Aug 5, 2009
Executives
Peter Darbee - Chairman, Chief Executive Officer & President Chris Johns - President of Pacific Gas & Electric Company Kent Harvey - Chief Financial Officer Jack Keenan - Chief Operating Officer Gabe Togneri - Investor Relations
Analysts
Greg Gordon - Morgan Stanley Daniel Eggers - Credit Suisse Ashar Khan - Incremental Capital Lasan Johong - RBC Capital Markets Daniel Site - Dudack Research Travis Miller - Morningstar Michael Lapides - Goldman Sachs Ivana Ergovic - Jefferies Annie Sal - Alliance Bernstein
Operator
Good morning and welcome to the PG&E second quarter earnings conference call. At this time, I would like to introduce your host, Gabe Togneri.
Thank you and have a good conference.
Gabe Togneri
Good morning everyone. We appreciate your interest in PG&E and today’s call.
We issued our earnings released earlier today as usual and it’s posted on the website, along with the supplemental tables, including the Regulation G reconciliation. The same information can also be found in an 8-K report that we furnished to the SEC and we’ll also file our joint form 10-Q report for PG&E Corporation and Pacific Gas and Electric Company today.
A replay of the conference call will be available from our website and our prepared remarks and the Q-and-A session to follow as usual contain forward looking statements based on assumptions and expectations reflecting information currently available to management. As we discussed in more detail in the press release and SEC reports, actual reports may differ materially from those forward looking statements.
Important factors that can affect our actual results are described in those reports we filed with the SEC. Those factors include the risk factors and other factors described in our Annual Report on Form 10-K for the year ended December 31, 2008 and our Form 10-Q reports.
We always encourage you to review those factors. Leading the discussion today will be Peter Darbee, Chairman, CEO and President of PG&E Corporation, Chris Johns, President of Pacific Gas and Electric Company, and Kent Harvey, CFO of PG&E Corporation.
Jack Keenan, our Chief Operating Officer at the utility and other key members of the team are also here and can participate in the Q-and-A session. Now, I’ll turn things over to Peter Darbee.
Peter Darbee
Thanks, Gabe and thank you all for joining us today. We’re posting solid results from the second quarter with earnings from operations coming in at $0.83.
We remain on track to achieve our guidance for 2009, 2010 and 2011. The foundation of our investment case continues to be a substantial capital expenditure plan together with manageable financing requirements and constructive regulation.
Last month, we submitted our notice of intent for the 2011 general rate case to the consumer division of the CPUC, and just a few days ago, we made our next transmission owner filing with the firm. The plans outlined in these filings remain consistent with our goals to provide safe and reliable service to our customers.
This requires substantial investments to replace aging infrastructure as well as systems upgrades to accommodate new technology. We also remain focused on operational excellence, both in our day-to-day operations and in managing our major long term projects.
We see a direct link between this focus and our ability to deliver for you, our shareholders. Last month, we promoted two highly experienced members of our Senior Management Team, Chris Johns to President of Pacific Gas and Electric Company and Kent Harvey to CFO of PG&E Corporation.
Their promotions demonstrate to shareholders our continued strong commitment to deliver our value proposition. Chris has proven himself to be an excellent leader who knows how to deliver results.
Kent is coming back to finance in the broader role, having previously served as CFO with the utility. Kent brings to the organization an invaluable breadth of experience and expertise in financial management, as well as, in Investor Relations.
The appointments of Chris and Kent to critical positions of PG&E are timely because this is a time of unprecedented change in our sector. These appointments will allow me to devote more time to longer term issues important to PG&E in our industry, especially as our country moves new directions on energy and the environment.
We see opportunities involving renewable energy and the transmission that will deliver this energy. We believe that the technology of smart grid will be able to integrate communications throughout the country’s energy infrastructure and give customers cleaner, more reliable, and more flexible energy services.
Smart Grid also paves the way for advancements like plug-in electric vehicles and distributed energy resources. My focus will be to ensure that PG&E is positioned to take advantage of these and other new growth opportunities as they arise.
We have also historically taken a leadership role in policy development, particularly as it concerns the environment. Both federal and state governments are giving increased attention to energy policy legislation.
This is an area where I’ll remain active focused on shaping national and regional policy that impacts our shareholders and our customers. Now, I’d like to turn it over to, Chris.
