PG&E Corp (PCG) — Q2 2025 Earnings Call Transcript

Good morning, everyone, and thank you for joining us for PG&E's Second Quarter 2025 Earnings Call. With us today are Patti Poppe, Chief Executive Officer; and Carolyn Burke, Executive Vice President and Chief Financial Officer. We also have other members of the leadership team here with us in our Oakland headquarters. First, I should remind you that today's discussion will include forward-looking statements about our outlook for future financial results. These statements are based on information currently available to management. Some of the important factors which could affect our actual financial results are described on the second page of today's earnings presentation. The presentation also includes a reconciliation between non-GAAP and GAAP financial measures. The slides, along with other relevant information, can be found online at investor.pgecorp.com. We'd also encourage you to review our quarterly report on Form 10-Q for the quarter ended June 30, 2025. And with that, it's my pleasure to hand the call over to our CEO, Patti Poppe.

Thank you, Jonathan. I am pleased to be with you this morning to share another solid quarter of execution. Our core earnings per share are $0.31 for the second quarter and $0.54 for the first half of 2025. Like last quarter, this is light relative to a full year run rate due to timing factors. It is, however, consistent with our internal plan, and I remain confident in reaffirming our full year guidance range of $1.48 to $1.52 with a bias toward the midpoint, which is up 10% over 2024. Top of mind for us and likely for you too, are matters before the California state legislature, specifically improving upon the AB 1054 wildfire construct and landing sensible affordability legislation. I'll start with AB 1054. Key decision-makers are currently focused on ensuring there is a mechanism to protect the Wildfire Fund's durability. I'm confident that meaningful measures will be enacted this session, sufficient to address downside risk and improve upon the status quo. It's also becoming increasingly clear that the state, just as it has done before with earthquake risk, really needs a longer-term comprehensive societal approach to catastrophic wildfire risk in the context of our changing climate conditions. This will take longer than the next 6 weeks, but a constructive step forward this session will need to provide the necessary protections in the interim and give clear direction for substantive next steps. Keep in mind, as with AB 1054, the IOUs would need to opt in to any additional wildfire fund contributions. As such, any replenishment framework would need to be part of a package, which improves upon what we have today and also sets the stage for comprehensive reform. Next, regarding legislative proposals to address affordability, we are 100% aligned with our legislature on the goal of affordable service for our customers while not compromising on safety or reliability. Where we differ is on the most effective means to achieve our shared goal. There are some elements in the proposals, which we firmly support, for example, moving funding for public purpose programs off the utility bills. As we've seen in many prior sessions, initial language tends to evolve significantly by session end, resulting in better long-term outcomes for customers and investment in California. I'm confident that this can happen again in 2025. There is simply too much at stake for the state to not push forward to make the most constructive policy choices possible. As evidenced by our 2027 general rate case proposal, our business fundamentals and core execution have never been stronger, and our simple, affordable model is providing the framework to continue funding needed investment while holding customer bills at or below the rate of inflation. As a reminder, the legislature is out on recess through August 18, after which they return for what is typically the busiest part of the session, wrapping up on September 12. Based on what we see today and having modeled a range of potential outcomes, we're pleased to reaffirm our current 5-year financial plan through 2028. For EPS growth, 10% this year and at least 9% each year 2026 through 2028. $63 billion in capital investments, no change to our financing plan to fund this capital growth, including no further equity through 2028 and continuing to target reaching a 20% dividend payout by 2028. While we're not providing specific details beyond 2028 on this call, we remain confident that the simple affordable model can continue to drive sustainable savings for customers and earnings growth for investors for years to come. Once we have legislative clarity, we look forward to sharing more of the details with you and rolling forward our plan. Also unchanged is our focus on physical and financial safety, our prioritization of customer affordability and our firm commitment to enabling California's growth and clean energy ambitions. Turning here to Slide 5. Our improving layers of physical protection ensure our hometowns are safer today and will be safer still tomorrow. We have a substantial suite of wildfire mitigations currently in place aimed at both ignition prevention and post-ignition response, and we continue to learn and improve upon existing mitigations year-over-year. For example, I'm particularly excited about our deployment of more than 10,000 sensors throughout our high-risk areas. These