Jul 30, 2008
Operator
Good afternoon. My name is Jennifer, and I will be your conference operator today.
At this time I would welcome everyone to the Pinnacle West Earnings Conference Call. [Operator Instructions].Thank you.
Ms. Hickman you may begin your conference.
Rebecca L. Hickman
Thank you, Jennifer. I'd like to thank everyone for participating in this conference call to review our Second Quarter Earnings, recent developments and operating performance.
Today I have with me Bill Post, our Chairman and CEO, Don Brandt, who is our President and Chief Operating Officer and also CEO and President Arizona Public Service, and Jim Hatfield, our new CFO. Before I turn the call over to our speakers, I need to cover a few details with you.
First, I encourage you to check the quarterly statistics section of our website. It contains extensive supplemental information on our earnings variances, and quarterly operating statistics.
Second, please note that all of our references to per share amounts today will be after income taxes and based on diluted shares outstanding. It is my responsibility to advise you that this call will contain forward-looking statements, based on current expectations, and the company assumes no obligations to update these statements.
Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements. Please refer to the caption entitled forward-looking statements contained in the Form-8K we filed with the SEC this morning, as well as the MD&A and risk factor sections of our 2007 From-10K, each of which identifies some important factors that could cause actual results to differ materially from those contained in our forward-looking statements.
Also during the course of this call, we will be discussing our ongoing earnings, which is a non-GAAP financial measure as defined by the SEC. Our earnings release, which is available on our web site is accompanied by a reconciliation of our ongoing earnings to our net income.
A replay of this call will be available on our web site www.PinnacleWest.com for the next 30 days. It will also be available by telephone through August 6th.
Finally, this call and web cast are the property of Pinnacle West Capital Corporation, and any copying, transcription, redistribution, retransmission or rebroadcast of this call in whole or in part without Pinnacle West's written consent is prohibited. At this point, I will turn the call over to Bill.
William J. Post
I would also like to thank you for taking your time to join us. As Becky mentioned, Jim Hatfield is with us today.
Two weeks ago, Jim joined us as Senior Vice President as chief financial officer, bringing with him more than 28 years of electric and gas industry experience. He most recently served as CFO of OGE Energy, and we are very excited to have Jim on board.
Don Brandt will discuss our financial results and operational highlights for the quarter, and then I will complete our remarks by discussing regulatory developments and our plans for the future. Don?
Donald E. Brand
Thanks, Bill. Our consolidated ongoing earnings in the second quarter were $104 million, or $1.03 per share, compared with $85 million or $0.84 per share a year ago.
The ongoing earnings exclude $0.30 per share of credits attributable to prior year tax issues resolved in the second quarter of this year. The increase in ongoing earnings of $0.19 per share was driven largely by improved results at our real estate subsidiary, SunCor.
SunCor's second quarter earnings improved $0.14 per share because of the sale of a 12-story office building at its Hayden ferry lakeside development in Tempe, Arizona. I mentioned on our last conference call that SunCor had a large commercial transaction pending which was expected to close in the second quarter.
This sale closed in June and contributed a $19 million after-tax gain. Excluding this one major real estate gain, our ongoing operating results were flat.
Now, I will cover some detail in the other variances for the quarter. Rate increases improved earnings $0.15 per share.
The retail base rate increase became effective last July, contributed $0.11 per share, while the whole sale and the retail transmission rate increases that became effective March 1st added $0.04 per share. Non cash mark-to-market valuations of APS's fuel and purchase power hedges net of related PSA deferrals increased as natural gas prices increased dramatically in the quarter.
These increases added $0.10 per share. Higher retail sales related to customer growth contributed $0.04 per share.
Increased margins related to long-term traditional wholesale contracts added $0.04 per share. These operating earnings improvements were substantially offset by cost increases and other factors.
For example, milder weather reduced earnings $0.11 per share. The second quarter of this year was cooler than normal, while the second quarter of 2007 was hotter than normal.
May of this year was one of the coolest in the past 15 years, and the five-day period surrounding Memorial Day was one of the mildest on record. On Memorial Day alone, Phoenix temperatures hit a high of only 82 degrees with a mean temperature of only 72 degrees.
We would have to go back to 1965 to find a similar period. Next item is, marketing and trading contributions were lower by $0.08 per share, and higher O&M costs decreased earnings $0.07 per share, related chiefly to higher maintenance costs for our distribution system and power plants, as we prepared for the summer peak season.
Increased depreciation and amortization driven by APS's continuing investment in plants and facilities reduced earnings $0.03 per share. With respect to 2008 guidance, we currently expect that consolidated ongoing earnings will be within a reasonable range of $2.50 per share.
We estimate that APS will contribute substantially all of the earnings and that SunCor's contribution will be minimal. Our ongoing earnings estimate excludes the $0.30 per share of prior year's tax credits recorded in the second quarter of 2008.
Looking at the growth in our service territory, as I mentioned, growth in discussing the earnings variances, growth has continued to slow in Arizona. Since growth has traditionally been a hallmark of our company and the entire state, the situation deserves more discussion.
Our customer growth in the second quarter of this year was 1.6%, down considerably from the 3.5% growth rate in the second quarter of 2007. We currently expect customer growth to continue to decline to a rate of about 1% by the end of this year.
Furthermore, we expect growth around 1% per year for the next several years. The dynamics of the mortgage and the housing markets as well as the weak US economy as a whole have clearly left a mark in Arizona.
Economic performance in the metropolitan Phoenix area has declined, particularly in the areas of population, immigration and job growth, especially construction jobs. As a result of the sharp downturn in the real estate markets, we estimate that the Metro Phoenix area has about 40,000 vacant homes and apartments, about half of which are in APS's service territory.
In robust real estate markets, the level of vacancies has been more on the order of 10,000 units. Over time as residential vacancies are absorbed, and we merge from this downturn in the construction cycle, we are confident the state will return to its historical robust growth rates.
The long-term fundamentals of the Arizona economy are still attractive and we expect Phoenix will regain its historical stature as one of the fastest growing major metropolitan areas in the country. While I'm on the subject, let me take a moment to comment on customer usage patterns we are seeing.
In the second quarter, residential usage declined by 6.5%. The very mild weather accounted for 6 of the 6.5 percentage points of that decline.
In other words, over 90% of the change was due to weather. In the first half of 2008, weather normalized residential usage is lower than the prior year by one half a percent or less, a very small decline.
These very small net of weather usage declines have been routine during economic downturns as customers respond to job losses and lower incomes, but have typically been short lived, lasting a couple of quarters to a year. Now I will turn to regulatory developments and operations at APS.
Bill will address APS's pending retail rate case, and interim rate request, but I will provide an update on APS's transmission rate case at the Federal Energy Regulatory Commission, and the related retail rate changes as well as the status of our power supply adjustor balances. In May, we reached an uncontested settlement of transmission rate case, which was approved by FERC last Friday.