Chris Johns
Thank you, Peter. Before I cover our operational accomplishments during the quarter, I want to talk briefly about my new role at PG&E.
For the past several years, I’ve seen a drive for excellence throughout our team and a commitment to making PG&E the leading utility in the country. Our focus on operational excellence has helped us make substantial progress in delivering for our customers, employees and shareholders.
We still have some work to do, and I intend to continue to lead that progress forward. Our SmartMeter Program is a great example of excellence in operations.
We’re installing this new technology at a pace of 12,000 meters per day and last month we installed our 3 millionth smart meter. The transition to the new upgraded technology has gone well.
We’ve installed more advanced meters than any other utility in the nation. We continue to remain on track to hook up 10 million meters for all of our customers by the end of 2011.
Our two new base load generating projects, Calusa and Humboldt, are moving forward according to plan. At Calusa, we’ve developed and completed much of the framework for the natural gas turbines and advanced cooling fans.
At Humboldt, we’re working on the foundation and will start the framework shortly. We expect both of these new highly efficient plants to be online in 2010.
The GRC filing that we previewed last month, will allow us to continue to invest in our infrastructure so that we can meet our customers’ expectations for safe and reliable service. This work creates thousands of jobs in various companies and industries, at a time when jobs in California are urgently needed.
The California economy has been making headlines nationally, both with the unemployment rate, as well as the debate on how to balance the state budget. While lawmakers were hammering out details for three weeks in July, the state issued warrants.
Fortunately, a budget was formalized and signed by the governor before the end of the month and normal payment terms will now resume. The warrants we received in July, which totaled about $4.8 million, will be payable in October with interest.
The economy continues to affect our customers. Our electric sales declined by a little over 1% compared to the first six months of last year, when adjusted for weather and meter reading days.
Our forecast indicated decline in sales of about 1% for the entire year compared to the previous year. As you know, decoupling protects our revenues from fluctuations in sales.
California currently has three times more foreclosures than the national average and unemployment rates remain high. We’re supporting our customers during this difficult time through our customer assistance programs.
We’ve recently expanded our outreach efforts to increase awareness of these programs and have simplified program enrollment resulting in increased participation. This quarter alone, over 100,000 eligible customers have been identified and enrolled in our programs through these efforts.
We’re helping our business customers reduce their energy bills through low cost or no cost energy efficiency options. Furthermore, we’re continuing to work together with our business customers to help them manage credit issues during this difficult time.
We’ve also shortened our collection cycle to be in line with regulatory guidelines. These actions are all consistent with what we discussed with you during our first quarter call.
They’ve helped us to effectively reduce the level of uncollectible expense we saw earlier this year. As a result, our write-offs for this quarter were generally in line with the second quarter last year and approximately $6 million less than the first quarter of this year.
We’re encouraged by our success so far. However, given the current economic outlook, we realize that we must remain aggressive with our mitigation efforts in order to maintain this momentum.
With that, I’ll turn it over to Kent Harvey.
Kent Harvey
Good morning, everyone. Before I get started with this quarter’s financial results, I did want to say how pleased I am to return to working at finance and interacting with all you at the financial community.
I’m looking forward to reconnecting with many of you and getting to know those of you that I haven’t worked with before. As we reported earlier this morning for the second quarter, PG&E Corporation earned $315 million dollars or $0.83 per diluted common share in earnings from operations.
On a GAAP basis, we earned $388 million, where $1.02 per diluted common share. This compares with $293 million or $0.80 per diluted share for the second quarter of last year and that’s on both the GAAP and non-GAAP basis.
As laid out in table four of our supplemental earnings package, earnings from operations this quarter reflect an increase of $0.06 per share relative to 2008; as a result, the revenues associated with higher authorized rate base investment. This comes from the increase in our PUC authorized revenues, as well as our FERC authorized revenues for electric transmission.
We had a number of items that combined to make up $0.02 positive in miscellaneous; principally this reflects gains in our non-pension benefit trust, as a result of equity market performance and it’s really a reversal of the negative impact we saw during the first quarter. On the flip side, cost accrued for environmental remediation work resulted in a negative $0.02 impact to EPS.
Based on the results of an environmental assessment completed during the quarter, we increased our estimate of future remediation costs at a former utility power plant. We also saw a $0.03 negative impact from share dilution and I’ll have more to say about this later on when I cover our financing activities.