sensors attached to our poles with 4 screws can be installed in about 5 minutes and provide data with very tangible results for customers, including detecting potential failures before they occur, preventing ignitions and shortening outage durations. In addition, we've expanded our PSPS model to assess fuel risk beyond the traditional high-risk boundaries. And when conditions warrant, we won't hesitate to include such areas in a proactive power shutoff. We've executed 4 PSPS events already in 2025, all of which included transmission lines. In fact, as part of our June PSPS event, a total of 22 transmission lines were de-energized for safety. Given the potential impact of the Eaton fire on wildfire fund durability, some of you have asked, what happens if there's another big fire this year before new legislation goes into effect? As a reminder, for any fire in 2025, we would first turn to our customer-funded self-insurance, which addresses claims up to $1 billion. We're also able to request cost recovery from the FERC under our formula rate. Beyond the $1 billion threshold, we would turn to the wildfire fund. And beyond the fund, we would seek recovery from the CPUC under the enhanced prudency standard. Importantly, PG&E has an annual safety certificate in place today. And clarifying one common misconception, if there are multiple events within a single coverage year, which together exceed the fund's resources, then available funds would be paid out by the administrator pro rata and not on a first event first paid basis. Moving to Slide 6. I want to reiterate that we share our state's desire to address customer affordability. In fact, we've been at it for a number of years, and we are on our way to delivering on that key priority. Our bills went down this year, and our forecast show residential combined bills to be essentially flat for the remainder of 2025 and going down again in 2026. We also see a pathway for 2027 bills to be lower than they are today. Our rate case, as proposed, would result in customer bills being flat compared to current bills as GRC revenue increases are offset by reductions in other items. This is a darn good proposal. And yet we're taking additional actions to lower rates even further. For example, our flat projection does not include savings from the DOE loan facility, reduced borrowing costs when we achieve investment grade and beneficial load growth, allowing us to spread our fixed costs over more units of energy. We forecast the energy we provide will continue to be more and more affordable through the deployment of the simple affordable model. Over time, our customers will experience savings and notice the trend. Also, with electric bills expected to be on the rise nationally, affordability can become a positive differentiator for us, and we're looking forward to turning around the prevailing narrative with California regulators and policymakers. Another driver of affordability will be beneficial load growth. As you see here on Slide 7, our data center pipeline continues to grow. Last quarter, our pipeline reflected demand of 8.7 gigawatts. Now adding interest from our second cluster study, offset by some attrition, we are actively working 10 gigawatts through various stages. That's healthy growth since last quarter and a nearly threefold increase since this time last year. The 10 gigawatts represent more than 50 different projects, many on the smaller side, consistent with the inference market. We recently filed for approval to serve Microsoft's planned 90-megawatt data center project in San Jose. This is just one of many smaller projects in our pipeline. I'd like to call our data center growth Goldilocks load, not so much to be a problem and yet enough to be beneficial for all of our customers. This is because our demand is differentiated by having a diverse set of projects, ensuring that our development pipeline remains robust and not reliant on a single location, counterparty or approval. While we value this diversification, we're also excited to be seeing data center operators express interest in some larger-sized projects as well as locating beyond the Bay Area into other prime locations within our service area. The market has gotten the message, PG&E is ready to serve. This is good news for Californians who stand to benefit from this unprecedented growth. Our civic leaders recognize this opportunity, too. Just last week, I had the pleasure of standing with San Jose Mayor, Matt Mahan to formally announce nearly 2 gigawatts of projects in the city of San Jose, powered by PG&E. Our 10-gigawatt pipeline enables California to create thousands of new construction and permanent jobs in the state, secure the future of AI and tech in California for decades to come and generate billions of dollars in annual revenue for the state through increased property taxes and additional sales tax revenue. We're particularly excited by beneficial load because every gigawatt we bring online offers the opportunity to reduce electric bills by 1% to 2%. The fundamentals of the PG&E operational story are strong and getting stronger. The proof is in our results. Improving and building upon our physical layers of protection year-over-year, submitting a general rate case, which delivers on our commitment to stabilize customer rates and seizing the tremendous opportunity for customer affordability from data center load growth in our service area. With that, I'll turn it over to Carolyn.