Under the terms of the settlement, APS is permitted to automatically adjust its wholesale transmission rates on June 1st each year, using a pre-approved formula rate setting methodology. As we previously discussed, the initial FERC rate request filed last summer was for a $37 million increase in annual transmission revenues based on a 2006 test year.
Of that amount, 30 million related to transmissions to serve APS's retail customers. Both the FERC and the Arizona Corporation Commission allowed APS's proposed transmission rates to become effective on March 1st of this year, subject to refund, pending the ultimate outcome of the case.
The retail increase was implemented using the transmission cost adjustor mechanism or TCA as we call it previously approved by the ACC. In the settlement, APS agreed to an increase of $28 million overall, of which $27 million applies to retail customers.
In May, we filed with the FERC for a second transmission rate increase, based on the formula agreed to in the settlement, using a 2007 test year which produced a net increase in annual transmission revenues of $15 million, of which 13 million applies to APS's retail customers. The second transmission increase became effective at the whole sale level on June 1st, and the retail level through a second TCA adjustment on July 3rd.
As of June 30th, APS had $23 million of accumulated PSA deferrals, with the very strong enhancements to our PSA that were approved by the ACC last year. We continue to be in a much better position with respect to fuel costs this year, than we have been in the past years.
On April 8th, the ACC approved APS's 2008 implementation plan for the state's renewable energy standard. The implementation plan for APS provides $34 million for renewable energy projects and customer incentives.
The expenditures will be recorded in O&M expense and purchase power costs, but will be offset by revenues collected through our renewable energy surcharge. In the second quarter of this year, about $5 million of the O&M expense increases and an offsetting increase in revenue were recorded.
Now turning to our recent operating performance. The Palo Verde units have been running well.
The combined capacity factor for the Palo Verde units was 74% during the second quarter. Essentially the same as last year's second quarter.
Both periods reflect planned refueling and maintenance outages. Currently all three units are operating at 100% power.
As most of you know Palo Verde has two refueling outages each year. The next refueling outages are at unit 1 in the fall and at unit 3 next spring.
Currently these outages are each expected to last 40 to 50 days. We are making substantial progress on our site improvement plan, and we are working closely with the Nuclear Regulatory Commission at various levels to insure that all issues are effectively addressed.
We are committed to return Palo Verde to sustainable first quartile performance. Our coal-fired plants continue to operate exceptionally well.
In the second quarter of this year, the units operated at an 85% capacity factor, which was essentially the same as a year ago. Our coal-fired plants have consistently run substantially above the industry average, and we expect them to do so again this year.
In June, APS placed two new gas-fired combustion turbine units into commercial operation, at its Yucca site in Yuma, Arizona. These units add 96 megawatts of peaking capacity in that area to help meet Yuma's summer load requirements.
Turning to a different topic, we are very proud of the fact that APS received the 2008 Edison award from the Edison Electric Institute in June. They award honors one US electric company for outstanding contributions to advancements of the industry.
APS was recognized for its development of a new technology known as a Transformer Oil Analysis and Notification system or TOAN as we call it here. The TOAN system allows APS to automatically monitor oil data and take necessary preventative actions on a much more timely basis when abnormalities occur.
Catastrophic transformer fires may one day be a thing of the past, not only for APS but the entire electric industry. We are proud the innovative achievements of our employees in the transmission area and throughout the company.
This Edison award belongs to them. Similarly, on the customer service side of our business, we recently received the results of the J.D.
Power 2008 survey of residential customers. Among large investor-owned electric utilities, APS ranked second in the west and sixth nationally in terms of overall customer satisfaction.
We work hard to maintain top-notch customer service, and continually strive to raise that bar even higher. That concludes my prepared remarks, and I will turn the call back over to Bill.
William J. Post
Thanks, Don. I would like to spend some time talking about our plans for the future and energy plan for Arizona.
Although as Don described, we currently are experiencing a slowdown from our historical customer growth rates. Growth in Arizona will continue over the long term.
Consequentially, we must aggressively address the future. Our customers growing energy needs and the financial strength that is vital to our success in serving those needs.
Reliable, affordable electricity is the key energy cornerstone in our modern economy. Our employees focus every day on providing top quality customer service, service which has been recognized as Don said year-after-year by superior J.D.
Power customer satisfaction rating. However, great customer service cannot be sustained without ongoing investments in our electric system, and a fair, timely return on those investments.
The infrastructure investments we're making today and over the next decade will shape the future of our state's communities, its environment and its economy. We must invest in our electric system to provide reliable service and to serve our growing customer base.
Growth in both customers and energy consumption means APS needs new energy resources, and we currently project needs for peaking resources within the next five to eight years, and new base load capacity shortly thereafter. We're exploring a variety of alternatives for both types of resources, renewable, gas, coal and nuclear as well as conservation, energy efficiency and demand response programs.
However, the specifics of how we acquire and pay for this future will require decisions that will include the public, the Arizona Corporation Commission, and our company. In addition, I believe energy independence for Arizona is essential in order to ensure that APS is not forced to rely on power purchases in volatile and uncertain regional markets to meet the state's energy needs in the upcoming years.
Thus resource planning is critical to serve growth effectively. During our recent calls I have discussed the resource planning initiative we launched in January of this year.
Our goal is to build public understanding of the options and the challenges we face in Arizona, as we plan for and acquire energy resources. To date, we've held six sessions that have been well attended by a wide variety of interested parties.
We are continuing this outreach process by meeting with community leaders and others throughout our state, and by the end of this year, we expect to file our future resource plan with the Arizona Corporation Commission incorporating the input we receive through this process. Resource optionality will be critical.
Peaking capacity does not necessarily mean gas-fired plants. For example, while the Solano solar facility we announced earlier this year has obvious benefits as a renewable energy source, it also competes with gas plants.
As we go through the process of determining our future resource commitments, we cannot lose sight of the need for retaining flexibility in our plan. However, planning is not enough.
We need the financial wherewithal to meet our future needs. Our financial strength must be improved to insure that we are able to continue serving Arizona's energy needs, reliably at reasonable prices.
Currently, we're at the bottom rung of the investment grade ratings ladder. Any slip from investment grade would prove costly to our customers and APS's investment grade status could not be restored easily or quickly.
Sustaining superior, reliable customer service requires a financially strong company. Investment grade credit ratings are an integral foundation for our business.
Certainly without investment grade ratings, costs of borrowing increase and financing flexibility decreases, and a lack of financial flexibility puts at risk our ability to acquire the generating resources to supply Arizona's future energy needs. For example, APS has made significant commitments to sustaining Arizona's energy future through renewables, including the recently announced Solana solar plant which is scheduled to begin delivering energy in 2011.
This project is not only crucial to our sustainable energy future, but also significantly help APS meet the renewable energy standard requirements prescribed by the Arizona Corporation Commission. With financial flexibility, we expect Solana to be the first of several large-scale solar projects.
