PG&E Corp (PCG) 2010 Q3 法說會逐字稿

Good morning and welcome to the PG&E Corporation third quarter earnings conference call.

At this time I would like to introduce your host Gabe Togneri.

Thank you, and you may proceed Mr.

Togneri.

Good morning everyone and thanks for joining us on our call.

Leading our discussion today will be Peter Darbee, our Chairman, CEO and President of PG&E Corporation, Chris Johns, President of Pacific Gas & Electric Company, and Kent Harvey, Senior VP and CFO of the Corporation.

Other members of the management team as usual are here and available to participate in the Q&A session.

I'll remind you that the prepared remarks and the Q&A session to follow will include forward-looking statements and these are based on assumptions and expectations that reflect information available to management.

Actual results may differ materially from those forward-looking statements.

Important factors that may affect our actual results are described in the reports that we file with the SEC.

Including the risk factors and other factors described in our annual report on form 10-K for the year ended December 31, 2009 and our form 10-Q reports.

We'll be filing our third quarter 10-Q report later today.

The earnings release we issued this morning is available on our website along with the supplemental earnings tables and including the Regulation G reconciliations.

You'll probably want to have those supplemental tables available and refer to them as we go through the results for the quarter.

And now I'll turn the call over to Peter Darbee.

Thanks Gabe, and thank you all to those of you who are on the phone as well as those that are joining us on the webcast this morning.

I'd like to begin with a review of the tragedy of San Bruno.

On behalf of our whole team let me again express our sympathy to the families affected and to the broader community.

The night this occurred we pledged that PG&E will do the right thing.

Since then we've been fully engaged in a broad based effort and we continue this effort and will continue this effort for as long as it takes to fulfill this commitment.

In our release this morning you can see that we have taken a significant charge to account for the cost of this effort and the appropriate liability estimates.

We're going to discuss this in more detail shortly but our principal focus regarding San Bruno remains on three areas which we'd like to outline.

The first has been providing support and assistance to the people affected.

Second has been taking appropriate steps to ensure that our gas system is safe.

And the third has been learning what led to this tragedy, so that we and the industry can prevent something like this from ever happening again.

These priorities have guided everything that we've done to date.

Just a few days after the accident, for example, we created the Rebuild San Bruno Fund.

We made as much as $100 million available to support the residents and the city.

These funds are going toward - first, the immediate financial assistance, second, residents' cost that aren't covered by their insurance and thirdly, reimbursing the city for certain expenses.

We've also launched a reinspection of our entire gas transmission system to ensure the public of its safety.

We recently completed an aerial leak resurvey of all 6700 miles of transmission mains.

By year end we will have completed a full on the ground leak survey of these transmission mains.

Additionally, we've announced our new pipeline 2020 program.

This put forth a strategy for raising the bar on our company and our industry when it comes to pipeline safety.

And lastly we've been cooperating fully with the national transportation safety board and the CPUC in their investigations, so that we can all learn the root cause and take any appropriate actions.

Very importantly in our response to San Bruno, we've been communicating regularly with policy makers and regulators.

And we've done so with an ongoing commitment to transparency as we redouble our focus on ensuring public trust and confidence in PG&E's system.

As we've been responding to the San Bruno accident it has been essential that we run all of our operations with the same focus on delivering for our customers.

That includes moving forward with our key regulatory cases, such as our GRC to ensure that we have the resources to deliver clean, safe and reliable energy.

I'm going to first turn it over to Chris, who will cover some of the additional points on San Bruno and provide you with our operational and regulatory update.

Then Kent will cover our financial results for the quarter.

Chris.

Thanks Peter.

I'm going to expand on what Peter shared with you regarding our efforts related to San Bruno, starting with the NTSB and CPUC activity.

I'll then provide an update on some of our regulatory proceedings and finish up with an update on some of our operational items.

The national transportation safety board released its preliminary report on the San Bruno accident about three weeks ago.

The initial report focuses exclusively on the facts that have been established to date, without drawing any conclusions as to the potential cause of the accident.

Going forward we expect the NTSB to focus on its physical analysis of the pipe, the events leading up to the rupture, our response to the event and other aspects surrounding the event.

The final report will probably take about a year although we expect additional interim reports.

It's critical to uncover the ultimate cause of the accident, so that we in the industry can take the necessary steps to prevent such a tragedy from happening again.

As the NTSB has said all along, if they learn anything during their investigation, that can be put into action, they won't wait for the final report to issue some recommendations.

And obviously we'll promptly work to implement any of those recommendations.

