PG&E Corp (PCG) 2011 Q1 法說會逐字稿

Good morning, and welcome to the PG&E first-quarter earnings conference call. At this time, I would like to introduce your host, Mr. Gabe Togneri of PG&E. Thank you, and have a good conference. You may proceed, Mr. Togneri.

Thanks, Josh. Good morning, and we appreciate you joining us. Our primary speakers today will be Chris Johns, President of Pacific Gas and Electric Company, and Kent Harvey, Senior Vice President and CFO of PG&E Corporation. You will also hear from Lee Cox, our Interim Chairman, CEO and President of the Corporation. Other members of the Management Team are here, and will participate in the Q&A. I will remind you, our remarks and the Q&A that follows include forward-looking statements based on assumptions and expectations that reflect information currently available to Management. Actual results may differ materially from current expectations. Important factors that may affect our results are described in the reports that we file with the SEC, including the risk factors and other factors that are in our annual report on Form 10-K for the year ended December 31, 2010 and our Form 10-Q reports. We encourage you to read them. We will be filing our 10-Q report for the quarter 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 will want to have that supplemental information available to refer to as we go through the results for the quarter. And now, I will turn the call over to Chris Johns.

Thanks, Gabe, and good morning, everybody. Now, as you know, I don't usually open up our calls, so it's appropriate to acknowledge the transition that we're in right now. As Peter Darbee stated when he announced his retirement, this change gives the Company an opportunity to move forward in facing some of our challenges. Obviously, a key step in that direction will be naming a new CEO. So, with us this morning to offer his thoughts on that is Lee Cox. Lee has been a key member of the Board at PG&E since 1996, and he's been our lead director since 2004. As Gabe mentioned, Lee is our Interim Chairman, CEO and President, and we are fortunate to have Lee's experience in this interim role. So with that, I will turn it over to Lee.

Thank you, Chris, and, good morning, everyone. I know the Team has a lot to cover this morning, so I'm going to be very brief. Let me just expand, though, for a moment, on a comment Chris made about a CEO retirement being a chance to move forward. I want all of you to know that the Board and our employees deeply understand and feel in every way how the events of the last year have affected the Company. And right now, we are all very focused on doing whatever it takes to fix our problems, and then also to regain the public trust. A lot of projects are already underway to do that. The new CEO we are seeking will be someone who can lead our teams to finish the operations turnaround that has really already started. And, we also want someone who can personally engage with our many stakeholders and gain their support.

So to that end, the search process is moving along well. The search committee is pleased with the quality of candidates. We are on track to name the new CEO in the coming weeks. But in the meantime, in the coming days, you will be hearing some announcements about what we are doing to resolve our problems and to regain the confidence of our stakeholders. Now, Chris and Kent are going to be delivering some tough news this morning and I want you to know that the Board believes that they and their teams will be able to solve our problems and then go on to improve operational and financial performance in the future. So, here it goes back to Chris to discuss Company operations.

Great. Thanks, Lee. I'm disappointed by our first-quarter results and our announcement today that we are revising our guidance. As a Management team, we are accountable for the overall performance of our Company. And as President, I'm accountable for the operational and financial performance of the Company, and to assure the necessary changes are made for PG&E to become the leading utility that our Management Team aspires for it to be. This morning, Kent and I will address the recent developments leading to the revised outlook for the year, as well as our plans moving forward. You can be confident that we are challenging our Leadership Team to deliver better results. My remarks begin as they did last quarter, with an update on activities and plans relating to the gas transmission system and pipeline safety.

I will also discuss our nuclear operations in light of the Japanese earthquake and tsunami and the winter storms we faced this quarter. The issues we are dealing with as a result of the San Bruno accident will have a lasting impact on PG&E and across the industry. We continue to help the families and communities affected by this tragedy. We have funded a trust for the city of San Bruno so it can effectively and efficiently continue with the healing and rebuilding process. The entire San Bruno community remains in our thoughts and in our prayers. This Management Team is fully committed to PG&E emerging from this experience, both as a better Company, and as a national standard bearer for safety and operational excellence.

We have several years of hard work ahead, and we are taking the actions needed to achieve that goal. We continue to fully cooperate with the various regulatory proceedings and investigations concerning gas pipeline matters. The National Transportation Safety Board held 3 days of fact-finding hearings in March, and we expect the NTSB to issue a final report sometime this fall. The California Public Utilities Commission is overseeing its own investigation, while also participating in the NTSB process. And as part of their investigation, the CPUC appointed an independent review panel to look into PG&E and the Commission policies and practices for managing the gas transmission system. We expect that the panel will provide its report to the CPUC sometime later this month.

At the end of February, the Commission issued an Order Instituting Investigation, or an OII, to examine PG&E's pipeline record-keeping practices. On April 18th, we responded to an initial set of questions posed in that OII. This included a discussion of pipeline document-retention practices. We're going to have to file other responses in the OII during May and June, including documents relating to pipeline maintenance procedures and practices dating back to the 1950s. Because the OII will likely take into account the findings from the final NTSB report, we don't expect the investigation to conclude until late 2011 or even into 2012. In February, the CPUC also issued an Order Instituting Rulemaking, or an OIR, which covers all California pipeline operators.