Failure to maintain investment grade credit ratings puts Solana and the future of our renewable energy programs at great risk. In fact, APS's entire resource acquisition program would be at risk.
In addition to our credit ratings, we must also ensure that we operate as efficiently and cost effectively as possible. During the second half of 2007, we conducted a complete review of our organization and our costs.
We previously discussed the results of that cost with you, so I will just summarize them quickly. We reduced 300 staff positions, resulting in annual pretax O&M savings of $7 million.
We reduced non-staff O&M producing annual pre-tax savings of another $7 million, and we eliminated more than $200 million of capital expenditures over the next five years. Each of these previously announced cost reduction efforts is on track.
Our efforts to-date have been rigorous but the fact remains that our current electric prices do not reflect our costs of doing business. Over the past five years, significant steps have been made with the Arizona Corporation Commission to re-regulate Arizona and rebuild the regulatory model, however, our financial health has deteriorated over this time period and our ability to perform in the future has been jeopardized because of the regulatory lag.
We have two significant regulatory matters pending before the Arizona Corporation Commission, both of which are critical to meeting the needs of Arizona's energy future. In March, we filed a retail rate case.
We updated the rate case on June 2nd to reflect the test year ended December 31st, 2007. As updated in June, the filing requests a net increase in annual retail revenues of $278 million to become effective October 1st of 2009.
Consistent with the original filing, we are continuing to propose several methods to reduce regulatory lag and the resulting earnings attrition. The hearing on the rate case is scheduled to begin next spring on April 2nd.
Although progress is being made in the general rate case, we simply cannot wait until late next year for a decision on that filing. Time is truly of the essence.
Bold steps must be taken and tough decisions must be made now that will prove beneficial to our customers and investors alike. To that end, on June 6th, we requested the ACC grant APS interim-base rates until permanent rates become effective under the pending general rate case.
The interim rate relief would provide critically needed cash flow, and strengthen our credit metrics and earnings. The interim request asked for a 4% rate increase which would increase annual pre-tax revenues about $115 million.
The amount would be subject to refund depending upon the eventual outcome of the rate case. It is essential that the ACC grant this request to provide some financial stability and strength for APS and accordingly to help our investment grade credit ratings.
Very simply, the amount of the interim request approximates the increase which results from updating only for the new tax year data, using staff's methodology from the last case, while not including any of the attrition mechanisms we have proposed. Two weeks ago, the ACC administrative law judge issued a procedural schedule for consideration of this request.
The key dates are as follows. Staff and interveners testimony is due August 29th, APS's rebuttal testimony is due September 8 and the hearing will begin on September 15.
This schedule is designed to allow the Commission to render decision on the request by November allowing the interim increase to take effect at the same time APS's winter rates go in effect. Since winter rates are lower than summer rates, concurrent implementation of the interim request would result in an average net decrease to customers of approximately 14%, compared with the rates they are paying today.
Even if implemented before winter rates go into effect, the interim would not increase customer bills, but instead offset the 4 mill fuel decrease that is currently estimated to go into effect later this week. While constructive and timely rate treatment is a critical component of maintaining and restoring APS's financial strength, we are also prepared to do whatever we can to improve our financial strength.
As Don indicated, our customer growth has continued slowing during the year and the situation is expected to continue for several years. Since last fall, the real estate slowdown has been exacerbated by higher gas and oil prices and a turndown in the national economy.
Therefore we have undertaken a further review of our cost. Although this review is still underway, we are pursuing efforts to reduce our capital expenditures by at least $500 million over the next three years.
We will not know the exact amount of these potential cuts until we have completed our implementation plan. These cuts will recognize the additional growth declines and they also will involve cuts in other areas that may impact our ability to serve future customers.
We cannot continue to impair our current financial health for future customers. Growth must pay for itself on a timely basis APS's electric prices must cover the cost of doing business to insure the viability of Arizona's energy future.
Short-term approaches will have long-term negative consequences for Arizona's economy and its people. The capital expenditure reductions will involve downward revision of our distribution expenditures, but they will also include delays or cancellation of some transmission projects and other facilities.
Without consistent, constructive regulatory score, now and into the future, we simply cannot continue a $1 billion a year capital expenditure program. Electricity is a vital component of a vibrant growing economy and we want to be the cornerstone supporting Arizona's energy future, but we cannot do it without a solid financial foundation.
It is our goal to fully finance our capital expenditures internally within three years. The four key steps of the program we're implementing are; first, the cost reductions announced and implemented earlier this year.
Second, the interim rate relief which is essential to maintain our financial strength. Third, the further capital reductions just discussed to be implemented beginning late this year and finally a constructive process and decision in the pending general retail rate case.
With the successful implementation of this program, which I believe will be achieved, we will eliminate the need for an equity issuance in 2008. Obviously, much of this plan as well as the outcome of our pending rate case depends on our ability to work closely with our regulators to bolster our Company's financial health.
As I said earlier, the fundamental issue is their prices do not reflect our cost of doing business and is time to restore our financial health. As innovative as we are, we cannot invest in the infrastructure needed to reliably meet our customers' growing energy needs without sufficient financial health.
Without positive, consistent regulatory support, our state's energy future in jeopardy. We have been working aggressively with the Arizona Corporation Commission to rebuild the Arizona rate regulatory model.
In the fuel area, transmission price increases, generation resource additions and now with our second interim request in as many years, the ACC has understood and has made the necessary decisions to implement major components of the new regulatory model. However, it is now time to address our financial ability to meet Arizona's future energy needs.
We cannot continue to finance growth by impairing our financial health and we cannot efficiently finance Arizona's energy future with today's impaired financial strength. That concludes our prepared remarks and we would be happy to answer all of your questions.
Question and Answer
Operator
[Operator Instructions]. We will pause for just a moment to compile the Q&A roster.
Your first question comes from Dan Eggers with Credit Suisse.
Daniel Eggers
Hi, good morning.
William J. Post
Hi, Dan.
Daniel Eggers
And this first question, just on the… the no need for external funding in 2008, the no need for equity. How much flexibility is there between the four points as far as if you don't get your interim relief, are you still on a position where you can avoid issuing equity or does that change the conversation quickly?
Donald E. Brand
Well Dan our primary focus and this is Don speaking. Our primary focus right now is getting that interim adjustment, as Bill said we are confident that we are going to carry that decision with the Arizona commission.
I think they understand our situation, they have acted responsibly with the transmission cost adjusters and the substantial improvements they made a year ago and our fuel adjustment mechanism and I think they will understand that implementing this interim adjustment is the responsible thing to do at this point.
William J. Post
And I think the fact that they have scheduled this and have addressed issues dealing with our credit issues over the last year, year and half show that they have been very focused on this. They understand how important it is for us to be able to maintain the financial strength we've had and improve it and I think the key is that interim decision.