In addition to participating in the NTSB's investigation, the CPUC has initiated its own investigation process.

They recently named their five member independent review panel.

And this panel will investigate the events of San Bruno, review industry best practices and make recommendations to the Commission.

We recently responded to a request from the CPUC for information on a preliminary review of the appropriateness of installing automated or remote controlled valves in our pipelines, how to manage the gas demand this winter in the San Francisco Peninsula pipeline system and the results of our initial gas leak resurvey.

We will continue to work with the CPUC and other third party experts to evaluate the appropriateness of installing automated or remote control valves in our pipeline system and include the results in our Pipeline 2020 program.

Speaking of the Pipeline 2020 program, as Peter mentioned, this is a comprehensive initiative that we announced just a few weeks ago.

This program is going to focus on five key areas.

The first is modernizing our pipeline system, with a particular focus on heavily populated and other critical areas.

The second is expanding the use of remote control or automated valves.

This would give operators the ability to shut off gas flow without having to dispatch personnel.

The third area is establishing is a non-profit entity dedicated to supporting research and development of next generation pipeline inspection and diagnostic technology.

Fourth is conducting a thorough review of all our internal processes and procedures related to pipeline safety, integrity and training, as well as developing and implementing best practice, policies and procedures.

In the fifth area is increasing our partnership with local community and first responders to enhance pipeline safety awareness and emergency response training and outreach.

Many of these efforts are applicable throughout the gas pipeline industry and we plan to work with other industry participants and experts to further develop the details of this program.

Clearly this is the major undertaking.

It's going to take time to develop and even more time to implement.

As such, it's premature for to us make specific comments on things such as the number of valves or miles of pipeline to be modernized.

I will note that we don't expect this initiative to impact our Gas Transmission and Storage rate case settlement that we announced back in August.

We expect that case to continue on its normal schedule with the proposed decision by February.

The judge and commissioner assigned to the case, that's Commissioner Simon, have also established a separate phase to the GT&S case, and that's going to focus on the evaluation of pipeline safety measures and emergency response procedures.

We expect that the Pipeline 2020, and any other initiatives resulting from San Bruno, will be coordinated with the CPUC through this or other proceedings.

Let me now turn to a few other items on the regulatory front.

We recently announced an uncontested settlement in the general rate case.

Our team worked hard to achieve this result.

Such a settlement in a GRC, where there is no opposition for the number of parties that are involved, is very uncommon.

We believe the settlement is fair and strikes an appropriate balance between our objectives and the key issues for the settling parties.

I'll also remind you that there are a number of factors outside of the GRC that will offset the increase requested in this settlement, allowing us to keep overall rates flat or slightly lower going into 2011.

Given where we are in the year, we think it's reasonable to expect that a final CPUC decision, on our GRC, will occur early next year.

Regardless of the timing of the final decision, we've requested that the GRC revenue increase be made retroactive to January 1st of 2011.

Now of the separately reviewed projects that we laid out at our Investor Conference in March, only one is still pending and that's our Manzana Wind Project, which has not yet received a proposed decision.

It continues to move through the regulatory process, and as we've communicated previously, the Commission is still focused on the price of the project and environmental issues.

In the energy efficiency incentives proceeding we received two proposed decisions at the end of September for the final true up of incentive awards for 2006 through 2008.

The two alternatives, one that recommends no additional incentive and the other that would award $40 million, are now at the commission for a final decision.

We're pleased to see the commission moving forward on this issue, and we're proud of the savings that PG&E's programs have helped customers achieve.

We estimate that these programs help customers save over 5,000 gigawatt hours, and 72 million therms over the three year program cycle.

This translates to over $650 million in savings on customers energy bills.

Moving to our operational update, I'll start with our SmartMeter program which continues to move forward.

To date we've deployed approximately 7 million new gas and electric meters and we're on track to complete the rollout in 2012 as planned.

At the same time we are continuing to improve our customer communications regarding the benefits associated with SmartMeters.

We're seeing more customers sign up to receive information about their energy usage, it's only possible with the SmartMeter.

This includes our Energy Alerts Program.

Which proactively notifies customers when their usage reaches a certain threshold that could move them into a higher rate tier.

Customers are telling us this is valuable and it's empowering them to better manage their usage and their monthly bill.

Operationally the benefits of the SmartMeter are already evidenced with the significant reduction in the number of estimated bills.

Only 0.1% of SmartMeter bills are estimated, compared to 1.2% for the old meters.

