PG&E Corporation (PCG) Q2 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to the Second Quarter Earnings 2011 Conference Call for PG&E Corporation. [Operator Instructions] At this time, I would like to introduce your host, Gabe Togneri, Vice President of Investor Relations. Thank you, and enjoy your conference. You may proceed, Mr. Togneri.

Thanks, Monique, and welcome. I know it's an especially challenging day in the broader market, so we appreciate you joining us on the call. As usual, we issued our earnings release this morning. It's available on our website, for those of you who may not have it, along with the supplemental earnings tables, which includes the Reg G reconciliations. You will want to have those tables available as we cover the results for the quarter. We'll also be filing our 10-Q report later today. I'll remind you, our remarks will include forward-looking statements, based on assumptions and expectations reflecting information currently available to management, and actual results may differ materially from those current expectations. You'll want to look at the important factors that can affect our results and those are described in the reports we filed with the SEC, including the risk factors and other factors described in those reports. And we, of course, encourage you to review those. On today's call, Chris Johns, President of Pacific Gas & Electric, will provide an update on our operations, including issues relating to pipeline safety. Our CFO, Kent Harvey, will address financial results for the quarter and forward outlook. But first though, Lee Cox, our Interim Chairman and CEO, who is on the phone with us, will make a few comments.

Thank you, Gabe, and let me first answer the question that probably a lot of you will want to be asking, and that is that we'll have an announcement very soon about our new CEO. And I acknowledge it took a little bit longer than we thought. It's not a sign of anything other than the Board wanted to make sure we did an absolutely perfect job. We are very happy with the outcome, and again, as I mentioned, you will be hearing about that soon. Along the way, we sought input from a lot of key stakeholders, and that's probably the reason it went a little bit longer. And also, some candidates who weren't originally on our radar screen emerged as possibilities, and so that took a little bit longer too. But we're to the point now, as I've said, where we'll have an announcement for you very soon. And changing subjects a little bit to today's presentation. I know it's been a tough year for our shareholders, our customers, and our stock price reflects that. And we know we have a lot of challenges ahead, but we're fixing our problems. We're going to be working very hard to regain public trust, and we want to put this company back in the position we believe it was before, which is in good set with all of our stakeholders. And Chris is going to speak about those efforts in more detail. Chris?