Daniel Eggers
Okay, if I do my math right now, looks like you guys are earning in less under 7% ROE this year with the interim adjuster. Would that put you guys a lot closer, how close to your earn would you guys be at that point?
Donald E. Brand
We will try make up a little better than half of that distance, it put us in the 9.
Daniel Eggers
In the 9 range?
Donald E. Brand
9 range.
Daniel Eggers
Okay.
Rebecca L. Hickman
And maybe on an annualized basis, Dan…
Daniel Eggers
Yeah. Yeah, right.
Rebecca L. Hickman
Remember that this year you only have two months in low sales months.
Daniel Eggers
No, I mean on an annualized basis. Sorry, but thanks Becky and I guess this is kind of last question.
And I don't know if you could walk through kind of some of the plusses and minuses from the old 250 guidance this year to the new 250 guidance since you guys were not stripping out the tax benefits from that number.
Donald E. Brand
Yeah there actually aren't any very large ones. Dan, I'm looking at a reconciliation here… the mark-to-market it is a little under a dime.
Actual realization on sales is around a nickel. It is split between commercial and residential.
Higher volumes on our wholesale contracts is $0.03 to a nickel. Then we've got a multitude of other items and some of our cost reductions that we, Bill mentioned that we went through as a result of '07, some of those who have come in earlier and better than we had anticipated.
Daniel Eggers
Okay. Thank you, guys.
William J. Post
Thanks, Dan.
Operator
Your next question comes from the line of Bill Atasoley [ph] from Citigroup
Greg Gordon
Actually, it's Greg Gordon. How are you doing?
William J. Post
Hey, Greg, how are you?
Donald E. Brand
Hi, Greg.
Greg Gordon
Okay, so when you… Dan asked a big chunk of my question. When you look at the potential for interim rate relief and the improvement, the potential improvement in returns, does that pick-up, but you just articulated.
Take into account the deceleration in customer growth and sales growth that you are looking at?
Donald E. Brand
Short answer is yes.
Greg Gordon
Okay. And you are basically presuming, and we should be presuming going forward that your revenue growth rate is going to decline to about 1% a year?
Donald E. Brand
Correct, and for the next several years. Yes let me respond a little broader to that.
I think what we are saying is our customer growth rate is about 1% per year.
Greg Gordon
Right, I'm asking if we can extrapolate that constant usage, that would be about 1% or if we were to see some deceleration in usage that you could see top line revenue grow even slower.
Donald E. Brand
Under current rates, you mean?
Greg Gordon
Yeah.
Donald E. Brand
And so when you say revenue, you are talking about, kind of, projecting revenues under today's rate levels.
Greg Gordon
Right, all things equal, that's right.
Donald E. Brand
Okay, all things equal. Yeah, that's in the ballpark.
Greg Gordon
Okay. And is the interim rate relief that you requested, is this an all or nothing number?
Or is this similar to any other rates filing where the commission could hypothetically come up with a different, still grant you relief, but grant you a different number than you have requested?
Donald E. Brand
The latter.
Greg Gordon
The latter, and at what point… you said basically that you are not planning on issuing equity now in '08. If you were to get a decision in the interim case that was… or how soon after you get a decision in the interim case would you make a final decision on that or is that basically already in the plan and you will reassess in '09, no matter what happens in '08 in the September decision?
Donald E. Brand
That's essentially our plan going forward.
Greg Gordon
Right, so if you need equity, it is going to be an '09 event, irrespective of what happens to the interim case?
Donald E. Brand
That's correct.
Greg Gordon
Thank you very much.
William J. Post
Thanks, Greg.
Operator
Your next question comes from the line of Paul Patterson with Glenrock Associates.
Paul Patterson
Good morning, guys…well, good morning over there, I guess. How are you?
William J. Post
Hi Paul, how are you doing?
Paul Patterson
All right. Just with the equity issuance, I mean assuming that everything works out with the interim increase and everything else, does that mean that the equity issuance is really eliminated for the foreseeable future or just simply postponed?
Donald E. Brand
I think highly likely would be to eliminate clearly for 2008. It's out and for a good part of 2009.
I think we would be comfortable move forward without equity.
Paul Patterson
Okay and then the $500 million capital reduction. I heard your prepared remarks and it wasn't completely clear as to, does this impact future growth or… I mean in other words, if growth comes back and what have you… I wasn't clear as to whether or not this does have the potential for affecting future growth or not?
Donald E. Brand
Well, let me ask you to clarify your question, when you say future growth. Are you talking about the capital expenditures somehow stopping that growth level or...
I am not sure if you…
Paul Patterson
You are reducing the capital, my understanding is that you guys are going to be reducing CapEx going forward over the next three years by about $500 million now. And I also heard in your prepared remarks that there was some issue with respect to having the right kind of spending longer-term set up to facilitate the growth for customers.
And I was wondering just how does this capital reduction, I mean you guys are going through some pretty substantial realignments of the business plan and I guess what I am trying to understand is whether or not, this… you mentioned that there was some concern I thought that you were voicing about the ability to fund future growth for the state and I am just wondering how this capital, this CapEx reduction plays into that?
William J. Post
Great, okay, thanks. Thanks for clarifying that.
As we said, the key for us, as we look to the future is we've got to be able to meet the energy requirements of the state, not only in the short term, but in the long term as well. And as we look to the future and we plan on filing with the commission in December of this year, a full resource plan that will deal with not only issues of renewables and purchase power, but also base load additions into the future.
As we deal with that, we've got to improve our financial strength to be able to add in the next 10 to 20 year period base load additions. For example, if you look across the country, efforts that have been underway by various regulatory jurisdictions in Florida for example where the commission has evaluated the need for new nuclear and has granted mechanisms for recovery of those expenditures through that process.
That's the type of thing that we could consider here as we deal with new construction for a base load. We would not make commitments in terms of new base load capacity of that substance without doing that.
Therefore we would remove any projection if you will of base load expenditures for that today based upon the outcome of that resource filing that we're going to make later this year.
Paul Patterson
Okay.
William J. Post
Let me also say that it's very important for us to meet the reliability requirements of our customers and we haven't diminished that. It is the way we're going to finance to meet that reliability, not the fact that we're going to diminish it.
Paul Patterson
Okay and then with the $500 million, if I understood you guys correctly, that's mostly distribution and some transmission. What… could you just give us a feeling as to what that from a capital budget perspective, what percentage of that is, I mean how much you're reducing you a percentage?
William J. Post
The total?
Paul Patterson
Yeah, the percentage of distribution and transmission, how much of that CapEx is going to be? How much $500 million represents I guess of the total volume?
William J. Post
Well, the only thing we can do as of today is kind of, you can look at it compared to the total amount and you can see the $500 million against the $3 billion round numbers over that time period. As far as the individual specific programs and projects, that's something we're going to finalize in the next 60 days or 90 days.