This quarter we can also report significant progress on our two large power plant construction projects.

Our Humboldt Bay Power Plant began commercial operation and went on line in September.

Our other large generation project, the Colusa Generating Station, is still expected to become operational by the end of the year.

We're proud of our teams at Colusa and Humboldt for their impressive work, moving these projects forward safely and on schedule.

That's an overview of the major operational developments over the past quarter and I'll now hand it over to Kent.

Thanks Chris, and good morning.

I will cover third quarter financial results including the charge related to the San Bruno accident.

I'll also provide some updates on guidance and financing activities.

For the third quarter GAAP earnings we're reporting $258 million or $0.66 per diluted common share.

That compares to $318 million or $0.83 per share last year.

The decline in GAAP earnings reflects the charge related to the San Bruno accident of $238 million pre-tax.

As you can see from Table 2 of our supplemental earnings package this equates to $141 million after tax or $0.36 per share.

Let me walk you through the two main components of the charge.

First are the direct expenses incurred during the quarter in connection with the accident and these total $18 million pre-tax and include costs associated with the pipeline inspections, that Chris described, our efforts to support San Bruno residents and our activities following the accident.

The second and larger component is a $220 million pre-tax provision for the third party liability associated with the accident.

This encompasses property damage, personal injury claims and usage of our San Bruno relief funds.

As you'd expect, these are estimates and there's significant judgment and uncertainty associated with the size of the ultimate liability.

We've developed a range of estimates for the liability of between $220 million and $400 million.

Consistent with accounting practice, we've accrued a liability at the low end of that range.

We expect that as events unfold in the future, we'll obtain additional information that will affect the estimate and we'll make adjustments to it when warranted.

As far as insurance is concerned, our third party liability coverage of $992 million substantially exceeds our estimates of the liability.

We believe that most of the cost associated with potential third party claims will ultimately be recoverable under our policy.

However, we don't expect to book an asset until a future period, when the insurance recovery process has progressed sufficiently.

Excluding the item impacting comparability related to the San Bruno accident, earnings from operations in the third quarter were $398 million or $1.02 per diluted common share.

That compares to $358 million or $0.93 per share, last year.

The $0.09 difference in earnings from operations was as a result of several factors summarized in Table 4 of our supplemental earnings package.

They include an increase of $0.07 related to higher authorized rate base investment, $0.02 due to a reduction in our long-term disability expenses and $0.03 for miscellaneous items.

And these positive factors were partially offset by increases in shares outstanding and severance cost compared to the year before.

As you'll see on Table 8, we're updating our overall GAAP guidance to reflect the item impacting comparability related to the San Bruno accident.

Overall GAAP guidance is $2.72 to $2.92 per share in 2010, and $3.27 to $3.72 per share in 2011.

The item impacting comparability for San Bruno consists of the two components I mentioned before.

First, is the estimated liability range of $220 million to $400 million pre-tax.

Second, is the estimated direct expenses that may be incurred as a result of the accident.

We estimate that these could total between $100 million and $150 million, pre-tax, through the end of next year.

The range for direct expenses is difficult to estimate since we're still fairly early in the process.

Even though we don't know what will be required as part of the investigation, we tried to identify an estimate and types of potential costs we may incur.

They include the cost of additional inspections and repairs, as well as any associated field work that may be required.

The cost of outside legal support related to third party claim.

These are not included in the liability range I described before.

However, we'd expect to recover most of these, ultimately through our insurance.

There's also the cost of technical experts and legal work to support the investigations and respond to inquiries from policy makers.

And then there are the other items such as the planned $10 million contribution to establish a non-profit R&D entity to advance pipeline technology.

Now, given the time of the investigations many of these costs are expected to continue well into 2011.

The sum of the liability and the direct cost ranges from $320 million to $550 million pre-tax, or roughly $0.50 to $0.85 per share, and this item impacting comparability has been spread over 2010 and 2011 in our guidance.

You've probably noticed that we've not reflected any benefit from insurance recoveries in the item impacting comparability.

Given that the NTSB investigation and the CPC process may not be completed until well into next year, the insurance process may not end up being substantially resolved until after 2011.

So we've not included it in guidance for the time being.

Our guidance for earnings from operations for 2010 remains at $3.35 to $3.50 per share.

Given where we are through the first three quarters, you can discern what we need from the fourth quarter, to be within our guidance range for the year.

A few things to keep in mind about Q4 for us.

The quarter will reflect higher expenses associated with the refueling outage of Diablo Canyon Unit 1.