I wanted to take a minute to update you on the three items impacting comparability that we outlined earlier this year. So, in April we received PUC approval for recovery of amounts spent valuing our Hydro facilities for possible divestiture at the beginning of the decade.
This recovery resulted in a $0.07 positive impact to GAAP earnings. Also, during the second quarter we received IRS approval for the tax refund that we had identified as an item impact and comparability for 2009.
This had a positive impact to our GAAP earnings of $0.15 and the third item impacting comparability of accelerated gas system integrity surveys and associated maintenance work. This project had a $0.03 negative impact on GAAP earnings during the quarter, but it’s been ramping up and is expected to result in a larger impact to GAAP earnings in the second half of the year.
We expect that the net effect of all three items impacting comparability will add between $0.06 and $0.08 to GAAP EPS for 2009. As Peter indicated, we’re reaffirming our guidance for 2009, 2010 and 2011.
We have two solid quarters behind us. Although, there were items that affected us negatively, such as the un-collectibles we experienced in the first quarter and the environmental remediation cost in the second quarter.
I believe, we’ve responded well to these items and have put in place plans to achieve our 2009 guidance. For example, Chris already talked about our second quarter success in mitigating the impact of uncollectible which negatively affected us in Q1.
We’ll continue to focus on that for the remainder of the year. Our last quarter’s call, we also mentioned the efforts we had initiated to tighten our belts and we completed that reprioritization and expect most of those benefits to occur in the second half of the year.
In addition, our electric transmission revenues tend to rise in the third quarter compared to the first two quarters, due to increased usage in the summer. That should be a positive in the second half of the year, because the FERC revenues are outside of the decoupling mechanism.
In terms of the financing activities on the debt side, we issued 500 million of floating rate short-term notes in June to support the collateral requirements of our electric procurement and hedging program. Then on the equity side, we issued $193 million of common stock through our 401k and DRIP programs during the first two quarters of the year.
This level of issuance was higher than we would normally expect, roughly double and it resulted in a bit more dilution than we would have expected. We’ll continue to monitor the programs and we do plan to shut off new issuance in these programs during some periods in order to manage our equity going-forward.
However, because of the success of the programs to date and in conjunction with our other positive cash items, we can now say that we do not expect to need to issue new blocks of equity outside of the 401k, and drip programs through 2010. Obviously, this outlook is based on our current approved CapEx program and if we increase the size of our CapEx in our financing needs would also increase.
On the regulatory side as Peter and Chris mentioned, we submitted a notice of intent in our upcoming general rate case covering 2011, 2012 and 2013. Our guidance is consistent with the GRC filing.
We plan to request a $1.069 billion revenue increase for our business in 2011, which on a standalone basis would represent a 6.5% increase over our 2010 revenue forecast. However, when we combine our GRC with all other anticipated rate changes, we estimate that the overall electric rate impact on January 1, 2011 will be less than 1%.
This assumes among other things the current forward curve for natural gas prices and its impact on power prices. Our GRC request reflects an annual average capital expenditure level of $2.7 billion in 2011, 2012 and 2013 for investments in gas and electric distribution, as well as electric generation.
Our formal GRC application will be filed in December and we hope to have a final decision by the end of 2010 for rates effective January 1, 2011. Last week as Peter mentioned, we filed our transmission owner 12Ks with the FERC, requesting an incremental $170 million in total revenues.
As I think our TO filings are driven primarily by electric transmission CapEx program, which includes projects to increase capacity, as well as planned replacement of equipment. Now, I’ll turn it back over to Peter for some concluding remarks.
Peter Darbee
Thanks, Kent. As I mentioned in my opening comments, policy makers have substantially increased their focus on improving our country’s future energy plans.
PG&E is frequently called on to provide input on these matters and we look forward to continuing to work with policy makers both regionally and nationally. One element of this focus is the Waxman-Markey Bill.
I learned a long time ago not to handicap political decisions, so I won’t offer a prediction on the passage this Bill. We’re actively involved in providing constructive feedback as the Bill moves through the Senate.
We’ve been a proponent of controls over emissions and the fair allocation of credits for quite some time. On the state level, we have been carefully following proposed legislation that would mandate a 33% renewable portfolio standard.
We believe there are a number of key items that must be addressed to make the 33% RPS goal by 20/20 achievable, including the expanding the eligibility of renewable resources, compliance flexibility and the use of renewable energy credits. We’re fully aligned with our customers and policy makers in supporting the expansion of renewable energy and are committed to helping resolve the challenges surrounding renewable energy.