Thanks, Lee. And to echo what Lee just said, this has been a challenging time for our customers and our shareholders. And obviously, and understandably our regulators are replying in unprecedented level of scrutiny on public safety and utility operation, and so are we. We're taking actions to fix underlying issues and rebuild our trust with our regulators and with the public. As most of you know, in June, the Independent Review Panel commissioned by the CPUC issued its report. And as you know, having read that, that the report was critical of PG&E's gas operations. We've embraced the panel's conclusions and its recommendations overall, and we're integrating those into our turnaround efforts. We're also applying those same lessons learned on the gas side of the business to the rest of our business. Let me now provide an update of the various gas pipeline regulatory proceedings, including some of the key events that are coming up in the next several weeks. And then I'll update you on the work we've been moving ahead within our gas operations and also touch briefly on some of our nuclear operations. First off, we anticipate that the NTSB will complete its investigation and release its final report with the root cause of the San Bruno accident sometime in September. In the meantime, the NTSB is going to continually provide some updates of its previously released factual document and will hold a meeting regarding the investigation we anticipate at the end of August. The conclusion of the NTSB investigation is an important milestone for us and for others, as the findings will likely provide further insight on improving our operations and inform all of our other proceedings. As you know, the CPUC has 2 major proceedings under way. The first is an order instituting investigation, and that's focused on PG&E's pipeline record-keeping activities. And the second is an order instituting rulemaking, which is focused on elevating the standards and practices for safety and integrity of the gas pipeline, not just for us at PG&E, but also for the gas transmission operators throughout our state. We expect that the investigation into the rulemaking are going to continue to move forward on somewhat independent, but parallel schedules. And we expect to get final decisions, most likely sometime in the early part of 2012. In the meantime, we're continuing to work to address our gas operational issues. Our new Executive Vice President of Gas Operations, Nick Stavropoulos, hit the ground running in June. We've also hired 3 experienced senior gas level engineers for key director level assignments. And we'll be hiring additional personnel with expertise in specific areas of gas pipeline operations in the coming months. Nick is focused on strengthening his organization and building the near-term and long-term action plan to turnaround our gas performance. We're continuing to gather and centralize and scan thousands of directors, which we've used to inform the regulatory proceedings and to substantiate gas pressure levels in more of our populated areas and to guide the additional work plants that we have in place. We also got our ambitious pressure testing program up and running during the second quarter, and so far, the news is good and that all of the segments tested has passed. No other company has targeted this amount of hydrostatic testing on in-service pipes, particularly in such a short period of time. Now we still have lots more to do, and this work will pick up pretty quickly here over the summer and the fall. We're also working on our implementation plan, which will be the next major milestone in the rulemaking when we file it towards the end of this month. Our implementation plan will embrace the concepts and the initiatives of our original Pipeline 2020 program and we'll also be inclusive of the request that the CPUC has asked us to include. The implementation plan will include our proposals for pipeline testing and replacement standards going forward and for retrofitting pipes to accommodate inline inspection tools and for automatic and remote shutoff valves. It's also going to address the issue of cost. The rulemaking requires PG&E's implementation plan to include a proposal for cost sharing or for reduced return. Now while the specifics will have to wait until we make our filing later this month, our proposal will recognize the significant cost that the shareholders have already funded, which right now is approximately $190 million pre-tax, since the San Bruno accident. Finally, I know a number of you are still interested in our nuclear issues, which continue to be the top of the mind in the aftermath of the Japanese earthquake and tsunami. Diablo Canyon is a critical source of power for millions of Californians. In fact, it provides about 20% of the electricity to our customers every year. The plant provides carbon-free power and has an excellent performance and safety record. Our power generation team has been actively engaged, even in advance than the NRC's report on the implications of Fukushima for U.S. nuclear operators. We're looking at ways to further improve the ability to withstand unexpected events at the plant, such as installing even more robust backup systems. We will also obviously incorporate additional insights in any new NRC requirements that will move us forward on safety and operational practices at Diablo. I also want to mention that this quarter, we successfully completed our latest refueling outage at Diablo Canyon. The outage work was done safely, with good performance on both the schedule and the budget. So with that, I'll turn it over to Kent to discuss the financial performance.