Some of our other operating expenses are expected to be tilted a little more to Q4 than Q3 when compared to last year, a timing issue really.

And then we also expect that we'll have lower positive contribution from a tax settlement when compared to Q4 of last year.

For 2011 earnings from operations we're narrowing our guidance range to reflect a $0.05 reduction at the top end.

The new range for 2011 is $3.65 to $3.80 per share.

You recall that the top end of our range was based on our full request in a number of key regulatory cases.

When narrowing the range now to reflect the settlements reached in the 2011 General Rate Case and the Gas Transmission Storage Case, as well as the final decision in the Cornerstone Case.

Our guidance continues to be based on a number of assumptions including those related to the level of capital invested and achieving our authorized return on equity of 11.35%.

Finally I'll cover our financing activities.

Through the end of the third quarter equity issuance under our 401K and DRIPP programs, totals about $150 million and we still expect it to be at roughly $200 million by year end.

We believe this will be sufficient to satisfy our 2010 needs.

We continue to expect that our equity needs for 2011 will be more than the $200 million or so that are normally provided by our 401(k) and DRIPP Programs.

Based on the GRC settlement and earlier regulatory decisions on our PV and Cornerstone Programs, we now estimate that our additional external equity needs for 2011 could total up to $400 million.

Whether we need the full $400 million of external equity will depend significantly on the regulatory outcome of the Manzana Wind Project.

Obviously, other factors can also impact our needs for the year.

In order to meet our equity needs, we filed a prospectus supplement with SEC today, to offer up to $400 million in common stock through a continuous equity offering program.

This is sometimes referred to as an, after market program or an equity driven program.

We currently plan on issuing some equity under this program before year end as conditions warrant.

Issuing some equity now will lower the amount that would otherwise be needed if we waited until into next year to begin.

And you'll recall that we need to maintain a 52% equity ratio on average for the entire year.

We've designed the program to maximize our flexibility, both in terms of how much equity we issue and over what time frame.

And obviously we'll provide periodic updates to you going forward.

Now I'll turn it back over to Peter.

Thanks, Kent.

Before we open it up for questions, we'd like to congratulate Jerry Brown on his election to Governor of California.

We look forward to working with him on advancing sound energy policy in California in the years to come.

In closing, as we've highlighted today we continue to take steps to ensure that PG&E is delivering the safe, reliable, clean and affordable energy that our customers value and expect.

This last quarter presented many challenges.

In the midst of these challenges we will continue to focus on the needs of the people who were directly affected on September 9.

We are grateful for the way our employees have responded and in particular the job they've done supporting the people of San Bruno.

Just as important, they've done this while staying focused on all of the other work that has to be done everyday to deliver for our customers.

Thank you, and we're now ready to take your questions.

(Operator instructions)

Valerie, Are you still with us?

Yes, sir.

One moment.

Our first question comes from the line of Lasan Johong with RBC Capital Markets.

You may proceed .

Valerie we're not hearing Lasan.

Probably my fault.

As tragic as San Bruno was, I think you guys handled it pretty damn well, and I want to congratulate the team for a job well done.

My question is the five point plan.

I understand you can't give us any details of mileage or lines involved or valves involved, but can you give us an idea of how much it's going to cost?

Lasan, this is Chris.

We don't have those estimates yet.

Basically, what we're planning to do is to engage a third party expert to work with us to help prioritize and look at the entire system and then start to start develop those plans.

So, it's too early and we don't have any dollar estimates at all yet.

Okay.

Again, I'm not suggesting that this is the case, but if there should be a case of gross negligence involved here, on PG&E's part, would that negate your insurance policy?

This is Kent and the answer is no.

Generally speaking third party liability coverage is quite broad, and by definition it's intended to cover anything unexpected and unintended, so that would not be an issue.

Excellent.

Last question for me.

Last two questions related to SmartMetering.

You mentioned that customers have been signing up for additional information.

Can you give us a percentage of your customers that have the SmartMeters that have A, signed up for it, and two, are you starting to see an impact on load?

As we've said we've got 7 million of these meters out there now and that is out of almost 10 million that we are going to do, so about 70%, and they all have access to a variety of different opportunities to look at their information.

So for instance, we try to monitor but a lot of them are using their own account, or what we call My Account and they go online and they can see on a daily basis what they used as far as their energy usage the day before, on an hour by hour basis, and they use that to help monitor what their energy usage has been.

In addition we've had some of the folks sign up and it's just in its infancy, for these energy alerts, which sends them out an automatic notice that when they start to reach the next level tiers, it gives them a warning that they are heading that way and then they can take action there.