We support the OIR and the CPUC's intent to establish new standards for pipeline construction, maintenance and safety. Responding to a directive that was part of the OIR process in March, we provided the CPUC with information on pressure test records and engineering specifications for our transmission pipelines in the more populated areas of our service territory. The process of collecting, scanning and indexing more than 1 million hard-copy records that I mentioned in our last earnings call, was a huge part of that effort. We are continuing to work with the CPUC to determine the methods that they would like to see deployed for validating the Maximum Allowable Operating Pressures, or the MAOPs, for the pipelines in California under these new standards.

Although earlier last month we stipulated to an agreement regarding our plans for calculating MAOP on much of our pipeline, the CPUC is still considering the appropriate method for validation. So, in the meantime, we continue to gather documentation, such as original as-built drawings, in order to enhance our flexibility to provide the evidence that the CPUC requires for MAOP validation. As you can imagine, this is a substantial increase in the scope of work we expected to be doing this year, and it's one of the major drivers of the increased costs we now expect to incur in 2011. And those costs will be reflected in the Item Impacting Comparability. Ultimately, we will validate the pressure levels for our entire gas transmission system, addressing the 1,800 miles of pipe located in the more populated areas and the nearly 5,000 other pipeline miles over the next few years.

Our action plan for this year also addresses inspecting and field-testing primarily older pipeline segments that were installed before pressure testing was required. We are beginning our field work this month, and initially plan to pressure-test or replace about 152 miles of pipeline with characteristics that are similar to the San Bruno segment. The relevant segments of pipe are not contiguous, so this work will actually extend over more than 200 miles on 24 separate pipelines. Hydrostatic pressure testing is major work. It involves shutting down the relevant pipeline segments, filling it with pressurized water to identify whether any leaks, cracks or other failures exist. And, each pressure test requires advanced initial engineering work and permitting with a lot of different agencies.

Most of the work is targeted for this summer, when our gas demand in California is low. This field work is another major driver of our forecast cost increase in the IIC. Another part of our plans is our proposed Pipeline 2020 program, and that's a multi-year pipeline modernization program that, if approved by the CPUC, will be 1of the most significant initiatives PG&E has ever launched. It will involve targeted efforts to inspect, upgrade or replace parts of our gas transmission pipeline system, and to add remote-controlled or automatic shutoff valves in locations where they can be effective. In fact, we have a pilot program in place to install these types of valves this year. Pipeline 2020 will also involve advancing best practices across the industry and supporting research in the next-generation inspection technology.

We plan to file our proposal for the first phase of this program with the CPUC around the end of June, as part of the OIR proceeding. The first phase of Pipeline 2020 will cover our gas transmission lines that are located in the more populated areas, and will identify pipeline replacements and operational changes designed to improve the transmission system. We believe the Pipeline 2020 program will advance the safety and the maintenance standards for natural gas pipelines in the United States. Now, let me turn to our nuclear operations. Over the last 6 weeks, we have gotten many questions about Diablo Canyon in light of the nuclear reactor problems in Japan following the earthquake and tsunami.

First, I want to clearly state that operating Diablo Canyon safely is a top priority. We are working constantly with both the Nuclear Regulatory Commission and the Institute of Nuclear Power Operations to assure that our operating practices and procedures place safety as the highest priority at Diablo Canyon. Testament to this commitment is the fact that Diablo Canyon Power Plant has been a reliable, safely run, clean source of affordable power for more than 25 years. Now, it's important to note that there are several key safety features that differentiate Diablo Canyon from the Fukushima Plant in Japan. First, Diablo Canyon is on an 85-foot bluff rather than at sea level, and that provides a significant tsunami safety margin.

There's emergency diesel generators with fuel tanks located underground that provide backup power on the site. And in addition, 2 reservoirs of desalinated water at the site provide an alternate source of emergency cooling that can be delivered without electric power. Now, having said that, we do not take our design for granted. We have been reevaluating the assumptions in the design of our plant and looking at events that could occur beyond those anticipated in the original and updated design. In addition, we continue to work with the industry to learn from the events in Japan. And, we will make any and all changes necessary to the safety of the plant as a result of these ongoing reviews.

In addition, we are currently working on license extensions for the plant. The licenses for the 2 units at Diablo Canyon expire in 2024, and in 2025, and we're currently seeking a 20-year license extension for each of the units. In response to public concern, we recently announced plans to accelerate completion of advanced 3-Dimensional seismic studies related to Diablo Canyon. And, we also formally asked the NRC to delay final approval of the license renewal application until these studies are complete. We expect the entire process to take several years.

And then finally, this quarter really presented us with some of the worst winter storm challenges we've experienced in a very long time. Storm activity was extreme in February and, in fact, between February 15th and the end of March, we spent more than $50 million in storm response. And for the quarter as a whole, we spent about $77 million in expense on storm recovery. This quarter, we had 24 days of major emergency storm activity, and all 24 days involved low-elevation snow. This results in a much larger volume of tree-related outage activity and difficult access conditions. The response effort involved more than 387,000 labor hours. Last year by comparison, we had 11 days of major storms in the first quarter with only 4 days of low-altitude snow. Now, the storms did, however, put us at 150% of normal snow pack levels in the Sierras, which means we will have good availability of hydro power this summer. And needless to say, we are glad to have these winter storms behind us. I am proud of our crews. They did a great job restoring power and they maintained a strong safety record in this process. So with that, I'm going to hand it over to Kent to talk in more detail about the financial challenges that we are facing.