One of the most significant challenges we see is permitting and citing of transmission. We hope to continue to work constructively with the state and federal governments to streamline this process.
I want to close by pointing out one other highlight of our business. This is a topic which we don’t often discuss with shareholders.
Specifically, diversity and inclusion have long been hallmarks of PG&E’s heritage of values and our commitment has been widely recognized over the years. Recently, we were again named one of the 40 best companies for diversity by Black Enterprise Magazine.
Our customer base is very diverse and we reflect this diversity through our employees, our Senior Management Team and Board of Directors. It makes us a better company.
This honor from Black Enterprise Magazine acknowledges the value we place on diversity in our culture. It is one of the principle values that help us reach our goals.
With that, I’ll close and we’ll now open it up for questions.
Operator
(Operator Instructions) Your first question comes from Greg Gordon - Morgan Stanley.
Greg Gordon - Morgan Stanley
A couple questions, first I hopped on a little bit late. I just caught the tail end of your commentary on equity issuance.
Could you review that again for me, please?
Peter Darbee
What I essentially covered was that our equity issuance through our drip and 401K programs continued at a fairly high pace, so far this year and so we’ve issued at about twice the rate we would have normally expected. As a result, we will be planning in future periods to shut-off those programs, essentially supplying the needs for the programs through external purchases and not issuing net shares.
Because of the issuance we’ve done to date, because of the earlier debt financing at the corporation level and the equity infusion that was made into the utility. Because of our strong cash flow through our tax refunds and otherwise, we don’t expect to need to issue any new block equity outside of the normal 401K, or DRIP programs through 2010.
Greg Gordon - Morgan Stanley
So you would continue to have a normal, what you would consider a normal level of shares through the DRIP, or would you be using open market purchases to satisfy the DRIP?
Peter Darbee
We’re going to be potentially at periods doing both. We have the ability to go back and forth and manage our equity issuance.
Obviously there are some restrictions on doing that, but within the restrictions we have sufficient flexibility.
Greg Gordon - Morgan Stanley
What is the weighted average share count analyzing in the guidance there?
Peter Darbee
We haven’t provided that.
Greg Gordon - Morgan Stanley
Okay. It was 368 at the end of the second quarter.
I presume the shares outstanding at the end of the quarter we’re somewhat higher than that?
Peter Darbee
That would probably be true. We have a fairly complex share calculation, because of the two class method.
So you really can back into that by looking at the financials, I think.
Greg Gordon - Morgan Stanley
The second question is; can you review where things stand in terms of resolving the controversy surrounding the energy efficiency incentive payment mechanism?
Chris Johns
We continue to move forward on that issue. We’ve actually done a joint filing with Sempra to try to put in place an agreement, a settlement agreement, on how they would resolve that.
We still anticipate that well will get an order by the end of this year that would allow us to resolve the 2008 award and then, we would have in 2010, something in place that would allow us to address the hold back that that it’s been done for last year, and then the holdback that will be in place for this year. We still believe that that’s moving along.
We won’t hear about it until probably the fourth quarter of this year.
Greg Gordon - Morgan Stanley
So there is an assumption built into your guidance range for the outcome of that proceeding?
Chris Johns
Yes. We’ve said all along, it’s zero to $30 million.
Greg Gordon - Morgan Stanley
Final question is more for Peter. I think one of the things investors generally get concerned about when they think about buying your stock is just while it doesn’t look like the overall economic malaise in California has really directly affected your ability to execute your business plan.
I think, people find it kind of hard to get their minds around how that won’t ultimately impact your ability to grow and/or achieve your financial aspirations. Can you talk about what the appetite is at the commission for continuing to allow you to invest in infrastructure and sort of try to frame for people what your exposures are to the economy, direct or indirect?
Peter Darbee
Sure. Let me cite a couple data points to provide guidance.
You may recall that Edison recently had a rate case, and that provided for a very significant increase in capital expenditures. What you see is that the size of what we’re proposing in terms of capital expenditure increases are on a par with what Edison proposed.
You’ll also see in looking at the Edison situation that they had a satisfactory, from their perspective, a resolution of the rate case. So I think, Edison has gone ahead of us in this process and come out of the commission with a satisfactory resolution of their rate case.