So, that's how we've been engaged with them on those aspects of it.

We haven't really seen anything yet that would show significant changes in load, but then again we haven't really rolled out any programs that are totally designed to do that.

We're really right now focused on getting all of these meters in and then we'll work with the commission on some of the pricing incentives that will really be designed to drive the changes in demand.

I see.

Okay.

Thank you.

I'll get back in the queue.

Thank you.

Our next question comes from the line of Hugh Wynne with Sanford Bernstein.

You may proceed.

Good morning.

I also wanted to commend your responsiveness at the San Bruno accident.

I think that's been well handled.

My questions are -- one around the equity, and two, around the cost related to San Bruno and the gas pipeline inspection.

Can you tell us what portion of that $400 million of external equity would be contingent upon Manzana?

This is Kent.

If you think about Manzana, overall it's a $900 million project.

If approved, most of those expenditures, obviously, would be next year and there would be a significant amount that would be the latter part of next year.

I would also say that with a project like that, there are significant tax benefits from it that offset some of the financing requirements.

So while it would be a significant portion of the $400 million, it would not be all of it next year.

Okay, so basically what you're guiding me to is to look at the $900 million in 2011 less tax benefits, less debt component.

And then you'd want think -- Yes, that's correct.

But you'd also want to think about the timing, because the timing of when you're doing it, since we are managing our capital structure on a 12 month average, it's not as simple as just the total amount during the year divided by two.

It's a little more complicated than that.

But generally speaking, you are on the right path.

Now, the fact that the insurance policy is robust and would cover gross negligence is comforting, but I wonder then why have you booked reserves for the pre-insurance cost.

Booked reserves for the -- You mean for the cost of the accident liability.

Without recovery, assuming no recovery.

Yes.

Yes, and that 's really the accounting rules for contingency requires us to take a charge.

And it requires us to look at the asset side as well as the liability side and separate the two.

The insurance company -- I'm sorry, let me just go on to the inspection of the natural gas transmission lines, this $100 million or $150 million expense that you are estimating.

I assume, that one, that will not be recoverable in any form under the either the gas accord or any other regulatory adjustment is that right?

Generally speaking for the $100 to $150 million I spoke about, we currently don't anticipate seeking recovery of these costs and let me just describe a little bit about that.

The costs that we have included in that category are one-time in nature.

We don't view them as ongoing mandates and that's why we've identified them as an item impacting comparability, and I mentioned some of the larger categories.

You mentioned the inspections of the pipeline.

There's also significant costs associated with legal costs and the other categories that I mentioned.

So, on the other hand, if we had new programs or standards that might happen in the future, those would likely have ongoing implications.

For example the 2020 -- the Pipeline 2020 program contemplates those types of things, and there we would plan to work with our regulators to further develop the proposals, including funding.

The only other thing I would add though, is within the $100 million to $150 million, there is a piece of those one time costs that are legal costs associated with third party claims, and those we did not include in our liability that we booked.

We will accrue those as they occur, but we would seek to recover those under insurance and I would expect that most of those ultimately would be recovered.

The gas accord maybe finalized only in February, would you expect the revenues to be increased in January or retroactively increased when the accord was approved?

This is Tom Bottorff speaking.

We have a motion pending before the PUC to allow recovery beginning in January.

That -- a proposed decision on that motion is expected in December, but we'll have to wait and see how the commission rules on that.

Great.

Thank you all very much.

Thank you.

Our next question comes from the line of Michael Lapides with Goldman Sachs.

You may proceed.

Could you just give high level overview in terms of changeover at the commission, and how really the timing of that and is that what you think impacts the timing of the settlement being approved or not approved by the commission or is there something other pushing it out entirely next year?

Let me begin and then Tom might be able to supplement that response.

Two of the commissioners come off at the end of the year.

That would be Dian Grueneich and Commissioner Bohn and then there's also -- what we need is confirmation with respect to a third, which would be, needs to come before the end of January.

So that's the line up as we have it.

Tom anything that you would add?

I would just add that we would expect if the commission is able to rule on the general rate case in January, we would have three commissioners in place.

If the decision comes after January we would at least have two, and the governor or can easily appoint someone to sit in for a temporary period or it can be for a full-time appointment.

So, there are a number of ways the commission can proceed in granting the decision whether we have the existing three on the commission or we supplement it with one or two new ones at the beginning of the year.

Got it.