Thanks, Chris, and good morning, everyone. I would like to begin by echoing what Chris said. We are disappointed in our quarterly results and the reduction in guidance that we have announced today. Several developments since our last call have caused us to revisit our outlook for the year. I have a lot to go through today, and I want to be sure that I can provide you with as much clarity and transparency as I can. So, let me highlight the key points before I begin a more detailed discussion. First, our earnings from operations for the quarter are down, and we're lowering guidance for the year. Second, the larger scope of work stemming from the San Bruno accident has caused us to increase our estimate of incurred costs for the Item Impacting Comparability.

Third, even though these San Bruno-related expenses are excluded from earnings from operations, they reduce our retained earnings, and therefore increase our equity needs and our EPS dilution. Fourth, although we are not providing 2012 guidance on today's call, I will share some observations about next year. And fifth, given the challenges we are working through this year, we plan to maintain our dividend at its current level for 2011.

So let me begin with Q1. Starting with Table 1 in the supplemental earnings package, we reported $230 million, or $0.58 per diluted common share, in earnings from operations for the quarter. On a GAAP basis, earnings were $199 million, or $0.50 per share. The difference between the two, $51 million pre tax or $0.08, is the Item Impacting Comparability for San Bruno and the related gas pipeline matters. During Q1, most of these costs are attributable to the massive records effort that Chris described.

Let me now go through the quarter-over-quarter comparisons for our earnings from operations, and that's in Table 3. The $0.58 in earnings from operations for the quarter represents a $0.21 decline compared to the first quarter of 2010. And here are the key items. First of all, we had an increase in rate base earnings of $0.04 related to our electric transmission business and our separately funded projects like Colusa and Humboldt, as well as SmartMeter. This was more than offset by a number of negative items. We were $0.07 unfavorable because of the General Rate Case, and the GT&S settlements were still pending at the end of the quarter. So, normal increases in operating costs for our distribution, generation and pipeline businesses were not offset by incremental revenue. The final decisions in both of those cases will be retroactive to the beginning of the year. So, we expect a catch-up to be recorded in Q2. We were $0.05 unfavorable due to the storm response costs that Chris described, and $0.06 due to charges for litigation and regulatory matters not related to San Bruno. A significant portion of this is in connection with the Rancho Cordova proceedings. We were also $0.03 negative due to lower gas storage revenues resulting from adverse market conditions. In Q1, the average price for summer-to-winter parking deals was about one-third of the price realized in the same period last year. And finally, we had a negative $0.03 impact due to a greater number of shares outstanding.

Based on the first-quarter results and our projections for the rest of the year, we're lowering our earnings from operations guidance range for 2011 by about 5%. Our prior range was $3.65 to $3.80 per share. The new range is $3.45 to $3.60. I want to be clear that we are not taking this lightly. But the number and the size of the challenges have caused us to step back and reevaluate what we can realistically achieve for the year. Beyond the impacts we have experienced in Q1, we expect to continue to see some lower gas storage revenues in future quarters, and continue to experience some higher litigation costs unrelated to San Bruno. This may be partly connected with the increased attention we have received in recent months.

We also expect that share dilution will grow as a result of the increased scope for the gas pipeline work. Since this is largely expense work, it negatively affects our retained earnings, and results in a greater need for equity issuance to maintain our authorized capital structure. Now, we have taken actions to try to offset the impacts of some of the items affecting our results. We have looked for efficiencies across various functions. But, we have to have sufficient resources to provide safe and reliable service. Notwithstanding these actions, in view of the factors I described, we believe it's prudent to reestablish our 2011 guidance for our earnings from operations at $3.45 to $3.60 per share, and that's shown in Table 7.

In Table 7, you will also see that we're updating our 2011 guidance range for the Item Impacting Comparability for natural gas pipeline matters to between $0.52 and $1.08 per share. The IIC includes two components, our incurred costs and third-party liabilities. So, I'm going to walk you through each. We're increasing the range for the first component, the incurred costs, to between $350 million and $550 million pre tax. Our previous estimate was $200 million to $300 million. I want to acknowledge that this is the second time this range has increased. This reflects, I think, the reality of the dynamic environment we are in, which has caused us to expand the scope of work we are planning for the year.

The costs are increasing for 2 main reasons. We've planned additional work to validate gas pipeline data for 1800 miles of pipe in more populated areas, and that's a huge increase from our prior scope. We have also more than doubled the number of miles of pipe to undergo hydrostatic pressure testing this year, from about 75 miles before, to more than 150 miles in our current plan. The work plan and the schedule for this is very aggressive, and significant additional resources are going to be necessary to complete the scope this year. I will also remind you that we have not included in our 2011 range any future fines or penalties we could receive as a result of the PUC's various investigations related to the San Bruno accident. The range for the second component, the third-party liability, that remains unchanged at $0 to $180 million pre tax.

