we look out at San Diego Gas and Electric and Southern Cal Ed's equity components, which are couple of 100 basis points lower than yours. Should the investment community assume that eventually you migrate to them or they migrate to you; how does this play out over the next three or five years?
Peter A. Darbee - Chairman, Chief Executive Officer and President
Well, a point we'd make in that respect is that if you look at the combination of Edison's equity ratio and ROE, the overall result of that is very close to our overall weighted average cost of capital, they have a lower equity ratio at about 48% I believe and a higher ROE, but, when you put that all together and consider the debt it's about same. So what we would say is we are really on an over all basis in equilibrium with Edison.
Michael Lapides - Goldman Sachs
Okay. And last question and this is just terms of thinking about the cost savings that you are going to undertake during 2008.
How much of that can you talk about right now is tied to employee reduction versus other cost savings for things like materials or other items?
Unidentified Company Representative
Michael there is a majority of it is around labor savings, and so if you look this year, we are expect just under 300 positions that will eliminate roughly 200 of those are associated with management and severance, which we have already taken into account. And then there is a about 75 or 80 that are what we call hiring calls that aren't necessarily employees, but come from the union base, and so that will address the majority of savings that we are expecting.
Michael Lapides - Goldman Sachs
And will you be able to realize the bulk of those labors savings in '08 or you will not see the benefit from that for full year until 2009?
Unidentified Company Representative
We will see a portion of the benefits within '08 and full year in '09.
Unidentified Company Representative
And those all are included in our guidance.
Michael Lapides - Goldman Sachs
Got it. Okay, thank you guys, much appreciate it.
Unidentified Company Representative
You are welcome.
Operator
Thank you Mr. Lapides.
Our next question comes from the line Doug Fischer [ph] with Wachovia. Please proceed.
Unidentified Analyst
Thank you, good morning. I noticed the...
it looks like the estimated average rate base for '08 is down about 200 million from I guess December. Can you elaborate on what is causing that decrease though I guess '09 is still up at the same level?
Gabriel B. Togneri - Vice President, Investor Relations
Yes, Doug, this Gabe. It's the usual process that as we update what we looked at, as we looked at some of the projects and the spending being pushed out slightly later in the year.
So while we think the CapEx is still going to be around 3.4 million not all of it is going to go into rate base as early in the year as we thought. So with some of it coming in later the weighted average rate base for the year is slightly lower, and yes you did notice a $200 million difference.
We think that that will all go into rate base later into '08, and so not affect the '09 estimate.
Unidentified Analyst
And then in with regard to the energy efficiency incentives, when they are booked. So there is two interims in the three year period, and you...
so, for this... but for this next one for '08, you will be filing just something that's both the interim and the true up for '08 when you file for that in '09?
Unidentified Company Representative
So, in '09 we will be filing for '08, and then I believe the final trip, so the rest of the non-65% to top 35% we probably won't see that until 2010.
Unidentified Analyst
So you would... under a normal expectation you would book the '08 in '09.
Unidentified Company Representative
Yes, that's right.
Unidentified Analyst
And book the balance the final in '10.
Unidentified Company Representative
Yes, that would be right, but the amount in '10 would be for all three years during the three year period.
Unidentified Analyst
Yeah. And then one last question; you mentioned in talking about the 8% additional investment projects, would those be beyond the numbers you laid out in December, are those in the CapEx number as you mentioned in December and maybe you could elaborate on just a little bit as to how much is a little bit so we say undetermined as of yet in the latter years?
William (Bill) T. Morrow - President and Chief Executive Officer, Pacific Gas and Electric Company
Well, as we said previously, there is energy efficiencies we plan over the next three years. There is additional planned operating initiatives over the next several years.
And when we think about capital investment opportunities, we want to look at those inline with those... with all of our pieces in getting to our 8%, but we gave the capital expenditure chart in the December timeframe, and there are a few things that are not in there and that includes the Ruby pipeline, the Pacific Connector Pipeline, the transmission line upto British Columbia.
It doesn't include any renewable generation that we might have an opportunity to get into and it doesn't include any new generation, conventional generation beyond that we have already disclosed to you.
Unidentified Analyst
So, is some portion of some of those projects needed to achieve the 8%?
Unidentified Company Representative
I would hesitate to point to anyone thing. I mean we need a combination of either capital investment opportunities or depending on the level of incentives that we get out of the energy efficiency or the benefits that we realize from some of the initiatives that Bill talked about.