Is there any precedence for rate case decisions getting -- or settlements getting delayed if you've got a majority of the commissioners, let's say there are three new commissioners come early next year, that weren't commissioners when the case was actually heard?

Typically, no.

There isn't -- that wouldn't be the case.

What the president -- I'm sorry, what the governor would do in that event is bring on, sometimes, and this is this has occurred in the past, bring on new appointments to ensure the decisions are issued with at least the three members.

We've had decisions in the past where three sitting Commissioners have been enough to approve significant decisions including general rate cases.

So there is precedence for that.

Got it, okay.

Thank you.

Thank you.

Our next question comes from the line of Leslie Rich with JPMorgan.

You may proceed.

Yes, I just wondered what you expect the timing of the Manzana decision to be.

Initially, I think, you had said it would be by year-end and I'm just wondering if you think that will be delayed into the first quarter as well?

We are still expecting a proposed decision probably toward the end of this month.

It's probably more likely that the decision, the final decision will be issued in the first part of next year.

Okay.

So that ties back into the magnitude of the Dribble program will be dependent on that?

Yes, that could drive the pace of the program, as well as the magnitude.

Great.

Thank you.

Thank you.

Our next question comes from the line of Paul Patterson with Glenrock Associates.

You may proceed.

Good morning.

Can you hear me?

Yes Paul.

Just on the 2011 guidance, the GAAP guidance, are there any insurance proceeds that are being in there, being calculated in there and if not, why not?

Is it going to be passed 2011 that you think you'll get recovery of it?

How do those factor into the GAAP guidance that you have for 2011?

Paul, this is Kent.

Yes, let me clarify that.

For 2011, the GAAP guidance does not reflect any proceeds from insurance and, obviously, when those are received, those would be a positive item impacting comparability.

Our thinking there is that the NTSB process could take us well into the second half of next year, and since it's likely that -- or possible, anyway, that a lot of the claims ultimately may not get resolved, or the significant ones, until after that happens, it's quite possible that a lot of the claims won't be resolved until you get beyond 2011.

So, for the time being, we've not reflected that in our 2011 GAAP guidance.

Okay.

So, on a cash basis the settlement discussion -- the issue of settlements and giving people money and the issue of getting proceeds, do you expect a significant mismatch there or does that change any financing issues or, how do you factor that, what's your outlook on that?

I think that it could, we could have some financing impact with that.

I would expect, if it happened next year, it would be the latter part of the year.

But that's sort of to be expected anyway.

We often reach settlements and then resolve the insurance after that.

Okay.

And then, just in terms of the on-going impact, you guys had this accelerated work on the gas system in the past and I was wondering, is there anything going forward that might be some certain expense that you see from San Bruno in terms of -- related to the work you might be doing and whether there's -- in other words is there any impact on shareholders that we should be thinking about, other than these accounting provisions that you are making, that we should think about?

This is Chris, Paul.

The way I would think about it is that when we talk about the number from last year on the distribution side, that was the 40,000 miles of distribution pipeline that we were looking at.

Here we are talking about a much smaller population of pipeline, and in fact we've already completed the aerial survey and we will complete the total walking survey by the end of this year.

And those kind of costs are included in the $100 million to $150 million that Kent talked about.

Outside of that, I would be looking more at the Pipeline 2020 program, which we'll work with the regulatory commissioners on the extent of what that program would be and I would anticipate that the majority of that is going to be capital in nature.

And so I think that's how you want to look at the future cost.

Okay.

Thanks a lot.

Thank you.

Our next question comes from the line of Dan Eggers with Credit Suisse.

You may proceed.

Good morning.

I guess, first question, with the elections over and Governor Brown coming in, can you just give an updated thoughts on how energy policies are going look in California, and if you see any substantive changes from the Schwarzenegger Administration to the Brown Administration?

Sure, so let me begin by outlining our focus on energy as a company, and that is that we've been very committed to providing clean and reliable energy to our customers, but also with the commitment to climate change and supportive of renewable strategy and AB-32 rollout.

But at the same time, we've focused very much on affordability.

We have to have clean energy at affordable rates.

As we see it, we see this very well aligned with where the new governor will be, in that he has indicated his support for the implementation of AB-32.

He has indicated his support for 33% renewables, but at the same time, one of the messages he's sending out in general is about the importance of frugality in government, because he recognizes the pressures that are on constituents and we see that lining up very well with our affordable energy approach.

So we see Governor Brown really extending on the path that's been set in recent years, and very well aligned with the leadership under President Peevey at the CPUC.