Thank you, Patti, and good morning, everyone. Here on Slide 8, we're showing your earnings walk for the first 6 months of 2025. Although core earnings of $0.64 are down from this point last year, as Patti mentioned, we're on track with our internal plan and confident in delivering on our 2025 non-core EPS guidance of $1.48 to $1.52 with a bias to the midpoint. First half results were impacted by the dilution from our December equity financings in addition to the CPUC cost of capital phase 2 decision last October. Over the second half, timing items are expected to fully reverse, and we have line of sight of additional O&M savings. We have nearly 100 different initiatives, big and small, that are yielding savings and will continue to yield more savings this year. Turning to Slide 9. Our 2027 general rate case is the lowest GRC percentage increase we've requested in 10 years and reflects our commitment to stabilize customer bills by deploying our simple, affordable model. With only a modest increase in base GRC revenues and an expected reduction in other items, we see a path for residential bills to be down in 2027 compared to today. This is the result of an intentional continuous effort to eliminate waste on behalf of our customers. In fact, in this filing, we highlight $2.5 billion in capital and expense saved across the enterprise from 2022 to 2024. These savings are being delivered across PG&E. We've rebalanced our use of subcontractors in gas operations. In electric operations, we've deployed tools to enhance our work bundling strategy and improved our new service application process to accelerate connections. And as we've talked about before, we continue to find opportunities to reduce the cost per mile of undergrounding, including piloting new installation equipment. Our simple, affordable model is enabled in part by annual nonfuel O&M cost reductions. Annual savings exceeded $200 million in 2022, 2023 and 2024. And I'm increasingly confident we are on track to continue beating our 2% target this year and beyond. With continued strong execution in this area, coupled with efficient financing and beneficial load growth, we see a path to holding bill growth to 1% to 3% while continuing to make needed capital investments on behalf of our customers. Here on Slide 11, we're reaffirming our $63 billion capital plan through 2028. Not included in the plan is an incremental at least $5 billion of customer beneficial work, much of which is FERC transmission. As we think about this $5 billion, I should emphasize, we will be very mindful of our valuation discount to utility peers. And I can assure you that we have no intention of issuing additional equity at these levels. As you know, we have already issued the equity needed to fund our existing $63 billion investment plan through 2028, and we have achieved compliance with our authorized regulated capital structure. This gives us considerable flexibility moving forward. When it comes to capital allocation, I want you to know, first, we plan conservatively. Second, we have a number of options and have built a plan with several points of flexibility. Third, we think and plan long term with our customers in the state's best interest at heart. Fourth, we will always be mindful of market conditions as they relate to funding the plan. Finally, to be clear, if the state did implement policy choices, which significantly constrain our longer-term ability to deploy needed growth capital accretively, we would carefully consider whether it might be more efficient to return some capital to shareholders. Focusing on proposals to securitize some of our capital investment, we strongly believe that this is not the right policy choice for our customers. Not only is it ineffective at delivering meaningful near-term customer savings, it also risks increasing our actual cost of capital, thereby driving up customer costs on the balance of our rate base, a significant unintended consequence. That said, we strongly support the goal of passing affordability legislation this session, and we're advocating in the legislature for policy choices that more effectively deliver on our shared goal of affordability. As Patti mentioned earlier, we've modeled a range of potential legislative outcomes for our current 5-year plan, and we remain confident that we have sufficient financial flexibility built in to deliver on our earnings guidance. Our 5-year financing plan shown here on Slide 12 remains unchanged. The plan is built to support our customer beneficial capital investments while also sustaining investment-grade credit metrics. As we've said in the past, the $2 billion parent debt paydown by 2026 in our plan was not an obligation. We're reevaluating this element of our plan and will likely maintain the current level of parent debt through 2026. This decision gives us flexibility in our 2026 plans, and we're still forecasting mid-teens FFO to debt. Second, we have created flexibility to defer some long-term financing to 2026, depending on conditions later this year. We're continuing to indicate $5 billion of estimated utility long-term debt issuance in 2025. We've raised $3 billion of this so far. And following the extension of our revolving credit facility that closed in June, we have flexibility to manage the remaining 2025 maturities without returning to the market until 2026. Reaching investment grade at the parent company will be a big win for our customers and continues to be a key focus for us. With the resulting lower future borrowing costs, investment grade is one of the most impactful and fast-acting affordability enablers, a point we will continue to emphasize in the context of the ongoing policy discussions. Last quarter, I mentioned that this was a big year for us in terms of regulatory filings. Two of those filings are behind us and moving through the process. First, the cost of capital application, which will set our CPUC return on equity for 2026. We believe we've made a strong case and look forward to a final decision before the end of this year. As a reminder, our filing is premised on the state delivering a constructive legislative fix for wildfire liability policy this year. Second, the 2027 GRC proposal, which I've already addressed; and third, our 10-year undergrounding plan, which we intend to file by year-end. I'll end here on Slide 15 with a reminder of our value proposition, which we've reaffirmed again today. We're focused on execution, including on the policy front, serving our customers and also delivering for our investors. I firmly believe that these commitments are not mutually exclusive. Today, we're standing for stabilizing customer bills and delivering consistent, predictable outcomes for all. With that, I'll hand it back to Patti.