I have spoken with people at Edison and said, “Was it the case that your rate case was so far progressed that when the financial downturn occurred and crisis occurred, that really there was it so much momentum in your rate case that it was too late to impact it” The response back was no, that the financial crisis did have significant impact on how that case was resolved, but in the end, they resolved it satisfactorily. When you think about the timing of our rate case process, we’ll be filing and then it will be resolved at the end of 2010, the beginning of 2011.
Our own belief is by that time, the economy will have turned around at that point. So we will have been through the trough and be on the improving side, and with the expectation that we’ll come through a rate case process very satisfactorily.
Now, what I would say in addition to that is that the commission continues to see the need, and I think policy makers continue to see the need to invest in our infrastructure in California. There’s certainly been a lot of enthusiasm for the smart grid, and remaining a leader in that regard.
There’s been continued enthusiasm for renewable deployment, as well as energy efficiency. So while we’re cautious and we’re sensitive to what’s happening in the economy.
I think people will take the long term view of what’s right and continue the growth of PG&E and what is required for our customers. So I think that’s a factor.
The other thing is we have been a beneficiary of reduced natural gas prices. So as we look at the rate outlook going forward, it seems moderate.
That’s the way we’re looking at it, but we’re sensitive in keeping an eye on that very question.
Operator
Your next question comes from Daniel Eggers - Credit Suisse.
Daniel Eggers - Credit Suisse
Can we just talk a little bit about where you guys are going to fallout this year for hitting renewable energy mix relative to state standards and developments on some of these commitments to build, whether they’re making any more progress than kind of the slow work in solar you’ve seen so far?
Chris Johns
Dan, this is Chris, I’ll start out. As you know, we have signed contracts and delivery for about 14% of renewable portfolio right now.
Those are the ones delivering. We have contracts actually in place for over 20% of our need, which would put us in compliance.
There is concern though, with that percentage that is not delivering yet, that we’ve got contracts for as to some of their ability to get permitting, some of their ability to get transmission hookups and some of their ability to get financing in this current economy, and we’ve been talking about that, you know, obviously for the last six or 12 months. So because of that, we continue to push really hard to sign more contracts and we’ve pushed, as you’ve seen to look at our own opportunities to own some renewable generations.
So for instance, we’re going to already start a pilot project later this month, building a little photovoltaic system right next to one our substations for a couple megawatts and start that process. You know that we are in front of the CPUC asking for permission to build 250 megawatts in a plan on photovoltaic over the next several years, and we expect the commission to rule on that later this year or early next year timeframe.
In addition to that, we continue to pursue opportunities to own larger installations of either wind or solar. We continue to look at those.
So all-in-all, we understand in this economy. It’s rough, and it will be challenging, especially around some of the issues on transmission and financing, but we remain committed to doing all we can to meet the standards in the spirit of what California would like to obtain.
Daniel Eggers - Credit Suisse
Are you seeing more opportunity and more interest for you guys to partner into some of these projects on a rate based perspective? As you think about maybe $2 billion of the loan guarantee money being stripped away for another clunkers program.
Does that open up more of a window for you guys to get involved in this front?
Chris Johns
Well, I will say that we definitely have seen an up tick in interest of folks calling us and asking us about our interest in either supplying tax equity capital or being part of a partnership or looking at a build-in transfer kind of situation, and we’re exploring those. As we’ve said, we are interested in being owners, depending on the technology and economics around the projects and as we’ve talked about before, you won’t see a grand plan around those as we find opportunities that are valuable for our customers and shareholders.
We will pursue them and then present them to the CPUC on a one at a time basis.
Daniel Eggers - Credit Suisse
On the GRC itself, the December filing, how did you guys come to that date versus maybe doing a little earlier? It seems like California’s had a bit of a hard time getting things done in 12 months, given some your peers.
Is there any motivation? What was the process?
I guess versus not falling them sooner.
Chris Warner
That date is in accordance with what’s called the rate case plan. It’s a phasing of the rate cases for the various utilities in the state that set by the CPUC.
So, that schedule is one that the Public Utilities Commission sets for us.
Daniel Eggers - Credit Suisse
I guess just one last question on the ROE reset or the potential to adjust the ROE for higher debt rates. Where are the spreads in your bonds on a tracking basis?
On the A and the triple-B range and when are we going to hear some clarity from you guys on what you plan to file for?