So Peter, do you see the renewable standard, being what Schwarzenegger has put forward as far as allowing out of state resources, or do you think there's going to be a shift to in state resources for a variety of political reasons?

I think that still has to play itself out.

On the one hand I think the influence of Unions will be a factor, but on the other hand we know that Jerry Brown is concerned about frugality.

We see two offsetting pressures occurring there and I think at this point it's a little early to know for certain how that's going to play out.

Do you have comfort that you can get your 33% standard with an in-state mandate, or do you think you need the out of state resource to make it a more economically viable goal?

I think, we're talking about ten years and if we look at the development that has occurred in the last ten years, that would lead us to conclude that we can get to 33%.

Really, the factor is cost, and that's a reason that PG&E has pushed very hard for broad access to out of state resources, and we will continue to push in that regard.

Can we get there?

I think we can with in state resources, but we don't like the impact that that would have on our customers potentially from a cost standpoint and we feel both regulators and policy makers should be very sensitive to that.

Climate change, of course, is a global problem and building barriers state by state really doesn't make sense in the context of solving a global problem.

Okay, and just one last question on this, I'm sorry Peter.

The capital spending you guys have laid out for your plan, does that take into account going to a 33% renewable standard in AB32 enforcement, or is there room for more spending to help accomplish those goals on your medium term planning horizon?

Why don't I have Kent address that question.

In terms of the capital that we've laid out in our guidance, of course, that goes through next year, and you remember, going back to March the original layout that we had.

The upper end, really for renewables, had our Photovoltaic Program which is now up and going and we are working very hard on that.

That's about $1.5 billion over about five years.

And then it also has the Manzana Wind Project in there.

Those are really the only projects that are currently included in utility on capital for renewables.

Thank you guys.

Thank you.

Our next question comes from the line of Jonathan Arnold with Deutsche Bank.

You may proceed.

Good morning.

Good morning Jonathan.

Can I just ask on Manzana, I just see your comments about the timing of the spend having a bearing on what you might need in terms of the equity dribble and it's obviously later in the year.

If you do get Manzana would it be reasonable to assume you'll continue to do some kind of program above your normal direct into 2012 as well?

Yes, that would be reasonable, all else being equal.

In a similar kind of zip code to what you are saying this year, for '11, sorry.

Our DRIPP and our 401K, we would normally expect to be at about $200 million a year this year, and we would expect something similar next year.

But in terms of incremental, in the event Manzana goes forward, would it be the same kind of incremental in '12 as you have in '11?

Oh, you're asking about '12.

I'm sorry.

I misunderstood the question.

We are not really providing any guidance about 2012 and financing needs for '12 at this point.

The capital expenditures related to Manzana would occur in 2011 under the current schedule.

My question though was more with the back -- because their back-end loaded, does that carry some of this equity need into '12, or are you planning that the dribble you would do in '11 would effectively get you where you need to be for '12?

I would say, generally speaking, the dribble would satisfy us for '11.

I haven't really looked at equity needs in '12 , and we'll be talking about that when we provide '12 guidance in future

Thanks, Kent.

Could I just get on one other thing?

It seems like the cost that you are planning to book through guidance, for San Bruno between '10 and '11 equate to sort of the high end of these ranges you've given, whereas you're only booking the low end in 2010.

How does the accounting work around that?

And, how should we think about the fact that you are using the $400 million higher end, I think, of the bigger number before, between the '10 and the '11 guidance?

Jonathan, let me take a crack at that.

Again, there's two pieces in our guidance for the item impacting comparability related to San Bruno.

There's the liability estimates and then there is the direct cost.

In case of the liability estimates we've identified a range of $220 million to $400 million, and we've booked the $220 million pre-tax.

The higher estimates for the IIC, which is in the lower guidance category, reflects the full $400 million.

The higher guidance, which has the lower IIC, reflects the $220 million for the liability, and similar with the $100 million to $150 million for the direct cost.

We've used the $100 million to $150 million to bound that component of the item impacting comparability.

Between the two years?

For two years, and we've spread it over the remainder of '10 and through '11.

Great.

Thank you, very much.

You bet.

Thank you.

Our next question comes from the line of Steve Fleishman with Bank of America, Merrill Lynch.

You may proceed.

Great.

Thank you.

Kent, what is the bonus depreciation cash in 2011 now that that's been extended?

We estimate that the cash impacted that, pre-tax, obviously, will be between $400 million and $500 million for us.

We expect most of the financing benefit of that, given the timing in 2010, most of the financing benefit will be realized next year.