Thank you, Carolyn. While I acknowledge the questions prompted by the current legislative session, the fundamentals of the PG&E playbook are undeniable. Strong layers of physical risk mitigation improving every day, ample runway to continue reducing nonfuel O&M, beneficial load growth serving customers in California's prosperity, improving credit ratings and balance sheet health, our differentiated rate case proposal, all providing a path for customer bills to be flat to down in 2027 from today. As I like to say, performance is power. It is our responsibility to continue to demonstrate performance and earn the trust and cooperation of our legislative leaders so that we can follow through on our promise to perform. When we do what we say and continue to improve our performance, we have the power to influence perceptions and outcomes. I've never felt more certain about the PG&E team and our ability to deliver both for our customers and our investors. With that, operator, please open the lines for questions.

So just appreciated the comment on the confidence in achieving the growth under various legislative outcomes. Maybe just to be more specific there. So I think concerns that we hear are things like the securitization proposals on the affordability bills and then potential equity needs to fund a new wildfire fund. Could you maybe be more specific on those issues? And just again, kind of if those were to pass, just your confidence in hitting the growth rate?

Thank you, Steve. I'm glad to clarify these questions. First, we've conducted various assessments regarding legislative scenarios, and we are reaffirming our guidance through 2028. We strongly believe we have the necessary flexibility. I want to emphasize that we continue to argue that securitization is not more affordable for customers, as it would lead to higher bills rather than lower ones. Therefore, we do not support the securitization proposals. However, there are some positive proposals that we hope will pass this year, as not having good affordability legislation would be disappointing. Our business model is somewhat complex, and it takes time for policymakers to grasp how certain decisions could negatively impact customers. We will continue to advocate and educate while ensuring we have a financial plan that can adapt to any outcomes from the legislative session. There are promising affordability measures, such as public purpose programs that could save customers $12 a month on their bills, which is significant. We believe initiatives like DOE debt financing for transmission could also benefit customers. We will keep collaborating to promote the right affordability solutions. Regarding equity needs for the wildfire fund, I want to clarify that there isn’t a necessity for an upfront payment. We do not support issuing equity to fund the wildfire fund, especially at our current valuations. When we mention opting in, we want to ensure that it offers better options than the status quo. The state usually makes sound decisions, and while our legislative process can be noisy and public in California, the silver lining is that it promotes transparency, leading us to the right outcomes as we have successfully done year after year.

I just wanted to pick it up from there. Not supportive of issuing equity to fund a wildfire fund solution. But just how are you thinking about the palatability to fund anything upfront at this point? I acknowledge that you also have, I think, some holdco debt capacity that Carolyn alluded to, but maybe I could just ask how you're thinking about that.