Paul Patterson
Does the $3 billion include generation or anything like that?
William J. Post
It has generation expenditures in it, but no real significant new plants. As you know, it's got continuing nuclear fuel expenditures as well as capital expenditures in all of our generation plants.
Paul Patterson
Okay. Then just finally, you guys mentioned the long-term fundamentals with the close in the surface territory and the 0.5% weather normalized decrease in sales and you said say you expect that for a couple of quarters, but then things get back to normal.
What recessions have there been in Arizona recently or how… what are you comparing that against, is that like the 1990 slowdown or?
Donald E. Brand
Comparing… that was our experience in the 2001/2002 period. The '90/91 period also very similar type of a usage pattern.
Paul Patterson
So, you basically by 2009, you expect the weather normalized usage to be what it was historically?
Donald E. Brand
Yes. Basically our growth is driven by the type and size of new homes.
And the trend and even the continuing trend, obviously, home building has slowed down, but towards larger homes, higher ceilings, more cubic feet. That's what the primary driver of usage and growth.
Paul Patterson
Okay. Thank you very much.
William J. Post
Thanks, Paul.
Operator
Your next question comes from the line of Jonathan Arnold with Merrill Lynch.
Jonathan Arnold
Good morning, guys.
William J. Post
Hi, Jonathan.
Jonathan Arnold
A question on SunCor, you obviously have this gain in the quarter. You are talking about minimal contribution for the year which seems to imply you'd be losing money in the second half which seems to imply, you'd be losing money in the second half, can you give revisit, what, fundamentally, what's going on at this business outside of this big sale and any changes we should anticipate and maybe just an update on what the embedded book value is in this one?
Donald E. Brand
Well, Jonathan, I think you are right in your assessment on the balance of the year and it will… earnings will be as essentially minimal for the year and we expect that for the next year or two. SunCor's actually gone through and continues to go through some cost management exercises.
We've cut more than 33 positions this year, and that's on top of 21 last year. That's just under a half of the organization.
We also see… we've been cutting back on G&A expense about $40 million in 2008. And also that's on top of a 21% decline last year.
And basically, the home building business is flat, very low levels. And comparing the business to… and during the next two years but at the same point in time, looking opportunistically at what type of development opportunities there might be in these depressed market.
William J. Post
You know, Jonathan, you will remember our discussion back in 2002 about recasting and developing a different portfolio for SunCor which we achieved and one of the fundamental objectives of that process to recast that portfolio was for us to be able, as we had downturns like the one we are in right now, be able to adjust our expense to the downturn in revenues which is really, fundamentally a downturn in terms of volumes and opportunities. That was achieved and that's basically the mode that we're in.
Jonathan Arnold
You expect the business to be a negative contributor in 2009?
Donald E. Brand
No. I think its going to be relatively flat.
Minimal either direction.
Jonathan Arnold
And is there a sort of book value number you could give us?
Donald E. Brand
Well, our book value is -- balance sheet is about $500 million, it's consistently stayed around that level, Jonathan.
Jonathan Arnold
Okay. I think all my other questions were answered I think.
Thank you.
William J. Post
Thanks, Jonathan.
Operator
Your next question comes from line of Paul Ridzon of KeyBanc.
Paul Ridzon
Just on top of Jonathan's question. I guess the implication is that, SunCor will have about a $0.15 loss in the back half of the year.
How much of that is cash as opposed to just non-cash?
Donald E. Brand
Majority of it will be cash.
Paul Ridzon
And then, your decision -- driving your decision for the $500 million decrease in CapEx, I know it's a hard question to answer, but how much was driven by reduced food growth projections and how much was just, you had to draw a line in the sand where -- if you are not allowed to structurally earn your cost of capital, you can't continue to spending money?
William J. Post
They were both important themes, I am not sure I can give you percentage allocation between the two. As we've looked to that the, basically the analysis is going through our whole company and this isn't an estimate that, Don, and Jim and I put together, and okay now, go figure out how to do it.
This is an estimate that we've been doing really from the bottom up, looking at every single project in the organization and evaluating it for a set of criteria of which, those are too important ones. But as I mentioned before, reliability is also important and it's not something that we want to see decline.
And in fact, if you look at our history, we, over the last 10 years had a significant improvement in our staffing and reliability, and that something that takes years to do, and we fully appreciate that. So, it's not easy to answer that question because it's really a set of criteria that the entire management team looks at.
But we're doing it very aggressively and we're doing with a perspective on the future that really requires a different method, and different approaches to be able to finance those capital expenditures.
Paul Ridzon
And just -- I want to make sure I understood you. I think it was Greg's question that there's no equity coming at '08 regardless of the interim treatment?
William J. Post
That will be pushed into'09, but how late in '09 depends on the interim treatment.
Donald E. Brand
It will depend on that and other events.
Paul Ridzon
Okay, thank you.
William J. Post
Yes Sir.
Operator
Your next question comes from the line of Raymond Leung from Goldman Sachs.
Raymond Leung
Hey everyone. Couple of questions, one with respect to the CapEx, could you elaborate a little bit more, given that we are half way through the year, how much is savings of that half a billion is this -- can you sort of say, is it this year or is it mostly backend loaded given the time of the year?
And then if you could also talk about some of your external financing needs on debt side to fund the capital program for this year?
Donald E. Brand
Relative to I think Bill's comment earlier was, we'd be implementing these additional reductions later in 2008. We weren't finished with the internal process yet.
So there will be relatively minimal amounts of impact on 2008 capital expenditures of this new 500 plus million dollars reduction. After that, it's probably going to be relatively evenly spread over the 2009 to 2011, maybe somewhat of a slight bias towards the front end loading.
Raymond Leung
Okay. And any debt financing plans for the balance to this year?
Donald E. Brand
No.
Raymond Leung
Okay. And one other thing, given the softness of the economy -- on collectibles, delinquencies, can you talk a little bit about that, please?
Donald E. Brand
We've seen an increase but nothing I'd put into the material category. Naturally with the downturn in the economy, and construction jobs being lost, and the overall impact of the housing market and mortgage market, naturally you are going to see uncollectible's go up and bad debt write-offs increase, but, like I said, an immaterial amount.
Raymond Leung
Alright, thank you guys.
Donald E. Brand
Thanks.
Operator
Your next question comes from the line of Danielle Sweetz with Sweetz Research [ph].
Danielle Sweetz
I was wondering, assuming you'll resume normal growth in 2009/2010, when would you require new generation?
William J. Post
Well, Danielle, if you look out, in the next five to six years, it's basically peaking capacity. And then after that, it would be base load.
Danielle Sweetz
Okay
William J. Post
So as we said today, the picture would be peaking first, and then base load.
Danielle Sweetz
And because of the leap time for base load, you talk about -- you are talking about beginning the construction in five to six years for base load?