Okay.

And then between that extension, together with the rate settlement, how are you tracking to the rate base forecast that you've given in the past for 2011?

I think we have as part of our 8K on the general rate case, we provided the rate base funded in 2011.

I know what it is in terms of zip code but I don't remember the specific number.

It's north of $16 billion with the GRC jurisdictional rate base.

Okay.

But if you go back to your analyst day or something like that, would -- I know bonus depreciation was -- you weren't sure either way then and we didn't have the settlement, are you still -- are the ranges back then, for rate base still in the ballpark or --

Steve, we are not going back and updating all of the different inputs into the original guidance but, I would tell you, if you go back to the March guidance, in the lower case that we had, there was no bonus depreciation for 2010 and in the higher case, it actually was reflected in there, at a comparable level, I think we had assumed $400 million in benefit.

So that was largely already reflected in the higher guidance that we provided on March 1st.

Thank you.

You bet.

Thank you.

Our next question comes from the line of Reza Hatefi with Decade Capital.

You may proceed.

Thank you very much.

Just to clarify on the rate base, you are still sort of in that range for 2011 that you gave back at the analyst day?

I have not gone back and added up all the pieces.

Remember, we have provided updates on a lot of separately funded capital projects.

So you kind of know how those played out other than Manzana, so it shouldn't be difficult for you to estimate where we are vis-a-vis what we talked about back on March 1, now that we have the general rate case settlement.

Okay.

So, I guess at some point down the line, you'll give us -- besides doing that calculation, you'll give us a new look on rate base guidance, down the line?

Yes, we would normally expect to do that when we provide guidance for '11 and '12.

Okay and then, I guess just thinking about this rate case and obviously there's a lot of moving parts and a lot of different projects, as you mentioned, how should we think about the trajectory and progression of rate base growth post 2011?

We haven't provided any guidance beyond '11 at this point.

What you have seen is, in terms of the general rate case, we've disclosed that the general rate case -- if the settlement is approved, would allow funding between $2.2 billion and $2.3 billion for those pieces, annually, for those pieces that are CPUC, GRC jurisdictional.

Okay, got it.

Thank you, very much.

Thank you.

Our next question comes from the line of Rudy Valentino with Morgan Stanley.

You may proceed.

Hi.

Thank you.

You've answered a lot of my questions.

Can you give an idea of what is your expectation for the tax rate for 2010 and maybe into 2011?

I don't have any specific estimates to provide you going forward.

Okay.

Rudy, this is Gabe, the one thing I would say is, I think people have recognized that we have over the last several years had a number of tax settlements that have benefited the company, but we've really have been working those off.

And the company for the last year or so has entered into this program with the IRS and Dinyar, remind me of the first name.

Our effective tax rate for the nine months of September was 37% and as Gabe mentioned, we are now in a program called the continuous audit program where we work with the IRS every year as we file the return, they are sitting by our side and we are discussing issues contemporaneously.

But our current effective tax rate is 37%.

Okay, thank you very much.

Thank you.

Our next question comes from the line of Ashar Khan with Visium Asset Management.

You may proceed.

I think most of my questions have been answered.

But just going back to that rate case that you provided, how much depreciation is there annually?

Can you just remind us?

I don't have that available to me.

I'm sorry.

Okay.

Thank you, so much.

Thank you.

We have a follow-up question from the line of Lasan Johong with RBC Capital Markets.

You may proceed.

Thank you.

Kent, I have a question on Manzana again.

It's interesting, because if I'm not mistaken, you ought to qualify for a 30% tax cash grant money, and you ought to have bonus depreciation on that project which would probably cover your entire equity, if you chose to take the 30% tax grant as opposed to PTC.

If you do that option, are you not over equitized going into 2012?

No.

We have factored in the implications of Manzana, in or out of our program, and we are comfortable with what the game plan is for 2011.

Where that positions us for 2012

But you are not in a position to disclose whether you would take the cash grant or the PTC?

I think that is still to be determined through the regulatory process.

I see.

So what you are preparing for is, I'm assuming, the PTC side of the business just in case?

That is a possible outcome of the regulatory process.

I see.

Thank you.

Thank you.

We have a follow-up question from the line of Michael Lapides with Goldman Sachs.

You may proceed.

Hi guys.

My apologies.

Asked and answered.

Oh, okay.

Thank you, Michael.

Thank you.

There are currently no additional questions waiting from the phone lines.

In that case we'll wish everyone a great day.

Thank you for joining us on the call and we really appreciate your interest.

Good bye