Yes. Thanks, Nick. I just think there's no reason to think that there would need to be a large upfront contribution. The fund doesn't need cash today. Claims typically take years to pay out. And it's important that we have the most affordable ways of supporting the wildfire fund. And so the fund has an important role. It provides the basis for a liability cap for investors. The durability of the fund matters. The liquidity of the fund, however, does not happen quickly. The claims don't pay out quickly. So it doesn't put us in a position. And so I don't think there's a strong reason to assume that a big upfront payment would be required.

Okay. And then just you gave a lot of details on how you're thinking about end of year and then 2026 financing. Can you just kind of remind us on where you kind of stand today on balance sheet capacity if we were to just look at it simplistically, like I think after you did the equity late last year, you kind of talked about having a $2 billion of holdco debt capacity. But can you just remind us on where you stand now?

Yes, this is Carolyn. As you mentioned, we completed the equity raise in December, and our $63 billion plan is fully funded at this time. Today, we updated the timeline for the $2 billion parent debt paydown. We do not plan to pay this down by the end of 2026, which gives us more flexibility in our plans for that year. However, we still expect to have it paid down by 2028. We are also targeting a mid-teens FFO to debt ratio, which we are currently achieving. Our aim is to maintain this mid-teens ratio through 2028. The percentage of our parent debt is relatively low compared to our peers, providing us with additional flexibility.

Thank you very much for the time, I appreciate it. To follow up a little bit on what was being discussed earlier. And obviously, the upfront acute needs of the balance sheet would be clearly unpalatable in the current environment. How do you think about a ratable or delayed contribution here? I mean, how do you think about the concept at all, right, notwithstanding even the idea that it would be front-end loaded. I just wanted to try to expand a little bit on the degrees of freedom that might exist here as you think about how to resolve the demands or tensions from the state as well as any other possible directions that perhaps might not be obvious or visible here, if you will?

Yes, it's important to understand the purpose of the wildfire fund. The fund is meant to help stabilize rates for our customers because, under the inverse condemnation doctrine, claims can be collected from customers. However, we believe that relying on this mechanism is not the best long-term solution for affordability in California given the state's wildfire risks. In the short term, we aim to support the fund’s sustainability, as it also offers liability protection for investors and utilities. This allows us to remain financially attractive and capable of meeting California's clean energy goals while enhancing system safety. The fund is crucial for both customers and investors. Maintaining its durability could take various forms, but we believe that long-term payments and distributing costs over time align with the pace at which the fund's liquidity is needed. Claims and funding issues are resolved over extended periods, so it's vital to spread the costs over the longest possible time to ensure adequate support for those affected by wildfires.

And a quick follow-up here. I mean it's not necessarily obvious, but how do you think about inverse condemnation as being part of the reform conversation? We've seen it somewhat in adjacent states. But I want to ask in the context of tackling tort reform and IC specifically. Is that part of the conversation here?

I would say the path toward a more holistic solution certainly needs to go beyond utilities. California needs a holistic wildfire solution. Look, we need a functioning insurance market for customers. The spread of wildfire is what is the most expensive portion, and that needs to be modernized through defensible spaces, building codes, better forest management. There's a holistic solution. Claims limitations definitely should be on the table. And so I think that the state has a real existential challenge here. And thankfully, we have a history of working well together here in California. The best solution will come when we stand together and find the path that protects and provides protections for those harmed by wildfire but also prevents wildfire. We spend billions of dollars a year preventing an ignition. And I'd say that the equal amount is not being spent to prevent spread. And I think that's a state role that we need to play together to make our communities hardened just like we did for earthquake, we think there's other solutions that should be on the table and that we should look at. So I would just suggest that inverse condemnation in its strict and most current form only fixes part of the problem. We need a bigger solution for California, and we're standing with California. We live here, too. We want to make sure it's a safe and vibrant place that can continue the California dream. We need to make sure that we've got wildfire legislation over time that reflects that and enables it.