Thanks, Chris. I plan to cover 3 items. Our financial results for the second quarter, our guidance for the year and then our financing plans going forward. And overall, I don't see any major changes in these items since our last call. So let's start with the quarter, and as you can see in Table 1 of the supplemental earnings package, we've reported $406 million or $1.2 per diluted common share in earnings from operations. On a GAAP basis earnings were $362 million or $0.91 per share. The difference between GAAP results and the earnings from operations is the item impacting comparability for gas pipeline matters. And that totaled $74 million pre-tax, which is $44 million after-tax or $0.11 per share. There are 3 pieces to the IIC, which you can find in the footnotes to Table 1. While the dollars in the footnotes are after-tax by convention, I thought I'd go through the pre-tax amount, so that you have that information as well. First, we incurred $76 million pre-tax, $44 million after-tax in pipeline-related costs during the second quarter. This includes our continued work on the records and data validation, the early stages of our hydrostatic testing program and then legal and other costs. Second, we increased the accrual for third-party liability claims by $59 million pre-tax during the quarter. You'll recall that we originally established a range for third-party liabilities of between $220 million and $400 million, and we booked the lower end of that range in Q3 of last year. Based on our recent experience with the mediation and litigation process, we've increased that provision by $59 million to $279 million. We continue to believe that $400 million is a reasonable estimate for the upper end of the range. Third, we booked $60 million pre-tax of insurance recoveries during the quarter, and that reflects payments from the carriers who have the first couple of layers of our liability coverage. I'll say a bit more about the item impacting comparability going forward when I get to guidance. Next one, we go to the quarter-over-quarter comparisons for our earnings from operations, and this information is in Table 3. The dollar to and earnings from operations for Q2 represents an $0.11 increase compared to the second quarter of the 2010. The biggest driver here was the final decisions received in our General Rate Case and Gas Transmission & Storage case. Those decisions were retroactive to January 1, so you see the year-to-date impact reflected in the 2 positive items, totaling $0.24 in Q2. Of that, $0.17 represents the increase in rate-base earnings and $0.07 recovers the normal increase in operating expense that we incurred in Q1, while the cases were still pending. This essentially catches us up for the revenue shortfall you saw last quarter. The rate case impact was partially offset by several items. We were $0.06 lower due to our plant refueling outage at Diablo Canyon and associated maintenance activities, and of course, we have no refueling in Q2 of last year. We were $0.02 unfavorable, due to lower gas storage revenues, as we continue to experience adverse market conditions with this part of our business. We also had a couple other items and each were about $0.01 negative, and then we were finally $0.03 unfavorable due to a greater number of shares outstanding than a year ago. I'll move on to guidance, which is shown in Table 7. And we are reaffirming our 2011 guidance range for earnings from operations that we provided on the first quarter call. We continue to expect earnings from operations to be in the range of $3.45 million to $3.60 per share for the year. Our 2011 guidance for the IIC related to gas pipeline matters has been updated to reflect the Q2 accruals I mentioned before. The range is now $0.51 to $0.99 per share compared to the previous range of $0.52 to $1.8. I'll briefly just walk you through the pieces and those also are shown in the footnotes to Table 7. The first component is pipeline-related costs, which remains unchanged at $350 million to $550 million pre-tax. This includes the estimated work associated with the pipeline records and data validation, our hydrostatic testing program and then our estimated legal and other costs during this year. I view the probability of incurring costs at the upper end of that range to be somewhat less than when we did our earnings call last quarter. But I also believe it's prudent to maintain the full range at this point in the year. The second component is third-party liability and the range for the year is now $59 million to $180 million pre-tax. All that we've done here is update the lower end of that range to reflect the $59 million that we accrued in Q2. The upper end is unchanged. And then lastly, we reflected the $60 million of insurance recovery in the item impacting comparability. We continue to expect that most of the third-party liability costs will be recovered through our insurance. However, other than the $60 million already recovered and shown in Q2, we're not including additional insurance recoveries in our 2011 guidance. We'll book additional recoveries once we've resolved our claims with the other carriers. Similarly, we've not included in our guidance range any estimates for potential future fines or penalties. Last up is just a brief update on equity issuance, which is unchanged from our last call. We're still forecasting a total equity need of roughly $400 million for the year and we continue to expect about $250 million internally through our 401K and dividend reinvestment program and about $150 million externally through our existing Dribble program. As of the end of the second quarter, we've issued roughly $150 million from the 401K and DRIP, and about $100 million through the dribble program. By the way, we plan to file a registration statement by tomorrow to cover the offer in sale of additional shares in our 401K plan. This does not represent a change in our plans for equity issuance. It just allows us to continue to issue shares to the 401K. I think those are the key points for the quarter. So we'll go ahead and open it up for your questions.

[Operator Instructions] Our first question will come from the line of Greg Gordon with ISI Group.

So just to be clear, I know, I think you were very clear, I just want to understand, at this point do you think you're tracking below the high end of the range of the pipeline related costs? Otherwise known as the costs that shareholders are most likely going to have to bear? So less than the $550 million high-end?

Yes Greg, if you look at our year-to-date numbers, they're running at about $125 million for all the direct costs. And so just simplistically, if you double that, that would only be $250 million and that would be the wrong thing to do. So I don't want to suggest that. Because obviously, we have a lot of our work that's more seasonal, and it's frankly upon us right now because in particular, the hydrostatic testing is primarily in the summer and into the fall. So you're going to see that in Q3 and into Q4 as well. So it's not as simple as math as that, but we are somewhat lower than our original plan several months ago, and I'm just reluctant to adjust the overall range at this point because we have had new things come on our plate, obviously, over the last number of months, and I think it's still a prudent range overall.

And is my memory correct that you're also expecting a similar range of expenses for next year as well?

Yes. What we've said with respect to next year, Greg, is that in terms of the costs we incur like that, or things like hydrostatic testing and other work, that the expenses could be on a similar order of magnitude as this year. And in reality, we're going to give you more specificity about that when we file our implementation plan a few weeks from now in the ratemaking proceeding. And ultimately, of course, the commission is going to determine what spending is appropriate, how the ratemaking is going to work, but in terms of the expense levels, we see a lot of the work we're doing this year. It's going to be multiyear in nature. I think the other thing you'll see in our implementation plan, is we'd like to do more capital work. Our profile this year has largely been expense work, but as Chris described, over time, we'd also -- we want to replace more of the pipeline, and we also want to upgrade it for more inline inspection, and we also want to get to more valve automation. And that type of work will also be capital work.