William J. Post
Well, Danielle, we are on a path this year to go through really an evaluation that includes all of the parties in our state in dealing with future base load capacity. The need for that fits that schedule.
To put it another way; as we go through the sessions that we have been having throughout the state, the filing that we expect to make later this year with the commission, there's sufficient time in there for us to be able to achieve a decision in the regulatory process, as well as the public process, consistent with our need.
Danielle Sweetz
Thank you.
William J. Post
You bet.
Operator
Your next question comes from the line of Edward Heine [ph] with Catapult.
Edward Heine
Good afternoon. Cam you hear me?
William J. Post
Yes.
Edward Heine
I had a quick question on the O&M side. I think, in the last call, you had been targeting about a $40 million increase for the entire year on O&M.
It looks like, through the first half of the year, you are already there. I wanted to kind of talk about that, and is there timing issues there or is there revisions to kind of what you are seeing on the cost front?
William J. Post
Well, let me gather. I've got the information in front of me here.
We're looking at -- still in that number for the year. Now, you've got the $5 million renewable energy standard factored into those numbers too which is offset on the revenue side.
Edward Heine
Okay.
William J. Post
So, you need to back that out.
Edward Heine
And then, would the rest, because you already got like 40, so that would bring it back down to 35 for the year so far, so the rest is more timing issues, then may be you had higher O&M last year than you will this year, just on that quarterly basis?
William J. Post
Yes.
Edward Heine
Okay. And then, I think the base of '07 was like $735 million which kind of a $40 million number implies like a 5% kind of escalation in cost.
William J. Post
Yes.
Edward Heine
Is there -- with your revenue line going down to the more 1% rate, do you -- how do you see the escalation of cost going and any impact from the reduction in the CapEx as well that may affect that?
Donald E. Brand
Well, let me address the first part, I am not sure how the CapEx impacts on the L&M side, but whether the 5% rate you see in there, and that's about right, but when we look at certain segments of the business like particularly, just the other day, looking at our fossil generation folks, the chemical that they use that are petro based, they are seeing 20 and 30% increases in those, and not an insignificant number of dollars, and its just simply tightening down the belt in lot of other areas that's been able to reduce these very large inflation rates down to 4% to 5% overall range. You know, and about half O&M cost are labor, and that rate is less than 5% inflation, which moderates the overall somewhat.
Edward Heine
Okay. So, as the revenue rate is declining, we're not going to see, you are still going to see pressure from the inflationary side?
Donald E. Brand
Yes, unfortunately I think so. And when we see that, and I am not sure, was your point on the CapEx side?
Edward Heine
Yes, I mean I guess you see lower depreciation rates from not spending that -- those dollars.
Donald E. Brand
Correct.
Edward Heine
So it's mostly there, so there is not as much on the O&M side from that.
William J. Post
Right.
Edward Heine
Okay, okay that's helpful for some color, thank you.
William J. Post
Okay, thank you.
Operator
Your next question comes from the line of Yiktat Fung with Zimmer Lucas Partners.
Yiktat Fung
Good morning.
William J. Post
Good morning.
Yiktat Fung
First I would like to revisit Dan's first question regarding the flexibility of the plan to avoid the, to eliminate the equity issuance. Obviously you've laid out four points.
One of them is, kind of them is kind of raised on the $200 million reduction of CapEx. I was wondering with regards to your other points, how much flexibility is there.
For example, if you get only like a $50 million interim rate increase or even like a zero interim rate increase, would that revive the need for equity?
Donald E. Brand
For 2008 it would not revise the need for equity.
Yiktat Fung
But for 2009, it might?
Donald E. Brand
It might, very well might, that and other factors that might change between now and then.
Yiktat Fung
And I guess the same thing goes for the $500 million reduction in CapEx, correct? So for example, if you only find $200 million of CapEx reduction, then ?
Donald E. Brand
That's not a possibility. It will be at least $500 million.
Yiktat Fung
It will be at least $500 million
Donald E. Brand
We have a very detailed process that Bill talked a little bit about, and we're not going to jump ahead of the team, because we've put a group of our best managers on this to go through the company in detail, and we're using the 500 number as a very preliminary number but it is a solid number. It will not be less than $500 million.
Yiktat Fung
And when will you announce the finalized numbers. I think you said before that, the implementation plans would be finalized within the 60 to 90 days.
Should we expect in like the third quarter conference call or?
Donald E. Brand
That's very likely.
Yiktat Fung
Okay and just one more question with regards to the second transmission rate adjustments. Does that change to the TCA require another approval from the Arizona Commission or does that flow automatically through?
Donald E. Brand
That second one was approved by the Commission.
Yiktat Fung
Okay. All right.
Thank you so much.
Donald E. Brand
You bet.
Operator
Your next question comes from the line of [inaudible] with Tyndall.
Unidentified Analyst
Hello, can you hear me?
William J. Post
Yes, good afternoon.
Unidentified Analyst
Hi, it's Yuvgeny [ph] from Tyndall. I just had a really quick questions.
I believe at some point Arizona Public Service had some auction rate securities, and in the light of the disruptions in that market have you redeemed those securities or do you plan to redeem them at some point in the future?
William J. Post
We have not redeemed them and actually we have seen some of the results of those auctions stabilize at relatively attractive pricing.
Unidentified Analyst
So, it sounds like as long as the prices are attractive, you will let them stay out there?
William J. Post
Yes.
Unidentified Analyst
Okay. Thank you.
William J. Post
You bet.
Operator
You have a follow-up question from Bill Atasoley [ph] with Citigroup.
Greg Gordon
Hi, guys. This is Greg again.
William J. Post
Hi, Greg.
Greg Gordon
So, I know that you have been asked this question several different ways. But, as we think about the capital formation plans, you're not going to issue equity in '08, and depending on the level of interim rates relief, and how you are feeling about the progress in the GRC, in conjunction with how well you do on meeting or beating your CapEx projected targets, equity may or may not actually be needed in '09?
Is that the summary of the five different questions have you been asked and the answers to those?
William J. Post
Yes. Yes.
Greg Gordon
Okay. The second question is on the real estate.
When we think about the book value, how much of that is sort of the raw land that was, sort of the initial Genesis of the real estate investments that the company made decades ago, and how much of that is relatively new stock, so we can get a sense of whether we ought to be thinking about the value of those assets at book value or discount the book value or premium book value, given the real estate market as it stand today.
William J. Post
Well, the -- as you know, we went through about a four to five year effort there in terms of re-posturing that portfolio. The land component declined over that period and, Greg, I don't have a number just off the top of my head of what proportion that is.
We could get that for you, but I don't have it off the top of my head.
Greg Gordon
Okay. So qualitatively speaking, what makes up that portfolio today?
William J. Post
It's the land. It's the planned community investments particularly in infrastructure.