Turning to the data center pipeline and your San Jose announcements. Can you expand on the San Jose update a little bit and particularly the path and timing to capturing some of those load growth benefits for customers? I guess I'm thinking back to the 1 gigawatt and 1% to 2% math there and when that might be an opportunity to add it to your outlook.

Yes, we are very enthusiastic about this. We aim to earn the trust of our communities. San Jose, as I often mention, is the smartest city in America, and we take pride in serving it. We have collaborated closely with the city to expedite permitting and enable the construction of data centers in San Jose, ensuring we can keep projects on schedule. We anticipate that construction for most of these projects will commence in late 2026 or early 2027, with the actual load primarily becoming available in 2027. The preparations for construction will take most of 2026. We expect to see this pipeline developing in San Jose and across our service area throughout 2027, 2028, and 2029. It's truly exciting. Once people realized that PG&E was prepared to serve, the applications began to flow in. Our cluster study process has proven to be quite successful, and our partnership with the City of San Jose has been a significant catalyst for the state. Mayor Matt Mahan has been a strong advocate for the economic benefits of this load growth and has recognized that there is land available in San Jose for development, which we are utilizing. This collaboration has been crucial for accelerating progress in construction and bringing the load online, and we expect to see rate benefits starting around 2027.

Got it. That's very helpful. And then expanding on those benefits, how are you thinking about tackling the affordability conversation in the legislature, given your outlook for '26 and '27 bills and then the points you just hit on the load pickup thereafter? Obviously, people are focused on the pressure right now, but you've also charted a path that could be different over the next few years. Do you see this affordability conversation as something that you can get to outcomes in this session? Or do you expect a multi-session effort here?

Yes, I believe we should achieve affordability solutions in this session. There are strong ideas that we support, along with our straightforward and affordable model. In defense of our legislature, our rates have decreased and stabilized this year, though this is the first time they are witnessing it. This marks a significant change in direction for California. A forecasted reduction in rates would be another major shift here. It's essential to get the timing right with the legislature and earn their trust. As I mentioned, performance is key; we must perform and deliver those rate reductions to build their confidence. In the short term, however, the legislature could take steps to make bills more affordable in California, as 30% to 40% of our bills are influenced by policy. This indicates an opportunity for the legislature to contribute to making energy more affordable. For example, removing public purpose programs from the bills could save customers $12 a month. Additionally, further reforms in net energy metering are crucial, as well as exploring how we finance transmission through state-driven loans similar to the Department of Energy's approach. This would benefit customers and potentially generate revenue for the state. I see many innovative solutions here, and we look forward to collaborating with the legislature to find the right approaches that will benefit customers both in the immediate future and over the long haul. I would like to see this wrapped up in this session.

I wanted to jump on Rich's question. And I appreciate it's transparent, the legislative process in California, and it's very fluid. But any thoughts on if we could see the solutions for AB 1054 combine and morph into also the affordability bills that are out there and we get one big package?

Well, it's a great question, Anthony. Look, we've got 6 weeks left. So a lot of things will get combined. And I do think it's good to look at the holistic impact, both for customers and for the IOUs, to make sure that we've got a package of solutions that work together this year.

And then this is maybe a harder question to answer, and I understand if you don't want to answer it. You highlight that whatever comes out of the legislature related to the AB 1054 modifications, it's voluntarily for all the utilities they want to opt in. So like obviously, questions earlier about maybe equity upfront or something is just something that you really would not sign up for. Are there any other items that you kind of want to see or don't want to see that would really cause you to think you might want to really volunteer to sign up on this legislation?

I believe the overall package needs to be an improvement. It should benefit our customers and our investors, and it has to be an advantage for our cost of capital. We need to ensure that it is better than the current system. I am confident that we can discover a more effective solution. The wildfire fund is crucial for both investors and customers, and its sustainability and funding are significant. I am optimistic because we have the right policymakers who are focused on serving the people of California. We will collaborate to reach the right outcome and trust that they will eventually make the right decision. We are actively advocating to ensure the fund is sustainable and that any long-term fixes are substantial and lead to meaningful changes in California's legislation. This will be essential for us to agree to participate.