Let me remind you how to think about that one. In Q3 of last year, we took a $220 million provision for third-party liability. That represented the lower end of our estimated range of $220 million to $400 million. The difference between those 2 numbers defines this year's range of $0 to $180 million. As I said before, we are not going to record any insurance recoveries until we have more certainty about their timing and amounts. And, all insurance recoveries will be reflected in the Item Impacting Comparability in the future. We may receive some payments under some of our insurance policies this year. Nevertheless, I think it's reasonable to assume that most of the payments from insurers will be made when the litigation process is further along.

As I said, I don't plan to provide specific guidance for 2012 on today's call, but I did want to make a few comments about next year. I believe one question for next year is, what our earnings per share from operations will be, putting aside the gas pipeline matters. And, that's going to be driven by three things primarily, the size of our authorized rate base, our earned return on equity, and then our equity issuance. This year, 2011, we're experiencing higher growth in authorized rate base than would be typical for us going forward. We expect average authorized rate base to grow from about $21 billion last year to roughly $23.5 billion this year. That's greater than 10% growth, and it's driven mainly by the rate base true-up in our General Rate Case, the impact of the Colusa and Humboldt -- those 2 power plants came online late last year, and then, electric transmission investments that are in our TO case.

We won't have all those same factors next year. So, we expect our rate base will grow more modestly in 2012, perhaps half the rate of 2011. Another contributing factor that you should keep in mind for 2012, is bonus depreciation. Because that will reduce rate base growth for our electric transmission business and some of our separately funded programs. Our authorized ROE for 2012 is still set at 11.35%, and we'll continue to target to earn our authorized return. In terms of equity issuance, the dilutive impact of funding the gas pipeline costs this year will carry through to next year since, of course, the shares will still be outstanding. It would grow further to the extent we continue to have to incur expenses before the ratemaking is resolved.

Some portion of the share dilution may be temporary, though, depending on the amount and timing of cost recovery. Another question for next year is how much additional costs will we incur related to all the pipeline work. And, when and how will recovery be decided? The simple reality is, it's pretty difficult for us right now to forecast our 2012 gas pipeline work. We expect that the PUC will establish new safety standards for the state's pipelines through its OIR proceedings. But, we don't yet know what the new standards will be, how they will be implemented or how the ratemaking will work. In the meantime, we are putting together plans to meet the higher standards we expect the PUC could adopt.

The cost of this work could be comparable to our 2011 expenses, depending on the outcome of the OIR. Along with the other California utilities, we'll seek funding for the work necessary to comply with the new standards. As we have done this year, we plan to continue to separate out the gas pipeline matters next year in an Item Impacting Comparability for both the costs and the recoveries from insurance or ratemaking. This will allow you to see the underlying performance of the business, as well as the impact of any gas pipeline costs and recovery on our GAAP results. It will also help make our results comparable between this year and next year. We intend to provide guidance for 2012 when we hold an investor conference. And, we'll work out the timing of that once the new CEO is on board.

Now, I will turn to financing and dividends, and let me start with the dividend. Given the reduction in our 2011 guidance and the various challenges we are facing, we believe that this is not the appropriate time to make any changes in our dividends. Therefore, we plan to maintain the current level for 2011. In keeping the dividend at $1.82 this year, we expect to continue to be within our target pay-out ratio range of 50% to 70% of earnings from operations, albeit still at the lower end. We know the dividend is important to our investors, and we want to be in a position to grow it in the future. In terms of equity issuance, the higher expenses for gas pipeline safety-related work will drive equity needs above what we previously estimated.

We currently anticipate needing roughly $400 million of equity during the year in order to maintain our authorized capital structure. Under our existing internal equity programs, including the 401K and DRIPP, we expect to be able to issue about $250 million this year, since we experienced a little higher-than-usual issuance in Q1. We currently plan to use the equity dribble program we established last November to meet our additional needs. And, we'll be filing an 8-K shortly regarding the continuation of this program. We have about $290 million of authorization remaining under the program, and we currently plan to utilize roughly half of that. Finally, I just want to provide you a quick update on some regulatory items.

Obviously, we are awaiting a final decision in our General Rate Case, which is on the Commission's agenda for tomorrow. The overall impact on electric rates, of course, will be minimal. In April, the CPUC approved a settlement of our Gas Transmission and Storage Case. And then also in April, the CPUC approved a resolution to address the treatment of bonus depreciation for us. This is a very complicated issue, but we believe the CPUC's resolution is balanced and workable for us. And then finally, just last week, we filed an uncontested settlement with the FERC in our Transmission Owner 13 Case. I know we have covered a lot on our remarks today, so I think I will stop there. I will thank you very much for your attention, and we'll open it up for your questions.

(Operator Instructions) Our first question comes from the line of Steve Fleishman with Bank of America. Please proceed.

Two questions. First, for Chairman Cox, with respect to a new CEO that you would be looking for, how important is it for that person to have experience in the California regulatory environment? And secondly, how important is it for that person to have experience running a gas business?