Those planned communities are not basically recording significant amounts of land. If you take a look at their investment, it is mostly in infrastructure which turns fairly quickly, rather than long-term investments in land.
We've got an investment in the golf courses that we've had fundamentally for the last decade plus, that stays in that category and then some commercial just like the building we just sold. But we'd be glad to give you a break out on those percentages.
Greg Gordon
Thank you very much.
William J. Post
You bet, Greg.
Operator
Your next question comes from the line of Jonathan Arnold with Merrill Lynch.
Jonathan Arnold
Just a couple of other things; how much is the mark-to-market gain you had would you anticipate reversing in the year, and what's embedded if your 250 number on that front?
Donald E. Brand
Well, obviously some of that based on where gas prices go for the balance of the year, but actually a very small turnaround for the balance of the year.
Jonathan Arnold
And based on -- and that's what you've baked into guidance, as a small turnaround?
Donald E. Brand
Yes.
Jonathan Arnold
And if gas prices stay where they are now, could we see something bigger than that?
Donald E. Brand
I missed the last part of that question, John.
Jonathan Arnold
Well it is based of a view that gas prices at the end of the quarter or they stay where they are today, could the answer to that question change?
Donald E. Brand
No, it is not. Actually it's driven by the level of our hedges and how they interact over the balance here more so than gas prices.
Jonathan Arnold
And one other thing, Bill, would be able to give us a quick update on the commission heading into the elections in November, and just latest thinking around candidate's etcetera?
William J. Post
Well, as much as I can, I mean that process is really just started, that election really doesn't get going, and really with a lot of attention to the candidates until almost the end of the summer, and just right before the election. There is 12 candidates that have been announced.
Eight of them are Republicans and four of them are Democrats. They cover, all kinds of backgrounds, I would say probably the most common one has experience as legislators, but we've got business people consultants, engineer's etcetera through that process.
It also is broad in terms of geography throughout the state. We got people from regions outside of Phoenix that are involved in that.
This is in my experience the largest number of candidates that I have ever seen in the last 25 years, and so, there is a lot of attention in terms of the primary, and it will really depend upon the campaign and the primary actions. So, its one where there is quite a bit of attention in terms of candidates, and I don't know how to generalize it any more than that.
Jonathan Arnold
We are still a little early in the
William J. Post
It really is.
Jonathan Arnold
Okay.
William J. Post
They have had one big debate so far, and only one, and there is more scheduled and so, over the next couple of months, I think we will get a better feel for what their positions are.
Jonathan Arnold
Yes
Operator
Your next question comes from the line of Peter Hark with Talon Capital.
Peter Hark
Hello, everyone.
William J. Post
Good afternoon.
Peter Hark
Hi, Bill. First, I just want to congratulate you on the hiring of Jim Hatfield, he is a solid addition to your management team.
William J. Post
Thank you. We agree that, and we are glad he is sitting here.
James R. Hatfield
Check in the mail, Peter.
Peter Hark
Thanks Jim. Actually, I just have a host of clarification questions more than anything.
First, when you filed the interim rate request, it was dovetail with the fall off of the PSA adjuster, and, so will the PSA go away as you recover those amounts in the next few days and thereby setting up what you wanted to avoid which was a step-up in rates when you do get interim rates in place.
William J. Post
Well as you know that's a fairly complex process as you deal with 21 cycles in the month, and you deal with this effort over the period as well as the variances in weather. If you look at the bill, which is what I think the customers care about, first and foremost is how much is the bill?
And when you look at 4% variations given our weather, it's not quite as precise as the algebra might suggest. I think the key is that we are going to able to deal with this interim in an environment given that decrease that won't increase overall bills and I think that's the most significant piece.
Peter Hark
Right and then actually to follow-up on some of your comments earlier, though, you were talking about actually seeing rate decreases in the November timeframe, I think of around 14%. How do you get to those numbers?
How is the decrease so pronounced?
Donald E. Brand
Why is that? That's a good question.
It goes back over years and years and years through rate cost allocation studies that allocate the costs between the summer and the winter and do that on a basis of fundamentally the drivers, the generation plant. And as you deal with Arizona, as you all know, we are summer peaking state driven largely by air conditioning load and as a result most of the costs that we have is… so in order to meet that large peak demand and therefore most of the costs are associated to that.
So it is a cost allocation methodology that has been accepted and approved by this commission over decades and it has its foundation, kind of the fundamental driver that's contributing to those costs. So summer costs for us are actually more expensive in winter and that's the reason the prices are higher.
Peter Hark
Okay, thanks. And when you made the filings, I guess even the GRC especially, you had asked that you could increase your equity investment in ATS to the 200 million to 400 million, but now that you are not issuing the equity currently, how will you make that equity investment?
Donald E. Brand
Well, I'm not sure that $400 million was explicit in the general rate case. The general rate case is predicated basically on equity levels and we believe those equity levels are valid.
Peter Hark
Okay, okay. Fair enough.
And then just conceptually, so I have a clear… assuming you get something on the interim rates, would that be a net deduction from the GRC case?
William J. Post
In the most simplest form, yes, but I think a better way to look in it is it's embedded in it.
Peter Hark
Right, okay.
William J. Post
So I think that's a better way to look at it.
Peter Hark
Okay, great. And then somewhat at odds for what you are trying to accomplish in describing your financial situation.
I guess a few days ago, Moody's had actually improved your outlook from negative to stable, citing what they're calling improving regulatory environment, I guess. And so I was hoping you could comment on that and what that might mean.
Also given the continued efforts of Commissioner Maze [ph] to get you guys to comply with various mandates of the state including renewables, I think in most particular on the renewable side and coming up with a plan to address that. But just trying to get your position or your perspective on… what Moody's says is an improving situation, particularly on cash flow and some of the mechanisms the Commission has put in place to you and you continue to kind of describe a deteriorating financial situation.
William J. Post
Let me comment and then Don can as well. If you look at the last couple of years, we've had a large number of regulatory decisions.
I don't think if there's any doubt about that, whether that covers everything from renewables to FERC transmissions revenue, to fuel adjustment clauses, to dealing with resource plans etcetera. So, we've had a lot of issues that this commission has addressed, and including as I mentioned in my prepared remarks, two interim emergency cases over that period.
This is a commission that has had to deal with literally the reconstruction, the re-regulation of Arizona from decisions that were made now almost a decade ago. And then put into a situation where we had to come back and make decisions on fuel adjustments clauses, and various other things.
The one that remains is the one that I mentioned in my prepared testimony which is, having sufficient financial strength to be able to finance Arizona's energy future. The commissions made a lot of tough decisions.
And as we go forward, I think its going to be critical that we have the financial strength to be able to meet the requirements, not only in terms of our customers growth, but also to provide an energy platform for the economy, for the state of Arizona. So, just to put a kind of an overall broad picture on it, that's the way I look at it.