Edison received a proposed decision from an ALJ that suggested reducing wildfire mitigation capital expenditures. I'm curious if you believe this might have any implications for your General Rate Case. Could it affect how you prioritize various capital expenditure programs?

Well, so as you know, that Edison's proposed decision just came out, and we'll look forward to hearing their take on it. What I'll tell you about our wildfire mitigation plans, we continue to file our wildfire mitigation plans and our GRC reflects it. We still intend to file our undergrounding plan later this year. I do think it's really important for the state of California that they see the value in undergrounding. Today in our customers' bills, we spend $20 a month on vegetation management, our customers do, and they only spend $1 a month on undergrounding. Undergrounding is the right permanent solution in our highest risk areas, not everywhere, but our highest risk areas. And so I think it is important that we continue to show we can do it more affordably, that we can do it efficiently. We are showing that. We're showing our unit costs going down and our ability to deliver for customers improving, and it is more affordable than our current construct of inspections and vegetation management year after year after year on those highest risk miles, and we know it reduces the most risk for the lowest cost. So we're going to continue to advocate for undergrounding as a key part of the wildfire mitigation solutions here in California.

I wanted to follow up on the data center pipeline. Just any thoughts on how we should think about your expectations on the conversion rate from early stage to final engineering to construction? And then could that pipeline conversion shift if ultimately there are securitization provisions around energization spend?

I would say that in our Cluster 1 and Cluster 2, we've observed approximately a 50% attrition rate from the initial application phase to construction. This rate might change as we gain more experience and improve our processes, potentially leading to a higher conversion into beneficial load. It's too early to make a definitive prediction on the attrition rate, but it appears to be around that 50% mark. As we approach the completion of the legislative agenda, we need to ensure we can accommodate that substantial load, which represents the most advantageous type of capital expenditure. This capital expenditure minimizes the need for additional builds, so we need to explore options for financing that new capital expenditure and supporting the large data center load, and we will be advocating strongly for that.

I want to add that much of this is related to transmission, which is funded by FERC, not necessarily by CPUC or other entities.

Got it. Okay. Great. I appreciate that color. And then I wanted to just ask quickly on the O&M reduction target, just given the commentary in the prepared about potential upside relative to what you have kind of baked into the plan there. I guess just any specific opportunities that you'd highlight driving that potential upside?

I'm sorry, can you repeat that question, Carly?

Yes, I'll take it, Carly. Yes, I'll take it, Carly. Sorry, this is Patti. On the O&M, we see lots of potential for upside. One of the areas that we're excited about is AI, of course, being able to deploy it, we've been able to dramatically improve our inspection process and reduce the cost to deliver that. We've got some new technologies we're deploying in our vegetation management area, where we're able to really streamline how we use technology to get a better vegetation read at a lower cost. And there's hundreds of projects. Carolyn mentioned hundreds of projects across the enterprise where people are deploying what we call waste elimination. It's the fifth play in our playbook, and we have all sorts of small ideas and then larger ideas. Self-insurance has been a continual benefit to customers, things like that, both on the big size and the small size. So I would say our O&M engine is just getting revved up, and you can count on us to be working hard to exceed that 2% target every year.

In your prepared remarks, there was mention of an interim study of a more holistic solution related to AB 1054, which was also referenced by several other stakeholders recently. How do you envision this process? And any sense of what actually would be studied between now and presumably the end of the governor's term?

Yes. We're eager to collaborate with the state to examine aspects such as the insurance market's viability for customers in California, the adequacy of building codes, and the effectiveness of community hardening programs and forest clearing. We also want to assess claims limitations. Other states have implemented measures to ensure that claim payouts benefit victims rather than other parties involved. We aim for a comprehensive system in California, similar to the approach taken for earthquakes, which are recognized as environmental hazards. We have building codes that enhance safety, response plans, and regular drills. This is a collective effort for earthquake preparedness, and we need to adopt the same collective approach for wildfires. We intend to play a significant role in this initiative and advocate for meaningful legislative actions to ensure that Californians continue to enjoy the quality of life, certainty, and affordability they expect.