We have been reaching out to stakeholders and asking them that question, so some of what I'll say you to reflects things that they have said to us. On the one hand, some people say it's very important to have come from California; on the other hand, we have people saying we need a set of fresh eyes. So, during the search process, we'll be thinking about both of those points of view and reconciling them. We think it's important that the person we hire has actually run, at the highest level possible, a regulated public utility. Not necessarily just gas, because gas represents about 35% of our assets, and we plan to be making many changes. A lot of them are underway already on the gas side of things. So, we are not looking for chief engineer, if that was behind your question, of gas. A CEO, as you know, has to be very skilled at dealing with the diverse set of stakeholders. And, that's incredibly important. And those stakeholders include people in the government, in the regulatory commissions, our employees, unions, and so on. So, we are looking for a lot, I know, but based on our search so far, we are finding candidates who are able to do all those things.

Great. My other question is to Kent. Could you please clarify on the 2012 commentary, your comments related to the gas business with respect to the spending to meet the higher gas standards, and you said something about could be comparable to 2011 expenses? And how you are going to be treating those? It just wasn't clear to me what you were trying to communicate there.

Let me try again. What I was saying is, obviously we've provided guidance for our gas-related expenditures this year of $350 million to $550 million. My second point is, we really don't know what the new standards are going to be next year. So, what we have been doing to a lot of our work related to our Pipeline 2020 proposal, is we have been trying to anticipate where we think things will go. And based on the work we have done to date, we believe that we could be doing a comparable amount of work next year. Meaning comparable to the types of expenditures we are talking about this year. But, we really need to know where the Commission is going on that issue, and ultimately what the new standards will be. That was really what I was trying to signal.

In terms of the Item Impacting Comparability in 2012, the way I think about it is the situation we're in right now, this is not an issue that gets resolved really quickly. Obviously, the accident happened late last year, there's still a lot of regulatory proceedings and investigations underway, and some of those will continue beyond this year. Of course, we also will go through all the third-party claims in the insurance. There's a lot of pieces to the challenge we are facing right now, and we're working all of them. But, they all won't be resolved really quickly. And all of them will have unusual impacts on results, in particular reporting quarters. So, our idea is to keep things as transparent as possible, both this year and next year, so that you can all keep track of the pieces, appropriately.

Just to clarify, the similar amount, let's say, is that a mix of potentially some more direct costs related to San Bruno, as well as spending to meet new safety standards?

I really think by the time we get to next year, we will be talking about a lot of things we would like to do to meet new standards in the state.

Okay. Thanks Kent.

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

Just a follow-up on Steve's question. If, in fact, the 2012 gas pipeline expenditures of $350 million to $550 million are in large part to meet new standards presumably set through the OIR, will these continue to be unrecoverable? Or, are we expecting that some portion of this could be put into rate base?

We really have to work through the OIR proceeding to determine that. And, Hugh, I just want to clarify, I did not provide guidance for 2012. I said, we could have expenditures that might be comparable to the levels we are experiencing this year, but I have not provided a specific range for next year. And I want to be very clear about that. But, we have to work through the OIR with the Commission and the other parties, and we have to really work through all the issues - what are the standards? What will the rate-making be, and what will the timing be?

No, I'm very clear on the lack of clarity. What can we do to make this a little bit more transparent? How should we think about the scale of the remaining testing or remediation and the potential costs associated with that testing remediation so that we can kind of follow your progress and estimate costs as you go along?

Hugh, I think we have given you a fair amount of information about this year. When we get around to providing guidance for 2012, we will try to be as clear as we can about that. The reality of our situation, which I mentioned, is that there is still a lot of things that are evolving fairly quickly. So, going forward, we will do our best to try to give you our insights into where things are going. But, we won't do that quantitatively until we are ready to do guidance for 2012.

Alright. Thank you.

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

Thank you very much. I just wanted to clarify a couple of points made earlier. You said 2012 rate base should be about half the pace of growth as was between '10 and '11. Does the 2012 sort of -- guidance you gave include the effects of the bonus depreciation and everything?

Yes, it would. Since you mentioned bonus depreciation, I know that's a topic that has confused a lot of people, so maybe I can just spend a moment and talk about it just to put it in context. It's particularly confusing, I think, for our audience because the regulatory treatment is little bit different for California Edison and San Diego Gas and Electric, since they have General Rate Cases that are up for next year. We are in a different situation, where we're in the first year of a General Rate Case cycle. So, just a quick background on bonus depreciation, I will try not to go on too long but simply put, what bonus depreciation does, is it increases our cash and it increases deferred taxes. And the higher deferred taxes causes a reduction in our actual rate base.

When actual rate base is lower than authorized rate base, that creates head room in our revenue requirement. And so consistent with the intent of the tax legislation, we plan to use that head room to make additional infrastructure investments for our customers. As a result, our actual rate base should stay pretty close to our authorized levels. We estimate that we'll increase our CapEx this year by about $200 million over what we normally had planned, and we do that in the latter part of the year. And then about $600 million next year. Now, what's happened with us, is the PUC has established a memorandum account. I referred to this earlier. The intent is to have us keep track of this to ensure that customers receive the intended benefit of the legislation.