But I mean, the expenses you're incurring on the pipeline-related costs this year are not expenses that you plan on filing for recovery for from the CPUC, so is there pretty much direct shareholder cost? It's not clear yet like whether next year's expense levels are recoverable or not recoverable, correct?

Yes. The whole issue of cost sharing, we're going to be addressing in our implementation plan in a few weeks from now.

One last question. Can you specifically define the concept of "very soon" in terms of when your CEO announcement might come?

I'll take that one. Very sooner, I think is probably the best term I can think of to use, right away, imminent.

Those are all good definitions. We've all been waiting on bated breaths. So we look forward to the announcement.

Our next question comes from the line of Daniel Eggers with Credit Suisse. Dan Eggers - Crédit Suisse AG: I guess the first question just to ask Greg's question one other way, it sounds like whoever you're hiring as CEO has signed on and has a contract and we're just waiting on an announcement? There's no more recorum [ph] is that fair to infer?

I really don't want to comment on any kind of detail rather other than what I already have. As I mentioned to you, the reason the search took a little bit longer than we thought was that there were more candidates in the pool that we wanted to consider than we initially thought. So that's what's taken the time. And other than that, I wouldn't want to characterize the delay in any other way. Dan Eggers - Crédit Suisse AG: And then, can you just maybe shed a little more light on process for getting the memorandum account set up? And is there a kind of timeframe we could look at where you least have a chance to start getting recovery on this money going out the door?

This is Tom Bottorff. We did make a formal request to have the memo account approved. It's pending in the rulemaking proceeding. But as yet, the commission hasn't taken any action on it, and it's not clear when they will. So it still remains a request pending at the PUC. Dan Eggers - Crédit Suisse AG: And there's no way until that goes effective, they're not able to get recovery on money spent, that's correct? There's not a potential to adjust that retroactively?

Well there is a potential, if the commission approves our request. That would be their decision whether they want to approve it retroactively, and we have asked them to do that, but we don't know that they would in fact take that action. Dan Eggers - Crédit Suisse AG: And then on the equity issuance using the Dribble in the quarter. Should we assume that it's going to be a ratable flow out of equity to get that $400 million number over the remainder of the year or how should we think about kind of that money raised?

This is Kent. I don't like to be more specific about the timing. But you can see how much we've done so far this year and what our general plans are for the rest of the year.

Our next question comes the line of Steven Fleishman with Bank of America.

A couple of questions. First, I think Chris mentioned that in the proposal you'll file early this month, there's $190 million pre-tax that have already been funded by shareholders. That $190 million, is that the cost of the basically, just the testing and recordkeeping?

This is Kent. The precise number, I think, in our press release is $189 million. And that's essentially all the costs we've incurred since the accident. So it's the initial cost in our work with the community. You remember, even late last year, we did a lot of additional leak testing and other actions to ensure the integrity of the system, and then it's all the work we've been doing this year. So it includes the hydrostatic testing, the records work, and of course, all of our legal costs and other things related to the pipeline.

Separate, however, from the third-party liability accrual.

Yes. These are only the direct costs that I was describing, and that are included in that $189 and our cumulative accrual, as I mentioned, before on the third-party liability was the $279 million.

And could you, just on the hydrostatic testing, I know you mentioned that so far you're having kind of problems, but just, how are you going on getting the testing done on in terms of -- it seems like it's difficult to actually, obviously do in terms of just timeliness? And can you meet the difficult targets that the commission set to get that done? Can you just give some flavor that?

Yes, Steve, this is Chris. First, let's separate those out. We put forth a plan, our own action plan on how much hydrostatic testing we thought we could do this summer, and it is our plan. It's not part of any proceeding at the CPUC. Having said that, it is a very ambitious plan, and we've been moving through it very deliberately. And obviously, when you're going in doing hydrostatic testing, you have to go through a lot of procedures, including getting permits for that, making sure that environmentally you've got everything in the right place at the right time, and then we're finding it, it takes about 10 hours to actually do the test, but it basically takes about a week to take the pipe out of service, clean it out, do the test and then put it back into service, making sure all the water is out of there and those kind of things. So when we look at it though, we still think that we've got a good chance of getting it all accomplished this year, in terms of what our schedule is. You may have seen that there were some reports that we filed with the CPUC, just alerting them to the fact that because of some of the things that you run into when you do these tests, that there could be a chance that we don't get it all done this year, but if we don't, we'll just do it next year.