Great. And then one follow-up on the financing plan. How do you view the proposed decision we get to SB 410 capital would be funded relative to plan? Any color as to how that interplays with some of the other drivers of your outlook?

Yes, Ryan, it's Carolyn. A couple of things. Just remember, that is just a PD, so we still have to wait for the final decision, which could be voted out as soon as the end of August. But another important thing to remember is that the PD allows for additional funding up to $2.4 billion for '25 and '26. Thanks to the SB 410 funding we received last year, we're actually on target to work through the backlog, and we continue to drive meaningful unit cost savings. But as we've been saying, any new capital approvals would not necessarily be additive to our plan. While we could make the plan bigger, we could add to our capital plan, we would also may look just to simply make it better by prioritizing projects that benefit customer affordability like energization or we could simply make our 9% growth plan longer in duration. So those are the choices that we have as we think about adding to the capital plan.

Just around the cost of capital proceeding, would you consider modifying your cost of capital position based on certain legislative outcomes? How much latitude is there within that proceeding in order to do that? Does the schedule allow for it?

Yes. We believe we have built a strong case with our request for an 11.3% return on equity. This filing is based on the expectation of a resolution regarding AB 1054. While we can file an off-cycle application if needed, we are confident that a constructive resolution on AB 1054 will be reached. We think the appropriate solution involves legislative action. Currently, we are encouraged that a final decision is anticipated before the end of the year, with evidentiary hearings scheduled for early September and a proposed decision expected in November.

Patti, could you tell me, is your confidence of hitting the targeted earnings growth rate under different legislative scenarios underpinned by options for capital redeployment such as regulated FERC transmission investments or stock buybacks, which at 7x earnings today is obviously accretive to investing in a rate base?

Our plan and what our confidence is, is that we have optionality. We have a lot of options. We have a deep demand for capital for our customers and capital investment to serve this new data center load to do energization, to connect new businesses, to make the system safer, to make it more reliable, to continue to operate a safe gas system here in California to operate our generating assets. We've got lots of demand for capital on our system, and we're going to make sure that we balance the needs of customers and the expectations of investors. Look, the IOU model is critically important for California. It's important for the safety of Californians. It's important for AI leadership in California. It's important for our clean energy ambitions. The IOU model is essential and that IOU equity capital is essential. And so our job is to make sure that policymakers, decision-makers understand that and value that like we do and make sure that we have appropriate returns for investors. And being attractive to investors can take different forms, and we'll take those forms if necessary, but our primary confidence is borne on a really effective legislative outcome this year, and that will drive our ability to further implement the simple affordable model, which delivers capital and earnings growth while reducing cost for customers. And we think that model is the winning solution for California.

I guess my first question is we've seen in the press about a Newsom plan for an $18 billion replenishment. Is that the entire plan that you're expecting out of the governor's office? Or is that just a part of something larger in your view?

Yes, Paul, the details are crucial. I definitely wouldn't rely solely on a press article to provide the complete picture in this situation. Let's allow the process to unfold. As I mentioned, the legislative process in California can be somewhat challenging at times, but we ultimately reach a good outcome, and I am confident we will do that here. It is essential for us, as part of a comprehensive approach, to ensure that there is durability in the fund, affordability for customers, and attractiveness for investors, along with a long-term solution that effectively addresses the systemic environmental danger that wildfires present for the Californians we serve.

Great. And then there's obviously not a lot of detail, but is there anything that you can share in terms of how the portion allocated to the IOUs would be allocated?

Yes. We're really just not in a position to speak for the legislature on this. Those are decisions that they'll be making, and we'll be working to advocate for obviously, proper cost allocation.

Thank you so much for joining us today, everyone. We know it's been a little bit of a bumpy ride, and we are in it for the long haul, and we want you to know. And I just want to remind you that we've looked at a range of scenarios and feel comfortable reaffirming our financial guidance through 2028 against this backdrop of a variety of outcomes. And we just look forward to keeping you updated as the legislative activity takes shape in the coming weeks. We're standing for California, we're standing for our customers, and we're standing for you. Thanks so much. Stay safe out there.