And they've dealt with many things. As we have described today, one of the keys is our ability to be able to finance, and our ability to be able to meet those requirement.
And with the plan that we've outlined, I think it's absolutely critical that we get to a point where we can finance that capital budget going forward on a basis that makes sense for our customers today and tomorrow. And so, it's not just an issue of changing this particularly structure and that particular structure, although we had to do that over the last several years.
Now we're in a position where we have to look at the larger picture and position Arizona in a positive way. I think the decisions that you have seen in the last 12 to 18 months, 24 months as this commission has dealt with fuel issues.
They've dealt with FERC revenue. They've dealt with issues that are forward looking, and I think there is an understanding today about the importance of our financial strength, so, that's a component of our plan to be able to get there.
Now, I'm also as you heard me say earlier, we have taken very aggressive steps and taking even more aggressive steps to ensure that we're doing everything we can to get to that goal as well. You can't get to, an ability to be able to finance the future, however purely on cost savings.
The cost savings are critical, they're important. It's the key that you be efficient, but it's also important that you provide high levels of customer service and reliability.
So you've got to factor all these things together in a way that meets that requirement, and it's -- we have seen positive decisions in terms of the commission, and understanding on the part of our need for financial strength, and I think as we go forward the commission will deal with this issue. As I mentioned, I believe that they will deal with it effectively.
Peter Hark
Thank you for those comments, Bill. In addition to that I'd think, I had seen a letter, recently from Commissioner Maize, that actually asked, why won't you update your GRC through a more timely period?
I think she was asking through June of '08, and you had updated your testimony, I think, through the end of '07. Will you continue to update the rate case stacks as you move through quarters or what can we use, I guess, as a -- the right rate base or test year for the case on its finality?
William J. Post
Well, it certainly is true that as we go forward, we'll get further and further distance from the test year, but I think it's also important to understand that just if you compare this test year to the previous test year, we have an additional $1.8 billion in capital expenditures that's in the current test year versus the one from the previous rate case, just for the ACC jurisdiction and not in FERC. So I think it's important to understand that this test year provides the foundation and the base for this interim decision and it's not required to update this every single month in order to deal with the interim decision.
It is true we have to stay current, and as we go through the process, we provide ongoing information. But this test year, as I mentioned in my prepared remarks, this test year, if you use the methodology that staff used in the last rate case would produce the result of interim increase.
Peter Hark
Okay. Perfect, perfect.
And the last two, I promise, a real quick. What your expectations are, I think there was earlier question on O&M expenses?
And in particular, I'm interested in what the Palo Verde O&M line is going to look like in '08? There was some -- there was heightened NRC involvement and there were some additional costs associated with that.
But I was just trying to gauge what direction Palo Verde expenses will be going on a going-forward basis, have we picked or do you expect that to continue to escalate or actually could it even begin to start falling off? And then the second question is, just a more of a final breakout.
I think somebody asked you early what the book value was of SunCor, but if you have the current book value of all of the subsidiaries, the APS, SunCor, and then kind of adding up to that $37 per share for that consolidated company? And thanks for all of your time and answers.
Thank you.
William J. Post
Sure. First on your question on Palo Verde, we are going through a very aggressive performance improvement plans at Palo Verde and we have been doing that for some 18 months.
There is approximately 2,300 items in that performance improvement plan and we expect, by end of this year, to have complete over 90% of those .So I think the bulk of the expenses associated with performance improvement plan will have been incurred as we deal with the obviously fairly a long list of issues that we have chosen to address and in terms of -- that's a list much, much longer than the ones that are included in the request from the Nuclear Regulatory Commission. However, it's premature for us to start talking about cost at Palo Verde RQ [ph].
Palo Verde, as Don mentioned to you, is we want Palo Verde to be in the top quartile performance of this industry and that's our goal and that's the goal we're going to achieve. And as we look to the future, it's not an issue where we're going to see significant cost increases to be able to do that, and it's really premature to talk about cost decreases.
On your second issue on book value, you may have to refresh us a little on that question.
Peter Hark
Oh just, if you can separate out on a subsidiary basis, what the book values are of each subsidiary that add up I think the reported book value at June 30th, '08 was around $37 a share, just didn't know if you have that broken out across the subs?
Donald E. Brand
I know we do but not handy Peter. I know Becky would be happy to walk you through that later if anybody else is interested.
I might just couple of things and the risk of going back to few of your questions. On the Moody's, stable rating 1 as you might expect, we expect Moody's has access and we've previewed virtually all of this and then some with them and our expectations and they are well aware of the commissions improvement in the fuel cost a year ago and the transmission cost adjusters, which contributed I believe to their statement about improving regulatory environment.
But in reading there is it, it would be only erroneous to overlook their language that their stable rating is based on a continuing regulatory recovery of cost and promised on continuing support of regulation that we've had in the past going forward and I interpret that as being the addressing, the general rate case, and the interim adjuster which is part of the plan Bill laid out and part of the plan we laid out to Moody's when we talk to them shortly before they issued that last publication. Also in one of your questions, you had a tail end about commissioner May is trying to get us to comply with the renewable energy standard.
The renewable energy standard is a promulgation of the entire commission. Commissioner May is no doubt a very strong supporter as our other commissioners.
But, we are complying with it. We are actually going to over comply with it and I had the opportunity to speak with commissioner May just two weeks ago about the renewable energy standard and our commitment.
We've come out vocally both myself and key representatives of the company that are more independently involved with the details and I put -- essentially put my discussion with her in the form of a letter which again if you or anyone else is interested, if you just ping Becky, she can send you a copy of that.
Peter Hark
That's great, Don. Thanks for that clarification and keep up the good fight.
Thank you for your time.
Donald E. Brand
Thank you.
Operator
Our next question comes from Paul Ridzon, KeyBanc.
Paul Ridzon
You have a large wholesale contract, I think it just recently expired and you had hedged that out with a strip. Can you talk about what we should expect for the balance of the year from that?
William J. Post
We will continue to generate some earnings over the balance of the year as that strip runs out.
Paul Ridzon
How much of that strip have you sold?
William J. Post
Basically, all of it. But it's relatively complicated transaction will generate $3 million to $5 million a quarter off of that structure for the balance of the year.
Paul Ridzon
You've already sold that or you have just booked the earnings as it's delivered?
William J. Post
Like I said, it's a complicated transaction. It's not as simple as we just sold off to that part of the strip.
Paul Ridzon
Okay, thank you.
William J. Post
Okay.
Operator
At this time, there are no further questions. Do you have any closing remarks?
William J. Post
I would just like to thank all of you for your time and any further questions that you have, don't hesitate to talk with Becky. We know this is a busy time and we appreciate your attention.
Thank you very much.
Rebecca L. Hickman
We do appreciate you being on the call. Please do call me or Lisa Malagon if you have any questions.
Thanks.
Operator
This concludes today's conference. You may now disconnect