And then just finally, I saw you've mentioned that you got some insurance proceeds, just how was the process going with the insurance process? Is there any challenges that have come up out of that or so far as expected?

Steve, this is Kent. It's been going as expected, and in general, I'll just let you know, we have been working really closely with the carriers throughout the process. So we've had regular communications with them so that they know how we're approaching the various issues in the litigation and the mediation. And we have settled with the first few layers in our insurance power, and that's what we booked in Q2. And we hope to continue to make progress with the other carriers, but we really just can't predict the timing of that.

Our next question comes from the line of Michael Goldenberg with Luminus Management.

I was wondering if you would be able to provide any more background on the CEO hire, if the person comes from utility or regulatory background, it's currently at some other firm or is coming out of retirement. Anything along those lines that you'd be comfortable sharing.

I think what I'd like to do is go back to the beginning in the call that we had 3 months ago, where I mentioned to you that we would be looking for someone from the energy or public utility sector, who had experience in operations as well as someone who could work within the regulatory arena. And so that's what we looked for, and I don't want to try to characterize the specific candidate now because I just think that would be providing too many details right now.

But the hire matches those requirements laid out 3 months ago?

Yes. Those requirements didn't change during the search.

In any way, have you communicated with the commission about it or is something that still needs to be done after the announcement?

When the process began, I sought input from commissioners about what characteristics they thought the new CEO should have, and they gave me that information. But no, I've not provided information to anybody at the commission about the final selection.

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

Just trying to think through some of the options on the cost side for the implementation plan. How do you think -- what do you think the path is in terms of how to get past the pipeline issues sometime over the next couple of years to where, we're not talking about PG&E potentially under earning it's authorized ROE and say like 2014 or 2015 timeframe. How do we kind of get to that level of certainty? I mean I understand it's completely going to be an issue over the next year to be expected normally happens in a situation like this. I'm more importantly thinking longer-term.

Well, Michael, this is Kent, I'll take a first cut at your question. In my mind, our big challenges are the ones that Chris laid out earlier. We really do need to restore trust. And we need to address our operational issues, and then we need to actually have the plan that we'd like to do to strengthen the pipeline, be consistent with what the commission wants us to do. And we've spent a number of months working on an appropriate approach to that latter issue, and that's what we're going to be filing later in the month in the implementation plan. And as part of that proceeding, that's where the cost recovery and cost sharing issues will be addressed, and that's really where we got to work it out.

But I mean intervenors are going to probably want you to spend a lot of money, obviously, to make the system as safe and reliable as possible, but have 0 impact or very minimal impact on customer rate, somewhat of a punitive outcome. How do you get around that? Like what are the kind of options? I know you haven't drafted the plan or haven't finalized the plan yet, but what are the potential kind of range of options that could make this something where you're not, I don't know for a long multiyear period, someone in the penalty box?

Well, I guess the principles that we've had all along, Michael, is that if we were remediating something from the past, which we could have done better, then we understand we wouldn't seek recovery of that from customers. If we are now building our pipeline to a new standard, and there's new standard set out in the state, which I think is where the commission is going, not just for us, but for the other pipelines in that state, that is something that should be recovered through rates over time.

Last item. You've talked, Lee, about the potential new CEO hire coming imminently or the announcement coming imminently. Yet your regulatory folks are probably well into the weeds of drafting the implementation plan. How do you think the timing of those 2 things up? Meaning is this individual likely participating in the drafting of that plan, because as CEO, this may be one of the most important things that will impact their performance, and yet probably a large portion of the plan drafting and writing is already underway before they've even started.

First, the new CEO has not participated in that process, but the principles that you would use to develop such a plan are not so unique to us or to the industry, that the new CEO would have a problem with that. I'm quite sure of that.