Kent Harvey
As you know, the mechanism has been setup for single-A as well as B double-A and so, we’re in a situation where we’re split rated and so, there’s a little bit of a lack of clarity there about, how that would work out at the PUC. If you look at the B double-A rates which we would focus on, they have been to-date above the trigger mechanism.
Although, they’ve been declining in recent months, it’s a 12 month average. So, our current intention would be to make an advice filing in October, requesting an increase in our ROE to reflect the trigger mechanism, and it would be based on the B double-A bond yield index.
That will be based on the triggering event that is baked into the cost to capital mechanism. Obviously, we plan to be pragmatic about it when it comes to the filing and we’re going to consider all of our options out there to make sure that we do what’s in best interest of our customers and shareholders.
Daniel Eggers - Credit Suisse
Just to make sure I understand. The increase may suggest a certain level of ROE bump, you guys have the discretion to ask for nothing or ask for less than the full adjustment if you’re so inclined?
Kent Harvey
That’s true; the mechanism is an advice letter filing where it’s supposed to be fairly mechanical.
Daniel Eggers - Credit Suisse
Where is that average to-date on your bonds, if you look at the B double A or on the A side?
Kent Harvey
I guess about ten months or so under our belt. If you looked at kind of where you were cumulatively, I believe we’re just slightly under 8% to-date.
The trigger mechanism is at about 6.25% I believe. So the difference is about 1.6%, 1.7%.
So, the mechanism says that you would adjust by half that amount, which would be somewhere in the 80 basis point range or so.
Daniel Eggers - Credit Suisse
That’s on the B double-A side.
Kent Harvey
That’s on the B double-A, yes. You wouldn’t hit the trigger with the single-A mechanism.
Operator
Ashar Khan - Incremental Capital
I was just trying to get if you could help us along, because in the first half the earnings growth has been a little bit sluggish. You said you’re going to make it up in the second half.
Could you just tell us, what are the factors? I guess you were talking about some them, I guess less on collectibles.
Could you specify a little bit more how the growth rate picks up in the second half of the year?
Peter Darbee
If you look at our earnings from our office for the first half of the year, obviously we’re a little shy, if you multiply by two, we would be a little shy of $3 and so to get up to our guidance, it would really reflect kind of the following factors. First, we did have a little hit in the first quarter from our uncollectible, so you mentioned that.
I also mentioned the fact that we had worked over the past quarter on some belt tightening and we think that will pay-off in the second half of the year. The third item is just kind of the seasonal impact of our transmission revenues, which tend to be higher in the third quarter in particular, when you have warmer weather and therefore, higher throughput and again, electric transmission revenues are not part of the decoupling.
So that would flow through to our earnings. Then I also mentioned that, towards the end of the year, we do expect resolution of some of our regular regulatory items and that would include our core procurement incentive mechanism that we have for our gas procurement, function for our core customers, as well as our customer energy efficiency incentives.
So those would be the factors that I would outline to think about the second half of the year.
Asher Conn - Incremental Capital
Kent, you still have ranges for rate for next year and years in 2010 and 2011. Based on what you have filed and what is in there?
Where do you stand with this new rate case? Where do you stand on those ranges, could you help us?
How do you get to the upper end or to the average? Or how should we look at it?
Kent Harvey
We did provide ranges in the original guidance for electric distribution and transmission, essentially our GRC capital expenditures. If you look at our generate case filing, or the notice of intent anyway at this point, the CapEx numbers that I described, which average $2.7 billion per year would be at the upper end of the range that we provided in the original guidance.
On the electric transmission side, I think we just provided an overall estimate, which was around $800 million, and our TL filing that we made quite recently with just a tad north of the $800 million, very consistent with the that level.
Asher Conn - Incremental Capital
Okay, so if everything gets approved then we would be at the higher end of those ranges provided for the guidance.
Kent Harvey
For the rate case portions.
Gabe Togneri
You might recall at our investor conference that we not only gave a range for the categories of spend covered by the GRC, but we also identified the cornerstone project as a potential incremental CapEx as well as the solar PV investments. So those are also part of the CapEx spend that would get us towards the high case and of course, those are not decided yet.
Operator
Your next question comes from Lasan Johong - RBC Capital Markets.
Lasan Johong - RBC Capital Markets
A couple of quick questions, Peter, I think it’s safe to say that given the guidance has been reaffirmed, that there is no danger or threat to at least immediately anyway, danger or threat to cutting down the CapEx budget from the outline that was given earlier in the year?