If we don't make sufficient investments over this period, the Commission could order us to refund revenues to customers in the future. The reason I mentioned this, is that we don't have the same situation for our electric transmission business, and there we do annual TO cases, as you know. And there, we would expect that our bonus depreciation would be reflected in our rate base in our next TO case. And then, bonus depreciation also flows through for most of our separately funded programs like SmartMeter, for example. So that's kind of how it works.

So, the projected '12 preliminary guidance you gave for rate base, that includes the puts and takes, the net/net of the lower -- because of the bonus D&A, but then you add some incremental CapEx. It's all in there, in that sort of preliminary guidance you gave?

That's correct, as well as the fact that we would be truing the electric transmission rate base in 2012.

Okay, great. I was also wondering, have you spoken to the rating agencies at all regarding all these issues that have taken place over the last few months, and, I guess, the levels of GAAP net income and so forth?

We have continued to have reasonably frequent interactions with the rating agencies.

Okay. Is there any concern on their part? I guess it's still ongoing, the discussions?

I think in the case of S&P, they do have us on a negative outlook. And then in the case of Moody's, they have reaffirmed our ratings.

Lastly, to clarify, the total equity issuance in 2011, including DRIPP, dribble and any outside issuances. Also, I don't recall if you mentioned potential equity needs in '12, total, all in.

I did not mention equity needs in '12. And in 2011, you're correct, the total needs we currently estimate are about $400 million. A good chunk of that will be with internal programs, but not all of it.

Thank you very much.

The next question comes from the line of Travis Miller with Morningstar. Please proceed.

Quick question on the storm costs. Is there any opportunity to recover those extra costs you incurred in the quarter?

This is Chris. Normally, for us to recover any kind of storm costs, it would have to be in an area where it was declared a state of an emergency, either by the governor or in a local area. And so, right now, as we have looked at it, there doesn't appear to be very much opportunity to do that for this set of storms.

Okay. Thanks.

The next question comes from the line of Michael Lapides with Goldman Sachs & Company. Please proceed.

Hey guys. Two questions. One, Kent, can you in the $23.5 billion rate base number you gave for 2011, can you give us the components, please?

I think that's probably more detailed than I took with me to this call, Michael. Sorry. I can't, but we would be happy to give you the basic components over the phone later on.

That sounds perfect. Secondly, on the Pipeline 2020 program, do you envision this as being a program where it's predominantly pipeline replacement, and therefore it's capitalized costs? Or, one where it's largely maintenance on existing pipeline, and therefore it's more operating-cost driven?

Michael, this is Chris. The way we are looking at it, is that I think that you will see a combination of replacing pipe. You will also see us making a lot of it piggable pipe. And so, a lot of it will be on the capital side of that. We'll also be putting in different valves, which, again, should generally be capital-type areas. I think that as we continue to work through with the CPUC, there will be maintenance activities and potentially changes in the way we are doing some of the maintenance based on the different standards. But, a lot of the modernization of the pipe will be to make it piggable and to replace some of the older pipe.

Got it. Okay. Thank you.

Our next question comes from the line of Andy Levi with Caris & Company

Getting off the pipeline for a second, the Rancho Cordova proceedings, I guess you had a cost this quarter. How many more quarters do you expect there to be litigation costs relating to that?

We have accrued some costs associated with it. We are still in a proceeding at the Commission related to that issue. So, we don't know how much longer that proceeding will go on.

And on the gas storage side, can you just get more into detail on why we are seeing the weaker earnings? Is that a basis differential, or is it more just an abundance of gas storage, so there's, in some ways, more competition?

In that business, obviously, volatility is your friend if you have a storage business. Obviously, not only are prices low, but volatilities are quite low as well. In the case of the parking services that we provide, usually the revenues there are linked to seasonal spreads. And that's what we experienced in the first quarter, and we think much lower seasonal spreads. And, we expect there's a good chance we'll experience that more in the latter part of the year.

And, I would assume 2012 too? Is that a fair assumption?

It's possible that item could continue into next year. We don't foresee a big rebound in the market, but, of course, it's a commodity market.

Okay. Thank you very much, guys.

The next question comes from the line of Jonathan Arnold with Deutsche Bank. Please proceed.

Just a couple of questions. I think the first one might be a follow-up for Chairman Cox. Could you give us some insight into where you are in the process in terms of timing, and when would be a reasonable timeframe to anticipate the announcement around a CEO? And then, ultimately, the Analyst Day you will then hold?

First of all, candidates have been identified. As you know, when that happens, extensive reference checks need to take place and other search work. Then, interviews are held, then decisions are made about possible final candidates. And then the reason I can't be more specific about a date, is that the person that you finally select may have needs at their end about when they can appear. So, as I said before, I think it would be a matter of weeks when this should complete.

In terms of the Investor Conference, Jonathan, this is Kent. We want to have our new CEO on board and then figure out what timing makes sense at that point.

Okay. Thank you. On a separate topic, what have you assumed in your guidance for the timing of the equity issuance that you are talking about for '11? Is it reasonable just to assume it's based on sort of mid-year. Half the shares show up in the average share count?