Our next question comes from the line of Hugh Wynne with Sanford Bernstein. Hugh Wynne - Sanford C. Bernstein & Co., Inc.: Just to change direction briefly on the Nuclear Regulatory Commission's recommendations regarding nuclear safety. There seem to have been a focus on the one hand on ensuring that the plant design was appropriate in light of natural hazards in the vicinity of the plant. And then secondly, the plant had the capability to withstand prolonged station blackout, and I was wondering if I can get your comments on how those priorities may or may not affect the Diablo Canyon

Yes, this is Chris, and obviously, our first and foremost focus at Diablo Canyon is on the safety aspects of it and making sure that it is running and operating in a safe manner. And so even before their 90-day letter, we have been taking hard looks at our original plant design and what you might consider to be forces outside of the original design basis and how well we are prepared for those kind of instances. And in fact, we've taken actions to order additional equipment for the plant just to make sure that we've got even increased backup access to either power or water, those kind of items out there. And then we've reevaluated and are consistently reevaluating our ability to withstand certain amounts of ground movement based on earthquakes. As you know, because of where we're relocated, we have our own seismic group that is constantly evaluating that. So we don't take any of it for granted. We are continuing to look at and look at the safety aspects of our plant and trying to do anything additional that we can to reinforce the safety of the facility. Now we've looked at the 90-day letter, and I think that there will be new things that all the facilities in the country will have to do related to that, and as much as we'd like to get a jump-start on it, we want to make sure that we're doing the things that the NRC eventually will want to have in place. So we we're working very closely with them on those issues. Hugh Wynne - Sanford C. Bernstein & Co., Inc.: Do you anticipate any major increase in operation and maintenance expense at the plant or for that matter in required CapEx?

It's really hard to predict right now because the NRC hasn't really said that what how and what they will want to have implemented. I would imagine though, most of it is going to be more around reinforcement of design in terms of making sure that you've got back up generation, that you've got access to power, that you've got access to cooling, that you have your facilities located in areas where they would be less susceptible to flooding or other kind of items like that. So in general, those sound more like capital type improvements than anything else as opposed to necessary ongoing maintenance type expenses.

Our next question comes the line of Andy Levi with Caris & Co. Andrew Levi - Caris & Company: On insurance proceeds, so I guess you said you settled with a layer for $60 million. So just if I remember correctly, you had about $1 billion of insurance, is that correct?

Yes, we had $992 million I think for the first 2 layers above the $10 million deductible. Andrew Levi - Caris & Company: Right, so does that $992 million, now since you've settled with some of the layers kind of go down if you know what I mean? So kind of what's left?

What happens really when you have a claim like this, is you have the entire tower, and obviously, our liabilities are not going to be close to be a full $992 million. And so what we're doing is essentially making claims against the lower layers as far as necessary to recover all the claims in the case. And so and after the accident happened, many of the layers were single incidents. So we actually reinstated the insurance for the remainder of that policy period. Andrew Levi - Caris & Company: I can probably understand, but I can talk to Gabe afterwards, offline. And then, just could you just also go over, I guess there was, I don't know if the word is confusion, but thinking after the first quarter call, you guys got out in the road and you started talking about rate base and CWIP and offsets to CWIP and maybe some offsets to those offsets, could you just go over that real quick again with us? Would you mind?

Let me give it a quick try, Andy, and again, we haven't provided guidance for 2012 for earnings from operations or for the gas pipeline IIC. I'll remind you what we've said about 2012. So in terms of the earnings from operations, which I think is what you're alluding to, I said a couple different things. First of all, that we'd expect average rate base to grow at about half the rate in 2012 as in 2011. And this year, for a variety of reasons, we expect double-digit growth in average rate base, so it's got to be going from about $21 billion last year to somewhere around $23.5 billion this year. And that's just won't be the case in 2012. So that's one thing I covered. The second thing is I think what you were alluding to, which is construction work in progress and the earnings on that. And in that case, we'd expect the overall amount of construction work in progress next year to probably be pretty comparable to what we're looking at this year, which is roughly in the range of about $1.5 billion, but we don't expect that all the AFUDC earnings associated with CWIP will flow through to our earnings because we do have a number of costs that are not recovered through rates. And those tend to offset a good chunk of our AFUDC earnings. So they include things like our charitable contributions, our advertising and lobbying expenses. So those are kind of the 2 major things I've said. I think I also commented just in general, that given our share issuance this year, that will obviously, affect share count next year as well, and so you want to keep that into account as you're thinking about 2012. Andrew Levi - Caris & Company: And what type of levels would you be assuming on charitable contributions, the 2 or 3 items that you talked about?