It's really a combination of all of those things that go into getting the 8%. And so we weigh them as we look out at them and that's how we feel comfortable getting to the 8% based on the probability of those things occurring.
Unidentified Analyst
Okay so there is some portion related to these. Thank you.
Operator
Thank you Mr. Fischer.
Your next question comes from the line of Mark Segall with Canaccord Adams. Please proceed.
Unidentified Analyst
Yes, I apologize if you already addressed this, but just wondering if you could provide us with any status update down the SmartMeter program particularly on the electric side.
Peter A. Darbee - Chairman, Chief Executive Officer and President
Mark, as we reported out, we are making really good progress in terms of the deployment of the meters both on the electric and the gas portion of it. We are billing now 200,000 monitored and billing 200,000 meters that's out there.
Our systems are working well. We do see the benefits, we were starting to see even further opportunities about how we can help our customers save money, how we can deal with things like demand response and important future, how we are going to help in terms of the reliability and the prediction of actually work failures are and even actually some leading indicators behind us, so we are quite exited about what we are seeing.
We are ramping up in terms of the deployment plan. As I mentioned, we have about a million incremental leadership, we are going to put in this year.
We have this upgrade issue that we are looking at that we are equally getting excited about. We think it's going to be a platform for us to be able to grow and develop products and services and event beyond what we are talking about today.
Unidentified Analyst
Okay, great that's helpful. Thanks a lot.
Operator
Thank you Mr. Segall.
Our next question comes from the line Reza Hatefi Polygon Investment Partners. Please proceed.
Unidentified Analyst
Thank you. Chris, you mentioned there was a earlier question about the 2.2 to 2.5 equity infusion and to the utility, you guys are generally speaking if I am not mistaken dividend out 400 million to 500 million from the utility to the holding company, so is it basically a dividend it out and then it comes back in for the most part?
Christopher P. Johns - Senior Vice President, Chief Financial Officer and Treasurer
No, the dividend out from the utility is generally then used as the large portion of what we pay as far as dividend out to our investors.
Unidentified Analyst
Okay, I got you. Thank you very much.
Operator
Thank you Mr. Hatefi.
Our next question comes from the line of Jonathan Arnold from Merrill Lynch. Please proceed.
Jonathan Arnold - Merrill Lynch
My follow-up was already answered. Thank you.
Operator
Thank you, Mr. Arnold.
[Operator Instructions]. Our next question comes from line of Raymond Long with Goldman Sachs.
Please proceed.
Unidentified Analyst
Hey guys. Just to elaborate a little bit more on the holding company injection equity.
Can you talk about what's the appropriate like consolidated metric that you will look for? Could you give us some parameters of how much debt you maybe willing to take on there, given that it's a pretty sizable over the four year period that you are talking about?
Peter A. Darbee - Chairman, Chief Executive Officer and President
Well, we are in an unusual situation in that. Most companies look and establish a credit rating for themselves and then out of that falls their equity ratios.
But because of the arrangement we have coming out of the bankruptcy plan and also CPUC regulation. The way we approach it is we have a target, which is very specific 52% that we must keep at a minimum, but we don't earn any capital, any return on capital in excess of the 52%.
So, what we are going to do in the utility is we are going to really focus on the 52%. And what turns out to be the case is the rating then is a result of the 52%, and it's an outcome rather than an objective.
So, that's the way we approach it in utility. Now in the holding company, we ask ourselves what's the appropriate level of debt and the conclusion that we come to historically is at $280 million that we raised in connection with the energy crisis.
We have managed that and we've handled that well. And so, as Chris mentioned, if that...
that will be retired and converted presumably in 2010. So, we feel comfortable with about the same level of debt at the holding company $300 million.
We've taken that as given. Now, the answer to the question as what more might we do from that.
That's really a function of all of the alternatives available to us, which Chris mentioned. For example, how much equity we raise from internal sources and external sources, that will be a function of the capital markets, the stock price, along the way, as well as may be hybrid securities, and we will also consider should there be more leverage or not.
But, that's the way we are looking at questions.
Unidentified Analyst
Okay, great. Thank you.
Operator
Thank you Mr. Long.
And there are currently no further questions waiting on the phone lines.
Gabriel B. Togneri - Vice President, Investor Relations
All right. In that case, I'd like to thank everybody for joining our call, and wish you a good day.