You know, Jonathan, we are almost to the middle of the year, I mean, realistically. And, I prefer not to be more specific just about our issuance timing. I feel like I would like to have that flexibility. So, I will leave that up to you guys.

Okay. Then, maybe on one other topic. The rate base numbers you gave us, do those include or exclude CWIP? I know the last time I saw you, you presented them. You had a with CWIP and without CWIP number. Can you just remind us how we should think about CWIP in terms of the earnings implications?

Yes, Jonathan, thanks for asking that question. The rate base numbers do not include CWIP. Those are authorized rate base numbers, and they are average year rate base numbers that I was referring to. In terms of CWIP, I think it's probably reasonable to assume very roughly in the $1.5 billion range for our CWIP this year.

Thank you. Can I just squeeze in one other? The line item on regulatory and litigation costs, the only thing you really called out was Rancho Cordova. Can you give us any more insight into what's in that number? How much of it was Rancho Cordova, and what the other pieces of it might be?

Jonathan, let me kind of restate what I said before. It is a $0.06 item, and I said a significant piece is Rancho Cordova. The other thing that I will remind you of, I said we have been experiencing a little bit higher litigation-related costs in general, not related to San Bruno during the first quarter. And, we think that we could continue to experience some of that this year. I think that's just probably a little bit of a reality of the world we are in right now.

That's not on any specific issue that you could identify?

That's correct.

Thank you very much.

The next question comes from the line of Tom O'Neill with Green Arrow. Please proceed.

This is probably a question for Kent. Related to the opening statement about hearing some of the announcements to resolve the problems and regain the confidence of the stakeholders, but not asking specifically about those, but is it fair to say we have discussed the financial implications of those today?

Tom, I'm not clear about your question. Could you repeat it, please?

Yes. Basically in the opening statements from Chairman Cox, it was basically, we were going hear some announcements in the coming days about resolving our problems and regaining the confidence of stakeholders.

Yes, I know where you are going now. Thank you. We have tried to incorporate in our guidance our view for the year, as inclusively as we can. I think really what Lee was referring to, is the fact that there's a lot we are trying to make progress on. And, you are going to hear some of those specific items and the progress and the steps we make in the coming days and weeks.

Got it. Thank you.

Our next question comes from the line of Ivana Ergovic with Jefferies. Please proceed.

Hi. Good morning. You talked in the past about 6% to 7% growth rate. What type of growth rate are you expecting now at the current lower levels?

Ivana, we actually have not been talking about specific growth rates, we have been providing guidance ranges by year. And so, what we have out there now is the guidance range, both for our earnings from operations for this year, as well as the Item Impacting Comparability for this year. And then what you heard me on the call today to do, is in general, give some general comments about 2012. But, we have not provided guidance for 2012.

Okay. I know you gave the new estimate for San Bruno safety-related costs of $550 million --

$350 million to $550 million is the range.

Yes. Is this your final estimate for the year? Would you expect it actually could go above $550 million?

It's our best estimate for the year.

Okay. Thank you.

Our next question comes from the line of Vedula Murti with CPD Capital. Please proceed.

Good morning. I'm wondering, with regards to the pipeline costs that you are incurring here, as we go forward -- and I think, Kent, you alluded that there's some prospect of carry-over into 2012. I think it was asked in some fashion, but I'm not sure that I understand it. How much do these costs have the ability to be potentially capitalized as opposed to being expensed? And, at any point in time here, is there an opportunity to go before the CPUC, given the retained earnings issue and the dilution issue that you referenced to perhaps get an accounting order to defer these until the next multi-year GRC?

Vedula, yes, the costs we have been incurring this year, as you've heard, has to do with a lot of our records work and then our data validation, and then hydrostatic testing. And so, the nature of those costs is they are more of expense-type costs. And I think next year, what you have heard from us, is that we could do additional similar work, additional hydrostatic testing for more of our system. Chris also alluded to the fact that we would like to modernize a lot of our pipeline and rebuild a lot of it, which, of course, would be capitalized. In terms of the OIR process at the Commission, and how to determine how that's all going to play out, I have commented a little on that. But, maybe I will ask Tom Bottorff, who leads up our regulatory relations efforts, to just say a bit more.

Just procedurally on the opportunity to recover some of the costs of these efforts, we had filed late last year, a memorandum account that we hoped the PUC would adopt to track recovery of the expenses we hoped to seek in a future proceeding. That proposed memorandum account was rejected in a draft resolution that the Commission has yet to take action on. But, they do expect to take action on that tomorrow. At the same time, while rejecting that memorandum account, they did recommend that we introduce it in the OIR proceeding, which we intend to do today. So, that would at least establish a vehicle for recovery of these costs. And then, as the course of the proceeding continues in the OIR, we do expect to file additional proposals to seek recovery of some of the costs that Kent described.

So, would you interpret the rejection of the mechanism you just described being more just not in the appropriate venue and context? And that in the other docket that it's more appropriate to be considered as opposed to passing judgment on the merits?

Yes, that is in fact what the PUC lays out in its draft resolution.