We haven't provided estimates for each of the components, but I would say it would be reasonable for 2011 to think that these items that are the below-the-line type items will offset very roughly, maybe about half of the AFUDC earnings. Andrew Levi - Caris & Company: And then I guess, possibly in the past, I don't know if I got this right, that I guess you always have kind of these charitable contributions and the advertising and things like that, but I guess I don't know if it's '08, '09 or '10, but I guess there was some offsets to some of those costs, I don't know if there was some tax items or...

I think that's the main reason why people had sort of not paid attention to this. Because the last few years, in addition to having some tax accruals that have been helpful, we've also had the CEE earnings. That with a pretty substantive level $30 million or $40 million a year, and I think those tended to have masked the below the line items. We just don't see those to the same extent going forward right now.

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

Kent, I'm just curious about if you could give us a little more insight into the factors that are causing the estimate on costs to come in or do you have some confidence that the high end of the range may not apply? To what extent is it timing on some of this testing and permitting issues. Is that part of it or all of it or none of the reasons?

We'll Jonathan, I don't have a whole lot more to add to what I've said before. Basically, just the profile is such that now, I think, there is a somewhat lower probability of hitting the upper end of the range, but I'm not taking the upper end of the range off the table yet. So we have not changed our guidance. I want to be clear about that. And I would say that we have found some additional records, which will reduce a little bit the overall hydrostatic testing, but I also recognize that we're still fairly early in the process. And so it's hard at this early juncture in the hydrostatic testing to really draw some definitive conclusions about the whole year yet. Because we're really, while we've been working hard at it, and we've been out in the field now since May, it’s still the first few months and we were in ramp-up mode.

Is it not right that you filed the commission that you might not get it done by the end of the year recently?

Yes, Jonathan, this is Chris. What we filed with them was just the acknowledgment that given all of the items that you have to go through, which is some of the permitting and then once you do the testing, if you find something in there, you may have to do additional work. That puts a lot of strain on the ability to meet such an aggressive program, and so all we were trying to do is to alert the commission to the fact that we may not be able to get it all finished this year, and then if we don't, we'll do it next year, but right now, we still feel like we're on schedule and that we'll able to get it done. But we do want to make sure that folks are aware of the challenges that are involved in such an aggressive schedule.

Is the main flex point on costs, to the extent you're finding records, then you don't have to do as much testing because if you have the records to prevent having to actually do the test?

Well, I would say that's one factor. I mean when you think of it in general, this is the amount work that's encompassed by all of these direct costs. There's a lot of it and it's huge scale, and we've been in ramp-up mode. So I would say there's a number of factors that affect it, and obviously, there's a lot of stuff that we've never done at this scale before, such as the hydrostatic testing. So our estimates, necessarily, need to be estimates, and we learn more as we go through the year, but we're still only part way through the year. And many of these activities we've really only just really been ramping up in the spring and into the early summer.

Our next question comes the line of Travis Miller with Morningstar.

Trying to get an idea for the core O&M, if we take out some of these one-time and San Bruno stuff, so we look at that increase of about $500 million, looks like year-to-date. We take out San Bruno cost, the Diablo Canyon refueling, the revenue tracked, recoverable items, what's core O&M growth looking like?

I would say that's a little more complicated question to respond to, and you're on the right track in terms of pulling those items out, but there are other things in O&M like our public focus program and others pass-through costs. So generally, the way to think about it is we have wage escalation, which is all about our core item that affects O&M earnings. And then it would be dependent upon things like the timing of the refueling and our Diablo Canyon outage and other work.

So really just the wage escalations as a core piece?

That's one of the primary drivers.

Travis, this is Gabe. The other thing that will help is when we do issue our Q, if you look at the Results of Operations section in the latter half of the Q, there will be a section that talks about the O&M category, and that will be, I think, somewhat helpful for you as well.

They don't have a lot of the same items that we discussed in the box.

And then just a quick reminder on the Diablo Canyon, you recovered that all in the quarter or is that spread over the entire period between the refueling outages on the recovery?

We recovered it over time, but we incurred the maintenance costs during the quarter, and obviously, you do a lot of maintenance during a refueling.

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

All right, in that case, I know you have a busy day ahead of you with other calls. So thank you very much for your interest and your attention, and have a great day.

Ladies and gentlemen, thank you for attending the Second Quarter Earnings 2011 Conference Call. This now concludes the conference. Enjoy the rest of your day.