Peter Darbee
Is that a question or a statement?
Lasan Johong - RBC Capital Markets
I’m asking to you confirm that if you don’t mind, Peter.
Peter Darbee
I think we’ve outlined the guidance and our plans with respect to CapEx remain the same.
Lasan Johong - RBC Capital Markets
Then is it also fair to say that as and you had outlined that there were possibilities for additional CapEx spend overtime in your presentation. I’m assuming for now, given what California demand that is off the table, is that correct?
It might return with the growth coming back in California, is that a good assumption?
Peter Darbee
We want to be clear and specific around this, and that is that we do have cornerstone filings, so that is out there. In the later stages of the planning horizon, we still have the British Columbia transmission line.
So we’re continuing to work on that, and that would be an increment to it. We have the pacific connector line that we’re continuing to work on, and that’s heading toward final FERC filing, and then as we discussed here, there is some other renewable opportunities that we continue to look at.
So I just want to remind everyone of those sort of contingent items that are out there. I think the situation remains pretty much the same from when we’ve spoken about those in the past.
Lasan Johong - RBC Capital Markets
What about your base CapEx spending? I mean, is there no reduction in that base CapEx due to less demand, less wear and tear?
Peter Darbee
Well, where we stand in that regard is, we have the previous rate case that we filed and we’re continuing along on the expenditures there and the expenditure path that we’ve outlined in the past and then the outlook for capital expenditures going forward are included in our NOI. So, we don’t really see a change as you suggest.
Our rate case filing took into consideration the economic environment and our forecast based on that. So I’m not quite sure what you’re getting at Chris has an additional point that he might make.
Chris Johns
What I would add to that is that, I think if I hear it, you’re getting at, there are changes in the economy that are impacting where we spend our capital. So, for instance, we’ve seen the decline in some new customer, in housing starts if you will and we had some capital set aside to address that.
What that’s done is, it’s freed up that capital and enabled us to redeploy it as we talk about a lot, we have continue demands to replace aging infrastructure, upgrade our reliability in various parts of our service territory and we’ve continued to see that side of that demand grow. So, redeployed in areas where we’ve been able to take advantage of the economy and the decline in something like new housing starts and redeploy that capital still within the rate structure that Peter outlined, but enables us to continue to address the aging infrastructure and the reliability requirements and then we baked all of that into our needs as the next rate case comes along.
We don’t anticipate that throughout that whole next rate case the economy would stay bad for the entire period and so we do anticipate some rebound there and some need to go back in and do address new housing starts.
Lasan Johang - RBC Capital
That’s perfect. I want to just follow up on Dan Eggers question.
The net effect of the bond index time to the ROE’s that you’re going to have an 80 basis point increase potentially in your ROE?
Peter Darbee
Potentially, that’s what the mechanism tells you to date, it’s a 12 month mechanism and we’re ten months through it. As I said before, we’re going to make the decision when we get to the fall about how to approach that and that’s a one year item that would only affect 2010.
That’s when the mechanism is in place through 2010.
Lasan Johang - RBC Capital
That would be 1225 roughly?
Peter Darbee
1215, I think if you added 80 basis points to our…
Lasan Johang - RBC Capital
Is that going to cause you some political heartburn?
Peter Darbee
Well, that’s one factor we’re going to consider when we evaluate the filing over the next couple months.
Lasan Johang - RBC Capital
You don’t have to do is it, right? You don’t have to take that increase?
Peter Darbee
Well, it’s an automatic mechanism, so it’s fairly mechanical, but we obviously have flexibility to work through it as we see fit.
Gabe Togneri
I’ll remind everybody on the call that our guidance for 2010 is consistent with our current 11.35% ROE is not con contingent on a bump.
Operator
Your next question comes from Michael Lapides - Goldman Sachs.
Michael Lapides - Goldman Sachs
Conventional generation, can you give an update about your thoughts for the need for new conventional generation in your service territory. What’s happening with some of the assets that you had originally contracted with?
What type of opportunities for potential rate based growth around conventional generation makes this over the next few years?
Chris Johns
As I think you may recall, we did file with the CPUC over a year ago on our requirements for the 2015 timeframe for conventional generation. In that ruling, in that plan, plus the results of the previous plan, it came out to be a need of around I guess 1100 to 1500 megawatts that we would have a need for conventional generation by 2015.