Okay. Can you give us a sense of what the total -- that you would put into that account, that you have been tracking that you would want to seek some type of regulatory resolution on? And how that projects out over the course of this year?

No, we haven't determined that at this point, Vedula.

Okay. Thank you very much.

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

Good morning. First question for the Chairman. Is the candidate that you are looking for, I'm assuming is someone who could guide PCG for the next 10 years in terms of age. Is that a consideration?

I really wouldn't want to comment on individual characteristics like that, because we have a range of people at different ages right now.

Okay, but is that something of a priority to the Board, or no?

It's not a driving factor, no. The other things that I mentioned earlier - someone who has actually managed at a senior level a regulated public utility, someone who excels at stakeholder management, someone with the kind of leadership ability to be involved in all of the operations recovery efforts that we have underway today. Those things, by the way, started last year, shortly after San Bruno. We haven't been waiting to do them until we got a new CEO. So, that's more of what we are looking for. I wouldn't narrow at all the search to a factor of age.

Okay. And then a question for Kent. Kent, based on your new guidance, could you tell us what this equates to on earned ROE for the gas and the electric business for 2011, please?

No, I don't have that calculation. So, I will leave that up to you guys to determine.

Okay. Thank you.

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

A lot of my questions have been answered, but just a quick one. In the reconciliation that you provide on those tables, there's this environmental liability. It's only a penny. I'm sorry if I missed this, what is that? Is there anything going forward that we should think about?

Paul, this is Kent. I didn't mention it just because it was such a small item, and we had a number of items to cover. But, we do regularly accrue environmental liability as you know, and so we do tend to have adjustments quarter to quarter. This was one that you saw compared to first quarter of last year. In this case, we have been doing some property purchases, and I think those have showed up as the charge.

Okay. But there's nothing significant going forward that we should be thinking about with respect to anything developing, right?

Environmental liabilities for us are often a significant item. We have a lot of different environmentally-related activities. As you know, we have this hazardous waste memorandum account that is the ratemaking that relates to a lot of our environmental liabilities. We are active in that area, and so I don't want to suggest that you won't see additional things related to that, because we typically do have charges related to environmental liabilities as we true them up, as new information occurs.

Paul, this is Chris, what I would add to that is I think you can look in the 10-Q, and it pretty much has the information on probably the top 2 or 3 or 4 of the environmental remediation efforts that we've got going on. I think generally, the costs are related to those efforts.

Okay. The gas market conditions, I had a little bit of trouble hearing the answer on that, with respect to 2012. Is there a fundamental change that you have seen in the market due to the either pipeline additions or storage in the area? Could you just sort of expand on that a little bit in terms of what you are seeing there, and how we might think about that going forward?

Yes, Paul, I mainly talked about the gas market conditions related to our gas storage business. My comments were mainly related to this quarter, and the fact that they could continue to affect us this year. Although, I did acknowledge in the Q&A that the market conditions could extend into next year as well. And really, what's going on there is low gas prices, low volatility, and then the prices that you can charge for storage services are negatively affected by that. And, that's really what is driving us. So, when we looked at the parking transactions we did the first quarter of this year, we received prices that were about one-third what they were the first quarter of last year. And we don't see an immediate turn-around there, but it's something we're going to keep watching.

Okay. Thanks a lot.

Our next question comes from the line of Steve Fleishman with Bank of America. Please proceed.

Thank you. Just a clarification, Kent. The 5% rate base growth that you highlighted for 2012, that is net of the impact of the bonus depreciation? Or, would it be lower with the bonus depreciation?

Yes, I think what I was trying to suggest, is that this year we have been at greater than 10% and next year, the pace will be about half as much. That includes the impact of bonus depreciation. It's sort of net/net everything. That's where we see things going for 2012 at this point.

Also, any of this capital spend for the gas system improvement, is that included in there? Or, is that not included in there?

There's no additional CapEx in that area included in the general comments about 2012 at this point.

Okay. Thank you.

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

Hi, Kent. Someone asked earlier the question about what do you expect your earned ROE to be this year. I just want to make sure I'm thinking about the components of this correctly. If I were to take the $23.5 billion rate base and multiply it times roughly a 52% equity layer, that would give me the equity base. And then, if I take the midpoint of your guidance, that gets me to not quite $1.4 billion of net income. Are there are any components I'm leaving out, in doing that kind of back-of-the-envelope math to think about earned ROEs?

I think your general approach is how I would go about it. Obviously, we had some things affecting us this year, based largely in the first quarter, that are giving us additional challenges to accomplish that. I think the only other thing I would say is that there are some costs that we incur that we don't receive customer funding for. Charitable contributions, for example, advertising, and public affairs-related stuff. Those normally are something that we incur. So, that's the only other thing I would add to it.

And do those other items offset the positive impact of CWIP? Because, I mean, the thing that wasn't in the numbers I threw out -- and my apologies. I had the $23.5 billion, I didn't have the up $1.5 billion of CWIP.

Yes, you do want to include CWIP, and so those would go in opposing directions. That's fair.

Got it. Okay. Thanks guys.

There are currently no further questions coming from the phone lines.

All right. In that case, I would like to thank you all for your attention. And have a great day.