We did a solicitation throughout last year, and we’ve been in the process of negotiating some of those proposals. In fact, we even did a filing earlier, I guess a couple months ago, on the first one of those that came through that would be through a PPA type of agreement.
We do anticipate here in the next month or so being in a position to provide the CPUC with a filing on all of the rest of that solicitation and the results in our proposed solutions to those. So we continue to see the need for new conventional generation in California, because we’re seeing contracts that are going [Audio Dip] seeing other facilities that are aging, quite frankly and we want to make sure that there is new steel in the ground and that’s what these generally have been aimed at.
So you will see and hear a little bit more about the results that here in the next several months.
Michael Lapides - Goldman Sachs
Are all of these compared to a self build option?
Chris Johns
The way the process it works, this is the CPUC actually did not allow us to propose that we would build it ourselves and own that and we’re still working through what that would look like for future times. What it really allowed for, was people to either bid in, build the facility and sell us under a long term contract, the electricity from it, or they were allowed to bid in and propose to build the facility and sell us the facility.
So we evaluate all of those and in fact, there’s an independent evaluator that also participates in that.
Operator
Your next question comes from [Daniel Site - Dudack Research]
Daniel Site - Dudack Research
I was wondering, you mentioned tightening your belt. How much do you anticipate the type of savings you hope to achieve this year and next year?
Kent Harvey
We actually have not provided any estimates of what that is, but we have the experience in the first quarter with collectibles, and we decided that we’d go back and kind of work with all parts of our organization to try to identify some lower priority spend that we could capture some efficiencies for. So we really expect to get that benefit in the second half of this year, and hope that we will be in place for the following year as well.
Daniel Site - Dudack Research
So it will be both on the CapEx side, as well as on the O&M expenses or just O&M?
Kent Harvey
Our focus was more on the expense side this year.
Daniel Site - Dudack Research
Okay and you will let us know next quarter?
Kent Harvey
To the extent, it’s a major factor, we would identify it. It will tend to be small items spread out through lots of different functions in our company.
Operator
Your next question comes from Travis Miller - Morningstar.
Travis Miller - Morningstar
The way you guys read the house legislation, Waxman-Markey. What do you predict would be the impact on your customer’s bills given the allowance structure that’s set up in there?
Peter Darbee
As you’re probably pretty aware, we’ve been one of the cleanest utility s in the United States for many years. In fact, based on owned generation, we net about 6% of the average utility in the United States on the basis of owned plus contracted for, we emit about 50% of the average emissions of the average utility in the United States.
So the legislation provides for the allocation of allowances 50% on the basis of historical emissions and 50% on the basis. So, we believe that the impact on customer rates with the proposed legislation would be very moderate.
Travis Miller - Morningstar
Still a moderate increase?
Peter Darbee
It would be pretty modest.
Operator
Ivana Ergovic - Jefferies
My understanding is that the Southern California Edison that also had split rating already got the approval to basically use its lower rating in determining the change in ROE in 2010. So, I’m just wondering if there are any reason why would you think that you wouldn’t be able to use the same logic?
Peter Darbee
We don’t have complete clarity on this issue. So, we don’t know at this point.
Operator
Your final question comes from Annie Sal - Alliance Bernstein.
Annie Sal - Alliance Bernstein
Can you just go through the warrants? I didn’t hear very clearly.
How is it going to work in the future?
Chris Johns
These are warrants that the state issued during this budget crisis. So, rather than paying their electric bill on a current basis, they issued warrants, which are basically saying that they would pay us later, they’re IOUs, if you will.
Now that they’ve got a signed agreement as to how they’re going to resolve the budget. Those warrants are due in October.
It was only $4.8 million for us, and we expected that they’ll come through and pay that.
Annie Sal - Alliance Bernstein
What happen if they can’t pay it? What’s the situation then?
Chris Johns
Well, ultimately, I’m not aware of anytime that they haven’t ever paid those, but obviously in a hypothetical situation that they never paid, the only ramifications we would have would be to file a suit against the state to get the cash back.
Operator
There are currently no additional questions waiting from the phone lines.
Gabe Togneri
Alright, well, I’ll just thank everybody again for their interest and I’m sure we’ll be seeing you at the couple of conferences that are coming up in September. Thanks very much.